Business in Action, 6E Courtland L. Bovee Solution Manual

Type:

Solution Manual

Resource:

Business in Action

Edition:

6th Edition

Author(s):

Courtland L. Bovee John V. Thill

Bovee/Thill, Business in Action 6/e Instructor’s Manual

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

Chapter Outline I.

Understanding What Businesses Do A. A business (p. 3) is a profit-seeking organization that provides goods and services designed to satisfy customers’ needs 1. A company’s business model (p. 4) is an outline of how the business intends to generate revenue (money received through the sale of goods and services) 2. If expenses exceed revenue, the business makes a profit B. Businesses add value for customers by transforming lower-value inputs into higher-value inputs 1. Businesses seek a competitive advantage that makes its products more appealing than those of its competitors 2. Businesses make decisions involving some risk in anticipation of receiving future rewards C. Major types of businesses 1. Not-for-profit (nonprofit) organizations such as charities and universities do not have a profit motive 2. Good-producing businesses create value by making tangible goods.

Goods-producing may be capital-intensive and this may be a barrier to entry (p. 6) 3. Service businesses (p. 4) create value by performing activities that deliver benefit to customers

II. Making the Leap from Buyer to Seller A. A business mindset (p. 6) considers decisions to be made and problems to be overcome before companies can deliver goods/services that satisfy customers’ needs B. Businesses contribute to society through: 1. offering valuable goods and services 2. providing employment 3. paying taxes

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 4. contributing to national growth, stability and security C. Businesses can have negative effects on society such as: 1. generating pollution and creating waste 2. creating health and safety risks 3. disrupting community 4. causing financial instability III. Recognizing the Multiple Environments of Business A. The social environment (p. 10) consists of trends and forces in society at large, such as population trends 1. A company is responsible to its stakeholders (all those groups affected by its activities) B. The technological environment is comprised of forces resulting from the practical application of science to innovations, products and processes C. The economic environment (p. 11) encompasses conditions and forces that: 1. affect the cost and availability of goods, services and labor 2. shape the behavior of buyers and sellers D. The legal and regulatory environment is comprised of laws and regulations at local, state, national and international levels.

E. The market environment is composed of: 1. a company’s target customers 2. buying influences that shape those customers’ behaviors 3. a company’s competitors IV. Identifying the Major Functional Areas in a Business Enterprise A. Research and development (R&D) (p. 12) is the functional area responsible for conception and design of products 1. Companies use information technology (IT) systems to promote communication and information usage B. Manufacturing, production and/or operations – the functional area charged with producing the goods and/or services of the company. It includes functions such as purchasing, logistics and facilities management C. Marketing, sales, distribution and customer support – customer-related functions that provide customers with the right product at the right price and place and then make sure customers have needed support and information D. Finance and accounting – responsible for all aspects of a firm’s finances, including financial planning, monitoring and reporting E. Human resources – responsible for the recruitment, hiring, development and support of employees F. Business services – other services performed by in-house staff, external firms or a combination of the two in areas such as law, banking and real estate V. Exploring Careers in Business A. Operations Manager/Operations management (p. 16) B. Human Resources Specialist C. Information Technology Manager (IT) D. Marketing Specialist E. Sales Professional F. Accountant G. Financial Manager

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Bovee/Thill, Business in Action 6/e Instructor’s Manual VI. Achieving Professionalism A. Professionalism (p. 18) is the quality of performing at a high level and conducting oneself with purpose and pride.

B. Professionalism encompasses seven traits: 1. Striving to excel 2. Being dependable and accountable 3. Being a team player 4. Communicating effectively 5. Demonstrating etiquette (p. 20) 6. Making ethical decisions 7. Maintaining a confident, positive outlook

Classroom Activities Break-out Group Discussion: Why are you taking the course?

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

Time Limit: 15 minutes.

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

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

Time Limit: 10 minutes.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Details: 1. On the blackboard, list the seven types of career track options as outlined in the section “Exploring Careers in Business” and assign a number (1 to 7) to each of the options.

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

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

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

End-of-Chapter Chapter 1 Behind The Scenes Build a Band, Then Build a Business Critical Thinking Questions 1. Assume that ETH really was in it for the money and not the music. Would it still make sense to stick with an indie label, or should the band pursue a major label contract and all the potential marketing exposure that comes with it? Explain your answer.

Yes, it would still make sense for ETH to stick with an indie label because in the new musical business environment, “the average independent musician sees more real cash from 10,000 independent sales than major artists see from a million sales”. Moreover, rather than relying on major labels to create marketing exposure, the ETC may utilize increasingly popular social networking sites such as Facebook and MySpace, other high-traffic sites and services such as YouTube, Twitter and iTunes as well as its own website to reach out to both existing and potential fans, and promote themselves in an efficient and low-cost manner.

2. Search online for “Enter the Haggis” and identify how many ways you can listen to the band’s music for free. Why is it in the group’s long-term interest to make its music available for free like this?

Students’ responses will depend in large part on the material currently posted on the website. However, some of the key online sites/services students can listen to the band’s music for free may include: Twitter, Facebook, MySpace, YouTube, iLike, iTunes and last.fm. It is in the group’s long-term interest to make its music available for free like this because it will keep loyal fans happy and attract new fans. Such fans may decide to purchase songs in the future or purchase tickets to the band’s concerts and shows.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 3. If the band had begun its professional existence 10 years earlier, how might its business strategy be different from the path it took?

ETH’s business strategy might be different 10 years ago because online distribution of music as well as social networking sites were either in their infancy or not available. It would have made more sense for ETH to pursue a major label contract.

Learn More Online Students’ responses will depend, in large part, on the material currently posted on the websites. However, some of the ways the band use its online presence to build a relationship with fans include: informing fans of upcoming shows and concerts, promoting new songs and records, as well as attracting new fans and building an online community of loyal fans.

Test Your Knowledge Questions for Review 1. What is a business model?

A business model is a clear, simple outline of how the business intends to generate revenue.

2. What are four ways that business can benefit society?

Business can benefit society by offering valuable goods and services, providing employment, paying taxes, and contributing to national growth, stability, and security.

3. Do all companies have an R&D function? Explain your answer.

No. Many companies simply resell products that other firms make or continue to make the same goods or perform the same services year after year.

4. How is the role of a financial manager different from the role of an accountant?

A financial manager is responsible for planning, while an accountant is responsible for monitoring and reporting.

5. What is professionalism?

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

Questions for Analysis 6. Why is it often easier to start a service business than a goods-producing business?

Goods-producing businesses produce tangible goods by engaging in activities such as manufacturing, construction, mining, and agriculture. These industries are capital-intensive businesses. Small companies starting in goods-production need substantial capital for the equipment needed to build the product, for the raw materials, for the warehouse for raw materials and finished goods, etc.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Additionally, small companies often lack the resources to buffer themselves from the competitors who need only a short time to be up and running with something similar. Few start-up companies are resource rich.

7. Does a downturn in the economy hurt all companies equally? Provide several examples to support your answers.

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

8. Do laws and regulations always restrict or impede the efforts of business professionals, or can they actually help businesses?

Laws and regulations do not always restrict or impede the efforts of businesses.

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

9. Why is it important for IT specialists and managers to understand business in addition to information technology?

It is important for IT specialists and managers to understand business in addition to IT because many of the IT functions within a business need to directly or indirectly support important business functions such as marketing, finance and HR, etc. IT staff members need to understand the business functional requirement of technology in order to design or acquire technology that best serves such business functions.

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

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

Questions for Application 11. How will you be able to apply your experience as a consumer of educational services to the challenges you’ll face in your career after graduation?

Students’ answers will vary, but may reflect some of the following key points: ➢ As a consumer of educational services, a student has likely learned a great deal about such services in the context of business offerings, thus leaning a lot about business principles. ➢ For instance, a student understands the impact of good or poor customer service related to educational services and thus understands the needs and wants of customers and how such needs and wants may best be met by businesses and other organizations.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual ➢

Such understanding of businesses and customers can be transferable to postgraduation careers and can help a student deal with challenges that exist in such careers.

12. What are some of the ways a company in the health care industry could improve its long-term planning by studying population trends?

Students’ answers will vary, but may include the following: ➢ Studying population trends will help the health care industry in gauging future demand for medical and healthcare services. ➢ For example, one major population trend is that the baby boomers are reaching retirement age. That translates to increasing demand for both pharmaceutical drugs and medical services that will serve the aging baby boomer generation, e.g. drugs and treatment for diseases that are prevalent for elders such as heart disease and cancer. ➢ The healthcare industry may also choose to focus on preventative care such as educating baby boomers on nutrition and exercise and provide corresponding goods and services.

13. Identify at least five ways in which your life would be different without digital technology. Would it be more or less enjoyable? More or less productive?

Students’ answers will vary. Possible digital technology may include the following: email, Internet search engines (Google), GPS technology/Google Maps, smart phones (Blackberry, iPhone), digital photos and videos, e-tailing (Amazon.com, eBay), social network sites (Facebook), other sites such as Twitter and YouTube, etc.

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

Student answers may vary; however, some possible ideas follow: ➢ “Striving to excel” inspires students to be the best they can be academically and in extracurricular activities. ➢ “Being a team player” helps students do well in team class projects that are becoming increasingly popular in colleges and universities. ➢ “Communicating Effectively” enables students to excel in class discussions, presentations and written assignments.

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

Students’ blog content will vary but it may involve resume and cover letter writing, interviewing preparation, and inviting firms to recruit on campus, etc.

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Improving Your Tech Insights: Digital Products

The category of digital products encompasses an extremely broad range of product types, from e-books to music and movie files to software and instruction sets for automated machinery. Digital products are commonplace these days, but the ability to remotely deliver product value is quite a staggering concept when you think about it. (As just one example, consider that a single iPod or other digital music players can carry the equivalent of two or three thousand tapes or CDs.) Supplying music over the Internet is amazing enough, but nowadays even tangible products can be delivered electronically: The technology that deposits layers of ink in inkjet printers is being adapted to deposit layers of other liquefied materials, including plastics and metals. Called 3D printing, inkjet fabrication, or additive fabrication, this technology is already being used to “print” product prototypes and simple electronic components. As the price of the technology continues to drop, it’s not too far-fetched to imagine a day when you’ll be able to download product description files from the Internet and fabricate physical items right on your own home “printer.” For more about this technology, visit Dimension 3D Printing (www.dimensionprinting.com), Stratasys (www.stratasys.com), or Z Corporation (www.zcorp.com).

Choose a category of products that has been changed dramatically by the ability to deliver value digitally. In a brief email message to your instructor, explain how digital technology revolutionized this market segment.

Students’ email messages may vary depending upon selection of technology.

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

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

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

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Bovee/Thill, Business in Action 6/e Instructor’s Manual convene an in-person or online meeting to give each member of the team an informal career counseling session based on the research findings.

Student answers will vary depending on the careers they research.

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

1. What goods or services does the company manufacture or sell?

Student answers may vary depending upon selection of company.

2. How does the company set its goods or services apart from its competitors?

Does the company compete on price, quality, service, or innovation?

Student answers may vary depending upon selection of company.

3. How does the company’s customer communication effort convey those competitive advantages?

Student answers may vary depending upon selection of company.

CHECKPOINTS Learning Objective 1: Explain the concept of adding value in a business and identify the major types of business Critical thinking: (1) What inputs does a musical group use to create its outputs?

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

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

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

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

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

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

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

Why or why not?

Students’ responses will vary depending on personal interests.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual LEARNING OBJECTIVE 2: List three steps you can take to help you make the leap from consumer to business professional.

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

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

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

Not necessarily because organized businesses that under the principles of sustainable development might conceivably produce less pollution than craftspeople that use a lot more energy or employ practices that hurt the environment.

It’s your business: (1) Have you thought about how you might contribute to society as a business professional?

Students’ responses will vary depending on personal opinions.

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

Students’ responses will vary depending on personal opinions.

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

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

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

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

Yes, because consumers account for a large proportion of the airline passengers and any trends affecting them will affect airlines, which ultimately will affect Boeing.

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

Students’ responses will vary depending on personal experiences.

(2) Have current economic conditions affected your career-planning decisions in any way?

Students’ responses will vary depending on personal experiences.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual LEARNING OBJECTIVE 4: Explain the purpose of the six major functional areas in a business enterprise.

Critical thinking: (1) Do service companies ever need to engage in research and development, since they’re not creating tangible products? Why or why not?

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

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

Because customer support goes to work after the sale, making sure customers have the support and information they need, thus improving customer satisfaction. Such efforts are important in developing repeat customers and building customer loyalty.

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

Students’ responses will vary depending on personal opinions.

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

Students’ responses will vary depending on personal experiences.

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

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

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

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

Because the work of the financial managers is generally kept in house. In addition, the work of a financial manager touches every part of the company.

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

(2) What is your view of the sales profession? If it is not entirely positive, what would you do as a sales professional to change that public image?

Students’ responses will vary depending on personal opinions.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual LEARNING OBJECTIVE 6: Identify seven components of professionalism.

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

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

(2) Would it be unethical to maintain a positive public persona if you have private doubts about the path your company is pursuing? Why or why not?

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

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

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

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

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

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Chapter 2 UNDERSTANDING BASIC ECONOMICS Chapter Overview This chapter introduces important micro- and macroeconomic concepts such as demand versus supply, competition, monetary and fiscal policies, inflation, and economic indicators. It distinguishes among major economic systems and discusses ways of measuring economic activity. It also covers the debate over deregulation and identifies key roles that government play in the economy.

Chapter Outline I.

What Is This Thing Called the Economy?

A. The economy (p. 26) is the sum total of all the economic activity within a given region B. Economics is the study of how a society uses its scarce resources to produce and distribute goods and services 1. Microeconomics is the study of economic behavior among consumers, business and industries that collectively determine the quantity of goods and services demanded and supplied at different prices 2. Macroeconomics is the study of a country’s larger economic issues, such as competition, government policies, and how an economy maintains and allocates its scarce resources C. Each society must decide how to use its economic resources or factors of production 1. Natural resources – things that are useful in their natural state (land, forests, minerals) 2. Human resources – people and their individual talents and capacities 3. Capital – money, computers, machines, tools and buildings 4. Entrepreneurship (p. 27) – the spirit of innovation, the initiative and the willingness to take on risks involved in creating/operating a business 5. Knowledge – the collective intelligence of an organization C. The supply of these factors of production is limited 1. Scarcity creates competition for resources 2. Scarcity forces consumer, companies and government to make trade-offs a. Opportunity cost (p. 28) is the value of the most attractive option not selected when making a trade-off

II. Economic Systems A. An economic system is the basic set of rules for allocating resources to satisfy its citizens’ needs 1. Free-market system – individuals and companies decide what products to produce, how to produce them, to whom to sell them, and at what price

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Bovee/Thill, Business in Action 6/e Instructor’s Manual a. Referred to as capitalism – private parties own/operate the majority of businesses and competition, supply and demand determine goods/services produced b. No economy is without limited intervention by government, creating a mixed economy or mixed capitalism 2. Planned system (p. 29) – governments largely control allocation of resources a. Communism is the economic system that allows individuals the least degree of economic freedom b. Socialism has a high degree of government planning, some government ownership of capital resources but private ownership is permitted in other industries 3. Governments change structure of economy in two ways: a. Nationalizing (p. 30) – assuming ownership of selected companies or industries b. Privatizing – allowing private businesses to perform services once performed by the government III. The Forces of Demand and Supply A. Demand (p. 31) – buyers’ willingness and ability to purchase products at various price points 1. The demand curve shows the relationship between price and demand – as price decreases, demand increases (i.e., more people are willing to buy) B. Supply – the quantities of a good/service that producers will provide on a particular date at various prices 1. The supply curve (p. 32) shows the relationship between supply and demand – as price increases, the quantity that sellers are willing to supply increases C. Demand and supply curves intersect at equilibrium point – the point at which quantity supplied equals quantity demanded IV. The Macro View: Understanding How an Economy Operates A. Competition (p. 34) is rivalry among businesses for the same customers.

B. There are different degrees of competition 1. Pure competition – the market situation in which there are so many buyers and sellers that no single buyer or seller can individually influence market price 2. Monopoly – the market situation in which one company dominates the market and can control prices 3. Monopolistic competition (p. 35) – the market situation in which there are many sellers who differentiate their products from those of competitors in at least some small way 4. Oligopoly – the market situation in which a very small number of suppliers provide a particular good or service C. Economic activity changes in response to factors such as investment patterns, shifts in consumer attitudes, world events and basic economic forces – called economic fluctuation or business cycles (p. 36) 1. Economic expansion – when the economy is growing and consumers are spending more money

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 2. Economic contraction – when spending declines, employment drops and the economy slows down a. A recession is two or more quarters of decline in gross domestic product b. A depression is catastrophic collapse of financial markets D. Unemployment rate – the percentage of labor force currently without employment 1. Four types of unemployment – frictional, structural, cyclical and seasonal E. Inflation – the steady rise in the average prices of goods and services throughout the economy 1. Deflation is the sustained fall in average prices V. Government’s Role in a Free-Market System A. There is considerable debate over the key roles that governments play in the economy 1. Regulation (p. 38) involves relying more on laws and policies than on market forces to govern economic activity 2. Deregulation involves removing laws and regulations to allow the market to prevent excesses and correct itself over time B. The government plays a role in the economy in four major areas: 1. Protecting stakeholders through numerous regulatory agencies 2. Fostering competition through prevention of monopolies a. Antitrust legislation b. Merger and acquisition approval 3. Encouraging innovation and economic development 4. Stabilizing and stimulating the economy through use of monetary policy and fiscal policy a. Monetary policy (p. 40) involves adjusting the nation’s money supply by increasing or decreasing interest rates. It is administered by the Federal Reserve Board b. Fiscal policy involves changes in the government’s revenues (taxation) and expenditures VI. Economic Measures and Monitors A. Economic indicators (p. 41) are statistics such as interest rates, unemployment rates, housing data and industrial productivity 1. Leading indicators (such as housing starts and durable-goods orders) suggest changes that may happen to the economy in the future 2. Lagging indicators (such as the unemployment rate) provide confirmation that something has happened in the past B. Price indexes offer a way to monitor inflation or deflation 1. The consumer price index (CPI) (p. 42) measures rate of inflation by comparing change in prices of a representative “basket” of consumer goods and services 2. The producer price index (PPI) is a statistical measure of price trends at the producer and wholesaler levels C. The gross domestic product (GDP) (p. 43) is the value of all the final goods and services produced by businesses located within a nation’s borders.

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

Time Limit: 15 minutes.

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

In-Class Activity: GDP vs. GNP Goal: Help students differentiate between Gross Domestic Product (GDP) and Gross National Product (GNP).

Time Limit: 10 minutes.

Details: 1. Draw a table with three columns and four rows on the blackboard with the following column headings respectively: “Scenarios”, “Which Country’s GDP” and “Which Country’s GNP”.

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

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Bovee/Thill, Business in Action 6/e Instructor’s Manual responsible for the production. For instance, in Scenario A, the goods and services produced by an American banker in London should be classified as the GDP of United Kingdom (UK) and the GNP of United States (US).

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

End-of-Chapter Behind The Scenes The Push for Grid Parity at Suntech Power Critical Thinking Questions 1. What effect are feed-in tariffs likely to have on electricity users who don’t adopt solar? Is this outcome fair? Why or why not?

Feed-in tariffs will likely raise the electricity rates in the short term for users who don’t adopt solar because individual suppliers are often paid above-market rates for their power by some governments. This outcome is fair because feed-in tariffs are intended to spur the growth of solar in the short term. Over the long run, high adoption rates of solar, combined with technical advances and production efficiencies will drive down the cost of solar energy.

2. If a particular government believes that solar is a more desirable energy source than nonrenewables such as coal and gas, why wouldn’t it simply grant solar energy utilities monopoly rights?

Because monopoly typically has the effect of reducing competition and raising prices.

3. Does it make sense for Suntech to acquire ailing competitors during a deep recession? Why or why not?

It would make sense for Suntech to acquire ailing competitors if it can structure an all-stock deal and conserve much needed cash during a recession. Another advantage of acquiring during a deep recession is the lower-than-usual acquisition price.

Learn More Online Students’ responses will depend, in large part, on the material currently posted on the website.

Test Your Knowledge Questions for Review 1. Why is the economic concept of scarcity a crucial concept for businesspeople to understand?

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

2. How does macroeconomics differ from microeconomics?

Macroeconomics looks at the study of an economy as a whole. It is the “bigger picture” view. It examines factors such as changes in unemployment, national income, rate of the economy’s growth, the nation’s gross domestic product, inflation and price levels. Microeconomics looks at the smaller picture. It focuses more on consumers, businesses and industries. Microeconomics examines factors such as supply and demand and the determination of price and output in markets.

3. Does the United States have a purely free-market economy or a mixed economy?

The U.S. has a mixed economy.

4. Why is government spending an important factor in economic stability?

In an attempt to foster economic stability, the government can levy new taxes or adjust the current tax rates, raise or lower interest rates, and regulate the total amount of money circulating in our economy. These government actions have two facets: monetary policy and fiscal policy. Monetary policy involves adjusting the nation’s money supply by increasing or decreasing interest rates to help control inflation. Fiscal policy involves changes in the government’s revenues and expenditures to stimulate or dampen the economy. Government spending is indeed an important factor in U.S. economic stability. For one thing, the U.S. federal and state governments are responsible for supplying and maintaining such public goods and services as the highways, military, public water works, fire and police protection, and so on. The U.S. government gets money to provide such public goods by collecting a variety of taxes.

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

To preserve competition, a government agency may stipulate requirements companies must meet to gain approval of a proposed merger or acquisition. If the governmental agency thinks a proposed merger or acquisition might restrain competition, it may deny approval altogether.

Questions for Analysis 6. Why is competition an important element of the free-market system?

The need to compete for customers keeps prices down, encourages cost-cutting techniques, and promotes a diversity of goods to cater to diverse and changing consumer preferences. Because competition responds to customer demands, products that are low quality or dangerous will be removed from the market, while products or services that are quality, fairly priced, and meet consumers needs will stay on the market. Because companies will not receive money for

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Bovee/Thill, Business in Action 6/e Instructor’s Manual goods that the consumer does not find worthwhile, the system is considered to be “self-regulating.”

7. Why do governments intervene in the free-market system?

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

Under mixed capitalism, the pursuit of private gain is regarded as a worthwhile goal that ultimately benefits society as a whole.

8. How do countries know if their economic systems are working?

Economic indicators are statistics such as interest rates, unemployment rates, and housing data, GNP, GDP, CPI, etc. A country’s professional economists sort and interpret these data to monitor and measure the country’s economic performance and predict its future performance.

9. Are the fluctuations in the business cycle predictable?

No, such fluctuations are rarely predictable.

10. Ethical Considerations. The risk of failure is an inherent part of free enterprise. Does society have an obligation to come to the aid of entrepreneurs who try but fail? Why or why not?

Students’ answers will vary, but may reflect some of the following concerns: ➢ Entrepreneurs willing to face risks of failure are a vital force in capitalist economies ➢ Such entrepreneurs will be rewarded handsomely when they become successful ➢ Many such entrepreneurs are involved in multiple ventures and may use earnings from successful ventures to fund, develop or improve ventures that are less successful Questions For Application 11. How might government and education leaders work with business to minimize structural unemployment?

Government and education leaders might work with businesses to provide educational opportunities and training programs that would best match workers’ skills with the current needs of employers in an effort to minimize structural unemployment.

12. How would a decrease in Social Security benefits to the elderly affect the economy?

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

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

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

Applying the law of demand vs. supply, you may want to relocate your restaurant to a neighborhood/area where there are not as many other restaurants, i.e. where there is less supply. There will be less competition and you may even be able to raise your price slightly without driving customers away.

14. Concept Integration. What effect might the technological environment, discussed on page 10 in Chapter 1, have on the equilibrium point in a given market?

Student answers may vary; however, the following provides a possible scenario: ➢ Technological advances may help reduce the cost of producing goods and services and therefore increasing the supply for a given market at every price, thus moving the equilibrium point as well.

Expand Your Knowledge Discovering Career Opportunities Thinking about a career in economics? Find out what economists do by reviewing the Occupational Outlook Handbook in your library or online at www.bls.gov/oco/.

This is an authoritative resource for information about all kinds of occupations.

Search for “economists” then answer these questions: 1. Briefly describe what economists do and their typical working conditions.

Economists study how society distributes scarce resources such as land, labor, raw materials, and machinery to produce goods and services. They conduct research and prepare surveys to collect data and then figure out what the data mean. They also forecast how the economy might change in the future.

Economists study topics such as prices, jobs, taxes, interest rates, and the stock market.

Most economists are concerned with practical applications of economic policy.

Economists devise methods and procedures for obtaining the data they need.

Some economists work for government agencies and assess economic conditions in the United States or abroad, in order to estimate the economic effects of specific changes in legislation or public policy. Other economists work for businesses and help them to figure out what to sell and at what Economists and market and survey researchers have structured work schedules.

They often work alone, writing reports, preparing statistical charts, and using computers, but they also may be an integral part of a research team. Most work under the pressure of deadlines and tight schedules, which may require overtime.

Their routine may be interrupted by special requests for data, as well as by the need to attend meetings or conferences. Frequent travel may be necessary.

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

Employment of economists is expected to grow more slowly than the average for all occupations. The demand for workers who have knowledge of economics is

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Bovee/Thill, Business in Action 6/e Instructor’s Manual projected to grow faster, but these workers will commonly find employment in fields outside of economics, such as business, finance, or insurance. Job prospects for economists will be best for those with graduate degrees in economics. Employment of economists is expected to grow 6 percent from 2008 to 2018, which is slower than the average for all occupations. Demand for economic analysis should grow, but the increase in the number of economist jobs will be tempered as firms hire workers for niche areas with specialized titles.

Many workers with economic backgrounds will work in related fields with more specific job titles, such as financial analyst, market analyst, public policy consultant, researcher or research assistant, purchasing manager, or a variety of positions in business and the insurance industry. Overall employment growth also will be slowed because of the relatively high number of economists—about 53 percent—employed in declining government sectors.

Employment growth should be fastest in private industry, especially in management, scientific, and technical consulting services. Rising demand for economic analysis in virtually every industry should stem from the growing complexity of the global economy, the effects of competition on businesses, and increased reliance on quantitative methods for analyzing and forecasting business, sales, and other economic trends. Some corporations choose to hire economic consultants to fill these needs, rather than keeping an economist on staff. This practice should result in more economists being employed in consulting services.

Median annual wage and salary wages of economists were $83,590 in May 2008.

The middle 50 percent earned between $59,390 and $113,590. The lowest 10 percent earned less than $44,050, and the highest 10 percent earned more than $149,110.

In March 2009, the average annual salary for economists employed by the Federal Government was $108,010. Starting salaries were higher in selected geographical areas where the prevailing local pay was higher.

3. What training and qualifications are required for a career as an economist?

Are the qualifications different for jobs in the private sector as opposed to those in the government?

A master's or Ph.D. degree in economics is required for many private sector economist jobs and for advancement to higher-level positions. In the Federal Government, candidates for entry-level economist positions must have a bachelor's degree with a minimum of 21 semester hours of economics and 3 hours of statistics, accounting, or calculus, or a combination of education and experience.

Undergraduate economics majors can choose from a variety of courses, ranging from microeconomics, macroeconomics, and econometrics to more philosophical courses, such as the history of economic thought. Because of the importance of quantitative skills to economists, courses in mathematics, statistics, econometrics, sampling theory and survey design, and computer science are extremely helpful.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Whether working in government, industry, research organizations, or consulting firms, economists with a bachelor's degree usually qualify for entry-level positions as a research assistant, for marketing or finance positions, or for various sales jobs. A master's degree usually is required to qualify for more responsible research and administrative positions. A Ph.D. is necessary for top economist positions in many organizations.

Candidates also should have strong computer and quantitative skills and be able to perform complex research. Patience and persistence are necessary qualities, given that economists must spend long hours on independent study and problem solving. Good communication skills also are useful, as economists must be able to present their findings, both orally and in writing, in a clear, concise manner.

Improving Your Tech Insights: Data Mining

To find a few ounces of precious gold, you dig through a mountain of earth. To find a few ounces of precious information, you dig through mountains of data using data mining, a combination of technologies and techniques that extract important customer insights buried within thousands or millions of transaction records. (Data mining has many other uses as well, such as identifying which employees are most valuable to a firm.)

Data mining is an essential part of business intelligence because it helps extract trends and insights from millions of pieces of individual data (including demographics, purchase histories, customer service records, and research results). Data mining helps marketers identify who their most profitable customers are, which goods and services are in highest demand in specific markets, how to structure promotional campaigns, where to target upcoming sales efforts, and which customers are likely to be high credit risks, among many other benefits. You may hear the term business analytics used in this context as well, describing efforts to extract insights from databases.

Research one of the commercially available data mining or business analytics systems. You might start with Information Week magazine (www.informationweek.com) or check out a company such as Angoss (www.angoss.com) click on “Software & Solutions” and then on “Sales & Marketing”). In a brief e-mail message to your instructor, describe how the system you’ve chosen can help companies market their goods and services more effectively.

Student answers will vary depending on the magazines or companies they pick.

Practice Your Skills Sharpening Your Communication Skills The subprime mortgage crisis (see page 472 in Chapter 20) that helped throw the economy into a recession in December 2007 bewildered a lot of people. In a brief paragraph (no more than 100 words), explain what a subprime mortgage is and why these loans helped trigger the recession.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Student answers will vary but they should define subprime mortgages, which are home loans for borrowers with low credit scores. They should also address the high risk and high default nature of such loans. Students need to mention that half of subprime mortgages are Adjustable Rate Mortgages, which are especially vulnerable to payment shock when low initial rates expired.

Building Your Team Skills Economic indicators help businesses and governments determine where the economy is headed. You may have noticed news headlines such as the following, each of which offers clues to the direction of the U.S. economy: 1. Housing Starts Lowest in Months 2. Fed Lowers Discount Rate and Interest Rates Tumble 3. Retail Sales Up 4 Percent Over Last Month 4. Business Debt Down from Last Year 5. Businesses Are Buying More Electronic Equipment 6. Local Economy Sinks as Area Unemployment Rate Climbs to 9.2 Percent 7. Telephone Reports 30-Day Backlog in Installing Business Systems Is each item good news or bad news for the economy? Why? What does each news item mean for large and small businesses? Report your team’s findings to the class as a whole. Did all the teams come to the same conclusions about each headline? Why or why not? With your team, discuss how these different perspectives might influence the way you interpret economic news in the future.

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

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

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

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

5. Businesses Are Buying More Electronics Equipment This headline indicates that businesses are replacing labor with machines.

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

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 7. Telephone Reports 30-Day Backlog in Installing Business Systems This indicates growth in the economy, as businesses are growing.

Developing Your Research Skills Some career paths have higher unemployment risks during the ups and downs of economic fluctuations. Research three business careers that should be relatively “recession proof” in the coming years, meaning employment doesn’t drop dramatically during a recession (or may even increase during a recession).

Summarize your findings in a one-page report.

Student answers may vary but three likely such careers are healthcare, education and green technology.

CHECKPOINTS LEARNING OBJECTIVE 1: Define economics, and explain why scarcity is central to economic decision making.

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

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

(2) If you had an unlimited amount of money, would you ever need to make tradeoffs again? Why or why not?

Students’ responses will vary depending on personal opinions but points to consider include the fact that economics is defined in terms of scarcity, and scarcity makes trade-off a necessity.

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

Students’ responses will vary depending on personal experiences.

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

Students’ responses will vary depending on personal experiences.

LEARNING OBJECTIVE 2: Differentiate among the major types of economic systems.

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

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Because in all economies, local, state, national and even international governments intervene in the economy in various degrees, including taxing and price controls (2) What are some possible risks of privatizing basic services such as the transportation infrastructure?

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

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

Students’ responses will vary depending on personal opinions.

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

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

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

The interaction of demand and supply keep a market in balance through the equilibrium point.

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

This increase will likely reduce the demand for that product.

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

Students’ responses will vary depending on personal opinions.

(2) Have you ever purchased something simply because it was on sale? Why? Students’ responses will vary depending on personal experiences.

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

Critical thinking: (1) Are colleges and universities an example of pure competition or monopolistic competition? Why?

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Bovee/Thill, Business in Action 6/e Instructor’s Manual They are monopolistic competition since they offer products that can be distinguish from competing products in at least some small way, such as strengths in certain majors or areas.

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

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

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

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

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

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

LEARNING OBJECTIVE 5: Outline the debate over deregulation, and identify four key roles that governments play in the economy.

Critical thinking: (1) Would it be wise for the government to put price controls on college tuition? Why or why not?

Students’ responses will vary depending on personal opinions as well as how much of a role they think government should play in the economy.

(2) Under what conditions, if any, should the federal government step in to rescue failing companies?

Students’ responses will vary depending on how much of a role they think government should play in private industries.

It’s your business: (1) How do you benefit from competition among the companies that supply you with the goods and services you need?

Students’ responses will vary depending on personal opinions (2) Does this competition have any negative impact on your life?

Students’ responses will vary depending on personal opinions

LEARNING OBJECTIVE 6: Identify the major ways of measuring economic activity.

Critical thinking: (1) Why would anyone bother to monitor lagging indicators?

Lagging indicators are important since they provide confirmation that something (such as a recession) has occurred in the past.

(2) Why is GDP considered a more accurate measure of a country’s economic health than GNP?

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Bovee/Thill, Business in Action 6/e Instructor’s Manual GDP is considered a more accurate measure since it includes goods and services produced within a country’s borders, and enables a nation to evaluate its economic policies and to compare its current performance with prior periods or with the performance of other nations.

It’s your business: (1) In your multiple economic roles as a consumer, employee, and investor, is inflation a good thing, a bad thing, or both? Explain your answer.

Students’ responses will vary depending on personal opinions.

(2) How is the federal budget deficit likely to affect you? What about your children as they grow up?

Students’ responses will vary depending on personal opinions.

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

Chapter Outline I.

Fundamentals of International Trade A. Economic globalization (p. 49) is the increasing integration and interdependence of national economies around the world B. Reasons why countries and companies trade internationally: 1. Focusing on relative strengths (comparative advantage) – Countries should focus in areas where it can produce more efficiently and trade for goods/services it cannot produce as economically 2. Expanding markets 3. Pursuing economies of scale – savings from buying parts and materials, manufacturing or marketing in large quantities 4. Acquiring materials, goods and services 5. Expanding to keep or attract multinational customers 6. Keeping up with competitors who compete on a global scale C. Measurements of international trade include the balance of trade and the balance of payments 1. Balance of trade (p. 50) is the total value of a nation’s exports less the total value of its imports over a specified period of time a. A trade surplus results if exports exceed imports b. A trade deficit results if imports exceed imports 2. Balance of payments (p. 51) is the sum of all payments one nation receives from other nations less the sum of all payments it makes to other nations over a specified period of time D. The foreign exchange rate is the rate at which the money of one currency is traded for another

II. Conflicts in International Trade A. Trade that takes place without governmental interferences is known as free trade (p. 52) B. Protectionism (p. 53) encompasses government policies aimed at shielding a country’s industries from foreign competition. Strategies include: 1. Tariffs – taxes, surcharges or duties levied against imported goods

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 2. Import quotas limit the amount of particular goods that countries allow to be imported during a given year 3. Embargoes – a complete ban on import or export of certain products or on all trade with certain countries 4. Restrictive import standards – establishing regulations that make it difficult or expensive for companies to import goods 5. Export subsidies – providing financial assistance to domestic producers to allow them to lower their prices in order to compete more effectively in the world market 6. Anti-dumping measures – regulations and sanctions against foreign companies that attempt to sell large quantities of a product at a price lower than the home-country price (dumping) 7. Sanctions – politically motivated embargoes that revoke a company’s normal trade relations status III. International Trade Organizations A. Organizations facilitating international trade 1. World Trade Organization (WTO) - established to negotiate, implement and monitor international trade procedures and mediate trade disputes among its member countries 2. International Monetary Fund (IMF) - established to monitor global financial developments, provide technical advice and training, provide short-term loans and work to alleviate poverty in developing economies 3. World Bank – United Nations agency that addresses poverty, health and education in developing countries B. Trading blocs (p. 55) – Also known as common markets, these regional organizations remove barriers to trade among their members and establish uniform barriers to trade with nonmember nations 1. North American Free Trade Agreement (NAFTA) – Comprised of the United States, Mexico and Canada 2. European Union (EU) – Comprised of more than 2 dozen countries, the EU is the world’s largest economy 3. Asia-Pacific Economic Cooperation (APEC) – Comprised of 21 countries working to liberalize trade in the Pacific Rim IV. The Global Business Environment A. Cultural differences – Culture (p. 57) is a shared system of symbols, beliefs, attitudes, values, expectations and norms for behavior 1. Businesspeople dealing with other cultures should avoid: a. Stereotyping (p. 58) – assigning a wide range of generalized attributes to an individual based on his/her membership in a particular culture or social group b. Ethnocentrism – judging all other groups according to the standards, behaviors and customs of one’s own group 2. Businesspeople should also be well-versed in the political issues, cultural factors and the economic environment of the country in which they plan to do business.

B. Legal differences 1. The legal system in the U.S. and the United Kingdom is based on common law, in which tradition, custom and judicial interpretation play important roles

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 2. The legal system in other nations (i.e., France and Germany) is based on civil law, in which legal parameters are specified in detailed legal codes 3. Another legal system in countries such as Iran and Pakistan is based on theocratic law, which is based on religious principles 4. U.S. companies are bound by the Foreign Corrupt Practices Act (FCPA) which outlaws bribery in other countries V. Forms of International Business Activity A. Importing and exporting 1. Importing (p. 60) is the buying of goods or services from another country and bringing them into one’s own country 2. Exporting is the selling and shipping of goods or services to another country B. International licensing (p. 61) – agreements to produce and market another company’s product in exchange for a royalty or fee C. International franchising – selling the right to use a business system, including brand names, business processes, trade secrets and other assets D. International strategic alliances and joint ventures 1. Strategic alliances are long-term partnerships between 2 or more companies to jointly develop, produce or sell products 2. Joint ventures are the joining of 2 or more firms to create a new business entity that is legally separate and distinct from its parents E. Foreign direct investment (FDI) (p. 62) – the investment of money by foreign companies in domestic business enterprises 1. Countries that establish a physical presence in multiple countries through FDI are known as multinational corporations (MNCs) VI. Strategic approaches to international markets A. Organizational strategies for international expansion include 1. A multidomestic strategy (p. 63), a decentralized approach in which a company creates highly independent operating units in each new country.

2. A global strategy, a centralized approach in which headquarters in the home country makes all major decisions 3. A transnational strategy, a hybrid approach in which major strategic decisions and business systems are centralized but local business units are empowered to make other decisions that are appropriate for local markets B. Functional strategies for international expansion – Companies face multiple decisions in pursuing international markets: 1. Products – Should products be standardized (selling the same product in all markets) or customized (different products in different markets) 2. Customer support – Whether or not to offer local support 3. Promotion – The degree to which promotional messages should be customized for each country 4. Pricing 5. Staffing – The decision to hire local managers or relocate managers from the home country

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

Time Limit: 20 minutes.

Details: 1. Break students into groups of five. (2 minutes) 2. Ask half of the groups to come up with three to four major benefits of globalization, e.g. home country firms’ access to new market/new customers, lower costs of labor and materials in host countries, host country consumers’ access to new products and services, new job opportunities in host countries, etc.; and ask the other half of the groups to come up with major pitfalls of globalization, e.g. the potential loss of jobs in home countries, sweatshop conditions in host countries, increasingly homogenized markets and products around the world, host countries’ loss of cultural identities, etc. Elect a group leader/facilitator and a note taker in each group. Ask each group to finalize their viewpoints from notes and then elect group representatives/speakers.

(10 minutes) 3. Ask representatives/speakers from two opposing teams to debate each other in front of the whole class, using ideas generated in prior group discussions.

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

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

End-of-Chapter Behind The Scenes Adapting an American Cultural Icon to the African Market Critical Thinking Questions 1. Why would MTV use the MTV brand name for its launch in Africa, rather

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Bovee/Thill, Business in Action 6/e Instructor’s Manual than coming up with a new name more closely identified with the target market, such as African Music Television?

MTV already has a well established brand name and it makes more sense to leverage that well-known brand in a new market such as Africa, especially when the target segment is most likely to be the young generation, who share similarities in musical tastes with their counterparts in the western world compared to the older generation.

2. What ethical responsibilities does MTV have relative to its expansion into Africa? Why? MTV has ethical responsibilities in Africa such as being active in health and social causes, such as offering educational programming about HIV protection.

3. Do global media such as MTV have the potential to improve international relations? Do they have the potential to harm international relations?

Explain your answers.

Global media such as MTV have the potential to improve or harm international relations depending on the content and types of programs that they present to the population. For instance, entertainment and educational programs that aim to help citizens from different countries to better understand each other have the potential to improve international relations while programs that divide citizens of the world and turn them against each other have the potential to harm international relations.

Learn More Online Visit the MTV Base website at www.mtvbase.com. Compare the site with MTV’s U.S. homepage at www.mtv.com. What differences and similarities do you see? How much American culture do you see reflected on the MTV Base website, as either content on the site itself or content on the cable channel this is described on the website? How many artists currently listed in the MTV Base Top Ten are from Africa?

Students’ responses will depend, in large part, on the material currently posted on the website.

Test Your Knowledge Questions for Review 1. How can a company use licensing agreements to enter world markets?

By licensing, a company can negotiate an agreement that entitles it to produce or market another company’s product in return for a royalty or fee. The company that obtains the license is responsible for the product quality, promotion, and distribution, and it must pay the other company a percentage of its sales. On the other hand, the company that grants the license avoids shipping costs, trade barriers, and other problems associated with international trade, while still receiving a portion of the revenue from overseas sales.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 2. What two fundamental product strategies do companies choose between when selling their products in the global marketplace?

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

Understanding a country’s culture and regulations helps a company make these important choices.

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

The balance of trade is determined by the relationship between the value of a country’s imports and the value of its exports. It is not as broad as the balance of payments, which measures the total flow of money into a country minus the flow of money out of the country over a period of time. The balance of payments includes not only the balance of trade but also payments of foreign aid by governments and direct investment in assets.

4. What is protectionism?

Protectionism is the economic policy of restraining trade between countries through methods such as imposing tariffs on imported goods, having restrictive quotas and other governmental regulations designed to discourage imports. This is often done to protect domestic industries; hence, the name.

5. What is a floating exchange rate?

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

Questions for Analysis 6. Why would a company choose to work through intermediaries when selling products in a foreign country?

By using intermediaries to sell products to a foreign market, a company can avoid some of the many problems that can occur when selling products in a foreign country. A company can avoid barriers to trade, one of the main obstacles to trading in a foreign market. There are many barriers to trade in place to protect countries from being overwhelmed by foreign imports. These can include tariffs, quotas, or embargoes. Other barriers may include laws, restrictive import standards, or domestic subsidies. Also, by using intermediaries, the company can avoid fluctuations in currency exchange, and governments. By using certain types of intermediaries, a company can also avoid exorbitant shipping costs. By using intermediaries, a company may stand to gain less profit, but also guarantees itself fewer risks.

7. How do companies benefit from forming international joint ventures and strategic alliances?

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

Companies share ideas, resources, and technology. By sharing their resources (especially technology) both companies become more competitive, enabling them to take on larger companies who have more resources than each company

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Bovee/Thill, Business in Action 6/e Instructor’s Manual alone. A joint venture is a partnership in which one company cooperates with other companies or governments to jointly develop, produce, or sell products. In this way, companies share investment costs, risks, management, and profits.

Again, by sharing responsibilities, these companies can increase their competitiveness in the global marketplace by pooling resources. No one company takes the risk upon itself, and doubles its resources. This is especially important in an era of multinational corporations.

8. What types of situations might cause the US Government to implement protectionist measures?

The US government might implement protectionist measures for several reasons, including: (1) shielding developing or struggling industries from foreign competitions, (2) bending to pressure to protect US jobs, (3) retaliating against the protectionist actions of other countries, and (4) protecting the health and safety of American citizens.

9. How do tariffs and quotas protect a country’s own industries?

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

Quotas limit the amount of a particular good countries can import during a year.

Limits can be set on quantities (such as bushels) or value (such as dollar value).

Quotas protect a country's industry by allowing only a certain amount of imports to enter the country at a given time. In this way, consumers can only spend a limited amount on imported goods, and must spend the rest on their own country’s industry.

10. Ethical Considerations. Is it unethical for a U.S. company to choose export markets specifically for their less-stringent consumer protection standards?

Why or why not?

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

Questions for Application 11. Suppose you own a small company that manufactures baseball equipment.

You are aware that Russia is a large market, and you are considering exporting your products there. What steps should you take? Who might be able to give you assistance?

The first step would be to evaluate whether there is a market for your product: do Russians play baseball? If you think there is potential, you should research the market to find out what competitors already sell your product and how much you can expect to sell. Next, you will want to talk with local distributors, government officials, the Russian foreign trade office, the US Department of Commerce, US companies doing business in Russia, and anybody else you can think of who might be able to help you crack the market. Investigate whether the Russian government restricts imports of the products you want to sell. Developing solid relationships with reputable agents and distributors will be one of your most important tasks.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 12. How has your current employer or any previous employer been affected by globalization? For instance, does your company compete with lower-cost imports? (If you don’t have any work experience, ask a friend or family member.)

Students’ answer will vary depending on personal experience. Possible scenarios include employers’ effort to seek new customers by entering foreign countries or their effort to cut costs by outsourcing to countries with lower material and/or labor costs.

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

Students’ answers may vary depending on opinion but they may include the following considerations: A) Will the fast food chain’s first overseas expansion effort be in Europe? B) Is there a good fit between the fast food chain and the types of businesses that are typically located in the shopping malls developed by the said developers? C) What are the specific laws and regulations governing foreign businesses in such European countries? Are there any tax advantages for joint ventures or wholly owned subsidiaries compared to strategic alliances?

14. Concept Integration: You just received notice that a large shipment of manufacturing supplies you have been waiting for has been held up in customs for two weeks. A local business associate tells you that you are expected to give customs agents some “incentive money” to see that everything clears easily. How will you handle this situation? Evaluate the ethical merits of your decision by answering the questions outlined in Exhibit 4.2 on page 73.

Student answers will vary, but should show evidence of answering the key ethical questions that will be developed in chapter 4.

Expand Your Knowledge Discovering Career Opportunities If global business interests you, consider working for a U.S. government agency that supports or regulates international trade. For example, here are the duties of an international trade specialist working for the International Trade Administration of the U.S. Department of Commerce: The International Trade Specialist, at the full performance level, will carry out a wide range of economic and trade analysis as a regional desk officer (Office covers Central and Southeast Europe) advise the Director of the Office of European Country Affairs and other departmental officials on matters pertaining to bilateral and multilateral trade policy development and implementation, market access and trade agreements compliance. Performance of these duties will require familiarity with and monitoring of U.S. and assigned countries’ trade policies, programs and procedures. Will be responsive to companies’ requests for assistance and perform outreach to the private sector. Will maintain close liaison and coordination with other departmental offices, other U.S. Government agencies, business organizations and foreign government entities. Will attend and report on meetings both in the Department and at other U.S.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual agencies, including but not limited to the Office of the U.S. Trade Representative and the Department of State. These meetings will involve development and advancement of trade policies, negotiating positions, and economic/commercial initiatives in the European region. He or she will prepare reports, talking points, speech materials, statistical data and correspondence for use by senior Commerce officials, utilizing word processing and computer software programs. Will review Foreign Service and intelligence reports on economic trends and issues in the region.

1. On the basis of this description, what education and skills (personal and professional) would you need to succeed as an international trade specialist?

Students’ answers will vary depending on their opinions.

2. How will does this job description fit your qualifications and interests?

Students’ answers will vary depending on their opinions and their own personal qualifications and interests.

3. How important would interpersonal skills be in this position? Why? Students’ answers will vary depending on their opinions.

Improving Your Tech Insights: Telepresence Telepresence systems start with the basic idea of videoconferencing but go far beyond with imagery so real that colleagues thousands of miles apart virtually appear to be in the same room together. The interaction feels so lifelike that participants can forget that the person “sitting” on the other side of the table is actually in another city or even another country. The ability to convey nonverbal subtleties such as facial expressions and hand gestures makes these systems particularly good for negotiations, collaborative problem-solving, and other complex discussions.

Conduct research to identify a company that has installed a telepresence system.

What kinds of meetings does the firm use the telepresence system for? What advantages does the system give the company?

Practice Your Skills Sharpening Your Communication Skills Languages never translate on a word-for-word basis. When doing business in the global marketplace, choose words that convey only their most specific denotative meaning. Avoid using slang or idioms (words that can have meanings far different from their individual components when translated literally). For example, if a US executive tells an Egyptian executive that a certain product "doesn't cut the mustard," chances are that communication will fail.

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

Compare your list with those of your classmates.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Student answers will vary, but the point of this exercise is to emphasize the number of idioms Americans use daily. Check students’ alternative messages to be sure the meaning is as clear as possible. It may even be useful for students to trade lists and critique each other’s language. They may be surprised at how slippery the English language really is.

Building Your Team Skills In April 2009, eight U.S. steel companies and the United Steelworkers union accused Chinese pipe manufacturers of dumping $2.7 billion worth of a particular type of stainless steel pipe on the American market the previous year. (Specifically, the type of pipe is called “oil country tubular goods” and is used in oil and gas wells.) In a petition to the U.S. International Trade Commission (ITC) and the U.S. Department of Justice (DOJ), the group said 2,000 U.S. employees had lost their jobs as a result of the unfairly priced Chinese imports. The petition asked for tariffs of up to 99 percent on the Chinese steel.

With your team, research the outcome of the steel industry’s petition. Did the ITC and DOJ enact tariffs on Chinese steel? After you have discovered the outcome of the petition, analyze the potential effect of the government’s position on the following stakeholders: ▪ US businesses that buy this type of steel ▪ US steel manufacturers ▪ Employees of US steel manufacturers ▪ The United Steelworkers union ▪ Chinese steel manufacturers Present your analysis to the class and compare your conclusions with those reached by other teams.

Students’ answers will vary but the point to take away here is that different stakeholders will likely have different positions on the same issue and may be affected in different fashion by the government’s actions. Students also need to understand the concept of “dumping” and the roles government and trade organizations play in dealing with such international trade practices.

Developing Your Research Skills Companies involved in international trade have to watch the foreign exchange rates of the countries in which they do business. Use your research skills to locate and analyze information about the value of the Japanese yen relative to the US dollar. As you complete this exercise, make a note of the sources and search strategies you used.

1. How many Japanese yen does one US dollar buy right now? (You can find the foreign exchange rate for the yen at www.x-rates.com and many similar sites.)

Answers will vary depending on when students check exchange rates.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 2. Investigate the foreign exchange rate for the yen against the dollar over the past month. Is the dollar growing stronger (buying more yen) or growing weaker (buying fewer yen)?

Answers will vary; however, students should recognize that currency exchange rates are constantly fluctuating, which creates instability in international business.

3. If you were a US exporter selling to Japan, how would a stronger dollar be likely to affect demand for your products? How would a weak dollar be likely to affect demand?

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

Answ

CHECKPOINTS

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

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

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

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

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

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

Students’ responses will vary depending on personal experiences.

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

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

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

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Critical thinking: (1) What would happen to U.S. workers if all trade intervention suddenly disappeared?

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

(2) What would be the effect on U.S. consumers?

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

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

Students’ responses will vary depending on personal opinions.

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

Students’ responses will vary depending on personal opinions.

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

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

Because they typically require complicated negotiations that take years to resolve.

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

Because by doing so its products will enjoy no-tariff status within the trading bloc. In addition, that country along with other trading bloc members can still erect trading barriers against all non-member countries.

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

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

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

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

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

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Such steps include educating the person of U.S. customs, enlightening her on differences in body language, and showing how respect is communicated in the U.S. culture.

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

By showing respectful gestures, and eye contact, among others.

It’s your business: (1) Have you ever experienced a communication breakdown with someone from another country?

Students’ responses will vary depending on personal experiences.

(2) If so, how did you resolve it, and how could you apply this experience to your business career?

Students’ responses will vary depending on personal experiences.

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

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

Yes because they may use foreign distributors in other countries.

(2) Why does so much foreign direct investment take place between the industrialized nations?

Because industrialized nations tend to offer greater protection for foreign investors, which is important since foreign direct investment carries much greater economic and political risk.

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

Students’ responses will vary depending on personal opinions.

(2) On what do you base your reaction?

Students’ responses will vary depending on personal opinions.

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

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

Because in some cases, a global strategy or transnational strategy is more appropriate when there are convergence of consumer preferences and tastes for certain products, such as the iPod.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual (2) How might the choice of overall organizational strategy affect a company’s staffing plans in each country?

The overall organizational strategy, e.g. centralized vs. decentralized might affect a company’s staffing plans in each country. For instance, a centralized organizational strategy will likely translate to staffing each country with managers from the home country.

It’s your business: (1) Have you ever purchased an imported product that seemed poorly adapted to the U.S. market?

Students’ responses will vary depending on personal experiences.

(2) How would you advise the company in order to satisfy U.S. customers more effectively?

Students’ responses will vary depending on personal opinions.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual

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

Chapter Outline I.

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Ethics in Contemporary Business A. Ethics (p. 71) are principles and standards of moral behavior that are accepted as right versus wrong. These involve: 1. Competing fairly and honestly 2. Communicating truthfully 3. Transparency – ensuring that affected parties can observe relevant aspects of transactions or decisions 4. Not causing harm to others, including: a. putting personal interests above the needs of other stakeholders b. insider trading (p. 72) – the use of unpublicized, confidential information to gain an advantage in stock market trading B. Factors influencing ethical behavior include: 1. Cultural differences 2. Knowledge 3. Organizational behavior a. Many companies develop programs to improve ethical conduct as well as a code of ethics (p. 72) that defines the values and principles that guide the organization’s decisions b. If an employee observes unethical/illegal behavior and is unable to resolve it internally, s/he can resort to whistle-blowing, reporting the wrongdoing through formal reporting mechanisms or externally to the news media or government regulators C. Ethical decision making 1. An ethical lapse is a situation in which an individual or group makes a decision that is morally wrong, illegal or unethical 2. An ethical dilemma (p. 73) is a situation in which more than one side of an issue can be supported with valid arguments 3. Decision makers must also be aware of possible conflicts of interest, situations in which competing loyalties can lead to ethical lapses

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Bovee/Thill, Business in Action 6/e Instructor’s Manual II. Corporate Social Responsibility A. Corporate social responsibility (CSR) (p. 75) is the concept that business has obligations to society beyond the pursuit of profits B. Companies that engage in CSR activities can choose between two courses of action: 1. General philanthropic CSR - Philanthropy (p. 76) involves the donation of money, time goods or services to charitable, humanitarian or educational institutions 2. Strategic CSR – Social contributions that are directly aligned with a company’s overall business strategy III. Perspectives on Social Responsibility A. Approaches to CSR can be categorized into four perspectives: 1. Minimalist CSR – The only social responsibility of the business is to pay taxes and obey the law 2. Defensive CSR – The business takes positive steps to address a particular issue because it has been embarrassed by negative publicity or pressured by activists and/or nongovernmental organizations (NGOs) a. Nongovernmental organizations (NGOs) (p. 78) are nonprofit groups that provide charitable services or promote causes 3. Cynical CSR – A company accused of irresponsible behavior promotes itself as being socially responsible without making substantial improvements in business. This includes: a. Greenwashing – publicity efforts that present a company as being environmentally friendly when its actions speak otherwise 4. Proactive CSR – A company takes socially responsible actions on its own initiative rather than in response to pressure or publicity B. Although there is no “correct” answer to how socially responsible a company should be, a two-tiered approach to CSR can be both practical and ethical 1. At the first tier, companies take responsibility for the consequences of their actions and limit the negative impact of their operations (“do no harm”) 2. At the second tier, companies can choose to help society in ways that investors, managers and employees deem appropriate IV. CSR: The Natural Environment A. Environmentalism involves concerns over pollution and resource depletion B. Beyond voluntary efforts and technological solutions, NGOs are pursuing political and economic solutions 1. Cap and trade (p. 81) is an environmental policy that gives companies a certain degree of freedom in addressing the environmental impact of specified pollutants by: a. reducing emissions to meet a maximum allowable amount (“cap”); or b. buying allowances to offset excess emissions (“trade”) C. Efforts to minimize resource depletion and pollution are part of an effort known as sustainability or sustainable development (p. 82) – operating a business in a manner that minimizes pollution and resource depletion

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Bovee/Thill, Business in Action 6/e Instructor’s Manual V. CSR: Consumers A. Consumerism (p. 83) is a movement that pressures businesses to consider consumer needs and interests B. Consumerism prompted the passage of the Consumer Bill of Rights, which established four fundamental consumer rights and the responsibility of business to respect them: 1. The right to buy safe products and buy them safely a. This includes safety standards established by the Consumer Product Safety Commission (CPSC) and other federal and state agencies b. Companies that collect personal information from customers have an ethical obligation to keep that information secure and prevent identity theft (p. 85), in which criminals steal personal information and use it fraudulently 2. The right to be informed 3. The right to choose which products to buy 4. The right to be heard VI. CSR: Employees A. Over the past several decades, businesses have changed their recruiting, training and promotion practices as well as their corporate values and behaviors B. The Civil Rights Act of 1964 established the Equal Employment Opportunity Commission to address job discrimination (p. 86) (denial of opportunities to individuals on the basis of characteristics that have no bearing on their ability to perform in a job) 1. Affirmative action programs are activities undertaken by businesses to recruit and promote members of groups whose economic progress had been hindered through legal barriers or established practices C. The Americans with Disabilities Act (ADA) guarantees equal opportunities in housing, transportation, education, employment and other areas for those with disabilities D. The Occupational Safety and Health Act established mandatory standards for safety and health and established the Occupational Safety and Health Administration (OSHA) to enforce them

Classroom Activities Break-out Group Discussion: Ethical vs. Legal.

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

Time Limit: 15 minutes.

Details: 1. Break students into groups of five. (2 minutes).

2. Ask each group to come up with at least one example that represents each of the following four situations: ethical and legal, ethical but illegal, unethical

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Bovee/Thill, Business in Action 6/e Instructor’s Manual but legal, and unethical and illegal. Sample examples include respectively the following: giving employees cash bonuses for exceeding sales targets, stealing food to help family members survive, employ child labor in countries where it’s legal to do so and engage in insider trading. (10 minutes) 3. Ask representatives/speakers from each group to present their results to the whole class, either verbally or written (on the blackboard). (3 minutes) Summary: Instructor summarizes the differences between ethical and legal, noting that ethical standard may vary from person to person and that legal standards may vary from country to country.

End-of-Chapter Behind The Scenes Nike’s Global Presence Puts It on The Front Lines of Corporate Social Responsibility Critical Thinking Questions 1. This chapter covers three factors that influence ethical decisions: cultural differences, knowledge, and organizational behavior. How have these factors shaped Nike’s CSR actions over the past two decades?

Corporate social responsibility (CSR) is the notion that business has obligations to society beyond the pursuit of profits. Sweatshops are not uncommon in many developing nations, but that was unacceptable to Nike. Nike decided to hold its factories to a higher standard and established a program to work closely with its vendors to improve their operations and practices. For example, it developed a manual that describes what factory needs to do to meet Nike’s standards. Nike decided to go beyond what was legal and do what is right. As a result, Nike has become a more responsible “corporate citizen”.

2. How does Mark Parker’s phrase “sustainable business” relate to sustainable manufacturing?

Sustainable development means that a business is operating in a manner that minimizes pollution and resource depletion, ensuring that future generations will have vital resources. Nike has addressed this in a number of ways. It has a water stewardship program to help minimize water usage. It has made efforts to reduce toxic materials and waste from its manufacturing process. It has increased the use of environmentally preferred materials and engages in an aggressive recycling program.

3. Is it unethical for NGOs to put pressure on just one company in an industry when they are trying to effect change across the entire industry, given that responding to that pressure is likely to cost that one company more than its competition?

Students’ responses will vary. NGOs often target firms because they are responsive to social pressure, and this pressure can result in better social performance. Targeting a firm is also used to make the company an “example” for the rest of the industry, thereby encouraging better social performance

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Bovee/Thill, Business in Action 6/e Instructor’s Manual industry-wide. However, this social pressure can have a negative effect, because drawing attention to a firm’s poor labor practices or environmental record could dissuade consumers from buying its products and dissuade investors from buying its stock.

Learn More Online Visit Nike’s consumer-oriented website, www.nike.com, and its corporate website, www.nikebiz.com. Study the messages presented on the two sides. How does Nike reach out to different stakeholder groups using these two separate sites? Read the “Letter to Shareholders” from Nike’s latest annual report (available in the “Investors” section of its corporate website). How does the company present its CSR efforts in a way that appeals to a reader whose primary interest is financial investment?

Students’ responses will depend, in large part, on the material currently posted on the website.

Test Your Knowledge Questions for Review 1. How do ethics differ from corporate social responsibility?

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

2. What is a conflict of interest?

A conflict of interest exists when choosing a course of action will benefit one person’s interests at the expense of another's or when an individual chooses a course of action that advances his or her personal interests over those of his or her employer. For example, a lawyer would find him- or herself in a conflict of interest situation if he or she represented both the plaintiff and defendant in a lawsuit. Similarly, independent auditors could be in a conflict of interest if their firm also served as the client’s consultants 3. How do companies support ethical behavior?

Companies that support ethical behavior refrain from making false or misleading communications to stakeholders. Companies who develop and adopt a written code of ethics and then work to ensure the code is followed, make decisions following these defined values and principles. It is essential that the code of ethics is supported with employee communications, formal training programs, commitment by all, and a system through which employees can get help when encountering ethically difficult situations.

4. How are businesses responding to the environmental issues facing society?

Environmental issues exemplify the difficulty that businesses encounter when they try to reconcile conflicting interests: Society needs as little pollution as possible from businesses. But producing quality products to satisfy customers’ wants can cause pollution to some degree. Business executives try to strike a

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Bovee/Thill, Business in Action 6/e Instructor’s Manual balance by making environmental management a formal part of their business strategy—along with quality, profits, safety, and other daily business operations 5. What is identity theft, and what responsibility do businesses have to prevent it?

With identity theft, a criminal steals personal information and uses it to take out loans, request government documents, get expensive medical procedures and commit other types of fraud. Companies that collect personal information such as credit card and Social Security numbers has an ethical obligation to keep this information safe and secure.

Questions for Analysis 6. Why can’t legal considerations resolve every ethical question?

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

7. How do individuals employ philosophical principles in making ethical business decisions?

To make the “right” choice, each person must think through the consequences of his or her actions. Ethical decisions can be divided into two general types: ethical dilemmas and ethical lapses. An ethical dilemma is a situation in which one must choose between two conflicting but arguably valid sides. The second type of decision is an ethical lapse, in which an individual makes a decision that is clearly wrong, such as divulging trade secrets to a competitor. Determining what’s right in any given situation can be difficult. One approach is to measure each act against certain absolute standards. In the United States, these standards are often grounded in religious teachings, such as “Do not lie” and “Do not steal.” Another place to look for ethical guidance is the law.

8. Why does a company need more that a code of ethics to be ethical?

By itself, a code of ethics can’t accomplish much. “You can have grand motives, but if your employees don’t see them, they aren’t going to mean anything,” says one ethics manager at accounting firm Arthur Andersen. To be effective, a code must be supported by employee communications efforts, a formal training program, employee commitment to follow it, and a system through which employees can get help with ethically difficult situations.

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

For years, many companies believed that the only role of a company was to make money, and social problems were the concern of the state. It was believed that socially responsible companies could not be profitable. But supporters of social responsibility now argue that a company has both an obligation to society beyond the pursuit of profits and that companies can be both socially responsible and

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Bovee/Thill, Business in Action 6/e Instructor’s Manual profitable. In fact, being a socially responsible company can help improve profits and being profitable can help companies stick to their social mission.

10. Ethical Considerations. Is it ethical for companies to benefit from their efforts to practice corporate social responsibility? Why or why not? How can anyone be sure that CSR efforts aren’t just public relations ploys?

Students’ answers will vary depending on personal opinion.

Questions for Application 11. What steps could a bookstore take to engage in strategic CSR? Students’ responses will vary but the following are some possible answers.

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

12. Based on what you’ve learned about corporate social responsibility, what effect will CSR considerations have on your job search?

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

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

Any knowledge that is in the public domain is ethical to share; any knowledge that is in the private domain of the previous company should not be shared.

14. Concept Integration. Is it ethical for state and city governments to entice businesses to relocate their operations to that state or city by offering them special tax breaks that are not extended to other businesses operating in that area?

You might consider asking yourself a series of questions: • Is the action legal? (Does it break any laws?) Is there a written state law on the situation? Does the policy spell out the penalty for breaking the law?

• Is it balanced? (Is it applied to all concerned?) Is it now balanced if other businesses do not obtain the same special tax breaks?

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Bovee/Thill, Business in Action 6/e Instructor’s Manual •

Can you live with it? (Does it make you feel good about yourself?)

Would you feel good about pretending that you didn’t know about the situation?

• Is it feasible? (Will it actually work in the real world?) Is there a special situation that requires the special tax break?

Students’ answers may vary. The action is unethical by governments, but widely practiced.

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

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

Students’ answers will vary depending on the job they have selected.

2. Select one job from the Handbook and search blogs, websites, and other sources to learn more about it. Try to find real-life information about the daily activities of people in this job. Can you find any information about ethical dilemmas or other conflicts in the duties of this position? What role do you think people in this position play within their respective organizations?

Students’ answers will vary depending on the job they have selected.

3. What skills, educational background, and work experience do you think employers are seeking in applicants for the specific job you are researching?

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

Students’ answers will vary depending on the job they have selected.

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

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

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Research some of the technologies now on the market. Assistive Technologies (www.assistivetechnologies.com) is a great place to search for the many categories of assistive technologies now available; it also provides links to a variety of other sites. The Business Leadership Network (www.usbln.org) “recognizes and promotes best practices in hiring, retraining, and marketing to people with disabilities.” For a look at the government’s efforts to promote these technologies, visit the National Institute on Disability and Rehabilitation Research (www.ed.gov/about/offices/list/osers/nidrr). Also visit the Rehabilitation Engineering and Assistive Technology Society of North America (www.resna.org).

Technology companies such as IBM (www.ibm.com/able) and Microsoft (www.microsoft.com/enable) also devote significant resources to developing assistive technologies and making information technology more accessible. Choose one assistive technology, and in a brief e-mail to your instructor, explain how this technology can help companies support employees or customers with disabilities.

Students’ answers will vary depending on the specific search engine/online research tool used and the specific technology picked.

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

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

Students’ email messages will vary but it will involve elements of ethical and CSR principles discussed in the chapter.

Building Your Team Skills All organizations can benefit from having a code of ethics to guide decision making.

But whom should a code of ethics protect, and what should it cover? In this exercise, you and your team are going to draft a code of ethics for your college or university.

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

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Next, using Exhibit 4.3 as a model, draft your school’s code of ethics (identify general principles and then provide specific guidelines). Write a general introduction explaining the purpose of the code and who is being protected. Next, write a positive statement to guide ethical decisions in each situation you identified earlier in this exercise. Your statement about promotion decisions, for example, might read: “School officials will encourage equal access to job promotions for all qualified candidates, with every applicant receiving fair consideration.”

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

Students’ answers will vary.

Developing Your Research Skills Articles on corporate ethics and social responsibility regularly appear in business journals and newspapers. Look in recent issues (print or online editions) to find one or more articles discussing one of the following ethics or social responsibility challenges faced by a business: ➢ Environmental issues, such as pollution, acid rain, and hazardous-waste disposal ➢ Employee or consumer safety measures ➢ Consumer information or education ➢ Employment discrimination or diversity initiatives ➢ Investment ethics ➢ Industrial spying and theft of trade secrets ➢ Fraud, bribery, and overcharging ➢ Company codes of ethics 1. What was the nature of the ethical challenge or social responsibility issue presented in the article? Does the article report any wrongdoing by a company or agency official? Was the action illegal, unethical, or questionable? What course of action would you recommend the company or agency take to correct or improve matters now?

Students’ answers will vary depending on the articles they choose to review.

2. What stakeholder group(s) is affected? What lasting effects will be felt by (a) the company and (b) this stakeholder group(s)?

Students’ answers will vary depending on the articles they choose to review.

3. Writing a letter to the editor is one way consumers can speak their mind.

Review some of the letters to the editor in newspapers or journals. Why are letters to the editor an important feature for that publication?

Students’ answers will vary depending on the articles they choose to review.

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CHECKPOINTS LEARNING OBJECTIVE 1: Discuss what it means to practice good business ethics, and highlight three factors that influence ethical decision making.

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

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

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

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

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

Students’ responses will vary depending on personal experiences.

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

Students’ responses will vary depending on personal experiences.

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

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

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

Not really. They are both morally sound.

It’s your business: (1) Have a company’s philanthropic or CSR efforts ever influenced your purchasing behavior?

Students’ responses will vary depending on personal experiences.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual (2) Have you ever benefited personally from a company’s philanthropic or CSR efforts?

Students’ responses will vary depending on personal experiences.

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

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

Students’ responses will vary depending on personal opinions.

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

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

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

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

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

Students’ responses will vary depending on personal opinions.

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

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

Why or why not?

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

(2) How would you respond to critics who say that cap and trade programs allow polluters to buy their way out of the responsibility of cleaning up their operations?

Students’ responses will vary depending on personal opinions but points to consider include that cap and trade will at least provide some incentives for firms to start tackle pollution.

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

Students’ responses will vary depending on personal opinions.

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

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Students’ responses will vary depending on personal experiences.

LEARNING OBJECTIVE 5: Identify four fundamental consumer rights and business’s responsibility to respect them.

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

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

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

Students’ responses will vary depending on personal opinions.

It’s your business: (1) Do you rely on social media when making purchases?

Students’ responses will vary depending on personal experiences.

(2) Have you ever lodged a complaint with a business? What was the outcome?

Students’ responses will vary depending on personal experiences.

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

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

Students’ responses will vary depending on personal opinions.

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

Students’ responses will vary depending on personal opinions.

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

Students’ responses will vary depending on personal experiences.

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

Students’ responses will vary depending on personal opinions.

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

Chapter Outline I.

Sole Proprietorships A. A sole proprietorship (p. 95) is a business owned by one person B. Operating as a sole proprietorship offers the following advantages: 1. Simplicity – It is easy to establish and requires less paperwork than other structures 2. Single layer of taxation – Profits are treated as the owner’s personal income and is taxed accordingly (i.e., pass-through taxation) 3. Privacy – There are no reports to be filed beyond tax returns and certain government reports 4. Flexibility and control – The sole proprietor can make decisions without inputs from shareholders or partners.

5. Fewer limitations on personal income – The sole proprietor can keep all profits 6. Personal satisfaction C. Operating as a sole proprietorship also has several disadvantages: 1. Financial liability – Sole proprietors have unlimited liability (p. 96) and are personally responsible for damages or debts incurred by the business 2. Demands on the owner in terms of time, stress and decision making 3. Limited managerial perspective 4. Resource limitations 5. No employee benefits for the owner 6. Finite life span

II. Partnerships A. A partnership (p. 97) is an unincorporated business owned by two or more persons B. There are different types of partnerships: 1. General partnership (p. 98) – In a general partnership, all partners have joint authority to make decisions for the firm and have unlimited liability for the firm’s financial obligations 2. Limited partnership – In a limited partnership, one or more persons act as general partners and have unlimited liability for the firm’s financial

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Bovee/Thill, Business in Action 6/e Instructor’s Manual a. Remaining owners are limited partners who have limited liability – the maximum amount for which they are liable is the amount of the investment 3. Master limited partnership (MLP) - A MLP is a partnership that is allowed to raise money by selling units of ownership to the general public.

4. Limited liability partnership (LLP) – An LLP is a partnership in which each partner has unlimited liability only for his/her own actions and at least some degree of limited liability for the partnership as a whole a. This structure is common with architects, lawyers and accountants C. Advantages of a partnership include: 1. Simplicity – It is easy to establish, although written partnership agreements are recommended.

2. Single layer of taxation – Profits are split between partners and treated as personal income on each partner’s tax return (i.e., pass-through taxation) 3. More resources – Partners can combine their financial resources to start up and operate the business 4. Cost sharing 5. Broader skill and experience base – Partners can pool their experience 6. Longevity – New partners can be drawn into the business to replace those who die or retire D. Disadvantages of a partnership include: 1. Unlimited liability – All owners in a general partnership and the general partners in a limited partnership have unlimited liability for the obligations of the firm 2. Potential for conflict 3. Expansion, succession and termination issues – Partners must agree how to handle bringing in new partners, selling partnership shares, or terminating partners E. Partnership agreements can maximize the advantages and minimize the disadvantages by formalizing details such as investment and profit-sharing percentages, management responsibilities, decision making, and disputeresolution procedures III. Corporations A. A corporation (p. 100) is a legal entity, distinct from any individual persons, that has the power to own property and conduct business B. A corporation is owned by shareholders (investors who purchase shares of stock) 1. The stock of a private corporation (or closely held corporation) is owned by only a few individuals and is not made available for purchase by the public 2. The stock of a public corporation is sold to anyone who has the means to buy it C. Advantages of a corporation include: 1. Ability to raise capital – A corporation can raise funds by selling shares of stock to outside investors 2. Liquidity – Investors an easily convert their stock into cash by selling it in the open market 3. Longevity – Shareholders can sell or bequeath their shares to others

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 4. Limited liability – A corporation’s shareholders face only limited liability; their maximum potential loss cannot exceed the amount they invested D. Disadvantages of corporations include: 1. Cost and complexity – It is more expensive and complicated to form than other business structures 2. Reporting requirements – Government agencies require publicly traded companies to publish financial reports 3. Managerial demands – Managers must deal with shareholders, financial analysts and the media in addition to business operations 4. Possible loss of control – Outside investors can gain seats on the board of directors and exert influence on management 5. Double taxation – A corporation pays income tax on its profits and individual shareholders then pay income tax on their share of the company’s profits received as dividends 6. Short-term orientation of the stock market – There is constant pressure to show earnings growth to meet investor expectations E. Special types of corporations 1. S corporations (p. 101) – A structure that combines the capital-raising options and limited liability of a corporation with the federal taxation advantages of a partnership 2. Limited liability company (LLC) (p. 102) – A structure that combines liability with the pass-through taxation benefits of a partnership 3. Benefit corporation – a profit-seeking corporation whose charter specifies a social or environmental goal that the company must pursue in addition to profit IV. Corporate Governance A. Corporate governance (p. 103) refers to the responsibilities and performance of the board of directors B. Three groups play key roles in corporate governance: shareholders (p. 100), the board of directors (p. 103) and corporate officers (p. 105) C. Shareholders 1. Holders of common stock elect the board of directors 2. Owners of common stock also have voting rights and are invited to an annual meeting a. Shareholders who cannot attend can vote by proxy (p. 104), which authorizes management to vote on their behalf 3. Shareholder activism involves activities taken by shareholders (either individually or in groups) to influence executive decision making in areas ranging from strategic planning to social responsibility D. Board of Directors – The board of directors is responsible for selecting corporate officers, guiding corporate affairs, reviewing long-term plans, making major strategic decisions and overseeing financial performance.

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

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 4. Independent board chairs (two people serving as Chairman of the Board and CEO vs. one person holding both roles) 5. Recruiting challenges E. Corporate Officers – The top executives hired by the board of directors who run the company 1. The highest ranking officer is the chief executive officer (CEO) (p. 105) 2. Other officers include the chief financial officer (CFO), chief information officer (CIO), chief technology officer (CTO) and chief operating officer (COO) V. Mergers and Acquisitions A. Businesses can combine permanently through mergers or acquisitions 1. A merger (p. 106) is an action taken by two companies to combine as a single entity 2. An acquisition is an action taken by one company to buy a controlling interest in the voting stock of another company a. A hostile takeover is the acquisition of another company against the wishes of management; the buyer tries to convince enough shareholders to go against management and vote to sell. Hostile takeovers can be launched in two ways: i. A tender offer ii. A proxy fight b. A leveraged buyout (LBO) is acquisition of a company’s publicly traded stock, using borrowed funds with the intent of using some of the acquired assets to pay back the loans used to acquire the company B. Advantages of mergers and acquisitions 1. Increasing buying power as a result of larger size 2. Increasing revenue by cross-selling products to each other’s customers 3. Increasing market share 4. Gaining access to new expertise, systems and teams of employees C. Disadvantages of mergers and acquisitions 1. Reaching agreement on how the merger will be financed 2. Determining who will be in charge upon completion of the merger or acquisition 3. Blending of product lines, branding strategies, advertising and sales efforts 4. Incompatible information systems 5. Layoffs, transfers and changes in job titles and work assignments 6. Incompatible organizational cultures D. Merger and acquisition defenses – Corporate boards and executives have devised strategies to defense themselves against unwanted takeovers, including: 1. A poison pill defense, in which the targeted company takes an action that makes it less valuable to the potential raider 2. A white knight tactic, in which a third company is invited to acquire a company that is in danger of being acquired in a hostile takeover VI. Strategic Alliances and Joint Ventures A. Strategic alliances (p. 109) are non-permanent, long-term partnerships between companies to jointly develop, produce or sell products

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Bovee/Thill, Business in Action 6/e Instructor’s Manual B. A joint venture is a separate legal entity established by two more companies to pursue shared business objectives

Classroom Activities In-Class Activity: What is the best form of business ownership?

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

Time Limit: 10 minutes.

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

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

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

Forms of Business Ownership

Taxation

Liability

Sole Proprietorship Partnership Corporation Limited Liability Companies

End-of-Chapter Behind The Scenes Scanning the Skies for Help at Sirius Satellite Radio Questions for Critical Thinking 1. Other than for purely financial reasons (interest on the loan and potential gains from its investment), why might Liberty Media want to help Sirius XM?

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Beyond purely financial reasons, Liberty Media might want to help Sirius XM as a way to gain potential competitive advantages against its main rival, Dish Network. It will broaden its own scope of products and services, and potentially achieve better economy of scale.

2. The poison pill defense that Sirius XM put in place after the merger expired in 2011, making it at least theoretically possible for another company to buy enough shares to complete a takeover. With its finances on much stronger footing and its stock price rebounding, the company has started to look like an attractive investment. If another party (including Liberty Media) eventually acquires Sirius XM because of its attractive stock price and growth prospects, does that mean the merger of Sirius and XM was a failure? Why or why not?

Students’ answers may vary depending on what criteria they use to determine whether a merger is a success or failure. The massive infusion of cash from Liberty Media did help the company survive, and it appears that capital and operating costs have decreased. Revenues have also begun to increase, and the company has put together a string of profitable quarters.

3. In 2011, Sirius XM’s stock was added to the NASDAQ 100 stock market index (NASDAQ’s index of its 100 largest nonfinancial companies). One intriguing outcome is that it forces mutual fund companies that offer other index funds (see page 448) that mimic this particular market index to buy Sirius XM stock. What effect might this change have on the potential for an outsider – welcome or not – to take control of the company?

Because the index fund mimics the market, a buyer can determine exactly what is taking place in the market. The company value is clearly stated because it is a multiple of the stock value and the number of shares of stock.

Learn More Online

How has Sirius XM fared since its merger and the assistance from Liberty Media? Get the latest financial information from the company’s website at www.siriusxm.com (look under “Investor Relations”). What is the business news media saying about the company’s prospects?

Students’ responses will depend, in large part, on the material currently posted on the website.

Test Your Knowledge Questions for Review 1. What are the three basic forms of business ownership?

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

2. How does unlimited liability put a business owner at risk?

Unlimited liability implies that any legal damages or debts incurred by the business are the owner’s personal responsibility. If the owner is not covered by appropriate insurance and run into serious financial or legal difficulty, such as getting sued for an accident that happened on her premises, she could lose not

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Bovee/Thill, Business in Action 6/e Instructor’s Manual only the business but also everything she owns, including her house, her car, and her personal investments.

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

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

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

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

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

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

Questions for Analysis 6. Why is it advisable for partners to enter into a formal partnership arrangement?

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

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

7. To what extent do shareholders control the activities of a corporation?

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

However, unless an individual owns a large number of common shares, or unless the corporation allows cumulative voting, no single shareholder carries much influence in an election.

8. How might a company benefit from having a diverse board of directors that includes representatives of several industries, countries, and cultures?

A diverse board of directors can bring unique and global perspectives to the company, which can lead to new products, new market opportunities, improved performance, and better overall business strategies.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 9. Why might two companies choose to form a strategic alliance rather than pursuing a merger or acquisition?

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

10. Ethical considerations. Are poison pill defenses ethical? If a potential acquirer buys company stock legally, thereby becoming a part-owner of the company, should management be allowed to entrench itself against the wishes of this owner? Explain your answer.

Students’ answers may vary depending on their opinions. When exploring the question of whether such actions are unethical, students might benefit from going back to the discussions in Chapter 4.

Questions for Application 11. Suppose you and some friends want to start a business to take tourists on wilderness backpacking expeditions. None of you has much extra money, so your plan is to start small. However, if you are successful, you would like to expand into other types of outdoor tours and perhaps even open up branches in other locations. What form of ownership should your new enterprise take, and why?

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

Because of the potential danger inherent to wilderness expeditions, a partnership could expose the owners to too much financial risk (i.e., a client might sue for injuries sustained on an expedition). Due to the limited financial resources of all of the owners, and the fact that all will probably be leading expeditions, a limited partnership is not a viable option either. If the owners didn’t anticipate remaining in the business for a long time, a limited liability company might be the best option, as it would allow them to pay taxes as though they were partners while limiting their liability to their investment in the company. However, because the owners have goals to expand the company, the best form of ownership would be a corporation. This will limit their liability and enable them to raise expansion capital by selling shares. Depending on their personal income tax rate, their anticipated need for capital to finance growth, and the expected future earnings of their company, the owners may want to establish a C corporation.

12. Do you own or have you ever considered owning stock? If so, what steps have you taken to ensure that company management has shareholder interests in mind?

Students’ answers will vary depending on personal experience.

13. Visit Liberty Media’s website www.libertymedia.com and find the company’s corporate governance guidelines. Assume you’re going to start a company that you plan to incorporate. Identify at least five principles of good

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Bovee/Thill, Business in Action 6/e Instructor’s Manual governance from Liberty’s website that you will use to guide the board of your new corporation.

Students’ responses will depend, in large part, on the material currently posted on the website.

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

It makes more sense to start a small corporation rather than a single-consultant sole proprietorship as the former allows more flexibility through various business cycles.

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

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

Students’ answers will vary.

2. Now write down what you might dislike about each form of business. For example, would you dislike the risk of bearing all the responsibility on a sole proprietorship? Would you dislike having to talk with your partners before spending the partnership’s money? Would you dislike having to write reports for top managers and shareholders of the corporation?

Students’ answers will vary.

3. Weigh the pluses and minuses you have identified in this exercise. On balance, which form of business most appeals to you?

Students’ answers will vary.

Improving Your Tech Insights: Groupware Groupware, software that lets people communicate, share files, present materials and work on documents simultaneously, is changing the way employees interact – and even the way businesses work together. For example, shared workspaces are “virtual

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Bovee/Thill, Business in Action 6/e Instructor’s Manual offices” that give everyone on a team access to the same set of resources and information: databases, calendars, project plans, archived instant messages and emails, reference materials, and team documents. These workspaces (which are typically accessed through a web browser) make it easy for geographically dispersed team members to access shared files anytime, anywhere. Employees no longer need to be in the same office or even in the same time zone. They don’t even need to be employees. Groupware makes it easy for companies to pull together partners and temporary contractors on a project-by-project basis. Groupware is often integrated with web-based meeting systems that combine instant messaging, shared workspaces, video-conferencing, and other tools.

Pick a company you might like to work for someday, and with that company in mind, conduct research to identify a currently available groupware system. (Groupware systems aren’t always identified as such, so you might want to search for “project collaboration systems” or similar terms.) Pick a company you might like to work for someday and in a brief email message to your instructor, explain how this particular groupware system could help the employees and managers in this company be more productive.i The email message will vary depending on which groupware students end up picking.

Practice Your Skills Sharpening Your Communication Skills You have just been informed that your employer is going to merge with a firm in Germany. Using the online or library sources, find information on the German culture and customs and prepare a short report.

Students’ reports will vary widely depending on their particular interests.

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

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

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

Who will be directly and indirectly affected by the choice of a new president? Of these stakeholders, which should be represented as participants in the decisionmaking process?

Select a spokesperson to deliver a brief presentation to the class summarizing your team’s ideas and the reasoning behind your suggestions. After all the teams

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Bovee/Thill, Business in Action 6/e Instructor’s Manual have completed their presentations, discuss the differences and similarities among credentials proposed by all the teams for evaluating candidates for the presidency. Then compare the teams’ conclusions about stakeholders. Do all teams agree on the stakeholders who should participate in the decision-making process? Lead a classroom discussion on a board’s responsibility to its stakeholders.

Presentations will vary.

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

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

Answers will vary depending on the articles selected.

2. What results do you expect this development to have on (a) the company itself, (b) consumers, (c) the industry the company is part of? Write down and date your answers.

Answers will vary depending on the articles selected.

3. Follow your story in the business news over the next month (or longer, as your instructor requests). What problems, opportunities, or other results are reported? Were these developments anticipated at the time of the initial story, or did they seem to catch industry analysts by surprise? How well did your answers to question 2 predict the results?

Answers will vary depending on the articles selected.

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

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

Students’ responses will vary depending on personal experiences.

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

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

It’s your business: (1) In your everyday consumer interactions, would you rather do business with a sole proprietorship or a corporation? Why?

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Students’ responses will vary depending on personal opinions.

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

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

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

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

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

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

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

Why or why not?

Students’ responses will vary depending on personal opinions.

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

Students’ responses will vary depending on personal opinions.

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

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

Because it has the dual advantages of single taxation and limited liability.

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

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

It’s your business: Assume you own stock in a large, publicly traded corporation that is hiring a new CEO. All other things being equal, who would be a better choice: a brilliant strategic thinker who is a weak communicator with poor “people skills”, or a gifted public

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speaker and motivator who is competent but perhaps not brilliant when it comes to strategy? Explain your answer.

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 4: Explain the concept of corporate governance, and identify the three groups responsible for ensuring good governance.

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

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

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

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

Students’ responses will vary depending on personal opinions.

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

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

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

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

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

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

Students’ responses will vary depending on personal experiences.

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

Students’ responses will vary depending on personal experiences.

LEARNING OBJECTIVE 6: Define strategic alliances and joint ventures, and explain why companies would choose these options over a merger or acquisition.

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

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

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

Students’ responses will vary depending on personal opinions.

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

Chapter Outline I.

The Big World of Small Business A. A small business (p. 117) is an independently owned and operated company that employs fewer than 500 people and is not dominant in its field B. The roles of small business in the U.S. economy include: 1. Providing jobs 2. Introducing new products 3. Supplying the needs of larger organizations 4. Injecting money into the economy 5. Taking risks that larger companies avoid 6. Providing specialized goods and services C. There are different types of small businesses 1. Lifestyle businesses are built around the personal and financial needs of an individual or family; these businesses will likely remain small 2. High-growth ventures are small because they are young but have plans to expand rapidly D. Factors contributing to the increase in the number of small businesses include: 1. E-commerce, social media and other technologies 2. Growing diversity in entrepreneurship 3. Downsizing and outsourcing

II. The Entrepreneurial Spirit A. The entrepreneurial spirit (p. 120) is the positive, forward-thinking desire to create profitable, sustainable business enterprises B. People start their own businesses for a variety of reasons, including wanting more control over their futures, being tired of working for others, and the inability to find employment C. Qualities shared by successful entrepreneurs include curiosity, adaptability, self-discipline, an ability to learn from mistakes and risk-taking III. The Start-Up Phase: Planning and Launching a New Business A. There are three options to starting a business:

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 1. Creating a new, independent business 2. Buying an existing independent business 3. Buying into a franchise system B. Launching a new business requires a business plan (p. 124) – a document that summarizes the proposed business venture, goals and plan for achieving those goals. The business plan should typically include: 1. Summary 2. Mission and objectives 3. Company overview 4. Products or services 5. Management and key personnel 6. Target market 7. Marketing strategy 8. Design and development plans 9. Operations plan 10. Start-up schedule 11. Major risk factors 12. Financial projections and requirements 13. Exit strategy IV. The Growth Phase: Nurturing and Sustaining a Young Business A. Many new businesses fail each year for a variety of reasons. Advice and support is available from a wide variety of sources, including: 1. Government agencies and not-for-profit organizations, such as the Minority Business Development Agency, the Service Corps of Retired Executives (SCORE), colleges and universities, and the U.S. Chamber of Commerce 2. Banks, credit card companies, and software companies 3. Mentors and advisory boards a. An advisory board (p. 128) is a team of people with subject-area expertise or vital contacts who help a business owner review plans and decisions 4. Print and online media, including blogs written by business owners and investors, as well as websites for business magazines 5. Network and support groups 6. Business incubators (p. 129) – facilities that house small businesses and provide support service during the company’s early growth phase V. Financing Options for Small Businesses A. Small businesses have a variety of resources available to them in financing their ventures B. The first infusion of capital in a business is called seed money (p. 130) C. Private financing is a broad term encompassing every source of funding except selling stocks and bonds and includes: 1. Banks and microlenders a. A microlender (p. 131) is an organization that lends smaller amounts of money to business owners who may not otherwise qualify for conventional bank loans 2. Venture capitalists (VCs) provide money to finance new businesses or turnarounds in exchange for a portion of ownership, with the objective of reselling the business at a profit

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 3. Angel investors are private individuals who invest money in start-ups usually earlier in a business’s life and in smaller amounts than venture capitalists 4. Personal credit cards and personal lines of credit 5. Small Business Administration assistance D. Going public, in which a company offers shares of ownership to the public 1. The first time a company offers its stock for sale is known as an initial public offering (IPO) (p. 132) or “going public” VI. The Franchise Alternative A. An entrepreneur who does not want to start up an independent business can buy a franchise, in which s/he buys the right to use a company’s trade name and sell its goods or services in a specific territory 1. The franchisor is the parent company that licenses elements of its business systems 2. The franchisee is the small business owner who contracts to sell the goods and services in exchange for an initial start-up fee and royalties based on sales volume B. There are three basic types of franchises: 1. Product franchise 2. Manufacturing franchise 3. Business-format franchise C. Franchising has advantages and disadvantages, and it is important to carefully research a franchising opportunity

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

Time Limit: 15 minutes.

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

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

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Business Ideas

Profit Potential

Degree of Risk Involved

Amount of Work Required

Availability of Market Research Data

Total Score

1 2 3 4

End-of-Chapter Behind the Scenes Building an Authentic and Purposeful Business at Sister Sky Critical Thinking Questions 1. Which of the qualities of successful entrepreneurs have Simeon and TurningRobe demonstrated?

Students’ answers may vary but will likely include the following. They love what they do and are driven by a passion to succeed. They are highly disciplined and willing to work long hours and make other significant sacrifices to achieve their goals. They are highly adaptable, tuned into their markets and change direction when needed to pursue new opportunities.

2. Should Simeon and TurningRobe consider lowering their ingredient costs by switching to petroleum-based ingredients or stopping their use of pure distilled water? Why or why not?

No they should not consider switching to petroleum-based ingredients because that would be inconsistent with their authentic, pure, all-natural and high-end brand image. The switch will hurt its “sustainable” reputation and may potentially turn off some loyal customers.

3. Would opening its own retail stores be a risky decision for Sister Sky? How would this change the company’s business model?

Opening its own retail stores may be a risky decision. It would change the company’s business model by adding a new distribution channel, which is the direct retail channel. It may compete with existing channels such as the Native American hotels and resorts and create channel conflict.

Learn More Online Go to http://real-timeupdates.com/bia6 click on “Learn More,” and then select “Chapter 6. Sister Sky video.” Would this video appeal to potential customers of Sister Sky products? What about potential investors? Why or why not?

Yes, this video would appeal to potential customers and investors because it does a good job of expressing Sister Sky’s sustainable and all-natural brand identity. It also presents the firm as an ethical and socially responsible business. Interviews with the founding sisters are also inspirational for both customers and investors.

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Test Your Knowledge Questions for Review 1.

What are three essential functions of a business plan?

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

2.

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

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

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

3.

What are the advantages and disadvantages of owning a franchise?

A franchisee has the advantages of wide name recognition, mass advertising, financial help, training, and support, but owning a franchise involves considerable start-up expense, monthly royalty payments to the franchisor, and constraints on the franchisee’s independence.

4.

What are the key reasons for most small-business failures?

Some key reasons are management incompetence, lack of industry experience, and inadequate financing.

5. What is a business incubator?

A business incubator is a facility where new businesses can lease space at bargain rates and share secretaries, receptionists, telephone equipment, financial and accounting advice, marketing support, and credit-checking services. Many incubators serve as mentors for fledging businesses. Some specialize in specific industries.

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

The entrepreneurial spirit is vital to the health of the national economy because entrepreneurial ventures inject a considerable amount of money into the economy and provide much needed jobs, particularly in a recession. They introduce new products and supply the needs of larger organizations. They provide specialized goods and services and compete with larger firms to keep prices low and qualities high.

7. Do you expect the number of entrepreneurs in the United States will grow in the next 10 years? Why or why not?

Yes, the number of entrepreneurs in the U.S. is expected to grow in the next 10 years because of the following three contributing factors: e-commerce and other technological advances, the growing diversity (women, minorities, immigrants, and young people) of entrepreneurship, and corporate downsizing and outsourcing.

8. What factors should you consider when evaluating a franchise agreement?

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Before signing an agreement you should learn about the financial condition of the franchisor, whether it has been involved in any lawsuits, the franchisor’s plans for expansion, the quality of the training and support offered by the franchisor, the depth and experience of their management team, whether they offer financial assistance to franchisees, and the “word on the street” about the franchisor and its industry.

9. What factors should you consider before selecting financing alternatives for a new business?

The process begins by assessing the firm’s financing needs and determining whether funds are needed for the short or the long term. You must also assess the cost of obtaining financing, and you must weigh the advantages and disadvantages of financing through debt or equity, taking into consideration the firm’s special needs and circumstances.

10. Ethical Considerations. You’re thinking about starting your own chain of upscale, drive-through espresso stands. You have several ideal sites in mind, and you’ve analyzed the industry and all the important statistics. You have financial backing, and you really understand the coffee market. In fact, you’ve become a regular at a competitor’s operation for over a month. The owner thinks you’re his best customer. He even wants to name a sandwich creation after you. But you’re not there because you love the espresso. No, you’re actually spying. You’re learning everything you can about the competition so you can outsmart them. Is this behavior ethical? Explain your answer.

Student’s answers will vary. To lead them back to the chapter objectives, the instructor might want to ask them what they’ve learned from this and how they would apply it to their future business careers.

Questions for Application 11. Briefly describe an incident in your life in which you failed to achieve a goal

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

Students’ answers will vary.

12. Based on your total life experience up to the point—as a student, consumer, employee, parent, and any other role you might’ve played—what sort of business would you be best at running? Why? Student responses may vary, but should relate to total life experiences up to now.

13. Concept Integration. Entrepreneurs are one of the five factors of production discussed in Chapter 2 (pages 26-27). Review that material and explain why entrepreneurs are an important factor for economic success.

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

14. Concept Integration. Pick a local small business or franchise that you visit frequently and discuss whether that business competes on price, speed,

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Bovee/Thill, Business in Action 6/e Instructor’s Manual innovation, convenience, quality, or any combination of those factors. Be sure to provide some examples.

Students’ answers will vary depending on the small business or franchise they pick. The question can serve the chapter’s goals in several ways. By examining a “real-life” small business, the student can start applying some of the concepts discussed in the chapter, including the issues covered in a business plan, the ways entrepreneurs can get into small businesses for themselves, and the things they should know before starting. Recognizing how a small business competes can emphasize the vital role of small businesses in the economy.

Expand Your Knowledge Discovering Career Opportunities Would you like to own and operate your own business? Whether you plan to start a new business from scratch or buy an existing business or a franchise, you will need certain qualities to be successful. Start your journey to entrepreneurship by reviewing this chapter’s section on entrepreneurs and by studying Exhibit 6.3. Now you are ready to delve deeper into the career opportunities of owning and running a small business.

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

Students’ answer will vary, but should be drawn from the characteristics discussed in the chapter: diligence, enthusiasm, persistence, and sociability; eagerness to learn new skills; tolerance for uncertainty; willingness to work hard and to take risks. Through work for big companies and other small businesses, many of these qualities can be developed prior to running a business of one’s own.

2. Visit www.sba.gov, click on “Starting & Managing a Business” and then “Use Our Starting Up Assessment Tool” (look under “Thinking About Starting”). Answer this brief survey and then think about what it says about your entrepreneurial readiness. Do you agree with what the survey says about you? Whether it says you are or are not ready, or somewhere in between, does this align with your long-term vision for your career?

Students’ answers will vary depending on results of the survey and personal experience.

3. On the SBA website, read the article “Steps to Finding a Mentor” in the “Finding a Mentor or Counselor” section. With these insights in hand, think about your personal, professional and academic networks. Assume that you want to start a business right now, before you graduate. Is there anybody you already know who could offer you sound advice? What sort of guidance would this person be able to offer? If you don’t know anyone, what steps could you take to meet a mentor or counselor?

Students’ answers will vary depending on personal experience.

Improving Your Tech Insights: Social Networking Technology

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Bovee/Thill, Business in Action 6/e Instructor’s Manual If you’ve used Facebook or Google+, you’re already familiar with social networking.

Business versions of this technology are changing the way many professionals communicate. Social network applications, which can be either standalone software products or websites, help identify potential business connections by indexing email and instant messaging address books, calendars, and message archives.

One of the biggest challenges small-business owners face is finding the right people and making those connections, whether you’re looking for a new employee, an investor, a potential customer, or anyone else who might be important to the future of your business. Using social networking, businesspeople can reach more people than they could ever hope to reach via traditional, in-person networking. Visit several of the websites listed in Exhibit 6.5 and read about the benefits of joining these networks.

In a brief email message to your instructor, describe how you could use these networks to locate potential candidates to serve on the advisory board of your small business (make up any details you need about your company).

Students’ emails will vary depending on the site they chose but the main topic should include networking with potential candidates online using one of the sites above.

Practice Your Skills Sharpening Your Communication Skills Effective communication begins with identifying your primary audience and adapting your message to your audience’s needs. This is true even for business plans. One of the primary reasons for writing a business plan is to obtain financing. With that in mind, what do you think are the most important things investors will want to know?

How can you convince them that the information you are providing is accurate? What should you assume investors know about your specific business or industry?

Students’ answers should include discussion of these key issues: (a) deciding what information is most important to convey, (b) convincing the audience that the information provided is accurate, and (c) determining what the audience already knows. a. Because its chief purpose is to obtain financing, the plan’s primary audience will be investors. Hence, the business plan’s most important task is to address the audience’s principal concerns: What will be the return on our investment? How will the business accomplish this? b. By clearly demonstrating that each point in the plan is backed by meticulous research, sound reasoning, and expert support, the plan can convince the audience that its information is accurate. c. Assumptions about the plan’s audience should be based on the same sort of careful research that has gone into formulating each of its components. The business plan writer should learn as much as possible about the audience itself before assuming anything about what that audience does or does not know.

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Building Your Team Skills The questions shown in Exhibit 6.7 cover major legal issues you should explore before plunking down money for a franchise. In addition, however, there are many more questions you should ask in the process of deciding whether to buy a particular franchise.

With your team, think about how to investigate the possibility of buying a Papa John’s franchise. Go to www.papajohns.com and find the information the company provides about franchising opportunities. First, brainstorm with your team a plan to learn more about the potential positives and negatives of buying a Papa John’s franchise. Be sure to consider both regular and nontraditional franchises, as the company calls them. Next, generate a list of at least 10 questions any interested buyer should ask about this potential business opportunity.

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

Students’ answers will vary.

Developing Your Research Skills Scan issues of print or online editions of business journals or newspapers for articles describing problems or successes faced by small businesses in the United States. Clip or copy three or more articles that interest you and then answer the following questions.

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

Students’ answers will vary depending on the articles chosen 2. What could a potential small-business owner learn about the risks and rewards of business ownership from reading these articles?

Students’ answers will vary depending on the articles chosen 3. How might these articles affect is someone who is thinking about starting a small business?

Students’ answers will vary depending on the articles chosen

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

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

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Because larger companies tend to have a lot more to lose in the case that they fail, i.e. more assets, more investments, and more employees, etc.

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

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

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

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 2: Identify the common traits of successful entrepreneurs.

Critical thinking: (1) Would someone who excels at independent entrepreneurship automatically excel at an intrapreneurial effort? Why or why not?

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

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

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

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

Students’ responses will vary depending on personal opinions.

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

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

Because such critical risks and problems are important for investors to consider when deciding whether to back the firms or not. It’s the ethical thing to do.

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

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

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Bovee/Thill, Business in Action 6/e Instructor’s Manual It’s your business: (1) Think of several of the most innovative or unusual products you currently own or have recently used (don’t forget about services as well).Were these products created by small companies or large ones?

Students’ responses will vary depending on personal experiences.

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

Students’ responses will vary depending on personal opinions.

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

Critical thinking: (1) Why would a state or local government invest taxpayer dollars in a business incubator?

Because such investments can bring big payoffs for the state or local municipality, including the prospects of higher tax revenues, more jobs and general improvement in the local economy.

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

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

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

Students’ responses will vary depending on personal experiences.

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

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

LEARNING OBJECTIVE 5: Discuss the principal sources of small-business private financing.

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

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

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

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Because by helping privately finance companies at an early stage (pre-IPOs), angel investors can typically reap higher investment returns rather than buying shares of a firms’ stock.

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

Students’ responses will vary depending on personal opinions.

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

Critical thinking: (1) Why might a business owner with a successful concept decide to sell franchises rather than expanding the company under his or her own control?

Because a franchise can expand more quickly by using funds from franchisees (those who buy into the franchisee for a fee). It also combines at least some of the freedom of working for yourself with many of the advantages of a larger, established organization.

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

Because franchises tend to be regional or national and are typically large organizations, which are not usually a good fit with the entrepreneurial spirit.

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

Students’ responses will vary depending on personal opinions.

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

Students’ responses will vary depending on personal opinions.

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

Chapter Outline I.

The Roles of Management A. Management (p. 141) is the process of planning, organizing, leading and controlling to meet organizational goals B. Managerial roles are the behavioral patterns and activities involved in carrying out the functions of management, and it includes thee major categories: 1. Interpersonal roles – providing leadership to employees, building relationships and acting as a liaison both inside and outside the company 2. Informational roles – gathering information from sources both inside and outside the organization and disseminating information to employees, other managers and other stakeholders 3. Decisional roles – making both routine and non-routine decisions that affect the organization II. The Planning Function A. Planning (p. 143) involves establishing objectives and goals for an organization and determining the best ways to accomplish them B. Strategic plans establish the actions and resource allocation required to accomplish the company’s strategic goals and encompass six steps: 1. Defining the company’s mission statement, vision statement and values statement a. The mission statement (p. 144) is a brief statement of why the organization exists and what it aims to accomplish for customers, investors and other stakeholders b. The vision statement (p. 145) is a brief, inspirational expression of what a company aspires to be c. The values statement identifies the principles that guide the company’s decisions and behaviors

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 2. The company must also have a clear assessment of its strengths and weaknesses relative to the opportunities and threats it faces. This is accomplished through a SWOT analysis a. Strengths are positive internal factors that contribute to the company’s success b. Weaknesses are negative internal factors that inhibit the company’s success c. Opportunities are positive situations that represent the possibility of generating new revenue d. Threats are negative forces that could inhibit a firm’s ability to achieve its objectives 3. Managers need to develop quantitative and qualitative forecasts that predict what will occur, when it will occur, and how it will affect the business 4. In order to understand the company’s competitors, it should also perform a SWOT analysis on each of its major competitors 5. The company then needs to establish goals and objectives a. A goal (p. 147) is a broad, long-range target or aim b. An objective is a specific, short-range target or aim c. Goals should be SMART – specific, measurable, attainable, relevant and time-limited 6. Once the strategic goals and objectives have been established, management needs to develop action plans to reach them III. The Organizing Function A. Organizing (p. 148) is the process of arranging resources to carry out an organization’s plans B. There are three levels of management in a typical corporate hierarchy, known as the management pyramid. The levels of management are: 1. Top managers (p. 149) are those at the highest level of the organization.

They are responsible for setting strategic goals and take overall responsibility for an organization 2. Middle managers develop plans to implement the goals of top managers and coordinate the work of first-line managers 3. First-line managers (also known as supervisory managers) are at the lowest level of the management hierarchy. They supervise the work of non-managerial (operational) employees and implement the plans set at higher management levels IV. The Leading Function A. Leading (p. 150) is the process of guiding and motivating people to work toward organizational goals B. Effective leaders possess a balance of three types of intelligence: 1. Cognitive intelligence – reasoning, problem solving, memorization and other rational skills 2. Emotional intelligence – a person’s awareness of and ability to manage his or her own emotions 3. Social intelligence – an ability to understand the dynamics of social situations and the emotions of other people C. There are three basic leadership styles or types:

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 1. Autocratic leaders (p. 151) control the decision making process in their organizations and restrict the decision-making freedom of subordinates 2. Democratic leaders (p. 152) delegate authority and involve employees in decision-making. This style is often called participative management 3. Laissez-faire leaders leave most decisions up to employees, particularly those concerning day-to-day matters and emphasize employee empowerment – granting decision-making and problem-solving authorities to employees so they can act without first obtaining approval from management D. Managers must also assume responsibility for education and encouragement.

This can take two forms: 1. Coaching involves helping employees reach their highest potential by meeting with them, discussing problems that hinder their ability to work effectively, and offering suggestions and encouragement 2. Mentoring is a process in which experienced managers guide lessexperienced managers by serving as role models E. Additional leadership challenges for managers involve managing change and establishing a productive organizational culture – the set of shared values and norms that support the management system and guide management and employee behavior V. The Controlling Function A. Controlling (p. 154) is the management function of measuring progress against goals and objectives and correcting deviations if results are not as expected.

B. The control cycle is a four-step process: 1. The first step is establishing standards (p. 155) (the criteria against which performance will be measured). a. One common approach to setting standards is benchmarking, in which a company’s key performance attributes are compared with industry leaders b. One of the most important performance variables is quality – a measure of how closely a product conforms to predetermined standards and customer expectations 2. The second step of the control cycle involves assessing performance using both quantitative and qualitative performance measures a. A balanced scorecard (p. 156) monitors performance from multiple perspectives, the growth and development of employees and intellectual property 3. The third step is comparing performance with established standards 4. In the fourth step, managers need to take corrective action to improve performance C. Managers must also plan how the company can respond to possible events, including crisis management – establishing procedures and systems for minimizing harm that might result from unusually threatening situations 1. A crisis management plan should contain both contingency plans and communication plans

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Bovee/Thill, Business in Action 6/e Instructor’s Manual VI. Essential Management Skills A. Managers should possess four types of skills to be effective in the organization 1. Interpersonal skills (p. 157) – the ability to understand other people and interact with them effectively 2. Technical skills (p. 158) – the knowledge and ability to perform the tasks required in a particular job. This category includes administrative skills, which are the technical skills in information gathering, data analysis, planning and organizing 3. Conceptual skills – the ability to visualize organizations, systems, markets and solutions both as complete entities and as interrelated pieces of a whole 4. Decision-making skills – the ability to define problems and opportunities, weigh the alternatives, choose an alternative, implement it, and evaluate the results

Classroom Activities Break-out Group Discussion: Three Leadership Styles.

Goal: Ask students to discuss the advantages and disadvantages of each of the three leadership styles and when each style is most effective.

Time Limit: 15 minutes.

Details: 1. Break students into groups of four or five. (2 minutes) 2. Ask each group to come up with some pros and cons of each of the three leadership styles, namely autocratic, democratic and laissez-faire. Then ask students to summarize when each style is the most effective. (Hint: For instance, autocratic leadership is most effective in helping a company stave off collapse even though it generally has a bad reputation.) (10 minutes) 3. Ask representatives/speakers from each group to present their results to the whole class, either verbally or written (on the blackboard). (3 minutes)

End-of-Chapter Behind the Scenes Customers Believe in Wegmans Because Wegmans Believes in Its Employees Critical Thinking Questions 1. Wegmans has always been managed by members of the Wegman family. Do you think the company could continue its winning ways if the next generation doesn’t want to take over, forcing the company to hire someone from outside the family as CEO? Explain your answer.

The company could continue its winning ways even if it hires someone from outside of the family as a CEO, as long as the outsider CEO continues the

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Bovee/Thill, Business in Action 6/e Instructor’s Manual laissez-faire style of management and extends the company’s tradition of putting employees first.

2. Would the Wegmans approach work for a car dealer? A bookstore? A manufacturer of industrial goods? Explain your answers.

The Wegmans approach would conceivably work for a car dealer or a bookstore since both are service oriented firms where there are substantial amount of employee contact with customers. Empowered employees will contribute to the bottom line of the firm through superior customer service. The same approach may not work as effectively for a manufacturer of industrial goods since there is the same amount of employee-customer interaction.

3. How does low employee turnover contribute to Wegmans’ distinct and positive corporate culture?

Low employee turnover contributes to Wegmans’ distinct and positive corporate culture since it encourages employees to build sustaining long term bonds with each other and with the store. Such bonds will help improve employees’ productivity through teamwork, ultimately enhancing job satisfaction of employees.

Learn More Online Visit the Wegmans website at www.wegmans.com and click on “Careers.” Read the information and watch the videos to learn more about working at Wegmans. Imagine yourself as someone who wants to join the company. Does the information on this website increase your interest in the company? Could you see yourself launching a career at Wegmans?

Students’ answers will vary.

Test Your Knowledge Questions for Review 1. What is management? Why is it so important?

Management is planning, organizing, leading, and controlling resources (land, labor, and capital) to meet an organization’s goals. It is critical and universally necessary in organizations because it is the force that holds the resources together and sets all activity in motion.

2. What is forecasting, and how is it related to the planning function?

Forecasting is an attempt by mangers to make educated assumptions about future trends and events so that their business is not adversely affected by these external changes. This helps managers to fill in gaps in the information they use to carry out the planning function.

3. What is the goal of crisis management?

The goal of crisis management is to keep the company functioning smoothly both during and after a crisis such as a product failure, a fight for company control, an environmental accident or a natural disaster. Successful crisis management requires comprehensive contingency plans and excellent communication with all affected by the crisis.

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4. How does leadership differ from management?

Leadership is the inspirational, visionary, and emotional side of guiding an organization, while management is the rational, intellectual and practical side of it.

5. Why are interpersonal skills important to managers at all levels?

Interpersonal skills are important to managers at all levels because management’s job is to get things done through people. Encouraging employees to work together toward common goals, interacting with employees and other managers, negotiating with partners and suppliers, developing employee trust and loyalty, and fostering innovation all require interpersonal skills.

Questions for Analysis 6. Why is cognitive intelligence alone insufficient for effective leadership?

Because effective leadership also requires two additional types of intelligence, namely emotional intelligence and social intelligence. In fact, various studies suggest that in leadership (and life in general), emotional and social intelligence play a far greater role in success than purely cognitive intelligence.

7. How do the three levels of management differ?

Although top managers take overall responsibility for the organization and set strategic goals, middle managers implement the broad goals set by top management. Middle managers set tactical objectives and coordinate the work of first-line managers who in turn establish operational objectives and supervise the work of operating employees.

8. How do autocratic, democratic, and laissez-faire leadership differ?

Autocratic leaders control the decision-making process in their organizations, often reserving the right to make all major decisions by themselves and restricting the decision-making freedom of subordinates. In contrast, democratic leaders delegate authority and involve employees in decision making. Even though their approach can lead to slower decisions, soliciting input from people familiar with particular situations or issues can result in better decisions. Laissez-faire leaders take the role of consultants, encouraging employees’ ideas and offering insights or opinions when asked, and they emphasize employee empowerment, giving employees the power to make decisions that apply to their specific aspects of work.

9. Why are coaching and mentoring effective leadership techniques?

Coaching encourages employees to become more personally involved—and committed—to their work. Although coaching may take more time than other methods, it seeks to empower employees so that they may learn to overcome problems, as well as reach their highest potential. Mentoring benefits both the employee and the mentor. While the employee learns from the mentor’s advice and insights, the mentor gains personal satisfaction as well as an additional network contact.

10. Ethical considerations. When an organization learns about a threat that could place the safety of its workers and its customers at risk, is management obligated to immediately inform these parties of the threat? Explain your answer.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Management is obligated to inform workers and customers of safety threats for several reasons. First, inattention to a safety risk can leave the company open to future lawsuits should it be discovered that the organization knew about the problems but did nothing to abate them. Second, the company risks a public relations disaster should the public gain knowledge of something they would consider a “cover-up.” Finally, the organization should alert its customers and workers because it is simply the ethical thing to do.

Questions for Application 11. Which would be more difficult to forecast 10 years from now: the number of 60 year-old residents or their average disposable income? Why? It would be easier to forecast the number of 60 year-old residents because you could rely on demographic data such as census reports and make certain assumptions about the population based on historic data. Disposable income would be more difficult to determine because it depends on a variety of factors: inflation, the current tax code, the state of the economy, etc.

12. What are your long-term goals? Develop a set of long-term career goals for yourself and several short-term objectives that will help you reach those goals. Make sure your goals are SMART (see page 147).

Students’ answers will vary. However, their answers should show an understanding of the difference between a goal (a broad, long-range target or aim) and an objective (a specific, short-range target or aim designed to help reach that goal). To emphasize what is meant by “specific, measurable, and time-limited,” instructors might want to reiterate the example given in the chapter: “[I]t is better to state ‘increase our customer base by 10 percent over the next three years’ than ‘substantially increase our customer base.’”

13. Concept Integration. Using Welch Allyn’s mission statement on page 144 as a model and the material you learned in Chapter 4, develop a mission statement balances the pursuit of profit with responsibility to employees and community. Choose either a manufacturer of musical instrument or a retailer of children’s clothing as the company.

Students’ answers will vary depending on the firm they chose, but should combine the elements of a mission statement (the organization’s purpose, basic goals, and philosophies) with the types of socially responsible activities described in Chapter 4 (conducting social audits, engaging in cause-related marketing, and engaging in philanthropy).

14. Concept Integration. What is the principal difference between a business plan (as discussed in Chapter 6) and a strategic plan?

A business plan plays a principal role in the creation of a new business, and its primary audience consists of potential investors. A strategic plan, on the other hand, is typically developed by a company’s board of directors and key managers, and is a tool for achieving strategic goals over a two- to five-year period.

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Expand Your Knowledge Discovering Career Opportunities If you become a manager, how much of your day will be spent performing each of the four basic functions of management? This is your opportunity to find out.

Arrange to shadow a manager (such as a department head, a store manager, or a shift supervisor) for a few hours. As you observe, categorize the manager’s activities in terms of the four management functions and note how much time each activity takes.

If observation is not possible, interview a manager in order to complete this exercise.

1. How much of the manager’s time is spent on each of the four management functions? Is this the allocation you expected?

Answers will vary depending on the manager selected.

2. Ask whether this is a typical workday for this manager. If it isn’t, what does the manager usually do differently? During a typical day, does this manager tend to spend most of the time on one particular function?

Answers will vary depending on the manager selected.

3. Of the four management functions, which does the manager believe is most important for good organizational performance? Do you agree?

Answers will vary depending on the manager selected.

Improving Your Tech Insights: Business Intelligent Systems

One of the maddening ironies of contemporary business is that many decision makers are awash in data but starved for true information and insights.

Business intelligence (BI) systems, also called business analytics, aim to harness all that data and turn it into the information and insights that managers need.

Explore the business intelligence or business analytics products offered by several of the leading vendors, including Actuate (www.actuate.com), IBM (www.ibm.com), SAP Business Objects (www.sap.com), Information Builders (www.informationbuilders.com), Oracle (www.oracle.com) and SAS (www.sas.com). Research a system offered by one of these vendors, and in a brief email message to your instructor, summarize in your own words the system’s benefits for managerial decision makers. (Business intelligence is a broad term that describes a variety of approaches, technologies, and specific products, so the field can be a bit confusing. Try several websites if needed to find a BI system that you can summarize briefly.)

Students’ email messages will vary depending on the systems they end up choosing.

Practice Your Skills Sharpening Your Communication Skills Potential customers frequently visit your production facility before making purchase decisions. You and the people who report to you in the sales department have

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Bovee/Thill, Business in Action 6/e Instructor’s Manual received extensive training in etiquette issues because you deal with high-profile clients. However, the rest of the workforce has not received such training, and you worry that someone might inadvertently say or do something that would offend one of these potential customers. In a two paragraph email message, explain to the general manager why you think anyone who might come in contact with customers should receive basic etiquette training.

Students’ email messages will vary.

Building Your Team Skills With a team of fellow students, perform a SWOT analysis for your college or university from the perspective of recruiting new students. Identify as many significant strengths and weaknesses as you can think of, being as objective as possible. Next, identify any important opportunities and threats you can find, such as demographic shifts or changes in government funding. Summarize your findings in a chart modeled after Exhibit 7.3. Finally, evaluate your college’s website and other promotional materials if available according to how well they present the school’s strengths to prospective students.

Students’ SWOT analyses will vary depending on the colleges and universities they attend, however, they will need to follow the SWOT analysis framework on page 145.

Developing Your Research Skills Find two articles in business journals or newspapers (print or online editions) that profile two senior managers who lead a business organization.

1. What experience, skills, and business background do the two leaders have?

Do you see any striking similarities or differences in their backgrounds?

Students’ answers will vary depending on the articles selected.

2. What kinds of business challenges have these two leaders faced? What actions did they take to deal with those challenges? Did they establish any long-term goals or objectives for their company? Did the articles mention a new change initiative?

Students’ answers will vary depending on the articles selected.

3. Describe the leadership strengths of each person as they are presented in the articles you selected. Is either leader known as a team builder? Long-term strategist? Shrewd negotiator? What are each leader’s greatest areas of strength?

Students’ answers will vary depending on the articles selected.

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CHECKPOINTS LEARNING OBJECTIVE 1: Explain the importance of management, and identify the three vital management roles.

Critical thinking: (1) How are social media changing the nature of the manager’s information role?

Social media such as blogs and wikis for both internal and external communications allow information to flow both directions (between managers and employees) rather than one direction. Social media also allow more people to participate and communicate in a more immediate and less formal way. The smart use of social media is helping managers lean more from employees and customers and communicate back to these and other stakeholder groups more effectively.

(2) Would managers get more respect from employees if they “rolled up their sleeves” and pitched in with the daily work more often? Why or why not?

Not necessarily. The most important part of a manager’s job is to delegate responsibilities and motivate others to do their jobs, rather than to have the managers do the jobs of the employees.

It’s your business: (1) Review the process you went through to choose the college you are currently attending. What lessons from your experience could someone apply to managerial decision making?

Students’ responses will vary depending on personal experiences.

(2) Do you believe you have the right personality for management? If not, what areas would you work on?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 2: Describe the planning function, and outline the strategic planning process.

Critical thinking: (1) Would Boeing and Old Navy develop strategic plans over the same time horizon?

Why or why not?

For the most part because companies in different industries tend to apply the same long-range horizon when it comes to strategic planning and such horizon typically ranges from two to five years.

(2) How does the vision statement guide the planning process?

The vision statement is a brief and inspirational expression of what a company aspires to be. It provides the firm and its managers and employees with some focus without getting into the specifics of a mission statement. It also inspires employees with a clear sense of purpose.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual It’s your business: (1) What is your personal vision statement for your career and your life? Have you ever thought about your future in this way?

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

(2) Consider a career path that you might pursue upon graduation, and perform a quick SWOT analysis. What are some of your internal strengths and weaknesses and external opportunities and threats?

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

LEARNING OBJECTIVE 3: Describe the organizing function, and differentiate among top, middle, and first-line management.

Critical thinking: (1) Why might a manager need to de-emphasize skills honed in previous positions as he or she rises through the organizational hierarchy?

Because as the manager rises through the organizational hierarchy, skills that were important to her job success may no longer be as important. For instance, functional area skills are not as important for a top manager compared to a first-line manager.

(2) Would top managers or first-line managers typically have more or less of the information they’d like to have for the decisions they need to make? Why? Top managers tend to have more information at the higher level, i.e. overall corporate level information, while first-line managers tend to have more information at the ground level, i.e. in the trenches, at the department level.

It’s your business: (1) Have you ever supervised others on the job or in volunteer work? If so, how would you rate your performance as a manager?

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

(2) If you were suddenly promoted to manage the department you’ve been working in, would you change your “work” personality? Why or why not?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 4: Describe the leading function, leadership style, and organizational culture.

Critical thinking: (1) Are management and leadership the same thing? If not, why not?

No. Management is the rational, intellectual, and practical side of guiding an organization, while leadership is the inspirational, visionary, and emotional side.

(2) Can a single individual be an autocratic, a democratic, and a laissez-faire leader?

Why or why not?

Yes, because an effective leader often adapts her leadership style to match the requirements of the particular situation. A normally democratic leader may adopt an autocratic style in a crisis situation such as implementing staff reductions or layoffs.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual It’s your business: (1) What is your natural inclination in terms of the three basic leadership styles – autocratic, democratic, and laissez-faire? Think about times in school, at work, or in social situations in which you played a leadership role. How did you lead?

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

(2) Does leadership experience in school activities such as student government and athletics help prepare you for business leadership? Why or why not?

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

LEARNING OBJECTIVE 5: Describe the controlling function, and explain the four steps in the control cycle.

Critical thinking: (1) Why is it important to meet the needs of internal customers?

Because various internal customers need to work as a team and support each other in ways that are best for the company.

(2) Is lowering performance standards in response to a failure to meet those standards necessarily a sign of “giving up”? Why or why not?

Not necessarily. It is possible that performance standards were set at too high of a level and needs to be adjusted.

It’s your business: (1) Do you benchmark your performance in any aspect of your personal or academic life? If yes, does it help you improve? If no, would it help you improve if you tried it?

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

(2) Think back over any crises you’ve faced in your life. How well did you respond?

What would you do differently in a future crisis?

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

LEARNING OBJECTIVE 6: Identify and explain four important types of managerial skills.

Critical thinking: (1) Why is trust a vital aspect of a manager’s interpersonal skills?

Because without trust, the communications from a manager will not be well-received by the employee, thus hampering the effectiveness of such communications.

(2) What are the risks of defining problems or opportunities poorly prior to making decisions?

Without proper definition of problems or opportunities, managers may be using the wrong information and arrive at the wrong decisions.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual It’s your business: (1) Would you succeed as a manager if you started a company right out of college, without having gained any experience as an employee in another company? Why or why not?

Students’ responses will vary depending on personal opinions.

(2) How would you rate your conceptual skills? Does “seeing the big picture” come easily to you? If not, how might you improve in this area?

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

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Chapter 8 ORGANIZATION AND TEAMWORK Chapter Overview This chapter covers the important topics of organizational structure and teamwork. It first discusses how different types of businesses are organized in order to best achieve their goals. It then highlights the pros and cons of working in teams, what constitutes effective teams and how to resolve team conflicts. Lastly it identifies useful techniques for improving the efficiency of team meetings.

Chapter Outline I.

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Designing an Effective Organization Structure A. A company’s organization structure (p. 166) is the framework that enables managers to divide responsibilities, ensure employee accountability and distribute decision-making authority 1. To design the organization’s structure, managers use an organizational chart, a visual representation of how employees and tasks are grouped and where lines of communication and authority flow 2. The goal of many companies today is establishing an agile organization, one in which company structure, policies and capabilities allow employees to respond quickly to customer needs and changes in the business environment B. Designing the most effective structure for the organization involves: 1. Determining which functions need to be done in-house and which functions can be outsourced a. A company’s core competencies are those activities which the company considers central and vital to its business 2. Identifying job responsibilities and determining the most appropriate level of work specialization – the degree to which organizational tasks are broken down into separate jobs 3. Defining the chain of command (p. 167) – the lines of authority that connect the various groups and levels within the organization. Two basic types: a. Line organization (p. 168) – a system that establishes a clear line of authority flowing from the top down b. Line-and-staff organization – a system that has a clear chain of command but also includes functional groups of people who provide advice and specialized services 4. Establishing the span of management (p. 169) – the number of people under one’s manager’s control; this is also called the span of control a. In a flat organization, there are fewer levels of management but each manager is responsible for more employees b. In a tall organization, there are more layers of management, with each manager responsible for fewer people

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 5. Determining decision-making authority a. Centralization is the process of concentrating decision-making authority at the top levels of the organization b. Decentralization (p. 170) involves delegating decision-making authority to employees in lower level positions in the organization II. Organizing the Workforce A. The arrangement of activities into logical groups that are then clustered into larger departments and units to form the total organization is known as departmentalization B. Departmentalization typically occurs in one of four ways: functional, divisional, matrix or network.

1. A functional structure (p. 171) groups employees according to their similar skills, resource use and expertise; i.e., accounting, marketing, engineering 2. A divisional structure groups departments according to similarities in product, process, customer or geography. Each division encompasses all the major functional resources (accounting, marketing, manufacturing, etc.) required to achieve its goals 3. A matrix structure (p. 172) is one in which employees are assigned to both a functional group and a project team, thus using functional and divisional patterns simultaneously 4. A network structure is one in which individual companies are connected electronically to perform selected tasks for a small headquarters organization III. Organizing in Teams A. A team (p. 173) is a unit of two or more people who work together to achieve a shared goal.

B. There are several types of teams: 1. A problem-solving team (p. 174) is assembled to find ways to improve quality, efficiency and/or the work environment and disbands after presenting or implementing the solution 2. A self-managed team is one in which members are responsible for an entire process or operation and requires minimal supervision 3. A functional team is one whose members come from a single functional department. The structure typically follows the formal chain of command.

4. A cross-functional team draws together employees from different functional areas. It can take on several roles, including: a. A task force (p. 175), which is formed to work on a specific activity within a specified period of time b. A committee that may be a permanent part of the organization and deals with regularly recurring tasks 5. A virtual team uses communication technology to bring together geographically distant employees C. Social networking and virtual communities are redefining teamwork and team communication by facilitating communication and erasing the constraints of geographic and organizational boundaries 1. Companies may use social networking technologies to form virtual communities or communities of practice

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IV. Ensuring Team Productivity A. The use of teams within an organization has several advantages, including: 1. Higher-quality decisions 2. Increased diversity of views 3. Increased commitment to solutions and changes 4. Lower levels of stress and destructive internal competition 5. Improved flexibility and responsiveness B. The use of teams within an organization also has several disadvantages, including: 1. Inefficiency 2. Groupthink (p. 178) – uniformity of thought that occurs when peer pressure causes individual team members to withhold contrary or unpopular opinions 3. Diminished individual motivation 4. Structural disruption 5. Excessive workloads C. The size of the team (5 to 12 members is recommended) and the types of individuals on a team are also vital to its success D. Other factors contributing to the success and effectiveness of the team include: 1. A clear sense of purpose 2. Open and honest communication between team members 3. Encouraging creative, original thinking 4. Accountability 5. Focus 6. Decision by consensus V. Fostering Teamwork A. Teams typically go through five stages of development, as follows: 1. Forming – a period of orientation in which members get to know each other and what is expected of them 2. Storming – the period in which conflicts may arise as team members jockey for position or form coalitions 3. Norming – the period in which harmony develops and team members reach agreement on member roles 4. Performing – the stage in which members are committed to team goals and the team focuses on task accomplishment 5. Adjourning – the stage after task completion in which issues are wrapped up and the team is dissolved B. As the team moves through the stages of development, it develops a certain level of cohesiveness (p. 181), a measure of how committed team members are to their team’s goals C. Teams will also establish norms, informal standards of conduct that guide team behavior D. Teams may also experience conflict 1. Conflict can be constructive or destructive 2. Conflict arises for a variety of reasons, including competing for resources, disagreement over responsibilities, poor communication, withholding information, differences in values, power struggles, and differing goals

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 3. Conflict can be resolved through proactive attention, communication, openness, research, flexibility, fair play and alliance VI. Managing an Unstructured Organization A. An unstructured organization (p. 183) is a virtual and networked organization that lacks a conventional structure but instead assembles talent as needed from the open market.

B. The advantages of an unstructured organization include: 1. Increased agility. It can assemble, disassemble and reconfigure as needed 2. Lower fixed costs and more flexible capacity management 3. Access to otherwise unreachable talent, because companies can “rent” top experts in a field as needed 4. Benefits of competition, because independent contractors compete with other contractors and must perform or risk not getting more assignments 5. Performance-based evaluation 6. Freedom and flexibility for workers, who can pick and choose projects and clients 7. Access to jobs that may otherwise be unattainable C. Potential disadvantages of an unstructured organization include: 1. Complexity and control, because workers report to multiple bosses in multiple companies 2. Uncertainty 3. Loss of meaning and connection 4. Diminished loyalty – workers are often competing vendors, not longterm employees 5. Career development – independent contractors are responsible for developing their own careers, rather than following a designated career path 6. Management succession 7. Accountability and liability

Classroom Activities In-class Activity: Tall vs. Flat Organization.

Goal: Help students better understand the differences between tall and flat organizations.

Time Limit: 10 minutes.

Details: 1. Create a list on one side of the blackboard, including the names of different companies such as Ford Motors, Google, Citi Group, Genentech, Microsoft, Intuit, Netflix, Walmart, etc.

2. Draw two columns on the other side of the blackboard, one labeled “Tall Organization” and the other labeled “Flat Organization”.

3. Ask students to pair up and recreate the content of the blackboard on their notebooks and subsequently assign all of the line items into the correct columns.

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End-of-Chapter Behind the Scenes Teaming Up for Success at The Container Store Critical Thinking Questions 1. Based on what you’ve learned about the way employees at The Container Store interact with customers, do you think that the company emphasizes centralized or decentralized decision making? Explain your answer.

The company emphasizes decentralized decision making. The employees receive extensive training and development and are thus empowered to do what is needed to “astonish customers” at their stores.

2. How might the company’s emphasis on teamwork affect accountability and authority?

From the company’s daily huddles and other team focuses, the employees are held accountable for their actions. They are also delegated the authority required to meet their customers' needs. The employees thus work together to meet the goals of the stores.

3. What effect might a change to commission-based compensation have on the team structure at the Container Store?

A change to commission-based compensation would defeat what the Container Store has accomplished in team building. Once a firm pays its employees commission, each employee begins focusing on what they sell individually rather than what the store does as a whole. The focus would become more “meoriented” than “us-oriented."

Learn More Online Visit The Container Store’s website at www.containerstore.com and read about the company’s history, its culture, and the benefits it offers employees. What do you think of the company’s belief that one great person equals three good people? What kinds of jobs are available in stores, the home office, and the distribution center?

Students’ responses will depend, in large part, on the material currently posted on the website.

Test Your Knowledge Questions for Review 1. What is an agile organization?

An agile organization is a company whose structure, policies, and capabilities allow employees to respond quickly to customer needs and changes in the business environment and to bring the best mix of talents and resources to every challenge.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 2. What are the characteristics of tall organizations and flat organizations?

A flat organization has relatively few levels in the management hierarchy, whereas a tall organization has many hierarchical levels, typically with fewer people reporting to each manager than is the case in a flat organization.

3. What are the advantages and disadvantages of work specialization?

Work specialization, also called a division of labor, refers to degree to which organizational tasks are broken down into separate jobs. When employees specialize in one task in a series needed to complete a job, they can complete it far more efficiently than if they performed every task necessary to complete the job. However, because repetition of tasks creates boredom, employees can become unmotivated, and feel isolated. For this reason, companies are balancing specialization and employee motivation through teamwork.

4. What are the advantages and disadvantages of functional departmentalization?

Functional departmentalization (grouping employees according to their skills and resource use) has several distinct advantages. First, resources are used efficiently, which saves a company both time and money. Second, centralized decision making enables upper management to give unified direction. Third, coordination of activities within departments becomes streamlined. However, communication between departments can become less clear, slowing down the overall production process, and making it difficult to respond to environmental changes. Sometimes employees even become alienated from the overall goals of the firm.

5. What are the advantages and disadvantages of the unstructured organizational model?

Advantages of the unstructured organizational model include: (1) increased agility to assemble, reconfigure and disassemble organizations as dictated by market trends; (2) lower fixed costs and more flexible capacity management; (3) access to otherwise unreachable talent; (4) benefits of competition; (5) workers are evaluated on measurable performance; performance-based evaluation; (6) freedom and flexibility; and (7) access to jobs that might be otherwise unattainable. The unstructured organization is not without its disadvantages, however, and these include: (1) complexity and control issues; (2) uncertainty; (3) loss of meaning and connection because employees do not have the opportunity to form bonds; (4) diminished loyalty; (5) employees must assume more responsibility for career development; (6) lack of management succession; and (7) less clarity in terms of accountability and liability.

Questions for Analysis 6. Why is important for companies to decide on their core competencies before choosing an organizational structure?

Core competencies are the activities in which a company excels and have the potential to create competitive advantages. Those are precisely the activities that companies should focus on themselves rather than outsource to other companies.

Therefore companies need to decide on their core competencies, i.e. the activities they should focus on before they choose an organizational structure.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 7. How can a virtual organization reduce costs?

In the virtual organization structure, companies hire the services that are needed when they are needed, and then are able to change them once they are no longer needed. Thus, rather than hiring individual employees to perform specific functions and paying for the training and development of these employees, the virtual organization structure allows the flexibility of focusing on its core competencies and outsourcing other key activities to firms who specialize in those specific areas.

8. What can managers do to help teams work more effectively?

To help teams work more effectively, managers can show strong support for team concepts, give the teams the authority to make their own decisions, and help them to establish clear objectives. Managers can also offer financial incentives for team performance, such as stock options, profit sharing, and bonuses. Public recognition is an additional powerful motivation for success.

9. How can companies benefit from using virtual teams?

A virtual team uses communication technology to bring geographically distant employees together to achieve goals. Companies can benefit from using virtual teams because they have the opportunity to assemble teams of experts wherever they may be, rather than rely on the people who happen to work in a given geographic locations.

10. Ethical considerations. You were honored that you were selected to serve on the salary committee of the employee negotiations task force. As a member of that committee, you reviewed confidential company documents listing the salaries of all department managers. You discovered that managers at your level are earning $25,000 more than you, even though you’ve been at the company the same amount of time. You feel that a raise is justified on the basis of this confidential information. How will you handle this situation?

Clearly, there are some ethical issues involved in this situation. Because this information was obtained when reviewing confidential company documents, students must take this issue into account when responding. Although the employee should seek a raise in salary, it would be a mistake to mention the salaries of other employees as a reason for greater pay. Answers should emphasize the reasons that the employee deserves a raise rather than simply comparing salaries (and it would probably be better not to mention others’ salaries at all).

Questions for Application 11. You are the leader of a cross-functional work team whose goal is to find ways of lowering production costs. Your team of eight employees has become mired in the storming stage. They disagree on how to approach the task, and they are starting to splinter into factions. What can you do to help the team move forward?

The team leader’s focus at this point should be to resolve the conflict and help the team become more cohesive. Adopting the avoidance style will not be helpful here; however, diffusion might be possible. The leader can encourage the disputing parties to confront the issue by openly discussing it at a special meeting. After both parties have stated their views, a compromise may be possible. If not, the leader can suggest that the team vote on the issue, with all

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Bovee/Thill, Business in Action 6/e Instructor’s Manual parties agreeing to accept the outcome. If this fails, the leader can turn to a neutral third party to mediate the dispute.

12. You’ve recently accepted a job as the U.S. sales manager for a German manufacturing company. One of your first assignments is serving on a virtual problem solving team with colleagues from Germany, France, Japan, and South Korea. Budgets are tight, so you won’t have the opportunity to meet with your teammates in person to get to know one another. What steps can you take to help the team develop into a cohesive and efficient unit?

Students’ answers will vary but some key points to consider include: A) take full advantage of the diverse viewpoints, experiences, and skills of the various team members; B) use technology to replicate resources that in-person teams rely on; C) take extra care to keep the team functioning effectively.

13. Concept Integration. One of your competitors has approached you with an intriguing proposition. The company would like to merge with your company. The economies of scale are terrific. So are the growth possibilities. There’s just one issue to be resolved. Your competitor is organized under a flat structure and uses lots of cross-functional teams.

Your company is organized under a traditional tall structure that is departmentalized by function. Using your knowledge about culture clash (see page 108), what are the likely issues you will encounter if these two organizations are merged?

Students’ answers will vary but the following are points of consideration: A) The organizational cultures of the two merged firms must be harmonized somehow, which can result in clashes between different values, management styles, communication practices, and other aspects of life on the job. A company that simply tries to impose its culture on the merger partner firm can experience significant resistance, and even widespread employee defection; B) A company with a flat structure and lots of cross-functional teams tends to be more decentralized while a firm with a tall structure that is departmentalized by function tends to be more centralized. The two merged firms need to decide together what the new organizational structure needs to look like (e.g. stick with one of the existing structures or adopt a hybrid structure, etc.).

14. Concept Integration. Chapter 7 discussed several styles of leadership, including autocratic, democratic, and laissez-faire. Using your knowledge about the differences in these leadership styles, which style would you expect to find under the following organization structures: (a) tall organization with departmentalization by function; (b) tall organization with departmentalization by matrix; (c) flat organization; (d) self-directed teams? a. When an organization is departmentalization by function, employees are grouped according to skill, resource use, and expertise. This kind of grouping is typical of a vertical organization and would function well with either an autocratic or democratic leader. b. When an organization is departmentalized by matrix, employees from functional departments form teams to combine specialized skills. Structure of these organizations is less rigid than those departmentalized by function. A leader for this style of organization would have to be democratic. Laissezfaire leaders would be too unstructured for this organization, and autocratic leaders would be too rigid.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual c. Horizontal organizations tend to use teams and reject separation of people and work into functional departments. Leaders for this type of organization would likely be democratic; they cannot be autocratic as they must delegate a lot of authority and trust employees to act with prudence. d. Self-directed teams manage their own activities and require little supervision: Clearly, the best leader for this structure would be a laissez faire leader. This type of leader could act as mentor and guide but would allow the selfdirected team to function on its own.

Expand Your Knowledge Discovering Career Opportunities Whether you’re a top manager, first-line manager (supervisor), or middle manager, your efforts will impact the success of your organization. To get a closer look at what the responsibilities of a manager are, log on to the Prentice Hall Student Success SuperSite at www.prenhall.com/success and click on Majors Exploration. Select “management” in the drop down box. Then scroll down and read about careers in management.

1. What can you do with a degree in management? ➢ Management or management trainee is a first step towards overall direction of a department, a division, or even a whole company. ➢ Supervision of employees in corporate, retail, or many other environments takes advantage of what you've learned about people and businesses. ➢ Management decision-making relies on well-founded analysis of facts and trends to improve in how a business is run. Management majors are trained to conduct these kinds of analyses. ➢ Management students are trained to understand the human resource needs of organizations and to develop programs for recruitment, training, retention, and development of employees. ➢ To compete successfully in a market, organizations need to know how to design and execute strategies. Management studies prepare students by giving them a background in strategic planning and in implementing strategy.

2. What is the future outlook for careers in management?

The future looks very promising with a management degree. There are a variety of subjects to specialize in and a variety of jobs available after college.

3. Scroll down to “Advice from a Management Professor”. After reading this information, does management appeal to you as a major? Why or why not?

Student answers will vary depending on personal opinion.

Improving Your Tech Insights: Wireless Networking Wireless networking – both local area Wi-Fi and wide area mobile phone networks - gives businesses three major benefits. The first is making information available where and when it can be most useful. The second is untethering workers from physical locations, allowing them to be productive

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Bovee/Thill, Business in Action 6/e Instructor’s Manual wherever they want or need to be. The third major benefit is simplifying the connection between people and computers. This can help in a variety of ways, from making it easier to add networking to an older building that doesn’t have wires running through the walls to enabling business teams to move around large corporate campuses (to attend team meetings, for example) without losing their connections to the company network. Research the ways businesses are using wireless networking to overcome organizational boundaries, enhance teamwork, or improve meetings. Identify three examples in a brief email message to your instructor.

Students’ answers will vary depending on the choice of research articles.

Practice Your Skills Sharpening Your Communication Skills In group meetings, some of your colleagues have a habit of interrupting and arguing with the speaker, taking credit for ideas that aren’t theirs, and shooting down ideas they don’t agree with. You’re the newest person in the group and not sure if this is accepted behavior in this company, but it concerns you both personally and professionally. Should you go with the flow and adopt their behavior or stick with your own communication style, even though you might get lost in the noise? In two paragraphs, explain the pros and cons of both approaches.

Student answers will vary depending on personal opinion.

Building Your Team Skills What’s the most effective organization structure for your college or university? With your team, obtain a copy of your school’s organization chart. If this chart is not readily available, gather information by talking with people in administration, and then draw your own chart of the organization structure.

Analyze the chart in terms of span of management. Is your school a flat or a tall organization? Is this organization structure appropriate for your school? Does decision making tend to be centralized or decentralized in your school? Do you agree with this approach to decision making?

Finally, investigate the use of formal and informal teams in your school. Are there any problem-solving teams, task forces, or committees at work in your school? Are any teams self-directed or virtual? How much authority do these teams have to make decisions? What is the purpose of teamwork in your school?

What kinds of goals do these teams have?

Share your team’s findings during a brief classroom presentation, and then compare the findings of all teams. Is there agreement on the appropriate organization structure for your school?

Universities and community colleges tend to be rich with examples of different types of organizational structures. There are usually many committees, and task forces, as well as “tall” organizational structures to examine. This blending of structures is a

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Bovee/Thill, Business in Action 6/e Instructor’s Manual good example for students to explore because it demonstrates the ways in which different types of structures can coexist. Students may tend to overlook the informal committees, groups, and networks; be sure to encourage them to notice the informal as well as the formal structures

Developing Your Research Skills Although teamwork can benefit many organizations, introducing and managing team structures can be a real challenge. Search past issues of business journals or newspapers (print or online editions) to locate articles about how an organization has overcome problems with teams.

1. Why did the organization originally introduce teams? What types of teams are being used?

Answers will vary depending on the articles selected.

2. What problems did each organization encounter in trying to implement teams? How did the organization deal with these problems?

Answers will vary depending on the articles selected.

3. Have the teams been successful from management’s perspective? From the employees’ perspective? What effect has teamwork had on the company, its customers, and its products?

Answers will vary depending on the articles selected.

CHECKPOINTS LEARNING OBJECTIVE 1: Explain the major decisions needed to design an organization structure.

Critical thinking: (1) What are the risks of a poorly designed organization structure?

A poorly designed structure can create enormous waste, confusion, and frustration for employees, suppliers, and customers.

(2) How does a flat structure change the responsibilities of individual managers?

A flat structure widens the span of management for individual managers.

It’s your business: (1) What would you say are your two or three core competencies at this point in your career?

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

(2) Would you function better in a highly centralized or highly decentralized organization? Why? Students’ responses will vary depending on personal opinions.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual LEARNING OBJECTIVE 2: Define four major types of organization structure.

Critical thinking: (1) Should The Container Store use the same organization structure in each of its stores around the country? Why or why not?

It should since that will give customers all over the country the same shopping experience and convey a uniform brand image.

(2) Why does a matrix structure create potential problems in the chain of command?

Because in a matrix structure an employee reports to two superiors simultaneously.

It’s your business: (1) Do you think you would function well in a matrix structure, where you would need to report to two bosses simultaneously? Why or why not?

Students’ responses will vary depending on personal opinions.

(2) What about as a manager—could you share control with another manager?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 3: Explain how a team differs from a group, and describe the six most common forms of teams.

Critical thinking: (1) How might the work of a task force or committee disrupt the normal chain of command in an organization?

Because task forces and committees are cross-functional and they require team members to take time away from their own departments or divisions to meet and work on specific activities.

(2) Should new hires with no business experience be assigned to virtual teams? Why or why not?

They can be assigned to virtual teams as long as they get to meet in person at least once with other team members before working on the virtual teams.

It’s your business: (1) Would you function well in a virtual team setting that offered little or no chance for face-to-face contact with your colleagues? Why or why not?

Students’ responses will vary depending on personal opinions.

(2) If you had two similar job offers, one with a company that stresses teamwork and another with a company that stresses independent accomplishment, which would you choose? Why? Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 4: Highlight the advantages and disadvantages of working in teams, and list the characteristics of effective teams.

Critical thinking: (1) Is groupthink similar to peer pressure? Why or why not?

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Groupthink is uniformity of thought that occurs when peer pressures cause individual team members to withhold contrary or unpopular opinions; therefore, groupthink is definitely related to peer pressure.

(2) Is supporting a group decision you don’t completely agree with always a case of groupthink? Explain your answer.

Not necessarily. It could be that you believe the group decision is for the good of the whole firm or group even though it may affect you negatively. In this case, it is known as a personal sacrifice for the common good rather than groupthink.

It’s your business: (1) How would you characterize the experience you’ve had working in teams throughout your high school and college years?

Students’ responses will vary depending on personal experiences.

(2) How can you apply experience gained on athletic teams and other collaborative activities to the business world?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 5: Review the five stages of team development, and explain why conflict can arise in team settings.

Critical thinking: 1) How can a team leader know when to step in when conflict arises and when to step back and let the issue work itself out?

It depends on whether the team leader perceives such conflicts as constructive or destructive. If they were constructive, she should step back, but if they were destructive, she should step in.

(2) What are the risks of not giving new teams the time and opportunity to “storm” and “norm” before tackling the work they’ve been assigned?

The risks include delaying the potential conflicts (rather than dealing with them first) until such conflicts prevent them from successful teamwork.

It’s your business: (1) Have you ever had to be teammates (in any activity) with someone you simply didn’t like on a personal level? If so, how did this affect your performance as a team member?

Students’ responses will vary depending on personal experiences.

(2) Have you ever had to adapt your regular personality in order to succeed on a particular team? Was this a positive or negative experience?

Students’ responses will vary depending on personal experiences.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual LEARNING OBJECTIVE 6: Explain the concept of an unstructured organization, and identify the major benefits and challenges of taking this approach.

Critical thinking: (1) “Unstructured” organization is something of a contradiction in terms; are such companies still “organized” if they have no permanent structure? Why or why not?

Companies with an unstructured organization are indeed organized, but in a very flexible, nontraditional manner. These companies use digital technologies to form and reform work patterns almost on a project-by-project basis.

(2) How can workers develop marketable skills if they work as independent contractors?

Although independent contractors have to assume more responsibility for their career development – as opposed to progressing through the ranks of an organization – they also have the opportunity to seek positions in which they can learn new skills.

Independent contractors can pick and choose projects that interest them and that they believe will assist them in obtaining marketable skills.

It’s your business: (1) Where do you think you would be most comfortable: as a regular employee in a conventionally structured firm or as an independent contractor, moving from project to project? Why? Students’ responses will vary depending on personal experiences.

(2) Assume that you went to work for a conventional employer and then left to work as an independent contractor as soon as you developed enough of a skill set to make it on your own. (Assume as well that you were not violating any sort of employment contract and were free to leave.) Would you have any ethical concerns about leaving an employer who had invested in your professional development? Why or why not?

Students’ responses will vary depending on personal experiences.

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Chapter 9: PRODUCTION SYSTEMS Chapter Overview Chapter Overview: This chapter combines the two important business functional areas of operations and information technology. It introduces the key concept of business system and uses it as a foundation to describe value chain, supply chain management and quality control. It then surveys how businesses use information systems to help improve both the efficiency and quality of various business processes.

Chapter Outline I.

The Systems View of Business A. Business can be viewed from a systems perspective. A system (p. 193) is an interconnected and coordinated set of elements and processes that convert inputs to desired outputs.

B. A company is made up of numerous subsystems (i.e., marketing, accounting, manufacturing, etc.) that constitute the overall system of the company C. Seven principles of systems thinking that can help managers are: 1. Help employees see how they contribute to the overall goal 2. Understand how individual systems work and how they interact 3. Understand problems before fixing them, and focus on things that are meaningful, not simply measurable 4. Understand the potential impact of solutions before implementing them 5. Do not move problems from one subsystem to another without fixing them 6. Understand how feedback works in a system 7. Use mistakes as opportunities to learn and improve

II. Value Chains and Value Webs A. A value chain (p. 197) consists of all the elements and processes that add value as raw materials are transformed into final products made available to the customer B. The value web (p. 198) concept expands this model into a multidimensional network of suppliers and outsourcing partners.

1. Outsourcing (p. 197) allows companies to focus on core competencies and contract out other functions or operations to other companies C. A variation of outsourcing is known as offshoring (p. 198), in which a company transfers a part or all of a business function to a facility in another country in pursuit of lower costs D. Arguments in support of offshoring include: 1. Companies have a responsibility to shareholders to pursue reduced costs 2. Lower prices for U.S. consumers 3. Offshoring may be the only way to reduce costs and remain competitive 4. Offshoring provides jobs for those in other countries

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 5. Offshoring saves other U.S. jobs by making U.S. companies more competitive in the global market E. Arguments against offshoring include: 1. Loss of well-paid U.S. jobs 2. Hidden costs (i.e., fuel costs and exchange rates) and geopolitical risks 3. Diminished responsiveness to marketplace trends and customers 4. Knowledge transfer and theft issues 5. Product safety issues 6. National security and public health concerns III. Supply Chain Management A. A supply chain (p. 200) is a set of connected systems that coordinates the flow of goods and materials from suppliers through to final customers B. Supply chain management (SCM) combines business procedures and policies with information systems that integrate the various elements of the supply chain into a cohesive system C. Benefits of SCM include: 1. Managing risks from costs and availability to health and safety issues 2. Coordinating relationships in the supply chain 3. Addressing trade-offs and balancing competing interests of functional areas 4. Promoting sustainability (i.e., resource usage, waste, and environmental impact) D. Supply chain and value chain are not interchangeable terms 1. The supply chain is the part of the value chain that acquires and manages goods and services needed to produce the company’s products E. SCM encompasses the following functions: 1. Inventory control (p. 201) – determining the right quantities of supplies and products to have in inventory (goods and materials kept in stock for production or sale) 2. Procurement – the acquisition of raw materials, parts, components, supplies and finished products required to produce goods and services.

Systems and techniques used to ensure that the company has what it needs when it needs them include: a. Materials requirement planning (MRP) b. Manufacturing resource planning (MRP II) c. Enterprise resource planning (ERP) IV. Production and Operations Management A. Production and operations management (p. 202) oversees all the activities involved in producing goods and services.

B. It encompasses the following functions: 1. Facilities location and design (factory layout), determining the arrangement of production work centers and other elements 2. Forecasting and capacity planning (p. 203) – establishing the overall level of resources needed to meet customer demand 3. Scheduling – determining how long each operation takes and deciding which tasks are done in which order. Tools used in this function include: a. Master production schedule (MPS) to coordinate production of goods

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Bovee/Thill, Business in Action 6/e Instructor’s Manual b. Gantt charts to show the progress of tasks needed to complete a project c. Program evaluation and review technique (PERT) chart to identify the optimal sequencing of activities i. The sequence of operations that requires the longest time to complete is known as the critical path (p. 203) 4. Lean systems (p. 204) are systems in manufacturing and other functional areas that maximize productivity by reducing waste and delays a. Productivity (p. 203) is the efficiency with which a company can convert inputs to outputs b. Lean systems rely on just-in-time (JIT) (p. 204) inventory management, in which goods and materials are delivered throughout the production process right before they are needed 5. Depending on the nature of the product and desires of target customers, goods and services can be created through: a. Mass production (p. 206) – the creation of identical goods or services, usually in large quantities b. Customized production – the creation of a unique good or service for each customer c. Mass customization – a manufacturing approach in which part of the product is mass produced and the remaining features are customized for each buyer V. The Unique Challenges of Service Delivery A. Operations management in the service sector faces a number of unique challenges, including: 1. Perishability – services are consumed at the same time they are produced and cannot exist before or after that time 2. Location constraints – services, customers and providers need to be in the same place at the same time 3. Scalability (p. 207) – the potential to increase production by expanding or replicating initial production capacity 4. Performance variability and perceptions of quality – the quality of services is often subjective 5. Customer involvement and provider interaction – the interpersonal experience affects customer perception of quality VI. Product and Process Quality A. Quality (p. 209) is the degree to which a product or process meets reasonable or agreed-upon expectations B. Operations management must define those expectations and then organize resources and systems to achieve that level, and this becomes more difficult with the increasing complexity of products C. The traditional means of maintaining quality is quality control – measuring quality against established standards after the good or service has been produced and weeding out defective products 1. Quality assurance (p. 210) is a more comprehensive and proactive approach of company policies, practices and procedures designed to ensure that every product meets quality standards 2. Four major tools and strategies for ensuring product quality are: a. Continuous improvement

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Bovee/Thill, Business in Action 6/e Instructor’s Manual b. Statistical process control (SPC) (p. 210), which involves the use of random sampling and tools such as control charts to monitor the production process c. Six Sigma – a rigorous quality management program that strives to eliminate deviations between the actual and desired performance of a business system d. ISO 9000 (p. 211) – a globally recognized family of standards for quality management systems

Classroom Activities Break-out Group Discussion: Offshoring Goal: Asks students to debate whether it is ethical for firms to offshore production facilities to countries with less strict environmental standards.

Time Limit: 20 minutes.

Details: 1. Break students into groups of four or five, with half of the groups supporting offshoring and the other half opposing offshoring. (2 minutes) 2. Ask the supporting groups to come up with the top two or three reasons they support offshoring, e.g. more job opportunities for the host country, stronger economies and improved living standards, etc. Ask the opposing groups to come up with the top two or three reasons they oppose offshoring such as degrading environmental conditions in the host country, job losses in the home country, etc. (10 minutes) 3. Ask teams from both sides to debate each other on the topic whether it is ethical for firms to offshore production facilities to countries with less strict environmental standards. The teams may go back and forth, attacking each other’s viewpoints and rationale. (8 minutes)

End-of-Chapter Behind The Scenes Fulfilling Customized Dreams at Carvin Guitars Critical Thinking Questions 1. If Carvin experienced an increase in orders from its website over a period of two weeks, should it expand its production capacity to make sure it can handle increased demand in the future? Why or why not?

While students’ answers may vary, the following are points to consider: In general, firms need to constantly monitor fluctuating customer demand to determine whether production capacity needs to be adjusted accordingly.

However, it is hard to say whether a two week increase in orders from its website represents an increase in demand over the long run or just a temporary anomaly.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual In the case of Carvin, the production situation is more complex because of its combination of automation and human touch. There is some built-in cushion/slack in the processes that are automated and production capacities can be easily adjusted. However, it is much harder to adjust product capacity for the processes that involve human touch.

2. Watch the video of Carvin’s production in action at http://www.carvinchannel.com. How would this information help convince potential buyers to consider Carvin?

While students’ answers may vary, a virtual factory tour can help convince potential buyers to consider Carvin because of its emphasis on high quality guitars with a human touch. They will get to see computer-controlled machinery in action as well as the craftsmanship of the guitar builders.

3. Wooden musical instruments have been carved by hand for hundreds of years. Why wouldn’t Carvin want to continue this tradition?

While students’ answers may vary, the following are points to consider: The tradition of hand-carving wooden musical instruments becomes a major bottleneck in production to satisfy increasing customer demand. Carvin’s new approach in mass customization enables it to differentiate itself from both full custom guitar producers and discounters by producing a large quantity of customized musical instruments faster and more economically.

Learn More Online Visit the Carvin website at www.carvin.com. How does the company promote its customized products? Step through the process of customizing a guitar or bass; would you feel comfortable purchasing a musical instrument in this manner? Review comments at www.carvinchannel.com and www.myspace.com/officialcarvin/comments. What are Carvin employees and customers talking about these days?

Students’ responses will depend, in large part, on the material currently posted on the website. For instance, the company has used various guitar artists and their tours/events to promote customized products on the site. It also lists store locations, contact info and links to its catalogs on the website.

Test Your Knowledge Questions for Review 1. What role does feedback play in a system?

Feedback is information from the output applied back to the input. Systems respond to feedback. In the case of an ad campaign, the response from target customers is a form of feedback that helps the department understand whether the campaign is working. Feedback can work in unanticipated ways, too. A good example is when managers send mixed signals to their employees, such as telling them that customer satisfaction is the top priority but then criticizing anyone who spends too much helping customers. Employees will respond to this feedback by spending less time with customers, leading to a decline in customer satisfaction.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 2. Why is offshoring controversial?

Offshoring is controversial because companies usually eliminate many of the jobs associated with the business functions they are outsourcing in the value chain to foreign countries in which costs are lower. It also has negative implications in terms of “knowledge transfer and theft” as well as “national security concerns”.

3. What is mass customization?

Mass customization is the use of mass production techniques to build products specifically tailored to individual customers’ needs.

4. What is a lean system?

A lean system is a manufacturing system that maximizes productivity by reducing waste and delays. It is at the heart of many productivity improvement efforts.

5. What is scalability in terms of managing a service business?

Scalability is the potential to increase production by expanding and replicating its initial production capacity. Service businesses that depend on the skills of specific professionals can be particularly difficult to scale. Examples range from chefs to interior designers to business consultants and graphics designers, particularly when the business is built around the reputation of a single person. (e.g. Martha Stewart Living).

Questions for Analysis 6. Why is it important to monitor performance variables that are the most meaningful, not those that are the most easily measurable?

Because the most meaningful performance variables can most significantly improve or hinder the quality of operating systems.

7. Why do some firms now think in terms of value webs instead of value chains?

Instead of the linear value chain, some businesses now think in terms of value webs, multidimensional networks of suppliers and outsourcing partners.i

The outsourced, value-web approach has several key advantages, including speed, flexibility, and the opportunity to access a wide range of talents and technologies that might be expensive or impossible to acquire otherwise.

Established companies can narrow their focus to excel at their core competencies; entrepreneurs with product ideas can quickly assemble a team of designers, manufacturing plants, and distributors in far less time than it would take to build an entire company from scratch.

8. How can supply-chain management (SCM) help a company establish a competitive advantage?

Supply-chain management enables a company to produce better quality goods and services at lower costs and in shorter time periods by integrating design and production with the procurement of supplies. It also facilitates greater flexibility in production, enabling the company to customize products for specific customer needs. All of these benefits help the company to establish an advantage over competitors.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 9. How does perishability affect the delivery of services?

Perishability means that services are consumed at the same time they are produced and cannot exist before or after that time. It also means that for many services, customers and providers need to be in the same place at the same time.

Perishability can have a profound impact on the way services businesses are managed and delivered, from staffing (making sure enough people are on hand to help with peak demands) to pricing (using discounts to encourage people to buy services when they are available).

10. Ethical Consideration. How does society’s concern for the environment affect a company’s facility location and layout?

Our society’s concern for the environment affects facility-location decisions because firms must recognize that the public wants the least amount of environmental impact possible. In particular the public is concerned that firms don’t put manufacturing plants in their “backyards.” This puts pressure on firms to find locations that are acceptable to the public and still cost effective. Layout decisions are also affected by public interest in the environment because firms need to be as efficient as possible with as little waste as possible to meet today’s environmental standards.

Questions for Application 11. Business is booming. Sales last month were 50 percent higher than the previous month and so far this month is looking even better than last month.

Should you hire more people to accommodate the increase? Explain your answer.

Students’ answers may vary but the following are some points to consider. We need to take a look at the type of business this is and in particular whether seasonality may be a factor that affects sales. If seasonality is a factor, we need to compare sales figures with the same month(s) last year to get an accurate picture whether sales actually increased from year to year. If sales did increase over same period last year, it might be time to hire more people.

12. If 30 percent of the patrons eating at your restaurant say they won’t eat there again, what steps would you take to define the problem(s) that needs to be solved, measure the relevant performance variables, and then analyze the root cause of the problem(s)?

Students’ answers may vary but the following are some points to consider.

Patrons won’t eat at your restaurants again possibly because the food was substandard, or the quality of service was poor, etc. Performance variables may include quality of good, speed and quality of service, and cleanliness of restaurant, etc.

13. You’ve developed a reputation as an outstanding math tutor, and you want to turn your talent into a full-time business after graduation. How will you address the challenge of scalability in your new venture?

Students’ answers will vary but they will need to address the scalability issue, i.e. service businesses that depend on the skills of specific professionals can be particularly difficult to scale.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 14. Concept Integration. How might supply chain management issues influence your decision on how to expand your vitamin and nutritional supplements company internationally?

Supply chain management (SCM) combines business policies/procedures with information systems and coordinates the flow of goods and materials from suppliers through to the final customer. Supply chain management would make it easier to expand into international markets because you could monitor the status of activities across all of your suppliers, plants, storage facilities and distribution centers. This means everything from ordering and acquiring raw materials through to delivering them to your international customers could be accomplished more effectively and more efficiently.

Expand Your Knowledge Discovering Career Opportunities Visit the Occupational Outlook Handbook at www.bls.gov/oco and locate “Industrial production managers” in the “Management” section.

1. What is the nature of the work? Does the combination of people management and technical problem solving appeal to you?

Students’ answer may vary depending on interests, but industrial production managers plan, direct, and coordinate the production activities required to produce the vast array of goods manufactured every year in the United States. They make sure that production meets output and quality goals while remaining within budget.

Depending on the size of the manufacturing plant, industrial production managers may oversee the entire plant or just one area of it. Industrial production managers devise methods to use the plant's personnel and capital resources to best meet production goals. They may determine which machines will be used, whether new machines need to be purchased, whether overtime or extra shifts are necessary, and what the sequence of production will be. They monitor the production run to make sure that it stays on schedule, and they correct any problems that may arise.

2. What is the outlook for careers in this profession? If you were interested in this field, would you consider it, given the job outlook?

Students’ answers will vary depending on their interest. However, employment of industrial production managers is expected to decline moderately by 8 percent over the 2008–18 decade. Overall manufacturing employment is expected to decline as the production process becomes more automated. However, because industrial production managers coordinate the use of both workers and machines in the production process, they will not be as affected as other occupations by automation.

Nevertheless, the employment decline will result from improved productivity and increased imports of manufactured goods.

Efforts to increase efficiency at the management level have led companies to ask production managers to assume more responsibilities, particularly as computers and production management software allow managers to coordinate scheduling, planning, and communication more easily among departments. In addition, more emphasis on quality in the production process has redistributed some of the production manager's oversight responsibilities to supervisors and workers on the production line.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual However, most of the decision making work of production managers cannot be automated, a factor that will limit the decline in their employment.

Despite the projected employment decline, a number of jobs are expected to open because of the need to replace workers who retire or transfer to other occupations.

Applicants with experience in production occupations, along with a college degree in industrial engineering, management, or business administration (particularly those with an undergraduate engineering degree and a master's degree in business administration or industrial management), will enjoy the best job prospects.

Employers also are likely to seek candidates who have excellent communication skills and related work experience and who are personable, flexible, and eager to enhance their knowledge and skills through ongoing training.

3. If you decide you want to work in a production-related job, what additional classes should you consider taking before you graduate?

Students’ answers may vary but possible classes to consider may include both engineering and business and management courses since applicants with experience in production occupations, along with a college degree in industrial engineering, management, or a related field, will enjoy the best job prospects for a productionrelated job.

Improving Your Tech Insights: Nanotechnology Think small. Really small. Think about manufacturing products a molecule or even a single atom at a time. That’s the scale of nanotechnology, a rather vague term that covers research and engineering done at nanoscale, or roughly 1/100,000 the width of a human hair.

The potential uses of nanotechnology range from the practical – smart materials that can change shape and heal themselves, more efficient energy generation and transmission, superstrong and superlight materials for airplanes, better cosmetics, smart medical implants, and ultrasmall computers – to somewhat wilder – foodgrowing machines and microscopic robots that could travel through your body to cure diseases and fix injuries. Like any new technology with lots of promise, nanotechnology also suffers from lots of hype.)

Conduct research to identify a product currently on the market that uses nanotechnology in some fashion. In an e-mail message to your instructor, describe the product, its target market, the role nanotechnology plays in the product’s design, and any known safety concerns regarding the use of nanotech in this or similar products.

Students’ answers will vary depending on the actual products they identify.

Practice Your Skills Sharpening Your Communication Skills As the newly hired manager of Campus Athletics, a shop featuring athletic wear logos of colleges and universities, you are responsible for selecting the store’s suppliers. Demand for merchandise with team logos and brands can be quite

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Bovee/Thill, Business in Action 6/e Instructor’s Manual volatile. When a college team is hot, you’ve got to have the merchandise. You know that selecting the right supplier is a task that requires careful consideration, so you have decided to host a series of selection interviews. Think about all the qualities you would want in a supplier, and develop a list of interview questions that will help you assess whether that supplier possesses those qualities.

Student answers will vary, but should address several key points: (1) production design, (2) facility layout and (3) commitment to quality. Questions should seek to find out how efficient the firm is, and how committed to quality and service the firm is.

Building Your Team Skills Identify a company that has recently decided to offshore some part of its operations. (Search online news sources for “offshore outsourcing” or similar terms.) With the other members of your team, identify all the stakeholder groups that were or might be affected by this decision and speculate on the impact it had on each group. Weighing the impact on all the stakeholders, vote on whether this was a wise decision for the company. Be prepared to present your conclusions to the class.

Students’ answers will vary depending on the company chosen but they should reflect the stakeholder model in Chapter 4. The best answers should seek to balance the interests of various stakeholder groups.

Developing Your Research Skills Seeking increased efficiency and productivity, a growing number of producers of goods and services are applying technology to improve the production process. Find an article in business journals or newspapers (print or online edition) that discusses how one company used CAD, CAE, robots, XML, or other technological innovations to refit or reorganize its production operations.

1. What problems led the company to rethink its production process? What kind of technology did it choose to address these problems? What goals did the company set for applying technology in this way?

Answers will vary depending on the article and company selected by the student.

2. Before adding the new technology, what did the company do to analyze its existing production process? What changes, if any, were made as a result of this analysis?

Answers will vary depending on the article and company selected by the student.

3. How did technology-enhanced production help the company achieve its goals for financial performance? For customer service? For growth or expansion?

Answers will vary depending on the article and company selected by the student.

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CHECKPOINTS LEARNING OBJECTIVE 1: Explain the systems perspective, and identify seven principles of systems thinking that can improve your skills as a manager.

Critical thinking: (1) Why are leverage points in a system so critical to understand?

Because a leverage point is a relatively small correction that could make the entire company perform better and represents low cost and high return on investment.

(2) Why should a manager in marketing care about systems in the finance or manufacturing departments?

Because the systems view states that all of the departments, including finance, marketing and manufacturing are all interconnected. Seeing how such departments connect with each other, i.e. seeing the big picture is critically important for business success.

It’s your business: (1) How could a systems approach to thinking help you get up to speed quickly in your first job after graduation?

Students’ responses will vary depending on personal opinions.

(2) Think back to your experience of registering for this class. How might you improve this system?

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

LEARNING OBJECTIVE 2: Describe the value chain and value web concepts, and discuss the controversy over offshoring.

Critical thinking: (1) Do U.S. companies have an obligation to keep jobs in the United States? Why or why not?

Students’ responses will vary depending on personal opinions but points to consider include the fact that many U.S. companies choose to send manufacturing jobs to developing countries because of lower labor costs in such countries.

(2) Will global labor markets eventually balance out, with workers in comparable positions all over the world making roughly the same wages? Explain your answer.

Students’ responses will vary depending on personal opinions.

It’s your business: (1) In your own long-term career planning, have you taken “offshorability” of your target profession into account?

Students’ responses will vary depending on personal experiences.

(2) Should such concerns affect your career planning?

Students’ responses will vary depending on personal opinions.

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LEARNING OBJECTIVE 3: Define supply chain management, and explain its strategic importance.

Critical thinking: (1) Why can’t companies just stockpile huge inventories of all the parts and materials they need, rather than carefully managing supply from one day to the next?

Because warehousing large quantities of parts and materials take a lot of space, which may not be available to many manufacturers. It .can be also be quite expensive, In addition, parts and materials can become obsolete. Keeping a huge inventory of parts and materials may present a significant financial risk.

(2) Why would a company invest time and money in helping its suppliers improve their business practices? Why not just dump underperformers and get better suppliers?

Because high-quality supplier network typically takes time and effort to build and can become a significant competitive advantage for manufacturers.

It’s your business: (1) In any current or previous job, what steps have supervisors taken to help you understand your role in the supply chain?

Students’ responses will vary depending on personal experiences.

(2) Is it dehumanizing to your colleagues and business partners to be participants in a supply chain? Why or why not?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 4: Identify the major planning decisions in production and operations management.

Critical thinking: (1) Why is it essential to identify tasks in the critical path of a project?

Because such tasks collective represent the most efficient way to complete a project.

(2) How does mass customization help a company balance productivity and customer satisfaction?

Mass customization has the twin advantages of economies of scale, which maximize a firm’s productivity, as well as providing a relatively customized customer experience, which improves customer satisfaction.

It’s your business: (1) The phrase “lean and mean” is sometimes used to describe lean systems. What are the risks of using such language?

Students’ responses will vary depending on personal opinions.

(2) Is this course an example of mass production, customization, or mass customization? Explain.

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

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LEARNING OBJECTIVE 5: Explain the unique challenges of service delivery.

Critical thinking: (1) How can technology help some service businesses address the challenge of scalability?

Technology can potentially help improve service efficiency and accuracy and thereby help address the challenge of scalability related to services.

(2) If customers are paying for a service, why should they ever have to share in the responsibility of ensuring quality results?

Because quality of experience is often an important aspect of customer service, and under most circumstances, feedback on quality of experience can only come from the customers.

It’s your business: (1) Do you think you have a natural personality for working in a service business?

Why or why not?

Students’ responses will vary depending on personal opinions.

(2) If you’re not a “natural,” what steps could you take to succeed in a service job anyway?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 6: Define quality, explain the challenges of quality and product complexity, and identify four major tools and strategies for ensuring product quality.

Critical thinking: (1) How significant is the role of software in product quality today?

As products become increasingly complex, defining and maintaining quality becomes an even greater challenge. Additionally, sophisticated production methods also increase the chance that something can – and most likely will – go wrong. Quality management software can assist a company in managing corrective and preventive actions, root cause analysis, audits and customer and supplier issues.

(2) How can process simplicity contribute to quality?

Because by reducing process complexity, manufacturers can often dramatically reduce mistakes and thereby achieve higher quality.

It’s your business: (1) Are the grades you get in your various classes an example of quality control or quality assurance? Explain your answer.

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

(2) Have you ever tried anything like the Six Sigma DMAIC process in your own life, even partially or informally?

Students’ responses will vary depending on personal experiences.

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Chapter 10 EMPLOYEE MOTIVATION Chapter Overview This chapter covers the important topic of employee motivation. It first defines motivation and introduces several classical motivation theories. It then identifies and discusses more current motivation theories and models such as Expectant Theory, Goal-Setting Theory, Job Characteristics Model, and Reinforcement Theory. Lastly it lists five managerial strategies that are crucial to maintaining a motivated workforce.

Chapter Outline I.

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What Motivates Employees to Peak Performance?

A. Motivation (p. 219) is the combination of forces that drive individuals to take certain actions and avoid others B. Workplace motivation can be assessed by measuring four indicators: 1. Engagement – an employee’s rational and emotional commitment to his or her work 2. Satisfaction – how happy employees are with work and how they are treated 3. Commitment – the degree to which employees support the company and its mission 4. Rootedness – the likelihood that employees will stay or leave C. Motivation stems from four fundamental needs: 1. The drive to acquire both physical and psychological goods 2. The drive to bond with others and feel a part of something larger 3. The drive to comprehend – learning, growing, meeting challenges 4. The drive to defend people, ideas and organizations they hold dear D. Classical theories of motivation include: 1. Taylor’s scientific management – an approached designed to improve employees’ efficiency by scientifically studying their work 2. The Hawthorne studies – research that suggested that understanding an employee’s performance is affected by his/her emotional and cultural makeup both on and off the job a. The studies also brought to light the Hawthorne effect, in which the behavior of workers change when they are being observed 3. Maslow’s Hierarchy of Needs – the theory that behavior is determined by needs, which are arranged in Maslow’s hierarchy (p. 222), with basic needs at the bottom and more advanced needs toward the top 4. Theory X and Theory Y – managers approach motivation in two radically different ways: a. Theory X managers assume that employees are irresponsible, unambitious, dislike work and managers must use force, control or threats to motivate them b. Theory Y managers assume that employees like to work and can be motivated by working for goals, and seek out responsibility

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 5. Herzberg two-factor theory (p. 223) – a model that divides motivational forces into satisfiers (motivators) and dissatisfiers (hygiene factors) 6. McClelland’s three-needs theory – a model of motivation that highlights individuals’ needs for power, affiliation and achievement II. Explaining Employee Choices A. More contemporary theories of motivation attempt to explain the choices that employees make 1. Expectancy theory (p. 224) – the theory that the effort employees put into their work depends on expectations about their own ability to perform, expectations about likely rewards, and the attractiveness of those rewards 2. Equity theory (p. 225) – the theory that employees base their level of satisfaction on the ratio of their inputs to the job and the outputs or rewards they receive from it III. Motivating with Challenging Goals A. Goal-setting theory (p. 226) is a motivational theory suggesting that setting goals can be an effective way to motivate employees B. For goals to function as effective motivators, they need to meet several criteria: 1. Goals must be specific 2. Goals must be difficult enough to inspire performance 3. Clear “ownership” of goals 4. Timely feedback 5. Cultural support for individual achievement and independence C. Management by objectives (MBO) (p. 227) is a motivational approach in which managers and employees work together to structure personal goals and objectives for every individual, department and project to mesh with the organization’s goals 1. MBO involves four steps: setting goals, planning action, implementing the plans and reviewing performance D. Goal setting theory has several weaknesses, including: 1. Establishing overly narrow or overly challenging goals 2. Establishing inappropriate time horizons for goal completion 3. Unintentional performance limitations 4. Missed learning opportunities 5. Unhealthy internal competition 6. Decreased intrinsic motivation IV. Redesigning Jobs to Stimulate Performance A. The job characteristics model (p. 229) suggests that five core dimensions influence three critical psychological states that determine motivation, performance and other outcomes.

1. The core job dimensions include: a. Skill variety – the range of skills needed to accomplish the job b. Task identity – the degree to which an employee has responsibility for completing an entire task c. Task significant – the employee’s perception of the impact the job has on others in the organization

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Bovee/Thill, Business in Action 6/e Instructor’s Manual d. Autonomy – the degree of independence in carrying out the tasks e. Feedback – timely information about the employee’s performance 2. These core job dimensions contribute to three critical psychological states: a. Experienced meaningfulness of the work b. Experienced responsibility for results c. Knowledge of actual results B. Three popular approaches to improve job satisfaction include: 1. Job enrichment (p. 230) – making jobs more challenging and interesting by expanding the range of skills required 2. Job enlargement – a horizontal expansion of the job in which more tasks are added 3. Cross-training or job rotation – training workers to perform multiple jobs and rotating them through these jobs in order to combat boredom or burnout V. Reinforcing High-Performance Behavior A. Reinforcement theory (p. 231) is a motivational approach based on the idea that managers can motivate employees by influencing their behaviors with positive and negative reinforcement B. Positive reinforcement offers pleasant consequences (rewards) for particular actions and behaviors 1. This increases the likelihood that behaviors will be repeated 2. Many companies use incentives – monetary payments or other rewards of value used for positive reinforcement C. Negative reinforcement encourages the repetition of a behavior (desirable or not) through the reduction, removal or absence of an unpleasant outcome 1. This is different from punishment, which refers to actions used to diminish the repetition of unwanted behaviors by adding unpleasant outcomes VI. Motivational Strategies A. Provide timely and frequent feedback – Feedback is the mechanism that shapes employee behavior, and it provides information needed to assess performance and make needed improvements B. Personalize motivational efforts 1. Establish systems and policies that are equitable 2. Build in as much flexibility as possible 3. Get to know employees as individuals in order to understand what is important to them C. Adapt to circumstances and special needs D. Address workplace negativity E. Serve as an inspiring leader and avoid micromanaging (p. 235) – overseeing every small detail of employees’ work and refusing to give them freedom or autonomy F. Self-motivation

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Classroom Activities In-Class Activity: What motivates you in the workplace?

Goal: Ask students to name various factors that motivate them at work and vote on such factors to determine which are considered the most important by the whole class. Help students understand that different individuals are likely motivated by different factors and that “money” is not necessarily the most important motivator for many individuals.

Time Limit: 10 minutes.

Details: 1. Ask the class to name various factors that motivate them the most in the workplace. Possible factors may include: high salary, generous benefits, a good relationship with co-workers, available training opportunities, a sense of constant learning and growing on the job, etc. If not enough students have work experience, ask them instead what motivates them the most in school.

2. On the blackboard, list the various factors that were named by students in Step One. Have students vote which factors are the most popular for the class as a whole. Make it clear to students that each is allowed to vote once only.

Tally up the votes for each factor.

3. Let students know that recent research has indicated monetary factors such as “high salary and benefits” are known as “dis-satisfiers”, which means workers won’t be happy if they are not paid well. However, “money” is not a “satisfier”, i.e. a motivating factor that ultimately influences an employee’s decision to stay with a firm. Research has indicated that the top “satisfiers” include good relationship with co-workers, available training opportunities as well as a sense of constant learning and growing on the job.

End-of-Chapter Behind the Scenes Taking a Second Look at the Career Ladder Critical Thinking Questions 1. How might Deloitte’s lattice approach help motivate employees and improve job satisfaction and performance?

Deloitte’s lattice approach might help motivate employees by allowing employees more flexibility at work, which is not possible with the ladder approach. With the lattice approach, employees get to define where they’ve been, where they are and where like to go next career-wise based on the four variables, namely pace, workload, location/schedule and role. It is a more holistic approach that focuses on the individual’s own career goals and offers employees the options to keep their work and personal life in sync.

2. How can managers determine whether a Deloitte employee is working at a decelerated pace in the career customization model or simply isn’t working very hard?

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Managers can determine whether a Deloitte employee is working properly by looking at whether an employee has accomplished his/her work related goals and reached a certain performance standard at work. In particular, managers can use specific goals and performance criteria that are pre-determined and mutually agreed-upon with the employee, as well as proper performance measurement tools.

3. What are the potential disadvantages from the company’s point of view of giving employees this much flexibility?

From the company’s point of view, a main potential disadvantage of giving employees this much flexibility is putting the employee’s personal goals above the company’s strategic and operational goals, and potentially hurting the company’s profitability in the process. Another potential disadvantage is alienating employees who are more committed to the ladder model—they may feel less motivated.

Learn More Online Visit the “Mass Career Customization” website at www.masscareercustomization.com, which offers more information about the Deloitte lattice model. Read “About MCC” and then try the “Interactive Exercise,” where you can chart your own career (real or imaginary). You can also download a brief version of the book Benko co-authored with another Deloitte executive, Anne Weisberg. Does the lattice model sound appealing to you?

Students’ responses will vary depending on personal opinions.

Test Your Knowledge Questions for Review 1. What is motivation?

Motivation is the combination of forces that moves individuals to take certain actions and avoid others in pursuit of individual objectives. Motivation is a complex psychological subject, and researchers have proposed a variety of theories to help explain why humans are driven to behave they do.

2. What is expectancy theory?

Expectancy theory, considered by some experts to offer the best available explanation of employee motivation, links an employee’s efforts with the outcome he or she expects from that effort. Like equity theory, expectancy theory focuses less on the specific forces that motivate employees and more on the process they follow to seek satisfaction in their jobs. Expectancy theory expands on earlier theories in several important ways, including linking effort to performance and linking rewards to individual goals. The effort employees will put forth depends on (1) their expectations about their own ability to perform, (2) their expectations about the rewards that the organization will give in response to that performance, and (3) the attractiveness of those rewards relative to their individual goals.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 3. What is management by objectives?

Management by objectives (MBO) is a motivational approach in which managers and employees work together to structure personal goals and objectives for every individual, department, and project to mesh with the organizational goals.

4. What are the core job dimensions in the job characteristics model?

The core job dimensions in the job characteristics model include skill variety, task identity, task significance, autonomy and feedback.

5. What is negative reinforcement?

Negative reinforcement allows people to avoid unpleasant consequences by behaving in a particular way. It encourages behavior through the removal or absence of an unpleasant outcome and increases the likelihood that a behavior will be repeated because an unpleasant outcome is avoided when that behavior is exhibited.

Questions for Analysis 6. How does the expectancy theory explain the effect of self-doubt on employee motivation?

According to the expectancy theory, self-doubt may cause an employee to believe that no amount of effort she is willing or able to apply to a task will result in an acceptable level of performance. She will be much less motivated and will likely say, “Well, why bother?”

7. How might a deadline that is too easy to meet cause someone to work more slowly than he or she might otherwise?

According to the goal-setting theory, carefully designed goals can motivate employees to higher performance. On the other hand, goals that are too easy to achieve (e.g. a deadline that is too easy to meet) will not motivate an employee to a higher performance. In fact, it may cause the employee to perform worse (e.g. work more slowly) than she might otherwise.

8. What effect will job enhancement likely have on someone with low growth needs? Why? Job enhancement makes jobs more challenging and interesting by expanding the range of skills required, however it may demotivate someone with low growth needs because the increased responsibility can be more a source of stress than inspiration.

9. Why do managers often find it difficult to motivate employees who remain after downsizing?

Because many of the employees left behind feel a sense of inequity in being asked to shoulder the work of those who left, without getting paid more for the extra effort.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 10. Ethical Considerations. Motivational strategies that reward employees for meeting specific performance targets can encourage them to work hard— sometimes too hard. Overwork can contribute to mental and physical health problems as well as interfere with other aspects of employees’ lives. As a manager, how do you determine how much work is too much for your employees?

Students’ answers will vary but the following are points of consideration.

According to goal-setting theory, setting goals that are too challenging may demotivate an employee, and lead to risky behavior, belligerent negotiating tactics, and ethical lapses as employees cut corners to reach targets. A manager may want to conduct a job analysis to determine the appropriate amount of work for an employee.

Questions for Application

11. You manage the customer service department for an online clothing retailer. Customers tend to call or e-mail with the same types of complaints and problems, day after day, and your employees are getting bored and listless. Some are starting to miss more days of work than usual, and several have quit recently. A few customers have called you directly to complain about poor treatment from your staff. Use the job characteristics model to identify several ways you could improve motivation, job satisfaction, and performance.

Students’ answers will vary but they need to incorporate the job characteristics model, including possibly upgrading the job dimensions of skill variety, task identity, task significance, autonomy and feedback in an effort to improve motivation, job satisfaction, and performance.

12. How do you motivate yourself when faced with school assignments or projects that are difficult or tedious? Do you ever try to relate these tasks to your overall career goals? Are you more motivated by doing your personal best or by outperforming other students?

Students’ answers will vary depending on personal opinions.

13. Imagine yourself in one of the jobs you would like to land after graduation.

Thinking about the importance of personalizing motivational tactics whenever possible, identify several steps your manager could take to make sure you stay motivated. Would these steps be fair to other employees as well?

Students’ answers will vary depending on the jobs chosen.

14. Concept Integration. Chapter 7 discussed several styles of leadership, including autocratic, democratic, and laissez-faire. How do each of these styles relate to Theory X and Theory Y assumptions about workers? a. Theory X assumes that employees are irresponsible, are unambitious, and dislike work and that managers must use force, control, or threats to motivate them. Theory X is more consistent with the autocratic style of leadership, which includes leaders who do not involve others in decision making. b. Theory Y assumes that employees enjoy meaningful work, are naturally committed to certain goals, are capable of creativity, and seek out responsibility under the right conditions. Theory Y is more consistent with democratic leaders, who delegate authority and involve employees in

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Bovee/Thill, Business in Action 6/e Instructor’s Manual decision making, as well as with laissez-faire leaders, who leave most instances of decision making up to employees, particularly concerning dayto-day matters.

Expand Your Knowledge Discovering Career Opportunities Whether you’re a top manager, first-line manager (supervisor), or middle manager, your efforts will affect the success of your organization. To get a closer look at the responsibilities of a manager, log on to the Prentice Hall Student Success SuperSite at www.prenhall.com/success. Click on “Majors Exploration” and then select “Business” and “Management” in the dropdown boxes. Then scroll down and read about careers in management. What can you do with a degree in management?

1. What can you do with a degree in management? ➢ Management or management trainee is a first step towards overall direction of a department, a division, or even a whole company. ➢ Supervision of employees in corporate, retail, or many other environments takes advantage of what you've learned about people and businesses. ➢ Management decision-making relies on well-founded analysis of facts and trends to improve in how a business is run. Management majors are trained to conduct these kinds of analyses. ➢ Management students are trained to understand the human resource needs of organizations and to develop programs for recruitment, training, retention, and development of employees. ➢ To compete successfully in a market, organizations need to know how to design and execute strategies. Management studies prepare students by giving them a background in strategic planning and in implementing strategy.

2. What is the future outlook for careers in management?

The future looks very promising with a management degree--there are a variety of subjects to specialize in and a variety of jobs available after college.

Improving Your Tech Insights: Blogging and Microblogging Blogging (and microblogging, of which Twitter is the best known example) has revolutionized business communication in recent years. Far more than just another communication medium, blogging changes the relationship between companies and their stakeholders by transforming communication from a formal “we talk, you listen” mindset to an informal and interactive conversational mindset.

Identify a company in which one or more managers are regular bloggers or Twitter users. In a brief email message to your instructor, explain how the company uses blogging to build relationships with customers and potential customers, employees and potential employees, and other stakeholder groups.

Students’ email messages will vary depending on the choice of company.

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Practice Your Skills Sharpening Your Communication Skills Choose one of the major motivation theories discussed in this chapter: expectancy, goal-setting, job characteristics, or reinforcement. Create a brief electronic presentation (3–5 slides) using PowerPoint, Keynote, Google Docs, or a similar tool explaining the theory and identifying its strengths and weaknesses as a practical management approach.

Student answers will vary depending on the specific motivation theory chosen.

Building Your Team Skills With your teammates, explore the careers sections of the websites of six companies in different industries. Look for descriptions of the work environment, incentive plans, career paths, and other information about how the company develops, motivates, and supports its employees. After you’ve compiled notes about each company, vote on the most appealing company to work for. Next, review the notes for this company and identify all the theories of motivation described in this chapter that the company appears to be using, based on the information on its website.

Students’ answers will vary depending on the companies they have researched.

Developing Your Research Skills Various periodicals and websites feature “best companies to work for” lists. Locate one of these lists and find a company that does a great job of attracting and motivating high performers. Learn as much as you can about the company’s management philosophies. Which of the motivation theories does the company appear to be using? Summarize your findings in a brief e-mail message to your instructor.

E-mails will vary depending on the specific company chosen.

CHECKPOINTS LEARNING OBJECTIVE 1: Define motivation, and identify the classical motivation theories.

Critical thinking: (1) How could a manager tap into the drive to defend to help rally employees?

The manager can use the drive to defend to motivate employees to fight for what is right and rally employees around the company’s mission or goals.

(2) Could Herzberg’s hygiene factors help explain the significant problem of employee theft and embezzlement? Why or why not?

Yes, because hygiene factors are mostly extrinsic and include working conditions and company policies, etc. In this case, the company may not have a company policy that is strong enough to deter behaviors such as theft and embezzlement.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual It’s your business: (1) If you are a typical college student who doesn’t have much financial security at the moment but you’re simultaneously trying to fulfill higher-order needs such as social interaction and self-actualization through education, would it make more sense, according to Maslow, to drop out of college and work seven days a week so you could help ensure that your physiological and safety needs are met?

Students’ responses will vary depending on personal opinions.

(2) Do you think today’s college students more closely match the descriptions of Theory X employees or Theory Y employees? What evidence can you provide to support your conclusion?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 2: Explain why expectancy theory is considered by many to be the best current explanation of employee motivation.

Critical thinking: (1) What steps could managers take to alleviate the self-doubt employees often feel when they join a company or move into a new position?

A manager can ensure that the employees have the skills they need to perform the jobs, tasks are clearly defined, and company policies and processes are functional.

They can also provide encouragement and role models for the employees.

(2) If you were a human resources manager in a large corporation, how might you respond to employees who complain that the CEO makes two or three hundred times more than they make?

Students’ responses will vary depending on personal opinions.

It’s your business: (1) Have you ever given less than your best effort in a college course because you didn’t believe you were capable of excelling in the course?

Students’ responses will vary depending on personal experiences.

(2) Was the outcome satisfying? Would you handle a similar situation the same way in the future?

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

LEARNING OBJECTIVE 3: Identify the strengths and weaknesses of goalsetting theory.

Critical thinking: (1) Why is collaboration between employee and manager essential to goal setting in management by objectives?

Because jointly setting clear and challenging but achievable goals can encourage employees to reach higher levels of performance.

(2) How can overly narrow goals and overly challenging goals contribute to ethical lapses?

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Because overly narrow goals and overly challenging goals will encourage employees to either miss vital aspects of the bigger picture or lead to risky behaviors, both of which contribute to ethical lapses.

It’s your business: (1) Do goals motivate you? Why or why not? Does it depend on whether the goals are your own or imposed by someone else?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 4: Describe the job characteristics model, and explain how it helps predict motivation and performance.

Critical thinking: (1) Can the job characteristics model be used to motivate employees in such positions as janitors or security guards in a factory? How? Yes, employees such as janitors or security guards can be motivated in this case by emphasizing the important job characteristics such as task significance, autonomy and feedback.

(2) Is modifying the five core job dimensions likely to motivate employees who have low growth needs? Why or why not?

Probably not since employees with low growth needs have little intrinsic need to grow and can be among the most difficult to motivate, no matter what steps managers take.

It’s your business: (1) Has the requirement of working in teams ever lowered your motivation or satisfaction on a school project? If so, how does the job characteristics model explain this?

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

(2) How does taking elective courses improve your experience of meaningfulness in your college “work”?

Students’ responses will vary depending on personal opinions.

LEARNING OBJECTIVE 5: Define reinforcement theory, and differentiate between positive and negative reinforcement.

Critical thinking: (1) Is demoting an employee for failing to finish a project an attempt at negative reinforcement or punishment? Why? It is punishment. While punishment decreases the likelihood that a particular behavior will be repeated, negative reinforcement increases the likelihood that a behavior will be repeated because an unpleasant outcome is avoided when that behavior is exhibited.

(2) In what ways is reinforcement theory similar to goal-setting theory?

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Students’ answers may vary depending on personal opinions but points to consider include that both have the intention of motivating employees to a higher performance either through setting goals or through behavior modification.

It’s your business: (1) How does your instructor in this course use positive reinforcement to motivate students to higher levels of performance?

Students’ responses will vary depending on personal experiences.

(2) If you study diligently to avoid being embarrassed when a professor calls on you in class, is this positive or negative reinforcement in action? Why? It should be negative reinforcement in action since a positive behavior is repeated because an unpleasant outcome is avoided.

LEARNING OBJECTIVE 6: List five managerial strategies that are vital to maintaining a motivated workforce.

Critical thinking: (1) Referring to the job characteristics model, how does micromanaging destroy motivation?

The job characteristics model states that “autonomy” is one of the five key job characteristics that helps motivate an employee. Micromanaging refuses to give an employee the freedom or autonomy to perform her job and therefore destroys motivation.

(2) Annual performance reviews are common in many companies; how might this tactic fail to motivate employees?

It may fail to motivate employees because giving feedback once a year is not timely and frequent enough.

It’s your business: (1) If you are motivated more by the love of learning than the promised rewards of a grade, how can you motivate yourself when grades play a key role in your success as others perceive it?

Students’ responses will vary depending on personal opinions.

(2) Have you ever worked with someone (in a job or in school) whose negativity was contagious? How did you keep from letting that negativity drag down your own performance?

Students’ responses will vary depending on personal experiences.

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Chapter 11: EMPLOYEE DEVELOPMENT AND SUPPORT Chapter Overview This chapter examines the critical business function of human resources management. It highlights the challenges that firms face in today’s workplace and discusses employment trends such as diversity and alternative work arrangements. It then describes important HR practices such as recruiting, hiring and training. Finally, it explains different types of employee compensations and benefits.

Chapter Outline I.

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Keeping Pace with Today’s Workforce A. Human resources (HR) management (p. 241) is the specialized function of planning how to obtain employees, oversee their training, evaluate and compensate them B. Contemporary staffing challenges include: 1. Aligning the workforce with organizational needs 2. Fostering employee loyalty 3. Monitoring workloads and avoiding employee burnout 4. Managing work-life balance – efforts to help employees balance the competing demands of their personal and professional life a. H.R. attempts to improve quality of work life – the overall environment that results from job and work conditions C. Steps in human resources planning include: 1. Evaluating job requirements through the process of job analysis.

Through job analysis, HR develops: a. A job description (p. 242), a formal statement summarizing work tasks and the conditions under which the employee will work b. A job specification, a statement describing the type of personnel the job requires, including skills, education, experience and personal attributes 2. HR must also forecast the numbers and types of employees who will be needed at different times. a. An important factor in forecasting is turnover rate – the percentage of the workforce that leaves every year b. To ensure an adequate supply of experienced employees, HR focuses on employee retention – efforts to keep current employees c. If existing employees are not available, HR can look outside the company for people to join the company as either permanent employees or contingent employees – nonpermanent employees such as temporary workers, independent contractors and full-time employees hired on a probationary basis

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Bovee/Thill, Business in Action 6/e Instructor’s Manual d. HR must also work with top executives to identify potential replacements for specific employees such as senior executives. This process is known as succession planning D. To meet the needs and demands of a diverse workforce, HR can adopt alternative work arrangements, including: 1. Flextime – scheduling that allows employees to choose their own work hours within certain limits 2. Telecommuting 3. Job sharing – an alternative work arrangement that allows 2 people to share a single full-time job II. Managing a Diverse Workforce A. Diversity includes all the characteristics and experiences that define people as individuals B. Diversity in the workforce presents managerial challenges, and some of the most important diversity issues today include: 1. Age – cultural assumptions about age and seniority as well as different values, expectations and communication habits among generations 2. Gender – There are several significant issues to be addressed by HR, including: a. Sexism (p. 246) – discrimination on the basis of gender b. The glass ceiling – an invisible barrier attributable to subtle discrimination that keeps women and minorities out of top positions in an organization c. Sexual harassment – unwelcome sexual advances, requests for sexual favors, or other verbal or physical conduct of a sexual nature within the workplace 3. Race and ethnicity 4. Religion 5. Ability – addressing ways in which individuals with disabilities can function effectively in the job C. Many companies are establishing diversity initiatives (p. 247) – programs and policies that help companies support diverse workforces and markets III. Managing the Employment Life Cycle A. The employment life cycle is comprised of three stages: hiring, termination and retirement 1. Hiring employees – The first stage is recruiting (p. 248), the process of attracting suitable applicants for an organization’s jobs 2. The second stage is termination – the processing of getting rid of an employee. This usually assumes one of two forms: a. Layoffs are the termination of employees for economic or business reasons unrelated to employee performance b. Firing employees – dismissing an employee for performance-related reasons 3. The final stage of retirement offers a variety of challenges depending on the industry and the company’s situation a. The Age Discrimination in Employment Act (ADEA) outlaws mandatory retirement (p. 250) (required dismissal of an employee

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Bovee/Thill, Business in Action 6/e Instructor’s Manual who reaches a certain age) unless an employer can demonstrate that age is a valid qualification b. A company can also induce employees to leave by offering them early retirement, using worker buyouts – financial incentives to employees who voluntarily depart IV. Developing and Evaluating Employees A. The effort to develop and evaluate employees includes providing performance appraisals, managing training and development programs, and promoting and reassigning employees B. To evaluate and improve employee performance, managers use performance appraisals (p. 251) – periodic evaluations of employees’ work according to specific criteria 1. A multidimensional review in which an employee receives feedback from his/her supervisor as well as subordinates, peers and outside stakeholders such as customers is known as a 360-degree review (p. 253) 2. Workers’ performance can also be monitored using electronic performance monitoring (EPM) – real time, computer-based evaluations that measure data input, email scanning, etc.

C. HR is also responsible for employee training and development 1. Training usually begins with employee orientation programs – training designed to acclimate new employees to the organization 2. Other forms of training should continue throughout the employee’s career, and to determine what training is needed, an HR department may maintain a skills inventory – a list of the skills a company needs along with the specific skills that individual employees currently possess D. As employees grow and develop, promotion and/or reassessment may be needed 1. A company may adopt a “promote from within” policy to try and fill positions internally before seeking applicants outside the company 2. It may also become necessary to reassign employees if an individual is given a job beyond his/her competence or the job changes and the employee no longer possesses the needed skill set V. Administering Employee Compensation A. One of HR’s most significant responsibilities is administering employee compensation (p. 254) – the combination of direct payments such as wages and salary and indirect payments such as employee benefits B. There are two kinds of monetary compensation 1. Salary – fixed cash compensation for work, independent of the number of hours worked 2. Wages – cash payments based on the number of hours an employee has worked or the number of units an employee has produced C. Companies can also provide managers and employees with incentives to encourage productivity, innovation and commitment to work, including: 1. Bonus (p. 255) – a payment in addition to the regular wage or salary that serves as a reward for achievement 2. Commissions – a form of compensation based on a percentage of sales made 3. Profit sharing – a system in which a portion of the company’s profits are distributed to employees

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 4. Gain sharing (p. 256) – a system that ties rewards to profits or cost savings achieved by meeting specific goals 5. Pay for performance – an incentive program that requires employees to accept a lower base pay but rewards them with bonuses, commissions or stock options if they reach agreed-upon goals 6. Knowledge-based pay – a system in which pay is tied to an employee’s acquisition of knowledge or skills VI. Employee Benefits and Services A. Employee benefits are compensation other than wages, salaries and incentive programs B. Employee benefits may be offered as preset packages or as flexible plans known as cafeteria plans, in which an employee can personalize his/her benefit package C. The benefits most commonly provided by employers are insurance, retirement benefits, employee stock-ownership plans, stock options and family benefits 1. Insurance – life, health, dental, vision, disability and long-term care insurance 2. Retirement plans (p. 258), company-sponsored programs for providing retirees with income, may include: a. Pension plans – traditional, defined-benefit retirement plans in which an employer specifies how much they will pay employees upon retirement b. 401(k) plan – a defined-contribution retirement plan in which employers often match a percentage of the amount employees invest in the plan c. Employee stock-ownership plan (ESOP) – a program in which a company places stock in trust, with each eligible employee entitled to a certain portion 3. Stock options grant employees the right to purchase a set number of shares of the employer’s stock at a specified price called the grant or exercise price within a certain period of time 4. Family benefits include paid vacation and sick leave, child-care assistance, elder-care assistance, tuition loans and reimbursements, and employee assistance programs (EAPs) (p. 259) which offer private and confidential counseling to employees with personal problems 5. Companies with 50 or more employees are also required to provide up to 12 weeks of unpaid leave per year in accordance with the guidelines of the Family Medical Leave Act (FMLA)

Classroom Activities In-Class Activity: Job Description vs. Job Specification Goal: Show students a real-life example of a job advertisement and have them identify the portions of the ad that correspond to job description and job specification.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Time Limit: 15 minutes.

Details: 1. Ask students to name their favorite company in the world (e.g. Google, Apple, BMW, Costco, etc.) and then have the class vote to determine the most popular company for the class. (5 minutes) 2. Go to the company’s Web page (e.g. using a laptop with Internet connection and a projector). On the company’s Web site, find a job advertisement, which may be located in most cases by clicking on the link “careers”. (If it is not possible to do Internet search real time in the classroom, have student conduct research before the class period and bring the job ads to school). (5 minutes) 3. Ask students to identify which portion of the job ad is considered job description and which portion of the ad is considered job specification.

Remind students that job description typically includes the duties and responsibilities of the job, while job specification typically entails the qualifications (education, experience, etc.) the job requires. (5 minutes)

End-of-Chapter Behind the Scenes Perking Up the Perfect Blend at Starbucks Critical Thinking Questions 1. Why do Starbucks' human resources managers need to be kept informed about any changes in the number and timing of new store openings planned for the coming year?

Starbucks' human resources managers are responsible for forecasting employee supply and demand. To do this, they need to be aware of how many new stores will open and when. Otherwise, they will not be able to accurately complete their forecasts and have employees hired and trained for new stores as they open.

2. Why does Starbucks offer benefits to its part-time labor force?

Starbucks gains significant flexibility from a part-time labor force. This is because Starbucks can be sure its stores have the right number of employees at the right hours by hiring part-timers who only want to work mornings, only want to work afternoons, only want to work weekends, and so forth. Given its generous benefits and good base pay, Starbucks isn't looking to save money by hiring part-timers rather than full-timers.

3. How does Starbucks' general employee-benefits program motivate its employees?

The following represents some of the ways Starbucks’ liberal employee-benefits program motivates its employees: Starbuck’s raised employees’ base pay. Next management bucked the trend in the industry by offering full medical, dental, life insurance and disability insurance benefits to every partner who worked at least 20 hours per week. These partners were also eligible for paid vacation days and retirement savings plans, benefits

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Bovee/Thill, Business in Action 6/e Instructor’s Manual not commonly available to part-time restaurant workers. Finally, Starbucks invested in its workforce by providing new hires with 24 hours of training about the finer points of coffee brewing as well as the company’s culture and values.

Also, a program offering stock options not just to upper-echelon managers but to all partners who worked 20 or more hours per week was also developed as a motivational tool. Owning a piece of the company motivated employees to take customer service to an even higher level of excellence.

Learn More Online Visit the Starbucks website at www.starbucks.com. Click on “Career Center”.

Explore how Starbucks presents its HR policies to potential employees. Browse the pages that discuss working at Starbucks. Read about company culture, diversity, benefits, and learning and career development.

Why would Starbucks post information about company culture in this section of the website? Why would job candidates be interested in learning about the culture as well as the employee benefits and training at Starbucks?

Students’ responses will depend, in large part, on the material currently posted on the website.

Test Your Knowledge Questions for Review 1. What do human resources managers do?

Human Resources managers oversee activities of employees including: training, development, motivation, evaluation, and compensation 2. What are some strategic staffing alternatives that organizations use to avoid overstaffing and understaffing?

To avoid overstaffing and understaffing, organizations are hiring more part-time employees, using temporary staffing services, and outsourcing tasks to other organizations.

3. What is the purpose of conducting a job analysis? What are some of the techniques used for gathering information?

Job analysis provides a formal and objective method of evaluating job requirements. The information-gathering techniques include interviewing employees, monitoring or observing employee activities, and having employees keep diaries of work activities.

4. How do defined benefit plans differ from defined contribution plans?

Defined benefit plans are retirement plans in which companies specify how much they will pay employees upon retirement. Defined contribution plans are those in which companies specify how much they will put into the retirement fund, without guaranteeing any specific payouts during retirement.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 5. What is the glass ceiling?

Glass ceiling is a lack of opportunities for women to advance into the top ranks, implying that women can see the top but can’t get there.

Questions for Analysis 6. How do incentive programs encourage employees to be more productive, innovative, and committed to their work?

Incentive programs link the work and productivity of an employee with his or her earnings. By making this link direct, employees can feel in control of their income and are motivated to improve not only their own performance but the performance of the company overall. Moreover, because employers show employees that their efforts will be rewarded, employees feel good about their jobs and valued as employees, creating a bond between company and employee.

7. Why do some employers offer comprehensive benefits even though the costs of doing so have risen significantly in recent years?

Even though the costs of providing employee benefits are on the rise, so are the costs of recruiting, hiring, and training employee’s in today’s tight labor market.

As a result, some employers have found that it actually costs them less to retain current employees by offering comprehensive benefits.

8. What are the advantages and disadvantages of 401(k) retirement plans?

The 401K retirement plans put the burden on workers to set aside money for retirement and invest it wisely. Also, many employees invest their plans almost entirely in the employer’s stock—subjecting their entire retirement savings to the fate of one company.

9. The 1986 Immigration Reform and Control Act forbids companies to hire illegal aliens but at the same time prohibits discrimination in hiring on the basis of national origin or citizenship status. How can companies satisfy both requirements of this law?

By verifying past employment, running background checks, and verifying educational credentials, a company can verify a person’s citizenship without discriminating against employees on the basis of national origin or citizenship status. By running a background check, the employer also protects all of its employees from possible dangerous situations.

10. Ethical Considerations. Corporate headhunters have been known to raid other companies of their top talent to fill vacant or new positions for their clients. Is it ethical to contact the CEO of one company and lure him or her to join the management team of another company?

Students’ answers will vary, but should reflect ethical checks, and verifying educational credentials.

Questions for Application 11. Assume you are the manager of human resources at a manufacturing company that employs about 500 people. A recent cyclical downturn in your industry has led to financial losses, and top management is talking about laying off workers. Several supervisors have come to you with creative ways of keeping employees on the payroll, such as exchanging workers with other

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Bovee/Thill, Business in Action 6/e Instructor’s Manual local companies. Why might you want to consider this option? What other options exist besides layoffs?

Adopting a no-layoff policy makes sense for a number of reasons. The first is that the layoffs will likely damage company morale, which can lead to lower quality and lost sales. A second reason is that the company may need to hire more employees when business picks up again. Although you may be able to rehire some laid-off employees, you will also incur the financial and time costs associated with recruiting and training completely new employees. A third reason is that finding ways to keep the employees will earn their loyalty and respect, which can translate into increased productivity, greater innovation, and lower costs in the long run.

12. When you begin interviewing as you approach graduation, you will need to analyze job offers that include a number of financial and nonfinancial elements. Which of these aspects of employment are your top three priorities: a good base wage; bonus or commission opportunities, profitsharing potential; rapid advancement opportunities; flexible work arrangements; good healthcare insurance coverage; or a strong retirement program? Which of these elements would you be willing to forego in order to get your top three?

Students’ answers will vary depending on personal preferences.

13. What steps could you take as the owner of a small software company to foster “temporary loyalty” from the independent programmers you frequently hire for short durations (one to six months)?

Students’ answers will vary but possible considerations include personalized orientation and other training programs that will make independent programmers feel more like permanent employees, as well as incentive programs such as performance based bonuses and/or profit-sharing which encourage programmers to do well while employed with the firm.

14. Concept Integration. Of the five levels in Maslow’s hierarchy of needs, which is satisfied by offering salary? By offering health-care benefits? By offering training opportunities? By developing flexible job descriptions?

Salaries and healthcare benefits satisfy only the first level of Maslow’s hierarchy of needs, survival. Training opportunities and flexible job descriptions offer challenges to employees which satisfy the highest level of need, self-fulfillment.

Expand Your Knowledge Discovering Career Opportunities If you pursue a career in human resources, you’ll be deeply involved in helping organizations find, select, train, evaluate, and retain employees. You have to like people and be a good communicator to succeed in HR. Is this field for you? Using print or online resources, find ads seeking applicants for positions in the field of human resources.

1. What educational qualifications, technical knowledge, or specialized skills are applicants for these jobs expected to have? How do these requirements fit with your background and educational plans?

Answers will vary according to student choices.

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2. Next, look at the duties mentioned in the ad for each job. What do you think you would be doing on an average day in these jobs? Does the work in each job sound interesting and challenging?

Answers will vary according to student choices.

3. Now think about how you might fit into one of these positions. Do you prefer to work alone, or do you enjoy teamwork? How much paperwork are you willing to do? Do you communicate better in person, on paper, or by phone?

Considering your answers to these questions, which of the HR jobs seems to be the closest match for your personal style?

Answers will vary according to student choices.

Improving Your Tech Insights: Telecommuting Technologies Thanks to mobile communication and cloud computing, working without going to the office is easier than ever before. When they’re used successfully, telecommuting technologies can reduce facility costs, put employees closer to customers, reduce traffic and air pollution, give companies access to a wide range of independent talent, and let employees work in higher-salary jobs while living in lower-cost areas of the country. In the future, these technologies have the potential to change business so radically they could even influence the design of entire cities. With less need to pull millions of workers into central business districts, business executives, urban planners, and political leaders have the opportunity to explore such new ideas as telecities – virtual cities populated by people and organizations who are connected technologically, rather than physically.

Telecommuting offers compelling benefits, but it must be planned and managed carefully. Conduct some online research to find out what experts believe are the keys to success. Start with the Telework Coalition, www.telcoa.org. You can also find numerous articles in business publications (search for both “telecommuting” and “telework”).

In a brief email message to your instructor, provide four or five important tips for ensuring successful telecommuting work arrangements.

Students’ emails will vary depending on their choices of research sites.

Practice Your Skills Sharpening Your Communication Skills A visit to the Business Owner’s Toolkit, at www.toolkit.com, can help you reduce your legal liability whether you are laying off or firing a single employee or are contemplating a companywide reduction in your workforce. Visit the website and scroll down to the Small Business Guide and click on People Who Work for You, followed by Terminating Workers to find out the safest way to fire someone from a legal standpoint before it’s too late. Learn why it’s important to document disciplinary actions. Then use the information at this website to write a short

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Bovee/Thill, Business in Action 6/e Instructor’s Manual memo to your instructor summarizing how to set up a termination meeting and what you should say and do at the meeting when you fire an employee.

Student Answers will vary but should include some of the following: Make it clear that the decision is final. If you take the position that the decision has already been made, all alternatives have been considered, and all the other managers or owners are in agreement (if there are any others who are involved in decisions of this nature), and that you are merely giving this information to the worker, you'll find it easier to keep your cool and keep control of the situation.

Briefly run through the benefits. Briefly cover the vacation pay, separation pay, continuation of health insurance or life insurance benefits, etc., that you are offering.

If you are attempting to get a release from the employee, now's the time to present it.

It's a good idea to have the employee's final paycheck ready so that he or she has something positive to carry away from the meeting.

Collect what's yours from the employee. You'll need to collect any keys, beepers, company car, company credit cards, or any other property belonging to you from the employee. You may want to do this now, or you may want to let the employee "save face" by allowing him or her to return these items to you at a specific later date. If the employee was working on an important project or has any important files, records, or property belonging to a customer in his or her possession, you'll want to make arrangements to get these back. We suggest that you make it clear that the payment of any severance pay or other benefits after discharge depends on the employee's cooperation with you in this area.

Building Your Team Skills Team up with a classmate to practice your responses to interview questions. Use the list of common interview questions provided in the Prologue, and take turns posing and responding to those questions.

Which questions did you find most difficult to answer? What insights did you gain about your strengths and weaknesses by answering those questions? Why is it a good idea to rehearse your answers before going to an interview?

Students’ answers will vary. However, remind students that interviews are an important part of the hiring process. Ask them to consider the value of such questions to employers in gaining knowledge about potential employees.

Developing Your Research Skills Locate one or more articles in business journals or newspapers (print or online editions) that illustrate how a company or industry is adapting to changes in its workforce. (Examples include retraining, literacy or basic-skills training, flexible benefits, and benefits aimed at working parents or people who care for aging relatives.)

1. What changes in the workforce or employee needs caused the company to adapt? What did the company do to respond to these changes? Was the company’s response voluntary or legally mandated?

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Answers will vary according to student choices. However, changes in the workforce discussed in chapter 9 should be included in any discussion along with any other factors directly related to articles. For example, students should be reminded of the growing number of women in the work force, as well as the rise in the average age of workers as baby boomers age.

2. Is the company alone in facing these changes, or is the entire industry trying to adapt? What are other companies in the industry doing to adapt to the changes?

While individual articles will reflect specific circumstances, students should cite some constants in their discussion of changing work forces. For example, the need for skilled workers continues to grow at a rapid pace, while the need for unskilled workers is declining. As jobs are replaced by technology, and companies continue to use team approaches to management, the face of American companies will become radically different.

3. What other changes in the workforce or in employee needs do you think this company is likely to face in the next few years? Why? Student answers will vary. However, be sure that students draw from their own experiences in the work force and the trends in companies discussed in this text.

For example, remind students that as companies become more horizontal, less management is required, or that as we continue to create a global market, the forces of competition, customer demand, and rate of change will escalate.

CHECKPOINTS LEARNING OBJECTIVE 1: Identify four contemporary staffing challenges, and explain the process of planning for a company’s staffing needs.

Critical thinking: (1) How can alternative work arrangements also help companies reduce costs and their impact on the environment?

Alternative work arrangements can help companies reduce costs by reducing their energy costs (e.g. via telecommuting), and by reducing attrition rates (e.g. via job sharing). They can also reduce companies’ impact on the environment by cutting down commute and resulting air pollution.

(2) How can electronic communication technologies contribute to employee burnout?

Electronic communication technologies such as emails and smart phones allow employees to be plugged in 24/7, which makes it difficult for them to separate work life from personal life, and create a feeling that work never ends. Such feelings will likely contribute to work-related stress and contribute to employee burnout.

It’s your business: (1) Would you prefer to work as an independent contractor or a permanent employee? What do you see as the advantages and disadvantages of each mode of work?

Students’ answers will vary depending on personal preferences.

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(2) Would you function well as a full-time telecommuter? Why or why not?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 2: Discuss the challenges and advantages of a diverse workforce, and identify five major dimensions of workforce diversity.

Critical thinking: (1) How could it benefit a company to invest in assistive technologies for its workers?

By investing in assistive technologies for its workers, a company can create a vital link for employees with disabilities, giving them opportunities to pursue a greater range of career paths and giving the company access to a broader base of talent.

(2) How might socioeconomic diversity in a company’s workforce create both challenges and opportunities for the company?

Socioeconomic diversity in a company’s workforce might create challenges for the company because supervisors may face the challenge of communicating with employees who have different socioeconomic background from their own, motivating them and fostering cooperation and harmony among them. Teams within the company also face the challenges of having employees with different socioeconomic background working together closely. Such socioeconomic diversity might also create opportunities for the company in that the company might benefit from a socioeconomically diverse work force that offers a broad spectrum of viewpoints and ideas, helps the company better understand and identify with diverse markets (i.e. customers of various socioeconomic background), and enables the company to benefit from a wider range of employee talents.

It’s your business: (1) What general opinions do you have of the generation that is older than you and the generation that is younger than you? What experiences and observations shaped these opinions?

Students’ answers will vary depending on personal opinions.

(2) Do you believe that any aspect of your background or heritage has held you back in any way in college or at work? Why? Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 3: Describe the three phases involved in managing the employment lifecycle.

Critical thinking: (1) Why would a company spend money on outplacement counseling and other services for laid-off employees?

A company would spend money on outplacement counseling and other services for laid-off employees to help ease the pain of layoffs as well as to minimize the chances of wrongful discharge lawsuits.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual (2) Why would a company spend money to induce retirement-age employees to stay on board for a while, rather than simply hiring younger employees to take their place?

Because in this case it may be cheaper to spend money to induce retirement-age employees to stay on board for a while rather than to hire young employees and to train them and bring them up-to-speed.

It’s your business: (1) Has anything been posted online that might embarrass you during a background search?

Students’ answers will vary depending on personal situations.

(2) Have you ever been interviewed over the phone or via computer? If so, did you feel you were able to present yourself effectively without face-to-face contact?

Students’ answers will vary depending on personal experiences.

LEARNING OBJECTIVE 4: Explain the steps used to develop and evaluate employees.

Critical thinking: (1) How can employers balance the need to provide objective appraisals that can be compared across the company’s entire workforce with the desire to evaluate each employee on an individual basis?

Employers can balance such need and desire by on one hand using a standard company performance appraisal form to ensure objectivity and consistency across the entire organization and by on the other hand providing individualized evaluation through multidimensional reviews such as the 360-degree review of each employee, and through using technologies such as electronic performance monitoring.

(2) Beyond increasing their skill and knowledge levels, how can training improve employees’ motivation and job satisfaction? (Review Chapter 10 if you need to.)

Training can improve employees’ motivation and job satisfaction by giving them a sense that they are constantly learning and growing on the job. That propels them towards the highest levels of Maslow’s Hierarchy of Needs, namely “esteem” and “self-actualization”.

It’s your business: (1) Have you ever had a performance appraisal that you felt was inaccurate or unfair?

How would you change the process as a result?

Students’ answers will vary depending on personal experiences.

(2) Do the methods your college or university uses to evaluate your performance as student accurately reflect your progress? What changes would you make to the evaluation process?

Students’ answers will vary depending on personal experiences at their colleges or universities.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual LEARNING OBJECTIVE 5: Describe the major elements of employee compensation.

Critical thinking: (1) What are some potential risks or limitations of performance-based pay systems?

Some potential risks or limitations may be A) incentives are not closely linked to actions within employees’ control; B) incentives are not complemented with effective feedback systems to let employees know how they are performing throughout the performance measurement period.

(2) How does equity theory (see Chapter 10) explain the anger some employees feel about the compensation packages their company CEOs receive?

Equity theory suggests that employee satisfaction depends on the perceived ratio of inputs to outputs. If an employee works side by side with a CEO, working for the same company and giving similar amount of effort, only to learn that the CEO earns significantly more money, she would not be satisfied in her work and motivated to continue working hard. The employee may perceive a state of inequity, and will not be happy with the situation.

It’s your business: (1) If you worked for a large corporation, would a profit-sharing plan motivate you?

Why or why not?

Students’ answers will vary depending on personal experiences.

(2) What questions would you ask before you accepted a sales position in which most of your compensation would be based on commissions, rather than base salary?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 6: Identify the most significant categories of employee benefits and services.

Critical thinking: (1) Why are stock options a controversial employee benefit, particularly for top executives?

Stock options are controversial particularly for top executives because A)from the executive’s point of view there is no real risk associated with stock options; B) this lack of risk exposure can lead to riskier decision making by the executives, as indicated by research.

(2) What are the risks of investing in an ESOP? The risks of investing in an ESOP include A) employees may be terminated before the options vest; B) stock prices may stay below the exercise price, leaving the stock options worthless.

It’s your business: (1) Would you take stock options in lieu of a higher salary? Why or why not?

Students’ answers will vary depending on personal opinions.

(2) Would you be willing to forego health insurance or a retirement plan for higher salary or wages? Why or why not?

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Students’ answers will vary depending on personal opinions.

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Chapter 12: MANAGEMENT-WORKFORCE RELATIONS Chapter Overview This chapter continues to examine the business function of human resources management and explore the relationship among management, workforce and labor unions. It introduces labor unions and the different perspectives of employers and employees regarding unions. It addresses important pieces of labor relations legislation and explains the collective bargaining process. Finally, it describes the procedures of addressing employee grievances and arbitration disputes, and lists major challenges facing unions today.

Chapter Outline I.

The Role of Labor Unions A. Labor relations (p. 266) is the relationship between organized labor and management B. Labor unions are organizations that represent employees in negotiations with management C. The effects of unionization from an employee’s perspective include: 1. Higher compensation – union employees earn more than nonunion workers 2. Greater benefits – union employees receive greater employee benefits than nonunion workers 3. Influence over hiring, promotions and layoffs – union contracts have specific provisions about hiring, promotion and layoffs, especially with respect to seniority (p. 267) - the length of time a person has worked for his/her current employer 4. Working conditions and workplace safety 5. Formal processes for employee grievances, discipline and other matters 6. Solidarity and recognition D. The effects of unionization from an employer’s perspective include: 1. Direct costs in terms of wages and employee benefits are increased 2. Union contracts often include work rules (p. 268) that specify such things as the tasks employees are required to do or are forbidden to do 3. Mixed results in terms of productivity

II. Unionization in Historical Perspective A. Congress passed the National Labor Relations Act (p. 269) (also known as the Wagner Act) in 1935. Key provisions included: 1. It gave employees the right to form/join unions, bargain collectively with employers through elected union representatives and engage in strikes 2. It prohibited unfair labor practices by both the employer and the union

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Bovee/Thill, Business in Action 6/e Instructor’s Manual B. The Labor-Management Relations Act (p. 271) (also known as the TaftHartley Act) was passed in 1947. It addressed many concerns raised by business owners and shifted the balance of power. Key provisions included: 1. Guaranteeing the right of employees not to join/support unions and outlawing coercion by unions 2. Requiring unions to bargain in good faith with employers and restricting certain strike activities by unions C. The Labor-Management Reporting and Disclosure Act (also known as the Landrum-Griffith Act) was passed in 1959 to address internal operations of unions, including democratic processes and financial accountability III. The Organizing Process A. When a union negotiates a contract, it obtains union security (p. 272) – measures that protect a union’s right to represent workers.

1. In a union shop, employees are required to join the union within a specified period of time after being hired 2. In an agency shop, employees are not required to join the union but must pay the equivalent of union dues 3. Twenty-two states have passed right-to-work laws that prohibit union and agency shops B. There are two basic types of unions: craft unions and industrial unions 1. A craft union offers membership to workers with a specified craft or skill (i.e., carpentry, masonry) 2. An industrial union seeks to represent all workers at a given employer or location, regardless of profession or skill level C. Unions are organized at the local, national and international levels 1. Locals (p. 273) are local unions that represent employees in a specific geographic area or facility 2. A national union is a nationwide organization composed of many local unions that represent employees in specific locations 3. International unions have members in more than one country D. The union organizing drive has several steps: 1. Unions persuade workers to sign authorization cards (p. 274), which indicate interest in having a union represent them a. At least 30% of employees must sign cards to proceed further 2. If the employer does not voluntarily accept the union, employees or the union may petition the NLRB to conduct a secret certification election 3. If the union wins a majority of votes cast in the election, the NLRB grants the union the authority to begin negotiating on the employees’ behalf a. The employer is required to negotiate with the union for at least one year b. If employees no longer wish to be represented by the union, members can cast a decertification (p. 275) vote to take away the union’s right to represent them

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Bovee/Thill, Business in Action 6/e Instructor’s Manual IV. The Collective Bargaining Process A. Collective bargaining (p. 276) is the negotiation between union and management to work together in forging human resources policies that apply to all employees covered by the contract B. Collective bargaining agreements (CBAs) are the contracts that result from this process C. Contract negotiations go through four basic steps: 1. Union officials determine needs of its members and management determines what it is willing to offer 2. Both sides present their demands, and offers and counteroffers are made during the bargaining process a. If negotiations stall, the parties may opt for mediation (p. 277), use of an impartial third party to help resolve the bargaining impasse b. When a legally binding settlement is needed, negotiators may submit to arbitration, a decision process in which an impartial referee listens to both sides and makes a judgment 3. If bargaining is successful and a tentative agreement is reached, union members vote for ratification 4. If union members approve the agreement, it is signed by union and company leaders D. If the parties cannot reach agreement, each side has several options.

1. The union can: a. Strike (p. 278) – a temporary work stoppage aimed at forcing management to accept union demands b. Boycott – a pressure action by union members and sympathizers who refuse to buy or handle the product of a target company c. Publicity d. Injunctions – court orders that requires one side in a dispute to refrain from or engage in a particular action 2. Management can: a. Hire strikebreakers – nonunion workers hired to do the jobs of striking workers b. Lockouts – pressure actions by management to prevent union employees from entering the workplace c. Injunctions V. Grievance, Discipline and Arbitration Procedures A. During organizing campaigns, contract negotiations and throughout the duration of the CBA, unions and management are prohibited from engaging in unfair labor practices (p. 279) – unlawful acts made by either side B. If an employee or a union believes the employer is not abiding by the terms of the CBA, most contracts specify procedures for filing a grievance (p. 280) – a formal complaint against the employer 1. Grievance procedures usually specify a multistep escalation process C. The CBA also outlines procedures for disciplining employees. This is typically done through progressive discipline, an escalating process of discipline that gives employees multiple opportunities to correct performance problems before being terminated D. Arbitration can also be used to interpret or apply the provisions of the CBA

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Bovee/Thill, Business in Action 6/e Instructor’s Manual VI. The Future of Labor A. Union membership has decreased over the last several decades and membership in the U.S. is now less than 12%.

B. Labor leaders are trying to change the legal procedures for conducting organizing drives through the Employee Free Choice Act (EFCA) (p. 282) Two significant provisions: 1. The union would be automatically certified if more than 50% of affected employees signed authorization cards 2. New collective bargaining agreements can be submitted to binding arbitration if agreement cannot be reached after specified periods of negotiation and mediation C. EFCA has failed in Congress several times

Classroom Activities Break-out Group Discussion: Pros and cons of unions.

Goal: Asks students to discuss the benefits and pitfalls of unions in a group setting and then debate in front of the whole class.

Time Limit: 20 minutes.

Details: 1. Break students into groups of four or five. (2 minutes) 2. Ask half of the groups to come up with some major benefits of unions, and ask the other half of the groups to come up with some major pitfalls of unions. Elect a group leader/facilitator and a note taker in each group. Ask each group to finalize their viewpoints from notes and then elect group representatives or speakers. (10 minutes) 3. Ask representatives/speakers from two opposing teams to debate each other in front of the whole class, using ideas generated in prior group discussions.

One group will address the benefits of unions, while the other will counter with pitfalls of unions. The teams may go back and forth, attacking each other’s viewpoints and rationale. (8 minutes)

End-of-Chapter Behind the Scenes Labor Conflict Comes to a Head at AAM Critical Thinking Questions 1. If you were a procurement manager at GM, how might the strike at AAM affect your long-term thinking?

As a result of the strike, you may want to consider procuring parts from suppliers and factories/venders around the world that are not unionized or are less susceptible to strikes, such as suppliers in developing countries such as China.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 2. What effect did Richard Dauch’s public statements and actions likely have on negotiations?

Dauch’s public statements and actions have likely hurt negotiations, putting him at a disadvantage.

3. Can wages in the U.S. auto industry ever return to their historical highs? Why or why not?

The wages in the U.S. auto industry will probably not ever return to their historical highs because of the increasingly popular trend of outsourcing to lower-cost developing countries such as Mexico, Brazil and China, where the labor costs are substantially less than those in the U.S.

Learn More Online Visit the AAM website at www.aam.com , click on “Investors Media,” and then read some of the recent news releases. Was the company profitable in the most recent quarter? Has there been any news about labor relations issues at AAM? Now look at the stock information. AAM shares were selling for as low as $0.26 at one point; where is the share price today?

Students’ responses will depend in large part on the material currently posted on the website.

Test Your Knowledge Questions for Review 1. From an employee’s perspective, what are the potential benefits of unionization?

From an employee’s perspective, the potential benefits of unionization are: higher compensation; greater benefits; influence over hiring, promotions, and layoffs; better working conditions and workplace safety; formal processes for employee grievances, discipline, and other matters; as well as solidarity and recognition.

2. How did the Wagner Act affect the balance of power between unions and employers?

The Wagner Act tilted the balance of power towards unions by affirming and protecting rights of employees to join and assist labor unions, and outlawing attempts by employers to interfere with employees’ rights to organize unions.

Union membership grew dramatically in the decade that followed, to the point where unions could virtually shut down entire industries through strikes.

3. What is a right-to-work law?

The right-to-work laws are state laws that prohibit union and agency shops, 4. What is a collective bargaining agreement?

A collective bargaining agreement is a contract that results from collective bargaining, which is a negotiation between union and management negotiations to forge the human resources policies that will apply to all employees covered by a contract.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 5. How does mediation differ from arbitration?

The main difference between mediation and arbitration is that arbitration produces a legally binding settlement while mediation does not.

Questions for Analysis 6. How does the long history of labor-management relations affect labor relations in today’s economy?

The long history of labor-management relations has indicated a pattern of powershifting back and forth between labor unions and owners/management. In today’s economy, unions face major challenges such as the conflict within its own movement, declining membership since the 1950s, as well as their lobbying effort to pass the Employee Free Choice Act. The current recession and increasing globalization have given incentives to management to cut costs via outsourcing to developing countries with lower labor costs. This means that labor-management relations will become more and more contentious in today’s economy.

7. How does the relationship between labor and management reflect the potential for conflict in the stakeholder model?

The stakeholder model states that various stakeholders of a company, including both management and employees, may have conflicting interests and motives. On one hand, management’s main goal for the company is to maximize profitability.

Such a goal can be partially achieved by minimizing labor costs. Labor union’s main goal, on the other hand, is to maximize its members’ wages and benefits. In this case, the goals of management and labor unions are in direct conflict with each other.

8. What are some of the explanations for the decline in labor union membership in the past 50 years?

Students’ answers will vary but possible points of consideration include: A) increasing globalization and outsourcing to developing countries with lower labor costs, including Mexico, Brazil and China; B) manufacturing firms such as foreign automakers establishing factories in non-unionized sun-belt states such as Tennessee and South Carolina; C) shifting public opinion towards unions.

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Why are many employers lobbying so vigorously against passage of the Employee Free Choice Act? Many employers are not in favor of the EFCA because of the loss of the secret ballot elections and the imposition of mandatory arbitration. EFCA opponents worry that union organizers will pressure employees into signing authorization cards because unlike secret ballot voting, knowledge of who did and did not sign an authorization card is not a secret. They also object to mandatory arbitration because they believe both sides will lose the freedom to negotiate and that an arbitrator could decide wage, benefits, work rules and other essential aspects of operating a business, even though that the arbitrator may have little or no experience in that industry.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 10. Ethical Considerations. Is it wrong for employees to try to convince each other to vote for or against unionization? How much pressure should employees be allowed to exert on each other during union organizing campaigns?

Students’ answers will vary depending on personal opinion.

Questions for Application 11. You work as an organizer for a union that is trying to persuade workers in the banking industry to unionize. You’ve collected authorization cards from 52 percent of the workers at a particular company. Should you file a petition with the NLRB for a secret-ballot election? Why or why not? (Assume the Employee Free Choice Act has not yet become law.)

Students’ answers will vary but at a minimum they should address that banking employers have to accept the union as the employees’ representative if more than 50% of the affected employees have signed authorization cards. If the employers do not voluntarily accept the union, employees or the union can petition the NLRB to conduct a secret-ballot certification election.

12. What advice would you give the founders of a new company who want to avoid unionization efforts among their workforce as the company grows?

Students’ answers will vary but at a minimum they will need to advise the founders to tread carefully and learn what they are allowed and not allowed to do under the Wagner Act. For instance, managers and owners are slowed to provide factual information about the union and labor relations laws and share personal experiences about life in a unionized workplace. However, they are not allowed to threaten employees for engaging in union activities or interrogate employees regarding union sympathies or voting plans.

13. A co-worker is arguing that the President should not have the authority to issue an injunction to stop a strike because doing so violates the legal rights of workers. How would you respond?

Students’ answers will vary but they need to at least address the fact that the president of the United States has the right, under the Taft-Hartley Act, to obtain a temporary injunction to halt a strike deemed harmful to the national interest, such as a wide-scale transportation strike.

14. Concept Integration. Which motivation theory or theories discussed in Chapter 10 help explain the sometimes contentious nature of labor relations?

Students’ answers may vary but one possible motivation theory from Chapter 10 that may help explain the sometimes contentious nature of labor relations is Theory X, which states that Theory X–oriented managers believe that employees dislike work and can be motivated only by the fear of losing their jobs or by extrinsic rewards—those given by other people, such as money, promotions, and tenure.

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Expand Your Knowledge Discovering Career Opportunities Mediation and arbitration are forms of alternative dispute resolution (ADR), so named because they offer alternatives to resolving disputes through lawsuits.

Mediate.com (www.mediate.com/about) offers extensive information about mediation, and the American Arbitration Association (www.adr.org) offers information about arbitration. The “Judges, Magistrates, and Other Judicial Workers” section of the Occupational Outlook Handbook (www.bls.gov/oco/ocos272.htm) also provides information on careers in arbitration. Visit these sites and explore the world of ADR. Is this a career you might want to pursue? What additional education would you need?

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

Improving Your Tech Insights: Employee Monitoring Software Is Big Brother watching while you work? Chances are extremely good that at least one form of electronic activity will be monitored in whatever workplace you join after graduation. The costs of inappropriate behavior can be so high that the majority of employers now monitor or control access to the Internet, telephone conversations (although employers are not allowed to record personal calls), voice mail, e-mail, instant messaging (but not text messaging, generally speaking), and other electronic media. Many employers also use keystroke monitoring or screen image recording software to keep track of what employees are doing at their computers. Many businesses also use video monitors throughout company facilities.

Employers have a number of concerns, including lost productivity, release of company secrets or confidential customer records, the viewing and sending of inappropriate material, and illegal activities by employees. Privacy advocates may not like all the monitoring, but current laws provide little protection for employee privacy, and courts have ruled that employers have the right to control the use of company-owned systems and to protect confidential information.

In a brief email message to your instructor, summarize this dilemma and its possible effects on employee-management relations.

Students’ email messages will vary depending on personal opinions.

Practice Your Skills Sharpening Your Communication Skills Identify a recent situation in which a labor union went on strike in an attempt to force an employer to drop plans to reduce wages, benefits, or job security.

Choose either the union’s position or the company’s position, and do the research necessary to write a compelling one-page argument for your side.

Students’ arguments will vary depending on the company and the position chosen.

Building Your Team Skills Form a team with several students who have chosen the same side in the dispute from “Sharpening Your Communication Skills.” In a debate against another

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Bovee/Thill, Business in Action 6/e Instructor’s Manual team that has taken the other side in the dispute, try to convince the rest of the class that your side is justified in taking the stance it took. Be prepared to address points likely to be raised by your opponents.

Students’ debate will vary depending on the company and the position chosen.

Developing Your Research Skills Conduct research to determine any significant recent changes to NLRB procedures, such as the “quick snap” election process (see page 282). If these procedures have been changed, what has the response been from unions, employees, and employers? Have any legal challenges been mounted against the changes? Have they had any noticeable effect on unionization and the economy?

Students’ answers may vary depending on timing of research and the research sites picked.

CHECKPOINTS LEARNING OBJECTIVE 1: Explain the role of labor unions, and contrast the perspectives of employees and employers on the issue of unionization.

Critical thinking: (1) Why is it so difficult to come up with a single conclusive answer about the effects of unionization on business productivity?

It is difficult to come up with a single conclusive answer because research has been contradictory about whether unions have a positive or negative effect on business productivity. In fact, an analysis of related research of 73 studies found 45 studies that showed a positive effect of unions on productivity and 28 studies that showed negative effect. The same analysis suggests that unions have had a net negative effect on productivity in UK and Japan but a net positive effect on productivity in the U.S. (2) How do labor relations demonstrate the stresses inherent in the stakeholder model?

Labor relations involve managers and employees, two of the major stakeholders for businesses. They have conflicting interests and goals, in that managers want to reduce labor costs to maximize profitability, while employees and unions want to maximize the income and benefits of employees. Such conflicts are consistent with the stresses inherent in the stakeholder model.

It’s your business: (1) Union supporters often talk about the need for greater democracy in the workplace. Explain why you agree or disagree with this sentiment.

Students’ positions and explanations will vary depending on personal opinions.

(2) Would you rather be promoted on the basis of seniority or of merit? Why? Students’ answers will vary depending on personal opinions.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual LEARNING OBJECTIVE 2: Identify the three most important pieces of labor relations legislation in the 20th century.

Critical thinking: (1) Why are disputes between labor and management often more complicated than just matters of money?

Such disputes are often more complicated than just matters of money because supporters and opponents of unionism often have profoundly different beliefs about fundamental economic principle and the ideal nature of society itself.

(2) Would you agree that the struggle between labor and management has, to at least some degree, been a matter of legislative overcorrection? Why or why not?

Students’ answers may vary but the statement is true to a certain extent since history has indicated the back-and-forth power shift between unions and management as legislators passed laws that alternately favored unions and management.

It’s your business: (1) Do you believe it is appropriate for unions to be involved in political activities?

Why or why not?

Students’ answers will vary depending on personal opinions.

(2) Given the long and complex history of unionization, many people now have an emotional response to the word “union.” Do you respond positively or negatively when you hear the word? Why? Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 3: Explain how unions are structured, and describe the organizing process.

Critical thinking: (1) Why does the concept of an agency shop exist, since employees in such facilities aren’t required to join the union?

The concept of an agency shop exists even though employees in such facilities aren’t required to join the union because it effectively “forces” the employees to join the union. Since employees in an agency shop are required to pay the equivalent of union duties even if they are not required to join the union, most employees in agency shop situations would just go ahead to join the union—“I might as well get the benefits since I am already paying”.

(2) Why do union organizers usually gather authorization cards from well over 50 percent of the employees in a bargaining unit before petitioning the NLRB for a certification election?

Because research indicates that a significant number of employees who sign cards end up voting against the union in the secret-ballot election.

It’s your business: (1) If you were an entrepreneur ready to start a new company, would state right-towork laws affect your decision about choosing a location for your business? Why or why not?

Students’ answers will vary depending on personal opinions.

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(2) Union supporters argue that all workers benefit from the improvements in working conditions that unionization has helped bring about over the years; do you agree that all workers are in unions’ debt? Why or why not?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 4: Describe the collective bargaining process.

Critical thinking: (1) Given the history of union-management relations, why do you think mediation tends to be so successful at resolving bargaining impasses?

Mediation tends to be more successful in resolving bargaining impasses since an impartial third party is involved to study the situation, explore new options, improve communication, and make recommendations for resolution of the differences.

Another important reason for its success is that it does not require a legally binding settlement, as in the case of arbitration. In arbitration, both sides will lose the freedom to negotiate and that an arbitrator could decide wage, benefits, work rules and other essential aspects of operating a business, even though that the arbitrator may have little or no experience in that industry.

(2) Why would an employer resort to a lockout?

An employer would resort to a lockout as a preemptive measure designed to force a union to accede to management’s demands.

It’s your business: (1) Should U.S. consumers be pressured to buy products made in the United States?

Why or why not?

Students’ answers will vary depending on personal opinions.

(2) Would you refuse to shop at a store that was being picketed by union members?

Why or why not?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 5: Explain the procedures for addressing employee grievances and arbitrating disputes.

Critical thinking: (1) Is it in a union’s best interest for its members to comply with all the terms of a collective bargaining agreement? Why or why not?

Yes. A union is in the best negotiation position with the management when its members are in compliance with the terms of a collective bargaining agreement.

(2) What risks do unions and employers take in deciding to use arbitration?

In arbitration, unions and employer will lose the freedom to negotiate and that an arbitrator could decide wage, benefits, work rules and other essential aspects of operating a business, even though that the arbitrator may have little or no experience in that industry.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual It’s your business: (1) Have you ever witnessed theft or other serious violations by employees in a workplace? What disciplinary measures were taken?

Students’ answers will vary depending on personal opinions.

(2) Do you believe that employees should be given multiple chances after committing minor offenses in the workplace, as progressive discipline procedures allow? Why or why not?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 6: Characterize the ongoing conflict over union organizing efforts.

Critical thinking: (1) What evidence would you need to reach a solid conclusion about why union membership has declined in the private sector over the past 50 years?

Students’ answers may vary but points of consideration include the following: A) increasing globalization and outsourcing to developing countries with lower labor costs, including Mexico, Brazil and China; B) manufacturing firms such as foreign automakers establishing factories in non-unionized sun-belt states such as Tennessee and South Carolina; C) shifting public opinion towards unions.

(2) Why do you suppose different surveys generate such wildly varying responses to questions about whether nonunion employees would like to join a union?

Responses to such surveys vary depending on who is doing the asking and how the question is phrased. For instance, answers become very different when respondents were asked a simple yes or no question rather than “definitely” and “probably”, regarding whether nonunion employees want to join the union or not.

It’s your business: (1) With everything you’ve learned about labor relations so far, would you describe yourself as more pro-union or more anti-union? Why? Students’ answers will vary depending on personal opinions.

(2) How would you respond to your workplace becoming unionized through a card check, rather than a secret-ballot election?

Students’ answers will vary depending on personal opinions.

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Chapter 13: THE ART AND SCIENCE OF MARKETING Chapter Overview This chapter introduces the dynamic business functional area of marketing. It defines marketing, and discusses how firms use market research to learn more about their customers’ needs and wants. It then outlines the major steps in the strategic marketing planning process and highlights the various market segmentation techniques. Finally, it introduces the next three chapters by identifying the four elements of a firm’s marketing mix.

Chapter Outline I.

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Marketing in a Changing World A. Marketing (p. 291) is the process of creating value for and building relationships with customers in order to capture value back from them B. Marketing applies goods and services, as well as not-for-profit organizations, places, people and causes 1. Place marketing describes efforts to attract people and organizations to a particular geographic area 2. Cause-related marketing promotes a cause or social issue to selected target markets C. Marketing helps people satisfy needs and wants 1. Needs are the differences between a person’s actual state and his desired state 2. Wants are specific goods, services, experiences or other entities desirable in light of a person’s experiences, culture and personality D. Marketing facilitates the exchange process (p. 292) – the act of trading something of value (money) for something else of value 1. When the exchange actually occurs, it takes the form of a transaction – an exchange of value between the parties D. Marketers add utility (the power of a good or service to satisfy a human need) to goods and services. There are 4 types of utility: form utility, time utility, place utility and possession utility F. The marketing concept (p. 293) is the idea that companies should respond to customers’ needs and wants while seeking long-term profitability and integrating marketing with other functional units in the organization 1. This involves relationship marketing – a focus on developing longterm relationships with customers, suppliers and distribution partners 2. One of the goals of relationship marketing is customer loyalty – the degree to which customers continue to buy from one company vs. another

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Bovee/Thill, Business in Action 6/e Instructor’s Manual III. Challenges in Contemporary Marketing A. There are 3 issues confronting marketing organizations: 1. Involving the customer in the marketing process. There are two types of technologies that foster this collaboration: a. Customer relationship management (CRM) (p. 295) – an information system that captures, organizes and capitalizes on all the interactions a company has with its customers b. Social commerce – the creation and sharing of product-related information among customers and potential customers 2. Learning about customers through collecting, analyzing and using data to make better marketing decisions a. Marketing research is the process of gathering and analyzing market intelligence about customers, competitors and related marketing efforts through a combination of methods 3. Marketing with greater concern for ethics and etiquette a. Permission-based marketing (p. 297) is an approach in which firms request permission to deliver messages to an audience b. A major issue is stealth marketing – delivering marketing messages to people who are not aware that they are being marketed to III. Understanding Today’s Customers A. The consumer market (p. 298) is made up of individuals and households that buy goods and services for personal use B. The organizational market is composed of companies and non-commercial institutions C. Consumer purchasing behavior is influenced by multiple factors: culture, socioeconomic level, reference groups, situational factors and self-image 1. Cognitive dissonance (p. 299) is the tension that exists when a person’s beliefs does not match his/her behaviors; one form is buyer’s remorse D. Organizational purchasing behavior differs from consumer purchasing behavior in the following ways: 1. It is based on economic payback and rational, objective factors 2. There is typically a formal buying process 3. Greater complexity in product usage 4. Participation by and influence of multiple people in the buying process 5. Closer relationships between buyers and sellers IV. Identifying Market Opportunities A. Strategic marketing planning (p. 301) involves three steps: 1. Examining the current market situation, including reviewing performance, evaluating the competition, examining internal strengths and weaknesses, and analyzing the external environment 2. Assessing opportunities and establishing marketing objectives, including market share (p. 302) – a firm’s portion of the total sales within a market. Marketing opportunities can be classified into four options: a. Market penetration – selling more of a firm’s existing products in the markets it already serves b. Product development – creating new products for current markets c. Market development – selling existing products to a new market d. Diversification – creating new products for new markets 3. Developing a marketing strategy

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V. Crafting a Marketing Strategy A. A company’s marketing strategy (p. 303) is its overall plan for marketing a product. It involves 3 steps: segmenting the market, choosing target markets and developing a marketing mix B. A market (p. 304) is the group of customers who want or need a particular product and have the money to buy it. Market segmentation is the process of dividing the market into smaller groups with similar needs, wants and purchase behaviors. A market can be segmented in 4 basic ways: 1. Demographics – the statistical analysis of a population 2. Psychographics – categorizing customers based on their psychological makeup, interests and lifestyles 3. Geographic segmentation – categorizing customers according to their geographic location 4. Behavioral segmentation – grouping customers according to their relationship with products or response to product characteristics C. After the market has been segmented, marketers will decide on its target markets - specific customer groups or segments to which the company wants to sell its products. There are four strategies for reaching the target market: 1. Undifferentiated marketing (mass marketing) - utilizing the same strategy for all potential buyers 2. Differentiated marketing – tailoring the marketing mix for each customer group 3. Concentrated marketing – focusing on only a single market segment 4. Micromarketing (individual) marketing – targeting a single market or even a single customer D. After deciding on its target market, the company focuses on positioning (p.

305) – managing the company’s marketing mix in a way designed to occupy a particular place in the minds of target consumers VI. The Marketing Mix A. The marketing mix (p. 306) consists of four elements of the marketing strategy: product, price, distribution (place) and promotion 1. Product (p. 307) is defined as the bundle of value that satisfies a customer need or want.

2. Price is the amount of money charged for a product or service, and is affected by numerous factors, including marketing objectives, government regulations, production costs, customer perceptions, competition and customer demand 3. Distributions channels (p. 308) are the systems for moving goods and services from producers to customers. These channels include marketing intermediaries such as wholesalers and retailers 4. Promotion – all the activities a firm undertakes to promote its products to the customers. Goals include informing, persuading and reminding

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Classroom Activities In-class Activity: Making sense of product life cycle.

Goal: Help students better understand the four stages of product life cycle and their implications for product marketing.

Time Limit: 10 minutes.

Details: 1. Create a list on one side of the blackboard, including various products that exist currently in the market. Sample products include iPhones, plasma flat screen TVs, analog cameras, and typewriters, etc.

2. Draw four columns on the other side of the blackboard, labeled respectively with the four stages of Product Life Cycle, namely introduction, growth, maturity, and decline.

3. Ask students to pair up and recreate the content of the blackboard on their notebooks and subsequently assign all of the product items into the correct columns.

End-of-Chapter Behind the Scenes Aggravation Leads to Inspiration for Sarah Calhoun of Red Ants Pants Critical Thinking Questions 1. How might Calhoun’s decision to keep production in the United States help solidify her market position in the minds of her target customers?

Calhoun’s focus was providing “hardwearing pants for hardworking women”, so her target market is likely adult women who are employed outside the home.

These consumers might be more sensitive than many to the trend for apparel companies to outsource labor to other countries, because this outsourcing often leads to a loss of jobs in the U.S. Thus, keeping production in the U.S. may appeal to consumers who not only want to “buy American” but who also want to keep jobs in the U.S. 2. If Red Ants Pants had investors looking for a quick return, how might that influence Calhoun’s decision to continue functioning as her own retail channel, rather than going through established retailers?

Having Red Ants Pants clothing available in retail outlets would enable far more customers to try the pants on, resulting in more sales and visibility in the market.

This would give Calhoun less control over price and inventory, but investors who was to go in for the “quick kill” might want to take that chance if it meant significantly higher sales.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 3. How could meeting small groups of women in their homes to talk about pants possibly be an efficient communication strategy?

Marketing’s first goal is to find out what the customer wants. Meeting groups of women in a home environment is an effective focus group strategy, because Red Ants Pants can talk to women in a relaxed atmosphere about the features that they seek in apparel.

Learn More Online Visit the Red Ants Pants website at www.redantspants.com and its page on Facebook (search for “Red Ants Pants” on Facebook). How are the various elements of the marketing mix represented? How does the style of communication help Red Ants Pants connect with customers? What sort of practical information is provided to help customers select and order products?

Students’ answers will vary depending on personal opinion as well as what is currently posted on the site.

Test Your Knowledge Questions for Review 1. Why are companies pushing for more accountability from the marketing function?

Companies are pushing for more accountability from the marketing function because the return on investment of the marketing function has been less than ideal in many industries. In fact, according to one recent research study, the advertising campaigns for two-thirds of established products in the marketplace do not bring in more revenue.

2. How does the organizational market differ from the consumer market?

The organizational market differs from the consumer market in that it is more clearly driven by economics and influenced less by subconscious, emotional factors. It places an emphasis on economic payback and other rational factors; it is a formal buying process; it involves participation and influence of multiple people; and it typically involves closer relationships between buyers and sellers.

3. What is strategic marketing planning, and what is its purpose?

The purpose of strategic market planning is to help firms identify and create a competitive advantage, something that sets the firms apart from their rivals and makes their products more appealing to customers. Strategic market planning is a process that involves three steps: (1) examining the current marketing situation, (2) assessing opportunities and setting objectives, (3) developing a marketing strategy to reach those objectives.

4. What external environmental factors affect strategic marketing decisions?

Economic conditions, changes in the natural environment, social and cultural trends, laws and regulations, and technological advancements are external environmental factors that affect strategic marketing decisions.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 5. What are the four basic components of the marketing mix?

The four components of a firm’s marketing mix consist of product, price, place (or distribution), and promotion.

Questions for Analysis 6. Why would customers knowingly buy counterfeit luxury brands?

In today’s recessionary environment, consumers still aspire to enjoy the good life but they are forced by circumstances to alter their spending habits. Some would knowingly resort to buying counterfeit luxury brands because some producers have made their products look virtually the same as authentic, high-priced luxury goods. Customers are also less hesitant to buy counterfeit products in cultures where there has not been strong intellectual property protection and enforcement.

7. How can marketing research and database marketing help companies improve their marketing efforts?

Companies can obtain information about customers’ changing needs by engaging in marketing research. Database marketing is the process of recording and analyzing customer interactions, preferences, and buying behavior for the purpose of contacting and transacting with customers. Companies can learn customer preferences and priorities through these methods to make the customers' experience more personal and compelling.

8. Why does a marketer need to consider its current marketing situation, including competitive trends, when setting objectives for market share?

Market share is a firm’s portion of the total sales within a particular market; therefore, it is dependent on total market size as well as the firm’s proportion of the market. Current marketing situation such as the overall economic condition is important because it affects the overall market size, while competitive trends determine a firm’s relative share of the overall market.

9. Why do companies segment markets?

By grouping or segmenting customers with similar characteristics, behavior, and needs, companies can target their products or services to satisfy the needs of each segment. Market segmentation is a more economical, efficient, and effective way to market products—especially if you have limited resources.

10. Ethical Considerations. Is it ethical to observe shoppers for the purposes of marketing research without their knowledge and permission?

Students’ responses will vary depending on personal opinions but they need to address the issues of privacy, intrusion and deception.

Questions for Application 11. How might a retailer use relationship marketing to improve customer loyalty?

A retailer would use relationship marketing to build long-term customer loyalty.

The retailer wants customers to continue to buy from him/her. Retailers might offer loyalty cards or programs or have special “customer-only” sales in which coupons are sent to registered customers’ homes for use in the retail store.

Students will have other responses based on personal experience.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 12. Think of a product you recently purchased and review your decision process. Why did you need or want that product? How did the product’s marketing influence your purchase decision? How did you investigate the product before making your purchase decision? Did you experience cognitive dissonance after your decision?

Student answers will vary depending on the product of choice.

13. If you were launching a new manufacturing company, would you draft your marketing plan or design your production processes first? Why? Ideally, you need to draft a marketing plan first before designing the production process. In order to create strong production processes, it is crucial to understand the scope and volume of the product to be produced or assembled. Without this information, a production designer could not effectively make decisions such as layout, inventory, or even location. Marketing planning makes the crucial step of assessing a firm’s current marketing situation, understanding customer needs and wants, and deciding whether to change products, leave them unchanged, increase volume, or reduce volume of output.

14. Concept Integration. How might the key economic indicators discussed in Chapter 2, including consumer price index, inflation, and unemployment affect a company’s marketing decisions?

Marketers are affected by trends in interest rates, inflation, unemployment, personal income, and savings rates. In tough times, consumers put off buying expensive items such as major appliances, cars, and homes. They cut back on travel, entertainment, and luxury goods. When the economy is good, consumers open their wallets and satisfy their pent-up demand for higher-priced goods and services.

Expand Your Knowledge Discovering Career Opportunities Jobs in marketing cover a wide range of activities, including a variety of jobs such as personal selling, advertising, marketing research, product management, and public relations. You can get more information about various marketing positions by consulting the Occupational Outlook Handbook (www.bls.gov/oco), job-search websites such as Career Builder (www.careerbuilder.com ) and Monster (www.monster.com ), and other online resources.

1. Select a specific marketing job that interests you. Using one or more of the preceding resources, find out more about this chosen job. What specific duties and responsibilities do people in this position typically handle?

Students' answers will vary. However, encourage students to conduct a selfevaluation based on their strengths and weaknesses in much the same way that marketing planners do. Students should consider which type of job might be best suited to their individual capabilities.

2. Search through help-wanted ads in newspapers, specialized magazines, or websites to find two openings in the field you are researching. What educational background and work experience are employers seeking in

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Bovee/Thill, Business in Action 6/e Instructor’s Manual candidates for this position? What kinds of work assignments are mentioned in these ads?

Students’ answers will vary; encourage students to consider ways in which they might try some of these jobs before “breaking into the field.” Internships are often available to eager students wanting to experience new fields.

3. Now think about your talents, interests, and goals. How do your strengths fit with the requirements, duties, and responsibilities of this job? Do you think you would find this field enjoyable and rewarding? Why? Students’ answers will vary.

Practice Your Knowledge Sharpening Your Communication Skills In small groups as assigned by your instructor, take turns interviewing each person in the group about a product that each person absolutely loves or detests. Try to probe for the real reasons behind the emotions, touching on all the issues you read about in this chapter, from self-image to reference groups.

Do you see any trends in the group’s collective answers? Do people learn anything about themselves when answering the group’s questions? Does anyone get defensive about his or her reasons for loving or hating a product? Be prepared to share with at least two marketing insights you learned through this exercise.

Students’ responses will depend upon the sampling of information gathered.

Building Your Team Skills In the course of planning a marketing strategy, marketers need to analyze the external environment to consider how forces outside the firm may create new opportunities and challenges. One important environmental factor for merchandise buyers at Sears is weather conditions. For example, when merchandise buyers for lawn and garden products think about the assortment and number of products to purchase for the chain’s stores, they don’t place any orders without first poring over long-range weather forecasts for each market. In particular, temperature and precipitation predictions for the coming 12 months are critical to the company’s marketing plan, because they offer clues to consumer demand for barbecues, lawn furniture, gardening tools, and other merchandise.

What other products would benefit from examining weather forecasts? With your team, brainstorm to identify at least three types of products (in addition to lawn and garden items) for which Sears should examine the weather as part of their analysis of the external environment. Share your recommendations with the entire class. How many teams identified the same products your team did?

Students’ responses will vary. The point of this exercise is to get students to consider the less-obvious (and sometimes unlikely) connections between all sorts of purchases. Any products geared for outdoors activities ranging from camping gear to picnic hampers will be affected by shifts in the weather. For example, imagine how an extremely rainy summer would affect the sales of sunscreen—or umbrellas, rain slickers, charcoal, bathing suits, sunglasses—etc. Encourage students to see the

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Bovee/Thill, Business in Action 6/e Instructor’s Manual connection between the weather and these obvious items, as well as the less-obvious items such as books, videos, or chlorine-removal shampoo!

Developing Your Research Skills From recent issues of business journals and newspapers (print or online editions), select an article that describes in some detail a particular company’s attempt to build relationships with its customers (either in general or for a particular product or product line).

1. Describe the company’s market. What geographic, demographic, behavioral, or psychographic segments of the market is the company targeting?

Answers will vary depending on the article selected 2. How does the company hold a dialogue with its customers? Does the company maintain a customer database? If so, what kinds of information does it gather?

Answers will vary depending on the article selected 3. According to the article, how successful has the company been in understanding its customers?

Answers will vary depending on the article selected

CHECKPOINTS LEARNING OBJECTIVE 1: Define marketing, and explain its role in society.

Critical thinking: (1) Should every company seek long-term relationships with customers to the same degree? Why or why not?

Every company seeking long-term profitability should view long-term relationships with customers as a critical success factor because research has indicated that the customer-focused companies in the long run tend to be more successful.

(2) Would a company that already dominates its markets ever care about the marketing concept? Why or why not?

Yes. Today’s market domination does not necessarily translate to continued future success. To achieve long term success, a company needs to embrace the marketing concept by responding to customers’ needs and want while seeking long-term profitability and coordinating its marketing efforts to achieve the company’s longterm goals.

It’s your business: (1) What is your reaction when you feel as though you’re being “sold to” by a company that is clearly more interested in selling products than in meeting your needs as an individual consumer?

Students’ answers may vary depending on personal opinions.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual (2) Do you want to have a “relationship” with any of the companies that you currently patronize as a customer? Why or why not?

Students’ answers may vary depending on personal opinions.

LEARNING OBJECTIVE 2: Identify three trends that help define contemporary marketing.

Critical thinking: (1) How can technology help companies replicate the community feel of a small neighborhood business on a global scale?

On one level, customer relationship management (CRM) systems can be powerful tools to help foster communication and collaboration between companies and their customers, allowing companies to record, organize and act on all the interactions that a company has with its customers. On another level, social commerce using blogs, wikis, user-generated content such as online videos and customer-created advertising, and other Web 2.0 technologies allow customers to communicate with companies, with each other, and with marketplace influencers such as prominent bloggers and journalists. All of the above technologies help companies replicate the community feel of a small neighborhood business on a global scale.

(2) Why do some critics consider stealth marketing to be unethical?

Stealth marketing is considered unethical by some critics because customers don’t know they are being marketed to in such situations. Such practices have raised concerns of privacy and intrusion.

It’s your business: (1) Are you so loyal to any brands or companies that you refuse to accept substitutes—so much so that if you can’t have your favorite product, you’ll do without? What is it about these products that earns your continued loyalty?

Students’ answers may vary depending on personal opinions.

(2) Have you ever been a target of stealth marketing? If so, how did you feel about the company after you learned you had been marketed to without your knowledge?

Students’ answers may vary depending on personal experiences and opinions.

LEARNING OBJECTIVE 3: Differentiate consumer buying behavior and organizational buying behavior.

Critical thinking: (1) Can business-to-business marketers take advantage of new insights into consumer buying behavior? Why or why not?

Yes because there are similarities between the consumer markets and business markets. For instance, the Rational Model of Buyer Decisions applies to both consumer and business purchases.

(2) How could families and individual consumers benefit from adopting some elements of organizational buying behavior?

Families and individual consumers could benefit from adopting elements of organizational buying behavior, including adopting a more rational and less

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Bovee/Thill, Business in Action 6/e Instructor’s Manual emotional purchase approach, as well as getting multiple people involved (e.g. friends and family) in the purchase decision making process.

It’s your business: (1) Do you read product reviews online before making important purchases? Why or why not? Have you ever contributed to social commerce by posting your own reviews or product advice?

Students’ answers may vary depending on personal experiences and opinions.

(2) Why did you buy the clothes you are wearing at this very moment?

Students’ answers may vary depending on personal experiences.

LEARNING OBJECTIVE 4: Define strategic marketing planning, and identify the four basic options for pursuing new marketing opportunities.

Critical thinking: (1) Why is it important to analyze past performance before assessing market opportunities and setting objectives?

Analyzing past performance is important because the firm will want to learn from its past mistakes and repeat its success. Reviewing where the firm was and how it got there can be good feedback for assessing market opportunities and setting objectives for the future.

(2) Why is diversification considered riskier than market penetration, product development, and market development strategies?

Diversification is the riskiest of the four strategies because not only does the firm need to develop a new product; it also needs to enter a new market. The other three strategies rely on an existing product and/or an existing market.

It’s your business: (1) Do you see yourself as a trendsetter in any aspect of your life?

Students’ answers may vary depending on personal opinions.

(2) How could the four options for pursing market opportunities be applied to your career planning at various stages in your career? (Think of your skills as the products you have to offer.)

Students’ answers may vary depending on personal experiences and opinions.

LEARNING OBJECTIVE 5: Identify the four steps needed to craft a marketing strategy.

Critical thinking: (1) Would two companies interested in the same group of customers automatically use the same target market approach (such as differentiated or concentrated)? Why or why not?

Not necessarily. Companies with different core competencies and cultures may use different market approach even though they are interested in the same group of customers.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual (2) Why aren’t marketers ultimately in control of the positions their products achieve in the marketplace?

Because marketers are usually not alone in the marketplace. Their market positions are often determined by the positions of their competitors.

It’s your business: (1) Think of three car brands or specific models. How are these products positioned in your mind? What terms do you use to describe them?

Students’ answers may vary depending on personal opinions.

(2) Given your transportation needs in the near future (assuming you will need a car), which model is the most desirable? The least desirable?

Students’ answers may vary depending on personal experiences and opinions.

LEARNING OBJECTIVE 6: Describe the four main components of the marketing mix.

Critical thinking: (1) Why is price sometimes referred to as captured value?

Looking back at Kotler and Armstrong’s definition of marketing, price is the value captured from customers in exchange for the value offered in the product.

(2) Why do companies that embrace relationship marketing focus on “customer communication” rather than “promotion”?

Companies focus on “customer communication” rather than “promotion” because today’s leading companies have moved beyond the unidirectional approach of promotion to interactive customer communication. By talking with their customers instead of at their customers, marketers get immediate feedback on everything from customer service problems to new product ideas.

It’s your business: (1) If you could buy a product from a website or a store right down the street and the cost was the same, where would you make your purchase? Why? Students’ answers may vary depending on personal opinions.

(2) When buying products, do you tend to seek out products with visible logos (such as the Nike swoosh or the Dolce & Gabbana initials) or do you ignore such products?

Or do you not care one way or the other? Why? Students’ answers may vary depending on personal experiences and opinions.

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Chapter 14: PRODUCTS AND PRICING Chapter Overview This chapter discusses in further details the first two P’s of the 4P’s marketing-mix framework that was introduced in Chapter 13, namely products and pricing. It describes the various stages in product life cycle and product development, and introduces the concepts of brand equity and loyalty, as well as packaging and labeling. Finally, it lists factors that influence pricing decisions and discusses the nine common pricing strategies.

Chapter Outline I.

Characteristics of Products A. Products can be classified as consumer products or industrial/commercial products B. Consumer products are primarily sold to individuals for personal consumption. There are 4 subgroups: 1. Convenience products (p. 316) – everyday goods and services that people buy frequently, usually without much conscious planning 2. Shopping products – fairly important goods and services that people buy less frequently with more planning and comparison 3. Specialty products – particular brands that the buyer especially wants and will seek out regardless of location or price 4. Unsought products – products such as life insurance, cemetery plots and items that are new to the marketplace C. Industrial and commercial products are purchased by organizations in large quantities and used to create other products or to operate the organization.

1. Expense items (p. 317) are inexpensive products that organizations generally use within a year of purchase 2. Capital items are more expensive products with a longer useful life D. Most products undergo a product life cycle and progress through 4 stages: 1. Introduction – from the R&D phase through first commercial availability 2. Growth – an increase in sales, competitors and distribution outlets 3. Maturity – sales begin to level off 4. Decline – sales and profits slip

II. The New Product Development Process A. The product development process (p. 319) is a formal process of generating, selecting, developing and commercializing product ideas. Six steps: 1. Idea generation – brainstorming product concepts that could satisfy unmet market needs 2. Idea screening – subjecting ideas to feasibility or concept testing to identify those with the best chance of turning into successful products

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 3. Business analysis – subjecting ideas that survive the screening stage to a business analysis based on estimates of production costs, sales volume and selling price 4. Prototyping – developing functioning pre-release versions called prototypes (p. 320) to be used by target customers 5. Test marketing – releasing a finished product to selected customers or market segments 6. Commercialization (p. 321) – large scale production and distribution of products that have survived the testing process III. Product Identities A. A brand is a name, term, sign, symbol, design or combination of those used to identify the products of a firm and to differentiate them from competing products. Multiple components: 1. The portion that can be expressed orally, including letters, words or numbers is the brand name (p. 322) 2. The portion that cannot be expressed verbally is its brand mark 3. The graphical and/or textual representation of a brand is its logo 4. Brand names and symbols registered as trademarks have legal protection so that their owners have exclusive rights to their use B. Branding creates value for a product – this is brand equity (p. 321) C. The commitment to a particular brand is known as brand loyalty (p. 322) – there are three levels: 1. Brand awareness 2. Brand preference 3. Brand insistence D. There are many types of brand names and types: 1. National brands – brands owned by manufacturers and distributed nationally 2. Private brands – brands that carry the label of a retailer or wholesaler instead of the manufacturer 3. Generic brands – products in plain containers that bear only the name of the product 4. Co-branding (p. 323) – a partnership between two or more companies to closely link their brand names together for a single product 5. Companies can also license their brands – sell the rights to its brand name and symbols G. Packaging serves numerous roles, including making products easier to display, facilitating the sale of smaller products, serving as a means of product differentiation and enhancing the product’s appeal and convenience 1. Labeling is an important aspect of packaging IV. Product-Line and Product-Mix Strategies A. Companies must manage individual products, product lines and product mixes. This role is handled by the marketing manager in a smaller company.

In a larger company, it is handled by a brand manager (p. 324) – a manager who develops and implements the marketing strategies and programs for specific products or brands 1. A product line (p. 325) is a group of products from a single manufacturer that are similar in terms of use or characteristics (i.e., snack-foods)

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 2. A product mix is a complete list of all products that a company offers for sale. A product mix has three dimensions: a. Width – how many product lines it has b. Length – how many items in its product lines c. Depth – how many versions of each product in a product line B. A company’s product line and mix can be expanded in several different ways 1. Line filling – introducing additional items in a given category under the same brand name (new flavors, package size) 2. Line extension – adding new and similar products with the same product name (also known as family branding) (p. 327) 3. Brand extension – applying a successful brand name to a new product category 4. Line stretching – adding items with price points above or below the current product line C. If a company is expanding internationally, brand managers must decide which products to offer and whether it will standardize or customize the products V. Pricing Strategies A. Pricing involves capturing value back from the customer in exchange for the value provided in the product. There are a number of considerations in establishing pricing: 1. Market objectives 2. Government regulations, including price discrimination, deceptive pricing and price fixing 3. Customer perceptions 4. Market demand – how sensitive are goods and services to changes in price. This measure is known as price elasticity (p. 328) 5. Competition B. The company must also consider its cost structure that determines how much it must spend to create and market its products, including: 1. Fixed costs (p. 329) – business costs that remain constant regardless of the number of units produced (i.e., rent, salaries) 2. Variable costs – business costs that increase with the number of units produced (i.e., supplies, commissions) C. One critical calculation in setting prices is break-even analysis – calculating the minimum volume of sales needed at a given price to cover all costs 1. The break-even point is the minimum sales volume that the company must achieve to avoid losing money VI. Pricing Methods A. A company can use a variety of methods or even a combination of methods in pricing its products, including: 1. Cost-based pricing (p. 331) – setting prices based on production and marketing costs, rather than conditions in the marketplace 2. Value-based pricing – setting prices based on customer perceptions of value 3. Optimal pricing (p. 332) – a computer-based pricing method that creates a demand curve for every product to help managers select a price that meets specific marketing objectives

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 4. Skim pricing – charging a high price for a new product during the introductory stage and lower the price later 5. Penetration pricing – introducing a new product at a low price in order to build sales volume quickly 6. Loss-leader pricing – setting a price on one product at a loss as a way to entice customers to consider other products 7. Auction pricing – buyers competitively bid on products being sold 8. Participative pricing (p. 334) – allowing customers to pay the amount they think a product is worth 9. Free and freemium pricing – offering some products for free while charging for others B. After a company has established its initial price, it can also use a number of price adjustment tactics to adjust the prices up or down over time, including: 1. Discounts – temporary price reductions to stimulate sales or lower prices to encourage certain behaviors (i.e., paying cash) 2. Bundling – offering several products for a single price that is presumably lower than the total of the products’ individual prices (i.e., Microsoft Office) 3. Dynamic pricing – continually adjusting prices to reflect changes in supply and demand (i.e., airline seats)

Classroom Activities Break-out Group Discussion: Skim Pricing vs. Penetration Pricing.

Goal: Ask students to discuss the advantages and disadvantages of skim pricing vs. penetration pricing strategies and when it is best to use each of them Time Limit: 15 minutes.

Details: 1. Break students into groups of four or five. (2 minutes) 2. Ask each group to come up with some advantages and disadvantages of skim pricing vs. penetration pricing strategies. Then ask students to summarize when it is appropriate to use each strategy. (Hint: One major advantage of skim pricing is maximized profit in the short term, while a major disadvantage is lower market penetration due to high price. A big advantage of penetration pricing is keeping competitors at bay with low price and ensuring maximum marketing share in the long run while a disadvantage is the lower profit in the short term.) (10 minutes) 3. Ask representatives/speakers from each group to present their results to the whole class, either verbally or written (on the blackboard). (3 minutes)

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End-of-Chapter Behind The Scenes Building the Annika Brand Critical Thinking Questions 1. Golfers who take lessons and purchase other services from the Annika Academy presumably share at least some of Sorenstam’s passion for winning.

Would toning down the competitive aspect of Sorenstam’s public persona negatively affect the Annika brand in the eyes of Academy customers? Explain your answer.

No, toning down the competitive aspect of Sorenstam’s public persona would not negatively affect much the Annika brand in the eyes of Academy customers since most of these customers are not professional golfers on the competitive circuit.

Instead most are amateurs or recreational golfers.

2. Sorenstam’s charitable efforts include the Annika Foundation, which you can read about on her website. How does her work with the Make-A-Wish Foundation and other activities contribute to her brand equity?

Her work with Make-A-Wish Foundation and other charitable efforts will enhance her brand equity because the consumers of today are more likely to purchase products from and conduct business with firms that are socially responsible.

3. Explain how the brand extension efforts in wine, perfume, and financial advice can reasonably fit under the umbrella of the Annika brand.

The brand extension efforts in wine, perfume, and financial advice fit reasonably under the umbrella of the Annika brand since such products are all consistent with who she is professionally and personally, i.e. successful on the golf course and charming and pretty in her private life.

Learn More Online Visit Sorenstam’s main website at www.annikasorenstam.com, her blog at www.annikablog.com, her Twitter account at http://twitter.com/#!/ANNIKA59, and the Annika Academy website at www.annikaacademy.com . What is your overall impression of Sorenstam as a businessperson and of the Annika brand as a product identifier? Do these communication efforts help in the effort to shift her public image away from that of the fierce competitor?

Students’ responses will depend, in large part, on the material currently posted on the website as well as personal opinion.

Test Your Knowledge Questions for Review 1. What are the four main subgroups of consumer products?

They are convenience products, shopping products, specialty products, and unsought products.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 2. What is test marketing?

Test marketing is a product development stage in which a product is sold on limited basis to gauge its market appeal.

3. What are the functions of packaging?

Packaging serves the initial function of protecting products from damage or tampering. It can also make it convenient for customers to purchase or use a product. In some cases, it is an essential part of the product itself. Packaging also plays an important role in a product’s marketing strategy. It makes products easier to display, facilitates the sale of smaller products, serves as a means of product differentiation, and enhances the product’s overall appeal and convenience.

4. How many books will a publisher have to sell to break even if fixed costs are $100,000, the selling price per book is $60, and the variable costs per book are $40?

The Breakeven Point= Fixed costs/ (Selling price – Variable costs per unit) = 100,000/ (60-40) =5,000 units.

5. How does cost-based pricing differ from value-based pricing?

The former starts with the cost of producing a good or service and then add a markup to the cost of the product to produce a profit while the latter establishes a target price on a product’s potential or perceived value in the market place, then works backward to identify a cost structure that will yield acceptable profit margins.

Questions for Analysis 6. How does branding help consumers?

Branding gives consumers a way of recognizing and specifying a particular product so they can choose it again. It also provides consumers with information about the product.

7. Why are some well-established brands worth millions or even billions of dollars?

Some well-established brands are worth millions or even billions of dollars because a well-established brand typically took millions or billions of dollars of advertising to establish over time. A brand name is important because it provides customers with a way of recognizing and specifying a particular product so that they can choose it again or recommend it to others. In fact, a brand name can be an organization’s most valuable asset because it helps generate tremendous amount of revenue in the long run.

8. Why is cost-based pricing risky?

Cost-based pricing is risky because it does not take into consideration any external factors such as customer demand or willingness to pay, as well as the prices of competitors.

9. Why is it important to review the objectives of a strategic marketing plan before setting a product’s price?

The first step in setting a price is to match it to the objectives you set in your strategic marketing plan. Is your goal to increase market share, increase sales,

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Bovee/Thill, Business in Action 6/e Instructor’s Manual improve profits, project a particular image, or combat competition? Students’ answers should focus on one objective.

10. Ethical Considerations. If your college neighborhood is typical, many companies in the area adorn themselves in your school colors and otherwise seek to identify their names with your school name and thereby encourage business from students. Some of these firms probably have brand licensing agreements with your college or are involved in sponsoring various groups on campus. However, chances are some of them are using school colors and other branding elements without having any formal arrangement with the college. In other words, they may be getting commercial benefit from the association without paying for it. Is this ethical? Why or why not?

Students’ answers may vary depending on their personal positions but they need to analyze whether firms’ actions are consistent with their personal value system.

Questions for Application 11. In what ways might Mattel modify its pricing strategies during the life cycle of a toy product?

For products in the introduction or growth stage of the product life cycle, Mattel may pursue either skim pricing or penetration pricing to either maximize profits or to establish market leadership position. For products in the maturity stage, Mattel may use price competition to undercut its competitors. For products in the decline stage, Mattel may use discount pricing or sale price to attract customers.

12. Do you consider yourself an early adopter when it comes to trying out new products or new fashions, or do you tend to take a wait-and-see attitude?

How does your attitude toward new products and new ideas influence your decision-making as a consumer?

Student answers will vary depending on the personal opinions or experiences.

13. Concept Integration. Review the theory of supply and demand in Chapter 2 (see pages 31-34). How do skimming and penetration pricing strategies influence a product’s supply and demand?

Skim pricing keeps the initial product price high and typically keeps customer demand low, i.e. limited to those that are early adopters. The high price does encourage supply and will result in competitors coming into the sector in pursuit of high profit margin. Penetration pricing keeps initial product price low to build sales volume and results in higher customer demand. However, there is less incentive for the suppliers because profit margin is low, thus discouraging competitors from entering the sector.

14. Concept Integration. Review the discussion of cultural differences in international business in Chapter 3 (see pages 57-58). Which cultural differences do you think Disney had to consider when planning its product strategies for Disneyland Paris? Originally the company offered a standardized product but was later forced to customize many of the park’s operations. What might have been some of the cultural challenges Disney experienced under a standardized product strategy?

Students’ answers may vary but here are some key points for consideration.

According to Chapter 3, companies like Disney must recognize the importance of cultural differences in international business. Such cultural differences include

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Bovee/Thill, Business in Action 6/e Instructor’s Manual differences in language, social values, ideas of status, decision-making habits, attitude toward time, use of space, body language, manners, and ethical standards, which collectively posed challenge to Disney’s standardized product strategy. Disney had to customize many of its park operations to meet such challenges. For instance, in the area of food service alone, Disney had 29 restaurants built inside Disneyland Paris to satisfy European customers’ high expectations for food. Menus and prices were also adapted to better suit European tastes. Disney started the precedent of serving alcoholic beverages in some parts of the park and installed 2,100 patio seats (30% of seating in the park) to satisfy Europeans’ preference of eating outdoors in good weather.

Expand Your Knowledge Discovering Career Opportunities Being a marketing manager is a big responsibility, but it can be a lot of fun at the same time. Read what the U.S. Department of Labor has to say about the nature of the work, working conditions, qualifications, and job outlook for marketing managers by accessing the Bureau of Labor Statistics Occupational Outlook Handbook at www.bls.gov/oco.

1. What does a marketing manager do?

Marketing managers develop the firm’s marketing strategy in detail. With the help of subordinates, including product development managers and market research managers, they estimate the demand for products and services offered by the firm and its competitors. In addition, they identify potential markets—for example, business firms, wholesalers, retailers, government, or the general public. Marketing managers develop pricing strategy to help firms maximize profits and market share while ensuring that the firm’s customers are satisfied. In collaboration with sales, product development, and other managers, they monitor trends that indicate the need for new products and services, and they oversee product development. Marketing managers work with advertising and promotion managers to promote the firm’s products and services and to attract potential users.

2. What are some key questions you might want to ask when interviewing for a job in marketing?

Students’ answers will vary.

3. What training and qualifications should a marketing manager have?

For marketing management positions, some employers prefer a bachelor’s or master’s degree in business administration with an emphasis on marketing.

Courses in business law, economics, accounting, finance, mathematics, and statistics are advantageous. In highly technical industries, such as computer and electronics manufacturing, a bachelor’s degree in engineering or science, combined with a master’s degree in business administration, is preferred.

Improving Your Tech Insights: Location and Tracking Technologies Location and tracking technologies cover a wide range of capabilities. Radio frequency identification (RFID) technology uses small scannable tags attached to

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Bovee/Thill, Business in Action 6/e Instructor’s Manual products or even people and pets. RFID is being implemented extensively in retail and wholesale distribution systems to enhance inventory management. Parents and caregivers can also use RFID to check on elderly relatives, pets, or children. The Great America amusement park in Santa Clara, California, offers RFID bracelets for $5 so parents and children can reconnect if they get separated in the crowds. The Food and Drug Administration (FDA) has approved an implantable device that stores medical information that emergency personnel could retrieve with a quick scan, even if the patient is unconscious.

The Global Positioning System (GPS) can pinpoint any location on Earth using a network of satellites and small transceivers. Trucking fleets use GPS to keep track of all their vehicles to optimize scheduling and make sure drivers stay on assigned routes. Some rental car companies use GPS to see whether drivers break the speed limit or venture outside of permitted rental territories. Enhanced 911, or E911, uses either GPS or cell phone towers to let emergency personnel pinpoint the location of people calling on cell phones. GPS-enabled smartphones are creating a dizzying array of new location-based services, from “friend finders” such as Loopt to shopping and dining guides to wireless payment systems.

Using online research tools, identify at least one emerging business opportunity that could take advantage of location and tracking technologies. In an e-mail message to your instructor, describe the opportunity and briefly explain how the technology would be used.

Student responses will depend on the opportunity they end up choosing.

Practice Your Knowledge Sharpening Your Communication Skills Now’s your chance to play the role of a marketing specialist trying to convince a group of customers that your product concept is better than the competition’s. You’re going to wade into the industry battle over digital photo printing. Choose a side: either the photo printer manufacturers, who want consumers to buy printers to print their own digital photos (visit HP at www.hp.com for a good overview of photoquality printers) or the service providers, who claim their way is better (visit one of the many retailers that offer a service-based approach, such as www.cvs.com or www.walmart.com). Prepare a short presentation on why the approach you’ve chosen is better for consumers. Feel free to segment the consumer market and choose a particular target segment if that bolsters your argument.

Student responses will depend on the approach they end up choosing.

Building Your Team Skills Select a high-profile product with which you and your teammates are familiar.

Do some online research to learn more about that brand. Then answer these questions and prepare a short group presentation to your classmates summarizing your findings.

• Is the product a consumer product, industrial product, or both?

• At what stage in its life cycle is this product?

• Is the product a national brand or a private brand?

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How do the product’s packaging and labeling help boost consumer appeal?

• How is this product promoted?

• Is the product mix to which this product belongs wide? Long? Deep?

• Is the product sold in international markets? If so, does the company use a standardized or a customized strategy?

• How is the product priced in relation to competing products?

Student responses will depend on the product they end up choosing.

Developing Your Research Skills Scan recent business journals and newspapers (print or online editions) for an article related to one of the following: • New-product development • The product life cycle • Brand extensions • Pricing strategies • Packaging 1. Does this article report on a development in a particular company, several companies, or an entire industry? Which companies or industries are specifically mentioned?

Answers will vary depending on the article selected.

2. If you were a marketing manager in this industry, what concerns would you have as a result of reading the article? What questions do you think companies in this industry (or related ones) should be asking? What would you want to know?

Answers will vary depending on the article selected.

3. In what ways do you think this industry, other industries, or the public might be affected by this trend or development in the next five years? Why? Answers will vary depending on the article selected.

CHECKPOINTS LEARNING OBJECTIVE 1: Identify the main types of consumer and organizational products, and describe the four stages in the life cycle of a product.

Critical thinking: (1) Do manufacturers have a responsibility to create safe products even if customers don’t care and don’t want to pay for safety features? Why or why not?

Yes. Under U.S. product liability law, manufactures are legally liable if customers suffer any injuries because their products are safe. Creating products that are unsafe will expose the manufacturers to litigation risks and potentially hurt the firms’ brand and reputation.

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(2) Do automobiles ever enter the decline stage of the product life cycle? Explain your answer.

Various automobile brands and models (e.g. Oldsmobile, Pontiac, Yugo, etc.) have entered the decline stage of the product life cycle while automobiles overall as a product class has not yet entered the decline stage, although one can argue that gasguzzling SUVs as a product form are also entering the decline stage as hybrids and electric vehicles are becoming increasingly popular.

It’s your business: (1) Have you ever had the urge to be “the first one on the block” to buy a new product, try a new fashion, or discover a new musical artist? If so, were you pleased or displeased when “the masses” began to imitate your choice? What does your reaction say about you as a consumer?

Students’ answers will vary depending on personal opinions.

(2) Have you ever replaced a product (such as a computer or smartphone) that was still functional, just because a newer version had hit the market? What influenced your decision?

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

LEARNING OBJECTIVE 2: Describe six stages in the product development process Critical thinking: (1) Apple claims to never do any marketing research for new product ideas but instead creates products that Apple employees themselves would be excited to have.

What are the risks of this approach? Would it work for all consumer and organizational markets?

The risks of this approach include that Apple employees may not be a good representation of consumers in general. In that case, products that have appeal to Apple employees may not be well received by consumers in general. Using this logic, Apple’s new product development approach may not work for all consumer and organizational markets.

(2) Consumers and government regulators sometimes complain about identical products being sold at different prices to different customers as part of test marketing efforts. Are such tests ethical? Why or why not?

Students’ answers will vary depending on personal opinion but points of consideration include the fact that many products are currently sold at different prices at different retailers, whether they are part of test marketing efforts or not.

It’s your business: (1) What currently unavailable services can you think of that could be offered on mobile phones?

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

(2) In addition to the mobile phone itself, what other product elements (such as a website or phone accessories) would be required to launch such a service?

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

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LEARNING OBJECTIVE 3: Define brand, and explain the concepts of brand equity and brand loyalty.

Critical thinking: (1) Can a brand with a bad reputation be rescued? Would a company be wiser to just drop a “bad brand” and start fresh with something new?

Yes. Historically there have been brands that have gone through rough times with consumers and have subsequently come back or been resurrected. It is up to the company to conduct a cost/benefit analysis to determine whether the “rescuing effort” is worth the effort rather than starting fresh with a new brand.

(2) Is staying with the same product only a case of brand “loyalty”? Could other factors be in play that lead consumers or organizations not to switch brands? Explain your answer.

Not necessarily. Sometimes the switching cost is so prohibitive and consumers or organizations decide to stay put.

It’s your business: (1) How many visible brand marks are you currently wearing? Are these common brands?

Students’ answers will vary depending on personal experiences.

(2)What do you think these brands say about you?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 4: Identify four ways of expanding a product line, and discuss two risks that product-line extensions pose.

Critical thinking: (1) If McDonald’s had been relatively unknown to French diners when the company entered that market in 1972, would it have made more sense to use a different and more “French-sounding” brand name? Why or why not?

It may not have made sense because by using a different and more “Frenchsounding” brand name for fast food, which is also relatively unknown to French diners, McDonald’s would have undertaken a diversification strategy, i.e. introducing a new product to a new market, which is riskier than simply introducing a new product to an existing market or introducing an existing product to a new market.

(2) Would a consumer-products manufacturer ever want to create more product extensions and variations than it could explain in terms of pure market appeal? Why or why not?

No it wouldn’t. It may confuse consumers and hurt the firm’s brand image if a manufacturer creates more product extensions and variations that it can explain.

It’s your business: (1) Citing specific examples, how has branding helped you as a consumer? Think about the assurance you have buying a known and trusted brand, for example.

Students’ answers will vary depending on personal experiences.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual (2) Think about some of the consumer products you buy frequently, such as cereal, painkillers, or snack foods. Do you appreciate the range of choices available to you when you shop for these items, or do you wish that companies would narrow the options to a handful in each category? Why? Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 5: List the factors that influence pricing decisions, and explain break-even analysis.

Critical thinking: (1) Why wouldn’t a firm just drop any product that isn’t selling in high enough volume to reach its break-even point?

There are various reasons why a firm would not just drop a product that isn’t selling in high enough volume to reach its break-even point. Some firms may decide to recoup as much of the research and development cost as possible while others may decide to use such a product as a “lost leader” to lure customers into their stores hoping that they would buy other products that are at least break-even in pricing.

(2) Is “9” style pricing ethical? Why or why not?

Students’ answers may vary but they need to address the fact that “9” style pricing is legal and that research has indicated that our minds equate that “9” with a bargain, even when it isn’t.

It’s your business: (1) Do you factor in the value of your time when you price comparison shop? Why or why not?

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

(2) As a consumer taking charge of your own financial future, what lessons could you take from the business concepts of fixed and variable costs?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 6: Identify nine common pricing methods.

Critical thinking: (1) What steps could a company take to determine the perceived value of its products in its target markets?

A company can conduct market research such as surveys with its targeted customers (sometimes coupled with price sensitivity analysis) to ascertain the perceived value of its products in its target markets. In some cases, managers of the firm need to estimate perceptions of customer value in order to establish the price. They then need to adjust the price up and down based on customer feedback.

(2) How can patterns of temporary price discounts “train” consumers to stop buying at full price?

Such patterns will lead consumers to expect price discounts periodically and stop buying at full price altogether in anticipation of discounted prices. It is particularly true with the “high-low” pricing model, in which products are priced high most of the

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Bovee/Thill, Business in Action 6/e Instructor’s Manual year and then discounted occasionally, particularly during the end-of-the-year holiday shopping season.

It’s your business: (1) Have you ever bid on anything on eBay, another online auction site, or an inperson auction? If so, how did you decide how much to bid? Did you set a maximum price you’d allow yourself to spend? Did you get caught up in the competitive emotions of bidding against someone else?

Students’ answers will vary depending on personal experiences.

(2) Have you ever purchased a hot new product as soon as it hit the market, only to see the price drop a few months later? If so, did you resolve never to buy so quickly again?

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

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Chapter 15: DISTRIBUTION AND MARKETING LOGISTICS Chapter Overview This chapter discusses in further details the third P of the 4P’s marketing-mix framework, namely place (distribution). It introduces marketing intermediaries such as wholesalers and retailers and the various marketing functions that they help provide. It also distinguishes the different distribution strategies. It then identifies the key attributes of distribution channel design and management and highlights the major component f distribution and logistics.

Chapter Outline I.

The Role of Marketing Intermediaries A. A firm’s distribution strategy (p. 341) – its overall plan for moving products through intermediaries to its final customers – is an important part of its marketing mix B. Most companies use marketing intermediaries to bring their products to market – people and organizations that assist in moving and marketing goods and services between producers and consumers.

C. There are two general types of marketing intermediaries: 1. Wholesalers sell products to other intermediaries for resale or to organizations for internal use 2. Retailers sell goods and services to individuals for their own personal use D. Wholesalers and retailers perform the following distribution functions: 1. Matching buyers and sellers 2. Providing market information 3. Providing promotional and sales support 4. Gathering assortments of goods 5. Transporting and storing products 6. Assuming risks associated with damage, theft, perishability and obsolescence 7. Providing financing 8. Completing product solutions to complete or customize solutions for customers 9. Facilitating transactions and supporting customers

II. Wholesaling and Industrial Distribution A. Most wholesalers can be classified as merchant wholesalers, agents or brokers 1. Merchant wholesalers (p. 344) are independently owned businesses that buy from producers, take title to the goods and resell them to retailers or organizational buyers. There are two general types: a. Full-service merchant wholesalers

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Bovee/Thill, Business in Action 6/e Instructor’s Manual b. Limited-service merchant wholesalers 2. Merchant wholesalers can also be distinguished by their customers: a. Wholesalers sell primarily to other intermediaries b. Distributors sell goods to companies for use in their own operations 3. Agents and brokers do not take title to the products they handle; their role is to bring buyers and sellers together B. Four trends are reshaping the wholesaling business in the coming years: 1. Integrated logistics management – i.e., outsourcing and third-party logistics (3PL) firms 2. Threat of disintermediation (p. 345) – the replacement of intermediaries by producers, customers or other intermediaries when those other parties can perform channel functions more effectively or efficiently 3. Unbundling of services – customers want to be able to select and pay for specific distribution services individually 4. Industry consolidation III. Retailing A. Retailing involves a blend of the distribution and customer communication elements of the marketing mix B. The wheel of retailing (p. 346) is an evolutionary process by which stores with low prices and limited service gradually upgrade until they no longer appeal to price-sensitive shoppers and are replaced by a new generation of low-price competitors C. Retailers can be divided into store formats and nonstore formats 1. Store formats include: a. Department stores – large stores that carry a variety of products in multiple categories, such as clothing, housewares, bedding and furniture b. Specialty stores – stores that carry only a particular type of goods (i.e., jewelry stores) c. Discount stores (p. 347) – retailers that sell a wide variety of aggressively priced everyday merchandise d. Off-price retailers – stores that sell a limited selection of designer labels and other fashionable products at steep discounts 2. Nonstore formats include: a. Online retailers – companies that use e-commerce technologies to sell over the Internet. E-commerce is the application of Internet technologies to wholesaling and retailing b. Mail order firms, vending machines and kiosks D. Major forces shaping the future of retailing include: 1. Overcapacity – too many stores to support current levels of business activity 2. Continued growth in online retailing 3. Growth of multichannel retailing (p. 348) – coordinated efforts to reach consumers through more than one retail channel 4. Format innovations – hybrid stores that combine different types of retailers or pop-up stores that exist for only a short period of time 5. Retail theater – the addition of entertainment or education aspects to the retail experience 6. Threat of disintermediation

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Bovee/Thill, Business in Action 6/e Instructor’s Manual IV. Distribution Strategies A. A company’s distribution mix (p. 349) involves the combination of intermediaries and channels a producer uses to reach its target customers B. The company must consider several factors in choosing its distribution channels, including: 1. Customer needs and expectations – how customer want and expect to purchase the company’s product 2. Product support requirements – both before and after the sale 3. Segmentation, targeting and positioning 4. Competitors’ distribution channels 5. Established industry patterns and requirements V. Considerations in Channel Design and Management A. In designing a distribution channel, managers must also consider five attributes: 1. Channel length – how many intermediaries there are between the producer and the consumer. Four primary channels for consumer goods: a. Producer to consumer b. Producer to retailer to consumer c. Producer to wholesaler to retailer to consumer d. Producer to agent/broker to wholesaler to retailer to consumer 2. Market coverage – the number of wholesalers or retailers that carry a product. There are three levels: a. Intensive distribution (p. 353) tries to place a product in as many outlets as possible b. Selective distribution uses a limited number of carefully chosen outlets to distribute products c. Exclusive distribution gives intermediaries exclusive rights to sell a product in a specific geographic area 3. Distribution costs 4. Channel conflict – disagreement or tension between two or more members in a distribution channel, such as competition between channel partners trying to reach the same group of customers 5. Channel organization and control – Producers and intermediaries can achieve coordination through marketing systems – arrangements in which channel partners coordinate their activities under the leadership of one of the partners VI. Physical Distribution and Logistics A. Physical distribution (p. 355) encompasses all the activities required to move finished product from the producer to the consumer 1. This is accomplished through logistics – the planning, movement and flow of goods and related information throughout the supply chain B. There are several aspects involved in the physical distribution of products, including: 1. Forecasting – the firm must have an accurate estimate of demand 2. Order processing (p. 356) – preparing orders for shipment and receiving orders when shipments arrive 3. Inventory control – having the right amounts of goods on hand to fill orders

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 4. Warehousing – products held in inventory are physically stored in warehouses owned by the producer, an intermediary or a third party a. Distribution centers (p. 357) are advanced warehouse facilities that specialize in collecting and shipping merchandise 5. Transportation – choosing a mode of transportation. There are six major modes of transportation: a. Rail b. Trucks c. Ships and barges d. Air e. Pipelines f. Digital networks Shippers can also combine multiple modes of transportation for a single shipment. This is known as intermodal transportation (p. 357)

Classroom Activities In-class Activity: Matching products with distribution channels.

Goal: Help illustrate the importance of integrated marketing communications by matching two out of the 4Ps, namely product with place or distribution channel.

Time Limit: 10 minutes.

Details: 1. Draw the following table on the blackboard.

Product Type

Product Example

Convenience Products Shopping Products Specialty Products

BMWs Chewing Gum Men’s Suits

Distribution Channel Selective Distribution Exclusive Distribution Intensive Distribution

2. Let students know that the items in the bottom three rows are somewhat randomly assigned to various cells and do not necessarily correspond with each other.

3. Ask students to pair up and recreate the content of the blackboard on their notebooks and subsequently match the correct items (that belong together) in the three columns with solid lines of different colors, using different color chalk or markers.

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End-of-Chapter Chapter 15 Behind the Scenes Costco Pushes Its Supply Chain to Satisfy Customers Critical Thinking Questions 1. If customers repeatedly ask Costco to carry certain items that the company thinks are outside its price/quality “comfort zone” (because they’re too expensive or not of high enough quality), should it give in and carry the items? Why or why not?

Students’ answers may vary depending on personal opinion but they need to address the potential danger of losing its key competitive advantage (of singular focus on high quality/low price products) by trying to be everything to everyone.

2. Most of the items on Costco’s website are available only through Costco; should it expand its online product selection to include more commonly available products, since an online store doesn’t have the physical constraints of a brick-and-mortar location? Why or why not?

Students’ answers may vary but one key point to consider is that even though online store does not have space constraints, it still has the special constraint of delivery to clients, e.g. any items that are bulky and therefore difficult to deliver should probably not be included in the online store.

3. If Costco can’t find enough land in, say, Japan, to build its usual store format, should it leverage the Costco brand name anyway and build something such as conventional department stores or grocery stores in these areas? Why or why not?

Students’ answers may vary depending on personal opinion but again they need to address the potential danger of losing Costco’s key competitive advantage of singular focus on high quality/low price products.

Learn More Online Visit the Costco website at www.costco.com. What evidence do you see of “clicksand-bricks” integration with the physical stores? Are sales promoted online? How much product information is available? Are nonmembers allowed to make purchases online? How does the online shopping experience at Costco compare to that of another online discounter such was Walmart (www.walmart.com) or to a specialty retailer, such as Bluefly (www.bluefly.com)?

Students’ responses will depend, in large part, on the material currently posted on the website.

Test Your Knowledge Questions for Review 1. What is a distribution channel?

Distribution channels, or marketing channels, are an organized network of firms that work together to get goods and services from producer to consumer.

Distribution channels come in all shapes and sizes. Some channels are short and

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Bovee/Thill, Business in Action 6/e Instructor’s Manual simple, such as the direct model; others are complex and involve many people and organizations.

2. What are the two main types of intermediaries and how do they differ?

Two main types of marketing intermediaries are wholesalers and retailers.

Wholesalers sell primarily to retailers, to other wholesalers, and to organizational users such as government agencies, institutions, and commercial operations. In turn, the customers of wholesalers either resell the products or use them to make products of their own. By contrast retailers sell products to the final consumer for personal use. Retailers can operate out of a physical facility (supermarket, gas station, kiosk), through vending equipment (soft drink machine, newspaper box, or automated teller), or from a virtual store (via telephone, catalog, or website).

3. What forms of utility do intermediaries create?

Market intermediaries create place utility, time utility, and possession utility. By transferring products from producer to the consumer, intermediaries ensure that goods and services are available at a convenient time and place. They also simplify the exchange process, and provide a number of specific functions that make life easier for both producers and customers. These include: providing a sales force, market information, promotional support, and financing, standardizing and dividing shipments; stocking and delivering the product; assuming risks; and matching buyers and sellers.

4. What are some of the main causes of channel conflict?

Some of the main causes of channel conflict include: A) producers provide inadequate support to their channel partners; B) markets are oversaturated with intermediaries; C) producers try to expand sales by adding additional channels, either on their own or through new intermediaries; D) some intermediaries bear the cost of developing new markets or promoting products only to see the sales revenue go to other intermediaries.

5. How does a specialty store differ from a category killer and a discount store?

A specialty store offers a complete collection in a narrow range of merchandise, often with extensive customer services. A category killer is a type of specialty store but it is massive in scale and dominating retail sales in its respective product categories. A discount store is nearly the opposite of a specialty store in that it offers a wide variety of merchandise at low prices with relatively fewer services.

Questions for Analysis 6. How do marketing systems help avert channel conflict?

To help avert channel conflict, producers and intermediaries can work together and achieve a certain degree of coordination through marketing systems, in which the channel partners agree to operate as a cohesive system under the leadership of one of the participants. The agreement can be brought about through ownership, contracts, and economic power.

7. What are some of the challenges facing retailers and wholesalers today?

The challenges (and opportunities) facing retailers today include: overcapacity of retailers, continued growth in online retailing, growth of multichannel retailing,

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Bovee/Thill, Business in Action 6/e Instructor’s Manual format innovations, retail theater experiences, and threat of disintermediation.

The challenges facing wholesalers are: increasingly integrated logistics management, threat of disintermediation, and customers requesting unbundling of services, and increasing industry consolidation.

8. How might a once-valued intermediary find itself threatened with disintermediation?

As online commerce continue its explosive growth, wholesalers and retailers face the threat of disintermediation if suppliers or customers don’t think they add sufficient value of if other types of retailers can do the job better. Examples are Dell selling directly to customers online and Netflix using its online/mail approach to displace many store-based DVD movie rental outlets.

9. How could strategic planning help a discount retailer avoid the pitfalls of the wheel of retailing?

A discount retailer could use strategic planning to avoid the pitfalls of the wheel of retailing by consistently staying true to its discount store roots, i.e. offering wide variety of merchandise at low prices with relatively fewer services. That means the discount retailer needs to continue to focus a long term strategy of minimizing services and offering products at low prices, rather than following the wheel of retailing and upgrading their operations to offer more services or products with higher prices.

10. Ethical Considerations. Manufacturers that have been selling to wholesalers and other intermediaries occasionally decide to start selling directly to end customers, which of course puts them in competition with the channel partners that have been selling for them. Even if this is legal, do you think such moves are ethical? Why or why not?

Students’ answers may vary but they need to showcase an understanding of channel conflict, as well as the differences between what’s legal and ethical.

Questions for Application 11. Imagine that you own a small specialty store selling handcrafted clothing and jewelry. What are some of the non-store retail options you might explore to increase sales? What are the advantages and disadvantages of each option?

Answers will vary depending on students’ opinions but sample non-store retail options include online retailing, mail-orders, vending machines, and interactive kiosks. Sample advantages of online retailing include low overhead (such as rent) and worldwide reach, while sample disadvantages include extra costs such as shipping and handling and lack of personal selling opportunities.

12. Compare the prices of three products offered at a retail outlet with the prices charged if you purchase those products by mail order (catalog or phone) or over the Internet. Be sure to include extra costs such as handling and delivery charges. Which purchasing format offers the lowest price for each of your products?

Answers will vary according to the products that the students select.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 13. Concept Integration. Chapter 9 discussed the fact that supply-chain management integrates all the activities involved in the production of goods and services from suppliers to customers. What are the benefits of involving wholesalers and retailers in the design, manufacturing, or sale of a company’s product or service?

Intermediaries are finding new value-added ways to solidify their roles within the distribution system. For example, computer wholesaler Ingram Micro assembles PCs and handles customer inquires (jobs once relegated to producers). The benefit of involving distributors in such activities is that their role in the distribution becomes stronger and is transforming along with the times.

14. Concept Integration. Which of the four basic functions of management discussed in Chapter 7 would be involved in decisions that establish or change a company’s channels of distribution? Explain your answer.

It should be the management function of planning, which is establishing objectives and goals for an organization and determining the best ways to accomplish them. For instance, a firm’s main objective can be maximizing profit by providing the best products and services to customers and such objectives can be best served by choosing/establishing channels of distribution that provides customers the best values at the lowest cost and within the shortest amount of time.

Expand Your Knowledge Discovering Career Opportunities Retailing is a dynamic, fast-paced field with many career opportunities in both store and nonstore settings. In addition to hiring full-time employees when needed, retailers of all types often hire extra employees on a temporary basis for peak selling periods, such as the year-end holidays. You can find out about seasonal and yearround job openings by checking newspaper classified ads, looking for signs in store windows, browsing the websites of online retailers, and checking Craigslist (www.craigslist.org) and other sites.

1. Select a major retailer, such as a chain store in your area or a retailer on the Internet. Is this a specialty store, discount store, department store, or another type of retailer?

Students’ answers will vary depending on the retailer chosen.

2. Visit the website of the retailer you selected. Does the site discuss the company’s hiring procedures? If so, what are they? What qualifications are required for a position with the company?

Students’ answers will vary depending on the retailer chosen.

3. Research your chosen retailer using library sources or online resources. Is this retailer expanding? Is it profitable? Has it recently acquired or been acquired by another firm? What are the implications of this acquisition for job opportunities?

Students’ answers will vary depending on the retailer chosen.

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Improving Your Tech Insights: Supply Chain Integration Standards How do Amazon’s computers know which book to reorder from its suppliers when you order one from Amazon’s website? Who makes sure RFID readers know how to detect RFID tags accurately and make sure databases know what to do with the data?

How does every one of the billions of barcodes now in use get the right combination of black and white stripes? All these decisions are guided by industry groups that define the standards and technologies that make sure supply chains work together, from producers to wholesalers to retailers.

Supply chain standardization might not be the most pulse-pounding technology from a consumer’s point of view, but global business simply wouldn’t work without it— and consumers benefit from the lower prices and better service that standards enable.

Moving forward, advances in supply-chain integration promise to remove billions of dollars of errors and inefficiencies from supply chains in many industries.

Visit the website of GS1 (www.gs1.org), a global, not for-profit organization that develops and oversees a number of supply chain standards. The brochure “What Is GS1?,” available on the About Us page, explains the importance of global business standards and describes bar codes, RFID tagging, the Global Data Synchronization Network, and other efforts. In a brief email message to your instructor, describe one of the GS1 standards and explain how it helps businesses operate more efficiently and serve customers more effectively.

Students’ email messages will vary depending on the GSI standard chosen.

Practice Your Knowledge Sharpening Your Communication Skills Sales of your DJ equipment (turntables, amplifiers, speakers, mixers, and related accessories) have been falling for months, even as more and more music fans around the world try their hand at being DJs. Magazine reviews and professional DJs give your equipment high marks, your prices are competitive, and your advertising presence is strong. Suspecting that the trouble is in the distribution channel, you and a half dozen fellow executives go on an undercover shopping mission at retail stores that carry your products—and you’re quickly appalled by what you see. The salespeople in these stores clearly don’t understand your products, so they either give potential customers bad information about your products or steer them to products from your competitors. No wonder sales are falling off a cliff. The executive team is split over the best way to solve this dilemma; you convince them that retraining your existing channel partners would be less expensive and less disruptive than replacing them. Now you have to convince store managers to let you pull their staffs off the sales floor for a half day so you can train them. Each store will lose a half day’s revenue, and each sales rep will lose commissions for that time as well. Draft a short email message for the store managers, explaining why the training would be well worth their time. Make up any details you need to complete the message.

Students’ answers will vary.

Building Your Team Skills Complicated or confusing shopping experiences are one of the biggest challenges for online retailing. Customers who can’t find what they’re looking for or who get lost

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Bovee/Thill, Business in Action 6/e Instructor’s Manual filling out order forms, for instance, often just click away and leave their virtual shopping carts. Unfortunately, consumers don’t always perceive the shopping experience the same way, so it’s not always easy for website developers to craft the ideal e-retail experience.

Your team’s task is to analyze the shopping experience on three competitive e-tail sites and from that analysis decide how a new competitor in the market could create a better customer experience. First, choose a product that everyone in the group finds interesting but that none of you have purchased online before. Then identify three websites that are likely to offer the product. Next, individually (so you can’t guide each other), each person in the group should then shop the three sites for your chosen product (if you can’t find the exact model, choose something similar). Answer the following questions about each site: 1. How difficult was it to find the product you wanted?

2. How much information was available? Complete product details or just a few highlights? A static photo or a three-dimensional (3D) virtual experience that lets you explore the product from all angles?

3. How easy was it to compare this product to similar products?

4. Could you find the store’s privacy and return policies? Were they acceptable to you?

5. How long did it take to get from the site’s homepage to the point at which you could place an order for the specific product?

6. What forms of help were available in case you had questions or concerns?

7. Go ahead and place your item in the shopping cart to simulate placing an order (don’t actually buy the product, of course!)

8. What social commerce and social elements did you encounter on the website?

Were they helpful in your search?

Summarize your impression of each of the three sites, and then compare notes with your teammates. Based on the strengths and weaknesses of each site, identify four pieces of advice for a company that wants to compete against these sites.

Students’ answers will vary depending on the sites chosen.

Developing Your Research Skills Find an article in a business journal or newspaper (online or print editions) discussing changes a company is making to its distribution strategy or channels. For example, is a manufacturer selling products directly to consumers? Is a physical retailer offering goods via a company website? Is a company eliminating an intermediary? Has a nonstore retailer decided to open a physical store? Is a category killer opening smaller stores? Has a major retail tenant closed its store in a mall?

1. What changes in the company’s distribution structure or strategy have taken place? What additional changes, if any, are planned?

Students’ answers will vary depending on the article chosen.

2. What were the reasons for the changes? What role, if any, did e-commerce play in the changes?

Students’ answers will vary depending on the article chosen.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 3.

If you were a stockholder in this company, would you view these changes as positive or negative? What, if anything, might you do differently?

Students’ answers will vary depending on the article chosen.

CHECKPOINTS LEARNING OBJECTIVE 1: Explain the role of marketing intermediaries in contemporary business, and list the eight primary functions that intermediaries can perform.

Critical thinking: (1) Why wouldn’t Apple develop the expertise to create professional video studios and other solutions that its channel partners now develop?

Because by doing so Apple may create channel conflict and alienate its current partners in the process.

(2) How can Costco be both a wholesaler and a retailer at the same time?

Costco can be both a wholesaler and a retailer at the same time since its business model is based on selling quality consumer products in bulk. Such products are packaged in large quantities that are also suitable for businesses that can subsequently resell them. These businesses tend to be either smaller retailers that repackage the products in smaller quantities for sale or are smaller producers that further process them into final products for sale.

It’s your business: (1) If you had the choice of buying a product directly from the manufacturer or from a local retailer, which would you choose? Why? Students’ answers will vary depending on personal opinions.

(2) Have you ever had to work with more than one retailer to get a complete product solution (such as getting car parts or home improvement supplies from multiple stores)? Was the experience satisfactory?

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

LEARNING OBJECTIVE 2: Identify the major types of wholesalers, and summarize four trends shaping the future of wholesaling.

Critical thinking: (1) Why does McKesson promote itself as a health care services company, rather than as a logistics company?

Because McKesson wants to expand the scope of its services beyond just wholesaling. Therefore it wants to be known as distributing healthcare related products and services rather than providing logistics for all industries.

(2) Why might a manufacturer choose to hire a third-party logistics firm rather than a conventional wholesaler or distributor?

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Because a manufacture may want to focus on core production activities and outsource a wide range of tasks in supply chain management, including not only traditional wholesaling activities but also order fulfillment, product repair, customer service, and other functions. In that case, a third-party logistics firm is more appropriate rather than a conventional wholesaler.

It’s your business: (1) Considering the forces shaping wholesaling, would you consider a career in this sector? Why or why not?

Students’ answers will vary depending on personal opinions.

(2) If your family ran a small industrial products wholesaler that was facing the threat of disintermediation, how would you respond?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 3: Identify the major retailing formats, and summarize six trends shaping the future of retailing.

Critical thinking: (1) Would it ever make sense for Amazon to open retail stores? Why or why not?

Students’ answers may vary depending on personal opinion but points of consideration include that Amazon started as one of the first pure-Internet retailers and is already selling just about everything online. Amazon has also entered the eBook space and created the phenomenally successful Kindle.

(2) Moving into the future, what effect is online retailing likely to have on the oversupply of retail store space in the United States?

Online retailing will likely increase the oversupply of retail store space even more as increasingly popularity of online retailing may take business away from brick-andmortar retailers.

It’s your business: (1) How have your shopping patterns changed in the past five years, in terms of how you research purchases and where you make those purchases?

Students’ answers will vary depending on personal experiences.

(2) Roughly what percentage of all your purchases do you make online? What could store-based retailers do to attract a greater portion of your business?

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

LEARNING OBJECTIVE 4: Explain the strategic decisions that manufacturers must make when choosing distribution channels.

Critical thinking: (1) Would two manufacturers trying to reach the same customer segment with similar products use identical distribution mixes? Why or why not?

Not necessarily. Examples include pure-Internet retailers and brick-and-mortar players trying to reach same customer segments but using different distribution mixes.

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(2) Is channel conflict necessarily always bad for everyone involved? Explain your answer.

No. Channel conflict may not necessarily bad for everyone involved. For instance, when a manufacturer decides to go online and sell its products directly to consumers, it creates a channel conflict with existing distributors and retailers. In this case, the channel conflict is bad for existing distributors and retailers but not necessarily bad for the manufacturer itself since now its overall revenue may increase due to its new direct channel.

It’s your business: (1) You’ve probably seen television commercials advertising products that are “not available in stores”. How does that lack of availability in stores affect your perception of those products?

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

(2) Would knowing that a manufacturer had to pay a retailer to gain shelf space for a particular product change your perception of that product? Why or why not?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 5: Identify five key attributes of distribution channel design and management.

Critical thinking: (1) Does exclusive distribution limit the potential size of a manufacturer’s market?

Why or why not?

Not necessarily. The exclusivity only applies to each market area, which can be as small as a town or village.

(2) Is it ethical for one participant in a channel to have power over the marketing system through sheer economic power alone? Why or why not?

Students’ answers may vary depending on personal opinion but points of consideration include the fact that such practice is not illegal.

It’s your business: (1) Does knowing that a product is available only in selected retail outlets affect your assessment of its quality?

Students’ answers will vary depending on personal opinions.

(2) Have you ever been skeptical of “shipping and handling” charges added to products you’ve ordered? Did these charges affect your buying decisions?

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

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Bovee/Thill, Business in Action 6/e Instructor’s Manual LEARNING OBJECTIVE 6: Highlight the major components of physical distribution and logistics.

Critical thinking: (1) Given the huge volume of small packages that Amazon ships every year, should it consider starting its own transportation company instead of giving all that business to FedEx and other shippers? Why or why not?

Students’ answers may vary depending on personal opinion but points of consideration include: A) Amazon may decide to focus on production and retailing alone and continue to outsource shipping function to third party shippers or logistics firms since it is already getting great rates in shipping due to its high shipping volume; or B) Amazon may decide to expand its scope of services to include shipping if such services can be done in house for lower cost than outsourcing.

(2) If another high-tech company approached Dell with a partnership proposal to build and operate several distribution centers that would ship both companies’ products to customers, what would you advise Dell to do? Why? Students’ answers may vary depending on personal opinions but points of consideration include whether the high-tech firm is a major competitor of Dell’s and by partnering with the firm, Dell would potentially lose its competitive advantages.

It’s your business: (1) Online retailers sometimes use free shipping as a promotional appeal. Do you think most consumers really believe the shipping is “free” and not just factored into the product’s price?

Students’ answers will vary depending on personal opinions.

(2) Have you ever paid extra for expedited shipping for an order placed on a website?

Was it worth the extra expense?

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

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Chapter 16: CUSTOMER COMMUNICATION Chapter Overview This chapter discusses in further details the last P’s of the 4P’s marketing mix framework, promotion (or customer communication). It introduces the promotional mix of advertising, public relations, personal selling and sales promotion. It also distinguishes direct marketing from advertising. It then emphasizes the increasing usage of social media in customer communications.

Chapter Outline I.

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Customer Communication: Challenges, Strategies, and Issues A. Marketing communication has changed over the years to a social communication model (p. 364), an approach based on interactive social media and conversational communicational styles B. The goals of communication strategy are: 1. Establishing communication goals to move potential customers toward purchases. This includes: a. Generating awareness of new products and companies b. Providing information and creating positive emotional connections c. Building preference d. Stimulating action – convincing a consumer to act on a product preference e. Reminding past customers that a product or company is still available 2. Defining customer messages. Marketers must define the core message (p. 365) – the single most important idea the company hopes to convey to the target audience about its products or the company 3. Assembling the communication mix (p. 366) – the combination of advertising, direct marketing, personal selling, sales promotion, social media and public relations that a company can use to reach current and potential customers. Companies must consider product, market and distribution channel factors in developing this mix a. One key decision is whether to focus communication efforts on intermediaries or on final customers i. With a push strategy, a producer focuses on intermediaries and tries to convince them to carry and promote its products ii. With a pull strategy, the producer appeals directly to end consumers b. Integrated marketing communication (IMC) is a strategy of coordinating and integrating communication and promotion efforts with customers to ensure greater efficiency and effectiveness

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Bovee/Thill, Business in Action 6/e Instructor’s Manual C. There are many legal ramifications to marketing communication, including regulations of the Federal Trade Commission (FTC) and state laws II. Advertising A. Advertising (p. 369) is defined as the delivery of announcements and promotional messages via time or space purchased in various media.

B. There are several types of advertising: 1. Product advertising promotes the features/benefits of specific products 2. Comparative advertising highlights how one product is better than others 3. Institutional advertising is designed to create goodwill and build a desired image for a company 4. Advocacy advertising presents a company’s opinions on public issues C. In planning a promotional campaign, the company must choose the advertising appeal – a creative tactic designed to capture the audience’s attention and promote preference for the product/company being advertised.

D. The company must also choose the advertising media (p. 370) for its products – communication channels such as newspapers, radio, television or the Internet 1. The company’s media plans outlines the advertising budget, advertising schedule and the media mix – the combination of print, broadcast, online or other media used for an advertising campaign E. Three trends are likely to shape advertising media in the coming years: 1. New online and mobile formats will emerge, and marketers need to determine how to reach consumers through a variety of media and delivery platforms 2. Marketers will be challenged to make TV commercials, online videos and other ads more entertaining. This includes product placement (p.

373), the paid display or use of products in television shows, movies and video games 3. Technical innovations will create new advertising tools and techniques III. Direct Marketing A. Direct marketing (p. 374) is direct communication other than personal sales contacts designed to stimulate a measurable response.

B. Direct marketing techniques have evolved from mail order to a computerintensive multimedia effort that includes mail, telephone and online media C. Direct marketing media include: 1. Direct mail – printed materials addressed to individual consumers, households or business contacts 2. Email 3. Search engine marketing (p. 375) – automated presentation of ads that are related to either the results of an online search or the content being displayed on other webpages 4. Direct response online 5. Telephone, both inbound and outbound.

6. Direct response television (infomercials) – using television commercials and longer-format infomercials to stimulate an immediate purchase response from viewers

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Bovee/Thill, Business in Action 6/e Instructor’s Manual IV. Personal Selling A. Personal selling (p. 376) is one-on-one interaction between a salesperson and a prospective buyer.

B. Personal selling has evolved from peddling products to creating customer partnerships and now involves consultative selling, in which the salesperson acts as a consultant and advisor to help customers find the best solutions to their personal or business needs C. The personal selling process involves seven steps: 1. Prospecting (p. 377) – finding and qualifying potential customers 2. Preparing – learning more about the people or organizations to be contacted 3. Approaching the prospect 4. Uncovering needs and presenting solutions 5. Handling objections 6. Closing (p. 378) – bringing the sales process to a successful conclusion by asking for and receiving an affirmative purchase decision 7. Following up V. Sales Promotion A. Sales promotion (p. 378) consists of a wide range of events and activities designed to promote a brand or stimulate interest in a product B. Sales promotions consist of two categories: consumer promotion and trade promotion.

C. Consumer sales promotions are used to stimulate repeat purchases and entice new users and include: 1. Contests and other audience involvement tactics 2. Coupons – printed or electronic certificates that offer discounts and are redeemed at the time of purchase 3. Rebates (p. 379) – partial reimbursement of price, offered as a purchase incentive 4. Point-of-purchase (POP) displays (p. 380) – an in-store presentation designed to promote products to potential customers as they are making their purchase decisions 5. Samples and trial-use versions 6. Special-event sponsorship 7. Other promotions, such as in-store demonstrations, loyalty programs, premiums (free or bargain-priced items offered to encourage consumers to buy a product), and specialty advertising (coffee mugs, pens or calendars containing a company’s name and other advertising) D. Trade promotions are aimed at inducing wholesalers or retailers to sell a company’s product and include: 1. Trade allowances – discounts or other financial considerations offered by producers to wholesalers and retailers 2. Dealer contests and bonus programs VI. Social Media and Public Relations A. Social media (p. 381) are electronic media that transform passive audiences into active participants by allowing them to share, revise or respond to content or contribute new content B. Social media activities combine new technologies with word of mouth – communication among customers and other parties, transmitting information

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Bovee/Thill, Business in Action 6/e Instructor’s Manual about companies and products through online or offline personal conversation C. Interactive participation is the driving force behind conversation marketing (p. 382), in which companies initiate and facilitate conversations in a networked community of potential buyers and other interested parties D. Another major impact of social media has been the rapid spread of brand communities – formal or informal groups of people united by their interest in and ownership of particular products E. Public relations are nonsales communication that businesses have with their audiences (including both communication with the general public and press relations) 1. A press release is a short message sent to the media covering topics that are of potential news interest 2. A company can also call a press conference, an in-person or online gathering of media representatives at which companies announce new information

Classroom Activities Break-out Group Discussion: Advertising vs. Public Relations Goal: Ask students to discuss the pros and cons of advertising and public relations in an effort to distinguish these two major types of customer communications.

Time Limit: 15 minutes.

Details: 1. Break students into groups of five. (2 minutes) 2. Ask each group to come up with the main pros and cons of advertising and public relations. Sample pros for advertising include “firms have total control of the message and the tone of such communications” and “communications can be as frequent as needed”, while sample cons include “advertising is not free and can often be expensive”. Sample pros for public relations include “communications are usually free” while sample cons include “firms typically have no control of the message and the tone of such communications” and “communications tend to be one time only”. (10 minutes) 3. Ask representatives/speakers from each group to present their results to the whole class, either verbally or written (on the blackboard). (3 minutes)

End-of-Chapter Behind the Scenes

SeaWorld San Antonio Gets Social to Build Interest in New Ride

Critical Thinking Questions 1. With social media proving to be a cost-effective way to attract park visitors, should SeaWorld abandon its other promotional efforts and focus everything on social media? Why or why not?

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Students’ answers may vary depending on personal opinion but in general it is a good idea to maintain various efforts of promotion since each may be effective in its own ways. The best approach is to evaluate the effectiveness of the each element within the promotional mix of SeaWorld using exit survey data and optimize the promotional mix, e.g. spending more money on the most costeffective promotional elements such as social media, and spending less (but still spend some) on other promotional elements that are less effective, such as TV ads or newspaper ads.

2. What steps can SeaWorld take to maintain a relationship with coaster enthusiasts, now that the excitement surrounding the new ride has faded?

Students’ answers may vary but one key point to consider include continuing the usage of social media to keep coaster enthusiast abreast of upcoming new rides that are being developed.

3. Do coaster fans such as members of American Coaster Enthusiasts constitute a brand community as described in the chapter? Why or why not?

Yes, coaster fans such as members of American Coaster Enthusiasts largely fit the definition of a brand community since it is defined as people who are united by their interest in and ownership of particular products. Such communities can be formal organizations such as the American Coaster Enthusiasts.

Learn More Online Search online for commentary and media materials relating to the Journey to Atlantis ride at SeaWorld San Antonio. (Be aware that different rides with the same name exist at the other SeaWorld parks.) Imagine that you’re a coaster enthusiast.

Based on what you see online, would you consider visiting San Antonio to ride Journey to Atlantis? Why or why not?

Students’ responses will depend, in large part, on the material currently posted on the website.

Test Your Knowledge Questions for Review 1. What are two key ways in which the social communication model differs from conventional promotional communication?

Conventional promotional communication tends to be one-direction only, and audiences are passive recipients of such communications. In contrast, social communication model involves two-direction communications, and in this case the audiences are active participants of such communications.

2. What is the difference between using a push strategy and using a pull strategy to promote products?

Push strategy focuses on intermediaries, motivating them to promote (or push) products toward end users, while pull strategy stimulates consumer demand via advertising and other communication efforts, thereby creating a pull effect through the channel.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 3. What are the advantages of personal selling over other forms of customer communication?

Personal selling has the following advantages over other forms of customer communication: A) It involves one-on-one communications, whereas other forms of communication tend to be one-to-many; B) Personal selling tends to be interactive while other forms of customer communication tend to be onedirection.

4. What is an advertising appeal?

An advertising appeal is a creative tactic designed to capture the audience’s attention and promote preference for the product or company being advertised.

5. What are some common types of consumer promotions?

Some common types of consumer promotion are coupons, premiums, point-ofpurchase displays, rebates, games, and sweepstakes.

Questions for Analysis 6. Why is it important for sales professionals to qualify prospect?

It is important because time is often the sales-person’s most valuable asset and time must be spent wisely, focusing on the most valuable prospects that are most likely to purchase.

7. What are the potential disadvantages of using celebrity appeals in advertising?

The potential disadvantages are that celebrities are expensive, and celebrity endorsements can be risky because the brand’s image becomes linked in the celebrity’s image, including whatever behavioral missteps and other image problems the celebrity experiences in his or her personal life.

8. Why do some companies avoid email marketing, particularly to noncustomers?

Because such e-mail marketing may very likely be considered “spam” by noncustomers and will probably be deleted by them.

9. Do marketers have any control over social media? Why or why not?

Marketers have some control over social media through good publicity. They can also create a good public image through offering high quality goods and services, thus generating positive “word of mouth”.

10. Ethical Considerations. Is your privacy being violated when a website you visit displays ads that are personalized in any way, even if it’s just geographically targeted to the local area (based on your computer’s Internet address)? Why or why not?

Students’ answers may vary depending on personal opinion but they need to address that such practice is legal under current law.

Questions for Application 11. If you were a real estate agent, how would you determine whether it’s worth investing a significant amount of time in a particular prospect?

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Students’ answers may vary depending on personal opinion but possible consideration includes determining how serious of a buyer or seller a prospect is.

12. Think about an advertisement (in any medium) that had either a strongly positive or strongly negative effect on your attitude toward the product being advertised or the advertiser itself. Why did the ad have this effect? If you responded positively to the ad, do you think you were being manipulated in any way? If you responded negatively—and you are a potential buyer of the product that was advertised—what changes would you make to the ad to make it more successful?

Answers will vary according to the ads that the students select 13. Would it be a good idea to “repurpose” conventional press release as posts on your company blog? Why or why not?

Students’ answers may vary depending on personal opinion but possible points of consideration include that conventional press release is one-way and the audience in passive, while a blog is a social media that includes two-way communication in which the audience can be potentially interactive by posting feedback or comments on the blog.

14. Concept Integration. Should companies involve their marketing channels in the design of their customer communications programs? What are the advantages and disadvantages of doing so?

Students’ answers may vary depending on personal opinion but possible advantages include synergy between the channel partners via cross—marketing and possible disadvantages include when channel partners are discordant in their marketing approaches and messages, resulting in possible confusion of the audiences.

Expand Your Knowledge Discovering Career Opportunities Jobs in customer communication—advertising, direct marketing, personal selling, sales promotion, social media, and public relations—are among the most exciting and challenging in all of marketing. Choose a particular job in one of these areas. Using personal contacts, local directories of businesses or business professionals, or online resources such as company websites or search engines (including Twitter and blog search tools), arrange a brief phone, e-mail, or personal interview with a professional working in your chosen marketing field.

1.

What are the daily activities of this professional? What tools and resources does this person use most often on the job? What does this professional like most and least about the job?

Students’ answers will vary depending on their choices of professionals.

2.

What talents and educational background does this professional bring to the job? How are the person’s skills and knowledge applied to handle the job’s daily activities?

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Students’ answers will vary depending on their choices of professionals.

3.

What advice does the person you are interviewing have for newcomers entering this field? What can you do now to get yourself started on a career path toward this position?

Students’ answers will vary depending on their choices of professionals.

Improving Your Tech Insights: Individualized advertising Don’t be surprised if you look out the window one morning to see clouds in the sky arranged in letters that spell out your name and invite you to try a refreshing bottle of Coke or remind you to get your oil changed at Jiffy Lube.

Maybe it won’t get quite that far, but advertisers are perfecting a variety of technologies that allow them to pinpoint individual audience members with customized messages. One interesting effect of this is that some advertising media or retailing formats are starting to look more like direct marketing media. As the chapter notes, Amazon.com already personalizes a storefront for every one of their customers. Here are a few other examples: personalized magazine covers (including one that shows an aerial photograph of each subscriber’s neighborhood with his or her home or office circled in red); commercials on digital cable systems that can be targeted to viewers in an individual neighborhood or even an individual household (with messages shaped by the demographics of the residents of the house); narrowlyfocused audio messages that can be aimed at a single shopper in a retail store; Google’s Gmail email service, which serves up ads based on specific words in your email messages; and Google’s behavioral targeted technology (its “interest-based advertising”), which displays ads based on your web-surfing patterns.

Identify one form of individualized advertising now in use (you can search for “individualized advertising,” “personalized advertising,” “behavioral targeting,” or “interest-based advertising”). In a brief email message to your instructor, describe the technology, explain how it helps businesses reach customers more effectively, and identify any privacy concerns involved with the medium.

Students’ email messagess will vary depending on their choices of technology.

Practice Your Skills Sharpening Your Communication Skills The good news: The current events blog you started as a hobby has become quite popular. The bad news: The blog now takes up so much of your time that you’ve had to quit a part-time job you were using to supplement your regular income. After some discussions with other bloggers, you decide to join Google’s AdSense program (www.google.com/adsense) to help pay for the costs of operating your blog. With this program, small ads triggered by keywords in the content you publish will appear on your site. However, you’re worried that your audience will think you’ve “sold out” because you’re now generating revenue from your blog. Write a short message that could be posted on your blog, explaining why you consider it necessary to run ads and assuring your readers of your continued objectivity, even if that means criticizing organizations whose ads might appear on your blog.

Students’ messages will vary.

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Building Your Team Skills In small groups, discuss three or four recent ads or consumer promotions that you think were particularly effective. Using the knowledge you’ve gained from this chapter, try to come to consensus on what attributes contributed to the success of each ad or promotion. For instance: Was it persuasive? Informative?

Competitive? Creative? Did it stimulate you to buy the product? Why? Compare your results with those of other teams. Did you mention the same ads?

Did you list the same attributes?

Students’ answers will vary.

Developing Your Research Skills Choose an article from recent issues of business journals or newspapers (print or online editions) that describes the advertising or promotion efforts of a particular company or trade association.

1.

Who is the company or trade association targeting?

Answers will vary depending on the article selected.

2.

What specific marketing objectives is the organization trying to accomplish?

Answers will vary depending on the article selected.

3.

What role does advertising play in the promotion strategy? What other promotion techniques does the article mention? Are any of them unusual or noteworthy? Why? Answers will vary depending on the article selected.

CHECKPOINTS LEARNING OBJECTIVE 1: Describe the three major tasks in crafting a communication strategy, and identify four important legal aspects of marketing communication.

Critical thinking: (1) Why do credit card companies target students even though most have little or no income?

They target students since many of them will soon graduate and get jobs with higherthan-average income. They will become future consumers with buying power.

(2) Would it be wise for a manufacturer that is new to a particular industry (and unknown within it) to invest most of its promotional resources in a pull strategy?

Why or why not?

Yes, it would be wise since a manufacturer that is new to a particular industry typically does not have existing relationships with wholesalers and retailers in the same industry. By using a pull strategy, they can appeal directly to end customers and have customers request its products through the distribution channels, thereby establishing relationships with wholesalers and retailers.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual It’s your business: (1) What is your “core message” as a future business professional? How would you summarize, in one sentence, what you can offer a company?

Students’ answers will vary depending on personal opinions.

(2) Does knowing that advertisers are trying to track your online behavior in order to target you with personalized ads make you want to limit or change your web surfing?

Do you think advertisers have the right to do this? Why or why not?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 2: Identify the major types of advertising, the most common advertising appeals, and the most important advertising media.

Critical thinking: (1) Do fragmented media make it easier or harder for marketers to engage in segmented or concentrated marketing? Explain your answer.

Fragmented media make it harder for marketers to engage in segmented or concentrated marketing because it means marketers will now have to buy media coverage in bits and pieces of varieties of media outlets rather than in large chunks in a concentrated fashion. It is also more difficult for marketers to co-ordinate over fragmented media a consistent brand image and marketing message, which are essential for segmented and concentrated marketing.

(2)Why would a company such as McDonald’s, which is already well known to virtually all consumers in the United States, continue to spend heavily on advertising?

Companies such as McDonald’s continue to spend heavily on advertising despite having well known brands because they want to keep up with their competitors and attract new customers and develop new markets.

It’s your business: (1) Have you ever believed that you could create better advertising for a product than the company behind the product created? If so, explain the type of appeal you would’ve used and why.

Students’ answers will vary depending on personal opinions.

(2) Do you find that you tend to watch and listen to most television commercials, or do you mute or channel surf during commercials? If you pay attention to commercials, what is it that captures your interest?

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

LEARNING OBJECTIVE 3: Explain how direct marketing differs from advertising, and identify the major forms of direct media.

Critical thinking: (1) Would an iPhone app that streams QVC or another shopping channel to mobile phones be an effective direct-marketing medium? Why or why not?

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Students’ answers may vary but points of consideration include the fact that some adjustments will need to be made as the screen sizes for iPhones are much smaller than television sets.

(2) If direct marketing has a better return on investment than other forms of promotion, why do companies bother with anything but direct marketing?

Because direct marketing is only effective with certain segments of consumers and businesses. Companies often need to look into other marketing approaches in their marketing mix in order to reach more varieties of customers.

It’s your business: (1) As a rough guess, what percentage of the direct marketing messages you receive in a given week is effectively targeted to your needs as a consumer? Identify a recent example that was well targeted and one that was not.

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

(2) Have you ever responded to the offer in a “spam” e-mail message? If so, what enticed you to do so?

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

LEARNING OBJECTIVE 4: Describe consultative selling, and explain the personal-selling process.

Critical thinking: (1) Why is the canned approach inadequate for many selling situations?

Because many selling situations require an interactive approach in which customers will ask questions that are not necessarily included in the canned script and expect answers directly from the sales person.

(2) Why should a salesperson take the time to qualify sales leads?

Because taking the time to qualify sales leads will significantly improve the chances of generating sales by helping salespersons focusing their time and attention on the leads that are the most likely buyers.

It’s your business: (1) Would you be comfortable in a personal-selling role? Why or why not?

Students’ answers will vary depending on personal opinions.

(2) What can you learn from professional selling methods to help you in a job interview?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 5: Define sales promotion, and identify the major categories of consumer and trade promotions.

Critical thinking: (1) If 99 percent of coupons are never used, why do companies keep printing so many?

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Companies still keep printing them because they have been doing them for a while and that coupons are still more effective than some of the other promotional tools.

(2) If wholesalers and retailers can make money selling a manufacturer’s product, why would the manufacturer need to offer incentives such as sales contests?

Manufactures would offer incentives such as sales contests as a part of a pull strategy to entice consumers to come into a store and to demand the manufacturer’s product.

It’s your business: (1) How can sales promotions reduce the reluctance that buyers might feel about trying an unfamiliar product?

Students’ answers will vary depending on personal opinions but points of consideration including free samples as a sales promotion tool to try the product without purchase.

(2) Have you ever participated in a sales promotion without really realizing you were doing so? For example, have you ever entered a sweepstakes sponsored by a company without thinking that you were getting on the company’s mailing list or otherwise participating in a marketing activity?

Students’ answers will vary depending on personal experiences.

LEARNING OBJECTIVE 6: Explain the uses of social media in customer communication and the role of public relations.

Critical thinking: (1) If marketers are advised against blatant product promotion in social media, why should they bother using these media at all?

Social media relies on “word of mouth”, which is more effective than blatant product promotion.

(2) Why are press relations so critical to the launch of many new products?

Press releases are critical to the launch of many new products because it allows firms to launch new products to a large audience at a low cost since most PR is free.

It’s your business: (1) Have you ever used social media to ask questions about a product or to criticize or compliment a company? Did anyone from the company respond?

Students’ answers will vary depending on personal experiences.

(2) Do you consider yourself a member of any brand communities (formal or informal)? If so, what effect do these groups have on your purchasing behavior?

Students’ answers will vary depending on personal opinions.

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Chapter 17: FINANCIAL INFORMATION AND ACCOUNTING CONCEPTS Chapter Overview This chapter covers the important business functional area of accounting. It defines accounting and discusses how managers and other stakeholders use financial information. It summarizes the impact of the relatively new Sarbanes-Oxley Act and introduces the three important financial statements, namely the balance sheet, income statement and cash flow statement. Finally, it discusses ratio analysis and identifies the major categories of financial ratios.

Chapter Outline I.

Understanding Accounting A. Accounting (p. 391) is measuring, interpreting and communicating of financial information to support internal and external decision making.

1. Financial accounting is concerned with preparing financial information for users outside the organization 2. Management accounting is concerned with preparing data for use by managers within the organization B. Bookkeeping is the clerical aspect of accounting, but accountants do more than bookkeeping and may specialize in areas such as cost accounting, tax accounting, financial analysis or forensic accounting C. Accountants are classified as either private accountants or public accountants 1. Private accountants (p. 392) are in-house accountants employed by organizations and businesses a. They work under the supervision of the organization’s controller, the highest-ranking accountant in a company who is responsible for overseeing all accounting functions 2. Public accountants are professionals who provide accounting services to other businesses and individuals for a fee a. Many public accountants are licensed certified public accountants (CPAs), accountants who meet certain requirements for education and experience and pass a comprehensive examination b. Accountants must obtain CPA and state licensing certifications before they can conduct an audit (p. 393) – a formal evaluation of the fairness and reliability of a client’s financial statements

II. The Rules of Accounting A. Financial accountants are expected to follow a number of rules to ensure the veracity and quality of the quality of the financial information presented.

B. GAAP (generally accepted accounting principles) (p. 394) are standards and practices used by publicly held corporations in the preparation of financial statements

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 1. GAAP is overseen in the U.S. by the Financial Accounting Standards Board (FASB) 2. The FASB has been working with the International Accounting Standards Board to harmonize GAAP with international financial reporting standards (IFRS) and develop global accounting standards C. External auditors are independent accounting firms that provide auditing services for public companies 1. Large companies may also use internal auditors – employees who investigate and evaluate the organization’s internal operations and data D. The Public Company Accounting Reform and Investor Protection Act (Sarbanes-Oxley) (p. 395) is comprehensive legislation designed to improve integrity and accountability of financial information III. Fundamental Accounting Concepts A. Accountants are guided by three basic concepts: the fundamental accounting equation, double-entry bookkeeping and the matching principle B. The fundamental accounting equation (p. 396) is: Assets – Liabilities = Owners’ equity 1. Assets are any items of value owned or leased by a business 2. Liabilities are claims against a firm’s assets by creditors 3. Owners’ equity is the portion of a company’s assets that belongs to the owners after obligations to all creditors have been met C. Double-entry bookkeeping (p. 397) is a method of recording financial transactions that requires a debit entry and credit entry for each transaction to ensure that the accounting equation is always kept in balance D. The matching principle requires that expenses incurred in producing revenue be deducted from revenues they generated during an accounting period 1. Accountants match revenue to expenses by adopting the accrual basis of accounting, in which revenue is recorded when a sale is made and expense is recorded when it is incurred.

2. A company may also operate on a cash basis, in which revenue is recorded when payment is received and expense is recorded when cash is paid 3. Depreciation is an accounting procedure for systematically spreading the cost of a tangible asset over its estimated useful life. This is another way that companies match expenses with revenue, because the cost of the asset must be matched to the income it generates in future years IV. Using Financial Statements: The Balance Sheet A. After individual sales, purchases and other transactions are recorded, classified and summarized, accountants must review the transaction summaries and correct errors and/or discrepancies before closing the books (p. 398) – transferring net revenue and expense account balances to retained earnings for the period B. The balance sheet is a statement of a firm’s financial position on a particular date C. A company prepares a balance sheet at least once a year, usually at the end of its calendar year (p. 399) – the 12-month accounting period that begins on January 1 and ends on December 31

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 1. Companies can also use a fiscal year reporting basis – any 12 consecutive months used as an accounting period D. The company’s balance displays the status of the following: 1. Assets – These can be tangible (buildings, land) or intangible (intellectual property, goodwill). The asset section is divided into current assets and fixed assets: a. Current assets (p. 401) are cash and items that can be converted into cash within one year b. Fixed assets are assets retained for long-term use, such as land, buildings, machinery and equipment 2. Liabilities are listed on the balance sheet in the order in which they will come due. There are two categories: a. Current liabilities (such as accounts payable and accrued expenses) are obligations that must be met within one year b. Long-term liabilities (such as loans, leases and bonds) are obligations that fall due more than one year from the date of the balance sheet 3. Owners’ equity is the owners’ investment in a business listed on the balance sheet. This can be displayed in different ways depending on the structure of the business (i.e., sole proprietorship, partnership, etc.) a. In a corporation, shareholders’ total investment value is the sum of the value of shares currently held plus retained earnings (p. 402) – cash that is kept by the company rather than distributed to shareholders in the form of dividends V. Using Financial Statements: Income and Cash Flow Statements A. The income statement is a financial record of a company’s revenues, expenses and profits over a given period of time; also known as a profit and loss statement B. The income statement summarizes revenue (income) and expenses (costs that have arisen in generating revenue) C. The first section of the income statement shows gross sales less any discounts or sales allowances; the result is known as net sales.

D. Cost of goods sold (p. 403) – the cost of producing or acquiring a company’s products for sale during a given period – is then deducted from net sales 1. The result is the company’s gross profit, also known as the gross margin D. Operating expenses are all costs of operation that are not included under cost of goods sold. These include selling expenses and general expenses 1. Deducting operating expenses and income taxes from the gross profit shows the company’s net income (p. 402) E. Another measure of profitability is EBITDA (p. 404) – earnings before interest, taxes, depreciation and amortization F. Companies may also prepare a statement of cash flows, which shows how much cash the company generated over a period of time and where it went VI. Analyzing Financial Statements A. Trend analysis involves the tracking of absolute numbers from one year to the next in order to uncover patterns B. Ratio analysis creates relative numbers by comparing sets of figures from a single year’s performance

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Bovee/Thill, Business in Action 6/e Instructor’s Manual C. Profitability ratios show the state of the company’s financial performance or how well it generates profits. Three common profitability ratios include: 1. Return on sales (p. 406) – the ratio between net income after taxes and net sales 2. Return on equity – the ratio between net income after taxes and total owners’ equity 3. Earnings per share - a measure of a firm’s profitability for each share of outstanding stock, calculating by dividing net income after taxes by the average number of shares of common stock outstanding D. Liquidity ratios measure a firm’s ability to pay its short-term obligations 1. Working capital (current assets minus current liabilities) 2. Current ratio (current assets divided by current liabilities) 3. Quick ratio (also called the acid-test ratio) is calculated by adding cash, marketable securities and receivables and then dividing that sum by current liabilities E. Activity ratios analyze how well a company is managing and making use of its assets. Two common activity ratios include: 1. Inventory turnover ratio, a measure of the time a company takes to turn its inventory into sales, calculated by dividing the cost of goods sold by the average value of inventory for a period 2. Accounts receivable turnover ratio (p. 408), a measure of the time a company takes to turn its accounts receivable into cash, calculated by dividing sales by the average value of accounts receivable for a period F. Leverage or debt ratios are a measure of the company’s ability to pay its long-term debt. Common ratios include: 1. Debt-to-equity ratio – a measure of the extent to which a business is financed by debt as opposed to invested capital, calculated by dividing the company’s total liabilities by owners’ equity 2. Debt-to-assets ratio – a measure of a firm’s ability to carry long-term debt, calculated by dividing total liabilities by total assets

Classroom Activities In-class Activity: Distinguishing the financial statements.

Goal: Help students better understand the differences between two major financial statements, namely the balance sheet and the income statement.

Time Limit: 10 minutes.

Details: 1. Create a list on one side of the blackboard, including an assortment of line items that belong to either the balance sheet or the income statement. Sample line items include accounts receivable, gross sales, fixed assets, cost of goods sold, current liabilities, selling expenses, retained earnings, gross profit, and common stock, etc.

2. Draw two columns on the other side of the blackboard, one labeled “Balance Sheet” and the other labeled “Income Statement”.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 3. Ask students to pair up and recreate the content of the blackboard on their notebooks and subsequently assign all of the line items into the correct columns.

End-of-Chapter Behind the Scenes Google This: “Cost Control” Questions for Critical Thinking

1. Given the eventual need for rigorous financial management, should every company have extensive cost controls in place from the first moment of operation? Explain your answer.

Not necessarily. When a firm is starting out and just developing new products and promoting its brand name to customers, too much emphasis on cost controls may stifle innovation and delay product adoption.

2. Google recently had a debt-to-equity ratio of 0.04. Microsoft, one of its key competitors, had a debt-to-equity ratio of 0.15. From a bank’s point of view, which of the two companies is a more attractive loan candidate, based on this ratio? Why? From the bank’s point of view, Google is more attractive because it has a lower debt-to-equity ratio, and therefore is less risky regarding its loans; i.e. Google does not need to devote as much cash to debt payments compared to Microsoft.

3. At the end of 2008, Google’s current ratio was 8.77. Midway through 2009, the current ratio was up to 11.91. Does this make Google more or less of a credit risk in the eyes of potential lenders? Why? A higher current ratio makes Google more of a credit risk because it indicates that Google now has fewer current assets available to pay for its current liabilities.

Learn More Online Visit Google’s “Investor Relations” section at http://investor.google.com. Peruse the latest financial news. How does the company’s financial health look at present?

What do the trends for revenue, expenses, and income look like? Does the company report both GAAP and non-GAAP financial results? Why does it report non-GAAP figures?

Students’ responses will depend, in large part, on the material currently posted on the website.

Test Your Knowledge Questions for Review 1. What is GAAP? GAAP is generally accepted accounting principles that apply to all published financial statements; all U.S. public companies must comply with GAAP. They

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Bovee/Thill, Business in Action 6/e Instructor’s Manual include basic accounting standards and procedures that have been agreed on by the accounting profession.

2. What is an audit and why are audits performed?

An audit is a formal evaluation of the fairness and reliability of financial statements.

Companies whose stock is publicly traded in the United States are required to file audited financial statements with the SEC.

3. What is the matching principle?

The matching principle requires that expenses incurred in producing revenue be deducted from the revenue they generated during the accounting period.

4. What are the three main profitability ratios, and how is each calculated?

The three main profitability ratios are return on sales, return on equity, and earnings per share. Return on sales is calculated by dividing net income after taxes by net sales. Return on equity is calculated by dividing net income after taxes by total equity. Earnings per share are calculated by dividing net income after taxes by the average number of common shares outstanding for that period.

5. What is the value of an income statement?

The main value of an income statement is that it shows whether a firm is making a profit or loss. It also indicates the company’s size, its trends in sales, and its major expenses.

Questions for Analysis 6. Why are the GAAP and IFRS standards being converged?

GAAP and IFRS standards are being converged because GAAP is not used in other countries. Changing GAAP to IFRS should help investors who want to purchase stocks of companies based in other countries, help U.S. stock exchanges by making them more competitive in world capital markets, help foreign companies that want to sell stock in the U.S. and help multinational firms by letting them settle on a single set of accounting standards.

7. Why would a company bother with double-entry bookkeeping?

The double-entry method was originally created to minimize errors caused by entering and adding figures by hand, but now it is used to keep the accounting equation in balance.

8. Why are the costs of fixed assets depreciated?

Fixed assets generally benefit more than one accounting period. According to the matching principal, the cost of the asset must be matched to the income it generates in future years. This is accomplished by spreading the cost of the asset over its useful life.

9. Why would a bank lending office be interested in the cash flow statement of a company that is applying for a loan?

Because the cash flow statement provides a good idea of a company’s ability to pay its short-term obligations when they become due, i.e. whether a company is likely to go bankrupt.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 10. Ethical Considerations. In the process of closing the company books, you encounter a problematic transaction. One of the company’s customers was charged twice for the same project materials, resulting in a $1,000 overcharge. You immediately notify the controller, whose response is, “Let it go, it happens often. It’ll probably balance out on some future transaction.” What should you do?

Students’ answers will vary, but should take into account the risks involved in allowing such an error to stand (e.g., the possible loss of the customer, potential legal difficulties, and the deleterious effects on other accounting activities), as well as the ethics that have been called into question here.

Questions for Application 11. The senior partner of an accounting firm is looking for ways to increase the firm’s business. What other services besides traditional accounting can the firm offer to its clients? What new challenges might this additional work create?

Some of the additional services include: designing accounting systems, updating computer information systems and management reporting systems, providing business valuations, consulting on profit improvement, developing employee benefits programs and inventory control systems, and performing financial analysis reports for any number of situations.

12. Visit the websites of Google and Microsoft and retrieve their annual reports.

Using these financials, compute the working capital, current ratio, and quick ratio for each company. Does one company appear to be more liquid than the other? Why? Answers will vary due to the timing of data; students should give evidence that they understand how to calculate the various ratios and know how to compare the liquidity ratios of different firms.

13. If you were asked to lend money to your cousin’s clothing store to help her through a slow sales period, would you be more interested in looking at the current ratio or the quick ratio as a measure of liquidity? Why? The quick ratio is more appropriate in this case since it leaves out inventories, and becomes a better indicator of a firm’s ability to pay creditors than the current ratio. Leaving out inventories is an important step here since the clothing store is going through a slow sales period.

14. Concept Integration. Your appliance manufacturing company recently implemented a just-in-time inventory system (see Chapter 9) for all parts used in the manufacturing process. How might you expect this move to affect the company’s inventory turnover rate, current ratio, and quick ratio?

Since the goal of JIT systems is to have only the right amount of materials when needed (with the ideal of “zero inventory”), you might reasonably expect the company’s inventory turnover rate to be higher than it was before the JIT system was implemented. You might also expect the current ratio, which divides current assets by current liabilities, to be lower since current inventories would be lower than before. The quick ratio, on the other hand, would be unaffected by the JIT system since it does not include inventory in its calculation; instead, it is

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Bovee/Thill, Business in Action 6/e Instructor’s Manual calculated by adding cash, marketable securities, and receivables, then dividing that sum by current liabilities.

Expand Your Knowledge Exploring Career Opportunities People interested in entering the field of accounting can choose among a wide variety of careers with diverse responsibilities and challenges. Visit the Accountants and Auditors page at www.bls.gov/oco/ocos001.htm to read more about career opportunities in accounting.

1. What are the day-to-day duties of this occupation? How would these duties contribute to the financial success of a company?

Accountants and auditors help to ensure that firms are run efficiently, public records kept accurately, and taxes paid properly and on time. They analyze and communicate financial information for various entities such as companies, individual clients, and federal, state, and local governments. Beyond carrying out the fundamental tasks of the occupation—providing information to clients by preparing, analyzing, and verifying financial documents—many accountants also offer budget analysis, financial and investment planning, information technology consulting, and limited legal services. Specific job duties vary widely among the four major fields of accounting and auditing: public accounting, management accounting, government accounting, and internal auditing.

2. What skills and qualifications would you need to enter this occupation?

How do these qualifications fit with your current plans, skills, and interests?

Most accountant and auditor positions require at least a bachelor's degree in accounting or a related field. Some employers prefer applicants with a master's degree in accounting, or with a master's degree in business administration with a concentration in accounting. Some universities and colleges are now offering programs to prepare students to work in growing specialty professions such as internal auditing. Many professional associations offer continuing professional education courses, conferences, and seminars.

Some graduates of junior colleges or business or correspondence schools, as well as bookkeepers and accounting clerks who meet the education and experience requirements set by their employers, can obtain junior accounting positions and advance to accountant positions by demonstrating their accounting skills on the job.

Students’ answers regarding their plans, skills and interests will vary.

3. What kinds of employers hire people for this position? According to your research, does the number of employees seem to be increasing or decreasing? How do you think this trend will affect your employment possibilities if you choose to enter this career?

Employment of accountants and auditors is expected to grow by 22 percent between 2008 and 2018, which is much faster than the average for all occupations. This occupation will have a very large number of new jobs arise, about 279,400 over the projections decade. An increase in the number of

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Bovee/Thill, Business in Action 6/e Instructor’s Manual businesses, changing financial laws and corporate governance regulations, and increased accountability for protecting an organization's stakeholders will drive job growth.

As the economy grows, the number of business establishments will increase, requiring more accountants and auditors to set up books, prepare taxes, and provide management advice. As these businesses grow, the volume and complexity of information reviewed by accountants and auditors regarding costs, expenditures, taxes, and internal controls will expand as well. The continued globalization of business also will lead to more demand for accounting expertise and services related to international trade and accounting rules and international mergers and acquisitions. Additionally, there is a growing movement towards International Financial Reporting Standards (IFRS), which uses a judgmentbased system to determine the fair-market value of assets and liabilities, which should increase demand for accountants and auditors because of their specialized expertise.

Improve Your Tech Insights: GRC Software The Sarbanes-Oxley Act’s requirement that publicly traded companies regularly verify their internal accounting controls spurred the development of software tools to help companies flag and fix problems in their financial systems. In the past few years, a number of software vendors have gone beyond Sarbox compliance to integrate the monitoring of a wide range of legal and financial issues that require management attention. This new category of software is generally known as governance, risk, and compliance (GRC) software. GRC capabilities can either be built into other software packages (such as accounting and finance software, process management software, or business intelligence software) or offered as standalone compliance programs. Vendors that offer GRC capabilities include Oracle (www.oracle.com), SAP (www.sap.com), and OpenPages (www.openpages.com ), among many others.

Explore one GRC software solution, and in a brief email message to your instructor, describe the benefits of using this particular software package.

Students’ answers will vary depending on their choices of the GRC solutions.

Practice Your Skills Sharpening Your Communication Skills Obtain a copy of the annual report of a business (these can be found online), and examine what the report shows about finances and current operations.

• Consider the statements made by the CEO regarding the past year: Did the company do well, or are changes in operations necessary for its future wellbeing? What are projections for future growth in sales and profits?

• Examine the financial summaries for information about the fiscal condition of the company. Did the company show a profit?

• If possible, obtain a copy of the company’s annual report from the previous year, and compare it with the current report to determine whether past projections were accurate.

• Prepare a brief written summary of your conclusions.

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Students’ answers will vary according to the annual report they choose to examine.

In developing their conclusions, students should show that they have applied the following: • •

• • •

Check the CPA’s report to see if the annual report conforms to generally accepted accounting principles (GAAP) When examining the chairman’s letter, pay attention to phrases like “Except for…” (which may indicate problems), and look for what’s new in each line of business (to indicate whether the company is in good shape to meet challenges of the future) Check the trend in the company’s working capital, analyze earnings per share (along with corresponding footnotes), and examine the trend in net sales Scrutinize the company’s debt-to-equity ratio Compare the report to the company’s previous annual reports, as well as to industry norms

Building Your Team Skills Divide into small groups and compute the following financial ratios for Alpine Manufacturing using the company’s Balance Sheet and Income Statement (see p. 412). Compare your answers to those of your classmates: • • • •

Profitability ratios: return on sales; return on equity; earning per share Liquidity ratios: current ratio; quick ratio Activity ratios: inventory turnover; accounts receivable turnover Leverage ratios: debt to equity; debt to total assets

Students’ choices will vary. In either case, their rationale should be clear, and should include consideration of several factors, including: • The total assets, liabilities, owners’ equity for each business • The nature of the assets (for instance, whether they are current or fixed, and how much of the assets consist of inventory) • The nature of the liabilities (e.g., if the company carries a high bank debt) • The results of ratio analyses which may be performed, including: ✓ profitability ratios (e.g., the company’s return on investment) ✓ liquidity ratios (e.g., the company’s working capital, current ratio, and quick ratio) ✓ leverage ratios (e.g., the company’s debt-to-equity ratio and its debt-to-totalassets ratio) Students should keep in mind that no single factor or ratio is a magic formula for predicting the future success of a company.

Developing Your Research Skills Select an article from a business journal or newspaper (print or online editions) that discusses the quarterly or year-end performance of a company that industry analysts consider notable for either positive or negative reasons.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 1. Did the company report a profit or a loss for this accounting period? What other performance indicators were reported? Is the company’s performance improving or declining?

Students’ answers will vary according to the particular articles students have chosen. For ease of evaluation, instructors might find it helpful to ask students to attach a photocopy of the article to their report.

2. Did the company’s performance match industry analysts’ expectations, or was it a surprise? How did analysts or other experts respond to the firm’s actual quarterly or year-end results?

Students’ answers will vary according to the particular articles students have chosen.

3. What reasons were given for the company’s improvement or decline in performance?

Students’ answers will vary according to the particular company being evaluated.

CHECKPOINTS LEARNING OBJECTIVE 1: Define accounting, and describe the roles of private and public accountants.

Critical thinking: (1) Why would a private accountant bother with becoming a CPA? Because some may consider a career with a big four Public Accounting firm more prestigious and more lucrative.

(2) What effect can unreliable or uncertain accounting have on the economy?

Unreliable or uncertain accounting at the microeconomic level will make it more difficult for economists to compile accurate or reliable macroeconomic data and make reasonable projections about the economy at the macro level.

It’s your business: (1) How rigorous are your personal bookkeeping and accounting efforts? Do you keep accurate records, analyze spending, and set budgets?

Students’ answers will vary depending on personal experiences.

(2) If you don’t really account for your personal finances, how might doing so help you, now and in the future?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 2: Explain the impact of accounting standards such as GAAP and the Sarbanes-Oxley Act on corporate accounting.

Critical thinking: (1) Should U.S. public companies with no significant overseas business activity be forced to follow international accounting standards? Why or why not?

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Not at the moment because it will be a waste of time and financial resources.

However, U.S. public companies should be informed of the potential convergence of GAAP and IFRS and act accordingly.

(2) How does requiring CEOs to personally attest to the accuracy of financial statements eliminate errors and misrepresentations?

It makes top executives of firms such as CEOs personally and legally accountable to any possible accounting errors and can potentially serve as a deterrent of accounting fraud.

It’s your business: (1) How might the convergence of GAAP and IFRS in the coming years affect you as an investor?

Students’ answers will vary depending on personal opinions.

(2) If you were considering buying stock in a company, would you support rigorous and detailed financial accountability such as that called for by Section 404 of Sarbanes-Oxley? Why or why not?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 3: Describe the accounting equation, and explain the purpose of double-entry bookkeeping and the matching principle.

Critical thinking: (1) How does double-entry bookkeeping help eliminate errors?

Double-entry bookkeeping system was created in the early days to help eliminate errors caused by entering and adding figures by hand. More recently, in double-entry bookkeeping, each transaction is entered twice, as a pair of offsetting entries to ensure that the accounting equation stays in balance.

(2) Why is accrual-based accounting considered more fraud-proof than cash-based accounting?

Because cash-based accounting can be misleading. For instance, in cash-based accounting, it is easy to inflate income by delaying the payment of bills. That is the main reason that accrual-based accounting is considered more fraud-proof.

It’s your business: (1) Does looking at the accounting equation make you reconsider your personal spending habits? (Think about taking on liabilities that don’t create any long-term assets, for example.)

Students’ answers will vary depending on personal opinions.

(2) How would accrual basis accounting give you better insights into your personal finances?

Students’ answers will vary depending on personal opinions.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual LEARNING OBJECTIVE 4: Identify the major financial statements, and explain how to read a balance sheet.

Critical thinking: (1) Why do analysts need to consider different factors when evaluating a company’s ability to repay short-term versus long-term debt?

Because short-term debts are obligations that will have to be met by the firm within one year whereas long-term debt have payment period beyond one year. That means the concerns for the short-term debt are much more immediate. Short-term expenses will also need to be booked as liability immediately. If such expenses and their associated liabilities were not recorded, the company’s financial statements would be misleading and would violate the matching principle.

(2) Would the current amount of the owners’ equity be a reasonable price to pay for a company? Why or why not?

Not really. Because successful companies are worth a premium beyond the current amount of owner’s equity and such premium will need to be included in the purchase price of the firm.

It’s your business: (1) What are your current and long-term financial liabilities? Are these liabilities restricting your flexibility as a student or consumer?

Students’ answers will vary depending on personal opinions.

(2) As a potential employee, what intangible assets can you offer a company?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 5: Explain the purpose of the income statement and statement of cash flows.

Critical thinking: (1) How could two companies with similar gross profit figures end up with dramatically different net operating income?

One possibility is that the two companies have dramatically different corporate income tax rates.

(2) How might a statement of cash flows help a turnaround expert decide how to rescue a struggling company?

A statement of cash flows shows how much cash the firm generated over time and where it went and it can help a turnaround expert decide which cash outflows will need to be reduced or eliminated all together.

It’s your business: (1) What would your personal income statement look like today? Are you operating “at a profit” or “at a loss”?

Students’ answers will vary depending on personal opinions.

(2) What steps could you take to reduce your “operating expenses”?

Students’ answers will vary depending on personal opinions.

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LEARNING OBJECTIVE 6: Explain the purpose of ratio analysis, and list the four main categories of financial ratios.

Critical thinking: (1) Why is it so important to be aware of extraordinary items when analyzing a company’s finances?

Because extraordinary items may have affected a company’s finances in one period but not the next. Being aware of such items are important when conducting trend analysis of a firm’s finances.

(2) Why is the quick ratio frequently a better indicator than the current ratio of a firm’s ability to pay its bills?

A quick ratio is typically a better indicator than the current ratio because it subtracts inventories from current assets and then divides the result by current liabilities.

It’s your business: (1) Assume you are about to make a significant consumer purchase, and the product is available at two local stores, one with high inventory turnover and one with low.

Which store would you choose based on this information? Why? Students’ answers will vary depending on personal opinions.

(2) If you were applying for a home mortgage loan today, would a lender view your debt-to-assets ratio favorably? Why or why not?

Students’ answers will vary depending on personal opinions.

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Chapter 18: ACCOUNTING AND FINANCIAL MANAGEMENT Chapter Overview This chapter covers the important business functional area of finance. It defines finance and identifies the key responsibilities of a financial manager. It introduces budgeting and describes the major types of budgets. Finally, it contrasts debt financing with equity financing and discusses in details the major categories of both types of financing.

Chapter Outline I.

The Role of Financial Management A. Financial management (p. 415) is planning for a firm’s money needs and managing the allocation and spending of funds. Three fundamental concepts: 1. Balancing short-term and long-term demands 2. Balancing potential risks against potential rewards (i.e., the risk/reward trade-off) 3. Balancing leverage and flexibility B. Financial management starts with a financial plan (p. 416) – a document that outlines the funds needed for a certain period of time, along with sources and intended uses C. Financial management must also monitor cash flow – money flowing into and out of the business – in order to avoid a liquidity crisis (i.e., having insufficient cash to meet short-term needs). This means monitoring working capital accounts, including: 1. Accounts receivable (p. 417) – amounts that are currently owed to a firm 2. Accounts payable – amounts that a firm currently owes to other parties 3. Inventory 4. Cash reserves – cash or cash equivalents that can be converted to cash quickly

II. The Budgeting Process A. Financial managers are responsible for developing budgets (p. 419), planning and control tools that reflect expected revenues, operating expenses, and cash receipts and outlays 1. Once the budget has been developed, the finance manager compares actual results with projections to determine variances and recommends corrective action. This is financial control B. Issues faced by managers in budgeting are: 1. Companies have a finite amount of money available and projects and departments compete for these resources 2. Revenues and costs are often difficult to predict

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Bovee/Thill, Business in Action 6/e Instructor’s Manual a. Companies protect themselves against future price increases by hedging (p. 420) – entering into contracts that allow them to buy supplies in the future at predetermined prices b. Companies may also use rolling forecasts and/or scenario planning 3. Managers may be uncertain how much revenue will be received or how much money should be spent a. A common practice is to use the previous year’s budget as a baseline b. With zero-based budgeting (p. 421), each department starts from zero every year and must justify each item 4. Types of budgets include: a. Start-up budget – identifies the money a new company will spend to launch operations b. Operating budget – identifies all sources of revenue and coordinates the spending of those funds throughout the coming year c. Capital budget – outlines expenditures for capital investments such as real estate, new facilities, major equipment and other items of permanent value d. Project budget – identifies the costs needed to accomplish a particular project III. Financing Alternatives – Factors to Consider A. There are two categories of financing: debt and equity 1. Debt financing (p. 422) involves borrowing money 2. Equity financing involves selling ownership shares in the company B. Financing can also be categorized as short-term or long-term 1. Short-term financing (p. 423) will be repaid within one year 2. Long-term financing will be repaid in a period longer than one year C. Another consideration in choosing a method of financing is the company’s cost of capital – the average rate of interest a firm pays on its combination of debt and equity. Cost of capital depends on three main factors: 1. Risk – Lenders expect their returns to be in proportion of the quality and the length of time of the venture 2. Interest rate – The cost of money varies with interest rates. The prime interest rate (p. 424) is the lowest rate offered on short-term bank loans to preferred borrowers D. Firms must also evaluate opportunity cost – the value of the most appealing alternative from among those that were not chosen.

1. A company may use leverage – increasing the rate of return on an investment by financing it with borrowed funds – if it an earn a greater rate of return than the rate of interest paid E. A company’s capital structure (the total mix of debt and equity it uses to meet short- and long-term needs) depends on three factors: how much should be raised, by what means, and when.

IV. Financing Alternatives: Short-Term Debt A. There are several options for short term financing, including: 1. Credit cards – an expensive but widely available form of short-term financing 2. Trade credit (p. 427) – credit obtained by a purchaser directly from a supplier

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 3. Secured loans – loans backed up by something of value, known as collateral 4. Unsecured loans – loans which require a good credit rating but no collateral. One common type is a line of credit, an arrangement in which a lender makes an agreed-upon amount of money for use at any time after it is approved a. Many lenders require the borrower to maintain a minimum amount of money on deposit at the bank – a compensating balance – while the loan is outstanding 5. Commercial paper – a short-term promissory note to repay a borrowed amount by a specified time with a specified interest rate 6. Factoring – obtaining funding by selling the firm’s accounts receivable a. The company is paid a percentage (70-90%) of the total outstanding amount V. Financing Alternatives: Long-Term Debt A. There are several long-term debt financing options available, including: 1. Long-term loans (term loans) – loans with maturities of 1-25 years. a. Long-term loans on real estate are called mortgages b. Lenders look at the 5 C’s when considering applications for longterm loans: character of the company owners, capacity or ability to repay the loan, capital (i.e., whether the company has enough capital to succeed), condition of the economy and industry, and collateral (i.e., tangible assets the lender can seize if the borrower defaults) 2. Leases (p. 430) – Instead of borrowing money to purchase an asset, a firm can enter into a lease, in which the owner of an asset (the lessor) allows another party (the lessee) to use the asset in exchange for regular payments 3. Corporate bonds – Bonds are certificates that obligate the company (the issuer or borrower) to repay a certain sum plus interest to the bondholder (the lender) on a specific date. Several types: a. Secured bonds – bonds backed by company-owned property that passes to bondholders if the issuer does not repay the amount borrowed b. Debentures – unsecured bonds backed only by the company’s promise to pay c. Convertible bonds – bonds that can be exchange at the investor’s option for a certain number of shares of the company’s common stock 4. To ease cash flow burden of redeeming bonds, companies can: a. Issue serial bonds, which mature at various times b. Establish a sinking fund, in which it sets aside a certain sum of money each year to repay its debt 5. Corporations usually retain the right to repay bonds before maturity.

These are known as callable bonds or redeemable bonds VI. Financing Alternatives: Equity A. Equity financing involves selling ownership shares of the company B. Equity financing can involve private equity (p. 432), in which ownership assets are not publicly traded 1. Examples include venture capital, angel investors and leveraged buyouts

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Bovee/Thill, Business in Action 6/e Instructor’s Manual C. Going public involves offering shares of stock to the public through a stock market such as the NYSE. 1. The first time a company offers its shares of stock to the public is known as an initial public offering (IPO) D. The IPO process has three phases: 1. Preparing the IPO – Assembling a team of legal experts, a public accounting firm to serve as auditor, and an underwriter – a specialized type of bank that buys the shares from the company and sells them to investors 2. Registering the IPO – The company must register with the SEC and submit a prospectus, which discloses required information about the company, its finances, and its plan for using the funds 3. Selling the IPO – The company and its team promotes the offering privately to institutional investors through a series of meetings called the road show

Classroom Activities Break-out Group Discussion: Debt vs. Equity Financing Goal: Ask students to discuss the key advantages and disadvantages of debt and equity to contrast these two major types of financing available to many firms.

Time Limit: 15 minutes.

Details: 1. Break students into groups of three or four. (2 minutes) 2. Ask each group to come up with the main advantages and disadvantages of debt and equity financing. Some key criteria to consider include maturity, claim on assets, influence over management, risk, and tax consequences. For instance, regarding “influence over management”, lenders typically do not have influence over management while shareholders typically do have influence over management to various degrees. (10 minutes) 3. Ask representatives from each group to present their results to the whole class, either verbally or written (on the blackboard). (3 minutes)

End-of-Chapter Behind the Scenes Visa Funds Its Future with Record-Setting IPO Questions for Critical Thinking 1. How might Visa executives use scenario planning in the budgeting process?

They might use scenario planning in the budget process to prepare for the two different scenarios surrounding the IPO, in this case, the possible success and failure of the IPO. To be more specific, Visa could start the year with the more optimistic forecast assuming the IPO will be successful, but then if the IPO does not go well, Visa could immediately adopt a second more conservative budget and reduce spending accordingly.

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2. Could Visa have accomplished its funding goals through short-term or longterm debt financing instead? Why or why not?

Short-term debt financing will be difficult because of the credit crunch. Longterm financing may not be easy either, depending how quickly the credit market can recover.

3. As Visa continues to explore growth opportunities, should it consider becoming a lender by issuing cards itself or lending money to banks that issue cards? Why or why not?

Students’ answers will vary but points of consideration include: 1) Visa’s strength is in payment processing rather than lending; 2) By issuing cards itself, Visa may alienate existing card issuers, which include the banks that make up the primary ownership group within the Visa association.

Learn More Online Visit Visa’s website at www.visa.com and locate the investors section. Has the company reported any significant financial news in the past year? Has it resolved its outstanding legal issues? What were its net income and earnings per share for the more recent fiscal year? Has company management expressed any concerns about ongoing cash flow issues?

Students’ responses will depend in large part on the material currently posted on the website.

Test Your Knowledge Questions for Review 1. What is the primary goal of financial management?

The primary goal of financial management is to maximize a company's value. To achieve this goal, financial managers develop and implement a firm’s financial plan, monitor a firm’s cash flow and decide how to create or use excess funds, budget for current and future expenditures, recommend specific investments, develop a plan to finance the enterprise for future growth, and interact with banks and capital markets.

2. What types of investments and expenditures are typically considered in the capital budgeting process?

Capital budget typically considers expenditures for real estate, new facilities, major equipment and other capital investments.

3. What is the difference between a secured and an unsecured loan?

A secured loan is one in which a lender provides cash using borrower’s assets as collateral and is also known as asset-based loan. An unsecured loan is one in which a lender provides lump sum of cash via a promissory note or on-demand access to cash via a credit line. Such a loan is not secured with assets.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 4. What does it mean when someone refers to a company’s capital structure?

Capital structure refers to the total mix of debt and equity used by a firm to meet its short- and long-term financing needs.

5. How can factoring help a company manage its cash flow?

Factoring is the approach in which a company sells its accounts receivable to an intermediary that collects from the customer. It helps a company manage its cash flow by freeing up working capital and making cash flow more predictable. It can also provide some protection from bad debts and consumer bankruptcies.

Questions for Analysis 6. Would it be wise for a young company that is growing quickly but still hasn’t achieved profitability to attempt to issue bonds as a way to expand its working capital? Why or why not?

It may not be wise for such a young company to issue bonds because it either needs to issue secured bonds with company-owned property or issue unsecured bonds but pay higher interest rates to attract buyers. Neither is easy or ideal for a young firm that has not achieved profitability. Equity financing such as venture capital or an IPO may be more appropriate in this case because of the company’s high growth.

7. Why is careful management of accounts receivable and accounts payable so essential to ensuring positive cash flow?

Because by carefully managing accounts receivable and accounts payable, a firm can maximize cash inflow through collecting money owed by customers as early as possible and minimize cash outflow through postponing payment till the last minute, thereby ensuring positive cash flow.

8. How does factoring differ from short-term debt?

Factoring is obtaining funding by selling accounts receivable. It is not really a form of borrowing in a conventional sense and is an alternative to short-term debt financing.

9. Why do lenders often refuse to finance 100 percent of the cost of a purchase, requiring borrowers to make a down payment that covers a portion (typically from 10 to 25 percent) of the purchase price? After all, a lender could potentially earn more by financing the entire purchase amount.

Because by requiring borrowers to make a down payment, a lender is lowering the risk of the loan and offering itself some protection against default on the loan.

10. Ethical Considerations. Budget projections always involve a degree of judgment because managers can never predict the future with total accuracy. For instance, one manager with an optimistic view and another manager with a pessimistic view could look at the same set of facts and arrive at distinctly different conclusions about the company’s financial prospects. When budgets will influence decisions made by investors or lenders, how should the people who prepare the budgets deal with the variance between optimistic and pessimistic viewpoints? On the one hand, being too pessimistic could result in lower levels of funding, which could be detrimental to employees, existing investors, existing creditors, and other financial stakeholders. On the other hand, being too optimistic could be

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Bovee/Thill, Business in Action 6/e Instructor’s Manual detrimental to prospective investors or creditors. How do you find the right balance?

Students’ answers will vary but they need to address the proper balance between being optimistic and pessimistic.

Questions for Application 11. The company you co-founded last year is growing rapidly and has strong prospects for an IPO in the next year or two. The additional capital that an IPO could raise would let you hire the brightest people in the industry and continue to innovate with new product research. There is one potential glitch: you and the rest of the executive team have been so focused on launching the business that you haven’t paid much attention to financial control. You’ve had plenty of funds from venture capitalists and early sales, so working capital hasn’t been a problem, but an experienced CEO in your industry recently told you that you’ll never have a successful IPO unless you clean up the financial side of the house. Your co-founders say they are too busy chasing great opportunities right now, and they want to wait until right before the IPO to hire a seasoned financial executive to put things in order.

What should you do and why?

Students’ answers will vary depending on personal opinion but points of consideration include monitoring cash flow and managing cash reserves so that the firm will not go bankrupt from a cash crunch.

12. Why might a company’s board of directors decide to lease office space even though it would be more economical to purchase the property and finance it with a long-term loan?

Because the board may be more interested in the flexibility that a lease helps provide rather than a long-term loan; e.g., the firm wants to expand into a larger office in a few years. It could also be that the property is extremely expensive to purchase and difficult to sell.

13. You’re getting ready to expand your woodworking hobby into a full-time business of building custom kitchen cabinets. To create top-quality cabinets, you know you’ll need to upgrade from the consumer-grade machinery you have now to industrial-grade equipment. The new equipment will be much more expensive but, if properly cared for, should last for decades, and you hope to be in business for at least 20 years. If the overall costs of leasing this equipment or borrowing money to buy it are roughly the same, which financing method would you choose? Why? In this case borrowing money to buy the equipment makes more sense since you want to be in business for at least 20 years.

14. Concept Integration. Review the definitions of current and fixed assets in Chapter 17 (see page 401). Why would a potential lender be interested in these two classes of assets when reviewing the balance sheet of a company applying for a long-term loan?

A potential lender may be interested in fixed assets if it wants to provide a secured loan to the borrower, i.e. such fixed assets can be used as collaterals. The same lender may also be interested in current assets to ensure the borrower has enough cash for payments in the near term.

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Expand Your Knowledge Discovering Career Opportunities People interested in entering the field of financial management can choose among a wide variety of careers with diverse responsibilities and challenges. Visit the “Financial Managers” page at www.bls.gov/oco/ocos010.htm to read more about career opportunities in financial management.

1. What are the day-to-day duties of this occupation? How would these duties contribute to the financial success of a company?

Financial managers oversee the preparation of financial reports, direct investment activities, and implement cash management strategies. Managers also develop strategies and implement the long-term goals of their organization.

The duties of financial managers vary with their specific titles, which include controller, treasurer or finance officer, credit manager, cash manager, risk and insurance manager, and manager of international banking. Controllers oversee the accounting, audit, and budget departments. Treasurers and finance officers direct their organization's budgets to meet its financial goals. Credit managers oversee the firm's issuance of credit, establishing credit-rating criteria, determining credit ceilings, and monitoring the collections of past-due accounts.

Cash managers monitor and control the flow of cash receipts and disbursements to meet the business and investment needs of their firm. Risk and insurance managers oversee programs to minimize risks and losses that might arise from financial transactions and business operations. Insurance managers decide how best to limit a company’s losses by obtaining insurance against risks such as the need to make disability payments for an employee who gets hurt on the job or costs imposed by a lawsuit against the company. Branch managers of financial institutions administer and manage all of the functions of a branch office. Job duties may include hiring personnel, approving loans and lines of credit, establishing a rapport with the community to attract business, and assisting customers with account problems.

2. What skills and educational qualifications would you need to enter this occupation? How do these qualifications fit with your current plans, skills, and interests?

Students’ answers will vary depending on personal experiences and opinions but most financial managers need a bachelor's degree, and many have a master's degree or professional certification. Bank managers often have experience as loan officers or in other sales positions. Financial managers also need strong interpersonal, math, and business skills.

3. What kinds of employers hire people for this position? According to your research, does the number of employers seem to be increasing or decreasing? How do you think this trend will affect your employment possibilities if you choose this career?

Employment growth for financial managers is expected is to be as fast as the average for all occupations. Employment of financial managers over the 2008–18 decade is expected to grow by 8 percent, which is as fast as the average for all occupations. Regulatory changes and the expansion and globalization of finance

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Bovee/Thill, Business in Action 6/e Instructor’s Manual and companies will increase the need for financial expertise and drive job growth. As the economy expands, both the growth of established companies and the creation of new businesses will spur demand for financial managers.

Employment of bank branch managers is expected to increase because banks are creating new branches. However, mergers, acquisitions, and corporate downsizing are likely to restrict the employment growth of financial managers to some extent.

Long-run demand for financial managers in the securities and commodities industry will continue to be driven by the need to handle increasingly complex financial transactions and manage a growing amount of investments. Financial managers also will be needed to handle mergers and acquisitions, raise capital, and assess global financial transactions. Employment of risk managers, who assess risks for insurance and investment purposes, also will grow.

Developing Your Tech Insights: Credit Scoring Software Credit scoring software is a type of business intelligence software that measures the credit worthiness of applications for credit cards, mortgages, business loans, and other forms of credit. It has the dual objective of filtering out applications that don’t meet a lender’s criteria while speeding up the process for applications that do meet the criteria. Using sophisticated mathematical models based on historical records, credit scoring software helps lenders decide which applicants to accept and how much credit to extend to each one. In addition, software with predictive modeling or predictive analytics helps predict which applicants will make the best customers (lowest risk and highest profit potential) for a given lender. Explore the credit scoring and risk assessment products offered by Fair Isaac (www.fico.com), Equifax (www.equifax.com/commercial/risk/en_us), or another company in this industry.

Choose one product, and in a brief email message to your instructor, explain how this tool can help lenders make better decisions.

Students’ emails will vary depending on the actual choices of credit scoring products.

Practice Your Skills Sharpening Your Communication Skills You’ve just been hired as the CFO of a start-up company that is just a few months away from launching its first products. Unfortunately, the company is running short of cash and doesn’t have enough to pay for initial manufacturing costs. Your boss, Connie Washington, is getting frantic. She has worked for several years to get to this point, and she doesn’t want the company to collapse before it even starts selling products. She comes to you asking for ideas to generate some funds—immediately, if not sooner. Several investors have expressed interest in helping with financing, but Connie doesn’t want to surrender any control by using equity financing. She wants to start applying for loans, even stacks of credit cards if that’s what it takes.

However, you don’t think piling on debt is such a wise idea at this point. The company doesn’t have any revenue yet, and there’s no guarantee that the new products will be successful. You’d rather share the risk with some equity investors, even if that means that Connie will have to give up some of her managerial authority.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Draft a short memo to Connie explaining why you think equity financing is a better option at this stage (make up any details you need).

Students’ memos will vary but they should present persuasive arguments for using equity rather than debt financing.

Building Your Team Skills You and your team are going to build an operating expense budget worksheet for a neighborhood Domino’s pizza franchise. Begin by brainstorming a list of expenses that are typical of a franchise delivery restaurant. One way to do so is to think about the company’s process—from making the pizza to delivering it. List the types of expenses and then group your list into categories such as delivery, marketing, manufacturing, financing, and so on. Leave the budget dollar amounts blank. Finally, develop a list of capital investments your company will make over the next three to five years. Compare your budget worksheets to those of the other teams in your class. Which operating and capital expenses did other teams have that your team did not? Which expenses did your team have that other teams omitted?

Did all the teams categorize the expenses in a similar manner?

Students’ answers will vary depending on the actual budget worksheets they create.

Developing Your Research Skills Choose a recent article from a business journal or newspaper (print or online editions) that discusses the financing arrangements or strategies of a particular company.

1. What form of financing did the company choose? Did the article indicate why the company selected this form of financing?

Students’ answers will vary depending on the actual choices of articles.

2. Who provided the financing for the company? Was this arrangement considered unusual, or was it routine?

Students’ answers will vary depending on the actual choices of articles.

3. What does the company intend to do with the arranged financing—purchase equipment or other assets, finance a construction project, finance growth and expansion, or do something else?

Students’ answers will vary depending on the actual choices of articles.

CHECKPOINTS LEARNING OBJECTIVE 1: Identify three fundamental concepts that affect financial decisions, and identify the primary responsibilities of a financial manager.

Critical thinking: (1) What role does the company’s strategic plan play in the process of financial management?

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Bovee/Thill, Business in Action 6/e Instructor’s Manual The company’s strategic plan establishes the company’s overall direction and identifies the need for major investments, expanded staffing, and other activities that will require funds.

(2) Does it ever make sense for a profitable company with positive cash flow to seek external financing? Why or why not?

Yes, the profit a company makes may not be enough for it to develop new products, hire new employees and/or expand into new markets, etc. In that case, external financing may be appropriate.

It’s your business: (1) Do you have a financial plan for getting through college? If not, how would such a plan help you?

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

(2) How well do you budget your personal finances? If you don’t budget, how do you monitor cash flow to make sure you don’t run out of money each month?

Students’ answers will vary depending on personal experiences.

LEARNING OBJECTIVE 2: Describe the budgeting process, three major budgeting challenges, and the four major types of budgets.

Critical thinking: (1) What are some of the risks of failing to create and manage budgets?

The risks of failing to create and manage budgets includes possibly negative cash flow (expenses exceed revenue) and bankruptcy (running out of cash).

(2) How does zero-based budgeting help a company spend its cash in the most effective ways possible?

Zero-based budgeting is the approach in which each department starts from zero every year and must justify every item in the budget. It helps a firm spend its cash in the most effective way possible because it forces each department to show how the money it wants to spend will support the overall strategic plan.

It’s your business: (1) What steps would you take to identify the costs of a two-week trip to Scotland next summer?

Students’ answers will vary depending on personal opinions.

(2) Assume you need to raise $3,000 between now and graduation for a down payment on a car. How would budgeting and financial control help you meet this objective?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 3: Compare the advantages and disadvantages of debt and equity financing, and explain the two major considerations in choosing from financing alternatives.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Critical thinking: (1) What factors might lead a company to gain additional funds through debt financing rather than through equity financing?

A company might lean towards using debt rather than equity financing if the prevailing interest rate is low, or if the management wants to maintain tight control of the firm, or when stock options are not important parts of employee benefits.

(2) Why does consumer debt have a more negative connotation than business debt?

Because for consumers, being in debt is often a sign of financial trouble or financial mismanagement. In contrast, businesses can make money by borrowing money. In fact, robust and well-run businesses of all types use debt as a routine element of financial management.

It’s your business: (1) Do you know your credit score, or have you ever looked at your credit report? To learn more about free credit reports, visit www.ftc.gov/freereports.

Students’ answers will vary depending on personal experiences.

(2) How should the cost of capital figure into your decisions about attending college, buying cars, and buying housing?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 4: Identify the major categories of short-term debt financing.

Critical thinking: (1) How does getting a secured loan using accounts receivable as collateral differ from factoring?

Getting a secured loan using accounts receivable is a form of short-term debt financing, while factoring is not really a form of borrowing in the conventional sense and is an alternative to short-term debt financing. It obtains funding by selling accounts receivable.

(2) Why would any seller offer trade financing, since it ties up working capital without generating any income through interest payments?

Because offering trade financing is often a competitive necessity, and doing so allows a seller to sell more to each customer because purchase levels are not constrained to buyer’s immediate cash balances.

It’s your business: (1) Would you launch a new company if the only way to finance it was through the use of your personal credit cards? Why or why not?

Students’ answers will vary depending on personal opinions.

(2) Which of the short-term debt alternatives identified in this section are available to you as a consumer?

Students’ answers will vary depending on personal experiences.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual LEARNING OBJECTIVE 5: Identify the major categories of long-term debt financing.

Critical thinking: (1) How could rates of technological change affect a company’s decision about whether to buy or lease equipment, vehicles, and other assets?

The faster the technological change, the more it make sense for companies to lease rather than buy equipment, vehicles, and other assets as it gives them the flexibility to upgrade such assets much more often and easily. Purchase, on the other hand, will often tie up capital for a long period of time.

(2) Why would lenders want to see that a business already has some level of capitalization before giving it access to more capital by means of a loan?

Because lenders want to minimize the risks of default by the borrowers. Having some level of capitalization makes the borrowers less risky.

It’s your business: (1) If you have just moved to a new city to start a new job, would you prefer to lease or rent an apartment? Why? Students’ answers will vary depending on personal experiences.

(2) Assume you are in the market for a new car. Will you lease or buy? Why? Students’ answers will vary depending on personal experiences.

LEARNING OBJECTIVE 6: Describe the two options for equity financing, and explain how companies prepare an initial public offering.

Critical thinking: (1) High-technology firms tend to dominate IPO filings year after year; why do you suppose this is?

High-technology firms tend to have high growth and high profit potential and these are the same firms that tend to capture the interests of not only the investing public but also the venture capital firms and investment banks that play important roles either leading to or during the IPOs. (2) Why does the volume of IPOs tend to track the ups and downs of the stock market?

The volume of IPOs tend to track the ups and downs of the stock market because stock market conditions tend to reflect the general interest of investors in the equity markets and such interests (or lack thereof) are the same that will make IPOs successful (or not).

It’s your business: (1) If you had the choice between working at a company still in the pre-IPO stage, which is offering a lower salary but a share of ownership that will become shares of company stock after the IPO, or a higher paying job with no stock, what additional information would you need before you would be comfortable making a choice?

Students’ answers will vary depending on personal experiences.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual (2) Choose any business that you might like to start as an entrepreneur. How would you make a compelling pitch to private equity investors to encourage them to invest in your company?

Students’ answers will vary depending on personal opinions.

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Chapter 19 FINANCIAL MARKETS AND INVESTMENT STRATEGIES Chapter Overview This chapter introduces students to the world of investments. It highlights securities and investments by discussing the importance of investment objectives and introducing key investment vehicles such as stocks, bonds and mutual funds. It then defines more exotic investments such as derivatives and describes the major types of financial markets.

Chapter Outline I.

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Stocks A. Stock (p. 440) refers to ownership of or equity in a company 1. Stocks are part of a class of investments known as securities – investments such as stocks, bonds, futures and commodities B. Companies can issue two major forms of stock: 1. Common stock – shares of ownership with voting rights. Three potential benefits: a. The opportunity to realize capital gains – increases in the value of a stock over time b. The opportunity to receive regular income in the form of dividends c. The right to vote on major corporate decisions 2. Preferred stock – shares of ownership without voting rights but with defined dividends C. At any point in time, each stock has different values: 1. Book value (p. 441) is the difference between the assets and liabilities as listed on the balance sheet 2. Market value (p. 442) is the price at which a stock is actually selling in the stock market 3. Intrinsic value is an estimate of what a company is actually worth, independent of book and market values and includes both quantitative and qualitative factors 4. To assess how a stock is priced, investors often use a stock’s price/earnings ratio (p. 443) – the market value per share divided by the earnings per share 5. If management believes a firm’s shares are undervalued, it can repurchase shares of stock through a stock buyout and reduce the number of shares outstanding 6. If management believes a firm’s stock price is too high, it can announce a stock split, dividing a share into two or more new shares and reducing the market value by the same ratio

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Bovee/Thill, Business in Action 6/e Instructor’s Manual II. Bonds A. Bonds are issued by corporations and various government bodies to raise funds and are characterized by three key variables: 1. Face value (p. 444) – the amount of money (principal) the bond buyer is lending to the bond issuer. Also called its par value or denomination 2. Maturity date – the date on which the principal will be repaid in full 3. Yield – the interest income a purchaser receives from the bond B. Advantages of bonds: 1. Bonds are less risky than stocks and many other investments 2. Bonds offer lower volatility than stocks 3. Corporate bonds can provide a regular source of income C. Disadvantages of bonds: 1. Bonds have lower average returns over time than stocks 2. Bond quality is tied to financial stability and a bond can be downgraded if the issuer’s finances are deteriorating 3. Bonds may have a call provision, in which the issuer has the right to repurchase the bond before maturity D. Federal, state and local governments and agencies also issue bonds. Several types: 1. Treasury bills (p. 446) are short-term debt securities issued by the federal government 2. Treasury notes are debt securities issues by the federal government that are repaid within 1-10 years after issuance 3. Treasury bonds (p. 447) are long-term U.S. government bonds with maturities of more than 10 years 4. Treasury Inflation-Protected Securities (TIPS) are treasury issues in which the principal amount is tied to the Consumer Price Index (CPI) to protect the buyer against the effects of inflation 5. Municipal bonds are bonds issued by states, cities and various government agencies to fund public projects III. Mutual Funds A. Mutual funds are financial instruments that pool money from many investors to buy a mix of stocks, bonds or other securities 1. Mutual funds are a way to achieve portfolio diversification – spreading investments across enough different vehicles to protect against significant declines in any one vehicle B. Advantages of mutual include: 1. Diversification 2. Professional management 3. Simplification of decision-making for individual investors C. Disadvantages of mutual funds include: 1. Cost – mutual funds charge an annual management fee a. The annual cost of owning a mutual fund, expressed as a percentage, is known as the total annual expense ratio (p. 448) b. Mutual funds may also charge a sales commission when buying or selling, called a load. Mutual funds that do not charge commissions are called no-load funds 2. Performance – many mutual funds do not perform as well as the overall stock market

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Bovee/Thill, Business in Action 6/e Instructor’s Manual a. Index funds are mutual funds that mirror the composition of a particular market or index (a statistical indicator of the prices of a representative group of securities) b. Indexing is also used by exchange traded funds (ETFs), mutual funds whose shares are traded on public exchanges in the same way as stocks D. There are several categories of mutual funds with different investment priorities and strategies E. When purchasing a mutual fund, the sum of money invested is divided into a number of shares based on the fund’s net asset value (NAV) (p. 450) – the fund’s assets minus its liabilities IV. Derivatives A. Derivatives (p. 451) are contracts whose value is derived from some other entity, usually an asset, and are used to hedge against or speculate on risk B. There are several types of derivatives, including: 1. Options – the purchased right (but not the obligation) to buy or sell a specified number of shares of a stock at a predetermined price during a specified period 2. Financial futures (p. 452) – legally binding contracts to buy or sell a financial instrument for a set price at a future date 3. Commodities futures – contracts to buy or sell specific amounts of commodities (agricultural products, petroleum, metals, etc.) for a set price at a future date 4. Currency futures – contracts to buy or sell amounts of specified currency at some future date 5. Credit derivatives are used to reduce a lender’s exposure to credit risk V. Financial Markets A. Securities markets can be divided into primary markets (which handle IPOs) and secondary markets (which handle public buying and selling after the IPO) B. Organizations that facilitate the buying and selling of stock are known as stock exchanges (p. 453). These include the New York Stock Exchange, the NASDAQ and other national and international exchanges C. The bond market (p. 454) – the collective buying and selling of bonds – is done over the counter; i.e., outside organized exchanges D. The money market is an over-the counter marketplace for short-term debt instruments such as Treasury bills and commercial paper E. The derivatives market is a market that includes exchange trading for futures and some options and over-the-counter trading for all other derivatives VI. Investment Strategies and Techniques A. Individuals should take several steps to become informed investors: 1. Establish investment objectives - how much you can invest, how much liquidity you require, tax consequences and your tolerance for risk a. Risk is inversely related to potential rate of return (p. 455), the gain or loss of an investment over time 2. Learn to analyze financial news and understand financial terminology

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Bovee/Thill, Business in Action 6/e Instructor’s Manual a. A bull market (p. 456) is a market situation in which most stocks are increasing in value b. A bear market is a market situation in which most stocks are declining in value 3. Create an investment portfolio – a collection of various types of investments a. Managing a portfolio to balance potential returns with an acceptable level of risk is known as asset allocation and involves dividing investments among cash instruments, income instruments and bonds B. Buying and selling of securities often requires using a broker (p. 457) – a certified expert who is legally registered to buy and sell securities on behalf of individual and institutional investors C. When buying or selling stocks, an investor can use a variety of order types: 1. A market order instructs the broker to buy or sell at the best price that can be negotiated at the moment 2. A limit order stipulates the highest or lowest price at which the customer is willing to trade securities 3. A stop order is an order to sell a stock when the price falls to a particular order D. Investors can use other buying and selling strategies, such as: 1. Margin trading, in which investors borrow money from brokers to buy stock, pay interest on the borrowed money and leave the stock with the broker as collateral 2. Short selling – selling stock borrowed from a broker with the intention of buying it back later at a lower price, repaying the broker and keeping the profit

Classroom Activities In-Class Activity: Risk vs. Return Tradeoff Goal: Help students comprehend the important investment principle of the “risk vs. return” tradeoff.

Time Limit: 15 minutes.

Details: 1. Draw a table with six rows and three columns on the blackboard and label the rows and columns as below.

2. Ask students to pair up and recreate the content of the blackboard on their notebooks and populate the rest of the table. Remind them that they need to rank order the investment options both in terms of return and risk.

3. Ask students to observe the pattern of the rankings. (Hint: There should be a positive correlation between risk and return, i.e. high risks tend to be associated with high returns).

4. If time allows, ask students if they have some extra money available to them, how they would distribute the funds among the five investment options.

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Investment Options

Return (1=Lo, 5=Hi)

Risk (1=Lo, 5=Hi)

1. Stocks 2. Bonds 3. Real Estate 4. Money Market Funds 5. “BlackJack” in Las Vegas

End-of-Chapter Behind the Scenes Chesapeake Energy Hedges its Way to the Future Questions for Critical Thinking 1. If speculators are barred from investing in futures contracts, how will that change Chesapeake’s approach to financial management? (Assume that natural gas distributors and other major customers would still be able to engage in futures contracts from a commodity buyer’s perspective.)

In that case, Chesapeake will have to rely less on future contracts to a certain extent and more on traditional trends analysis and projections.

2. Why do you suppose accounting regulations require companies to report paper losses or gains from futures contracts in their financial statements?

Such regulations are in place to minimize opportunities for companies to manipulate the reporting of profits/losses in their financial statements.

3. Should the government continue to allow speculation in natural gas futures as a way to keep developing domestic energy sources, even if it can be proven that speculation contributes to price volatility for producers and customers? Why or why not?

Students’ answers may vary depending on personal opinions but points of consideration include: 1) On one hand, hedging does bring predictability to a company’s cash flow; 2) On the other hand, some believe that the very financial tools that producers use to protect themselves from violent price swings, such as future contracts, could be contributing to the price swings in the first place.

Learn More Online Visit Chesapeake’s “Investors” section at www.chk.com/investors. Click on News Releases to see the latest financial news from the company. How does Chesapeake’s financial health look at present? What do the trends for revenue, expenses, and income look like? Read the “Letter to Shareholders.” Does it mention hedging? If so, have the company’s hedging activities been beneficial in the most recent year?

Students’ responses will depend, in large part, on the material currently posted on the website.

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Test Your Knowledge Questions for Review 1. What is the difference between a stock’s market value and its intrinsic value?

The market value (or market price) is the price at which a stock is actually selling in the stock market. Market value is what the stock market says the company is worth, but intrinsic value is an attempt to establish what the company is “really” worth. Investors use both quantitative and qualitative factors in estimating intrinsic value, and various analysts can arrive at different values for the same stock.

2. What is the money market?

The money market is an over-the-counter marketplace for short-term debt instruments such as Treasury bills and commercial paper. Its purpose is to help corporations and government agencies meet short-term liquidity needs. Unlike stocks and many bonds, the amounts traded in the money market are far beyond the reach of individual investors, so the money market is used by corporations, governments, banks, and other financial institutions 3. What happens during a 2-for-1 stock split?

During a stock split, the number of shares that each stock certificate increases and the value of each share is proportionately lowered. In a two-for-one stock split, the number of shares outstanding doubles, and the value of each share is then divided in half. If, for instance, the original single share was worth $100, it will become two shares, each worth $50.

4. What is a p/e ratio, and what does it signify to an investor?

Price-earnings ratio, or p/e ratio, is defined as the market value per share divided by the earnings per share. The p/e ratio is often used to assess how a stock is priced, based on company earnings for the previous year (or anticipated earnings for the coming year, in which case it is known as forward p/e). A higher than average p/e suggests that investors expect the company to grow vigorously, but a p/e that is too high can mean the stock is overpriced and vulnerable to a decline.

A lower than average p/e might suggest an overlooked stock with upside potential, or a troubled company in which investors have lost confidence.

5. How does a commodities future differ from buying a commodity outright?

Buying a commodity outright will involve the delivery of commodity, however, a commodities future is used as a hedging tool to protect against future price fluctuations and often does not involve with the delivery of the commodity itself.

Questions for Analysis 6. If an investor had enough money to diversify adequately through buying individual securities, why might he or she still consider buying mutual funds instead?

Because buying mutual funds will still provide a much higher level of diversification than buying individual securities. The amount of money used to

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Bovee/Thill, Business in Action 6/e Instructor’s Manual purchase an individual stock can be used to buy more shares of a mutual fund, which is inherently more diversified than a single stock.

7. How can asset allocation be used to diversify against risk?

Asset allocation involves spreading investments across different vehicles to protect against significant declines in any one vehicle, thus achieving diversification against risk.

8. Why may different analysts arrive at different intrinsic values for the same stock?

Investors use various ways to estimate intrinsic value by including both quantitative financial factors and qualitative factors such as intangible assets and management capability. Thus, the use of different factors and individual interpretations of these factors can result in different intrinsic values.

9. When might an investor sell a stock short? What risks are involved in selling short?

An investor might sell stock short if she or he were pessimistic and expected a market downturn. The biggest risk in selling short is timing and deciding when to buy back the stock.

10. Ethical Considerations. Would it be ethical for you to write in your personal blog about the positive outlook on a stock that you own, without telling readers that you own the stock? Why or why not?

It would be unethical in this case because you would be considered pumping up the stock for possible personal gain.

Questions for Application 11. If investors want a steady predictable flow of cash, what types of investments should they seek and why?

They should seek bonds, since most bonds offer regular and fixed returns. They should also seek stocks that pay high dividends, such as income stocks.

12. If you are worried that a panicked market might cause the price of one of your stocks to plunge, what type of sell order could you use with your broker to limit your losses?

You should use a stop order that tells the broker to sell if the price drops to a certain level.

13. If your bank specializes in lending money to home builders and the forecast for new home sales is predicting a decline in the coming months, what type of financial instrument could you use to protect against builders defaulting on loans because they are unable to sell the houses they’ve built?

The bank can provide secured loans to home builders, loans that are backed by assets such as the houses builders have built.

14. Concept Integration. Review the discussion of mission statements on page 144 in Chapter 7. Suppose you were thinking about purchasing 100 shares of common stock in General Electric. Why might you want to first review the company’s mission statement? What would you be looking for in the

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Bovee/Thill, Business in Action 6/e Instructor’s Manual company’s mission statement that could help you decide whether or not to invest?

Investing means putting your money to work to earn more money. The company’s mission statement should state the policy of the company regarding growth (whether you might make money on an increase in the share price) or dividends (whether you might make money on the dividends they pay).

Expand Your Knowledge Discovering Career Opportunities Think you might be interested in a job in the securities and commodities industry?

This industry has one of the most highly educated and skilled workforces of any industry. View the “Securities, Commodities, and Financial Services Sales Agents page at www.bls.gov/oco/ocos122.htm to read more about these professions.

1. What are the licensing and continuing education requirements for securities brokers?

Students’ answers will vary depending upon the date they access the article.

2. What is the typical starting position for many people in the securities industry?

Students’ answers will vary depending upon the date they access the article.

3. What factors are expected to contribute to the projected long-term growth of this industry?

Students’ answers will vary depending upon the date they access the article.

Improving Your Tech Insights: Online Investing Tools The Internet has been a boon for individual investors, helping to level the playing field with professional and institutional investors by making in-depth information easily accessible. In addition to information, a number of websites now offer handy interactive tools for investors. Find an online tool that could help you as an investor, anything from a stock screener to an investing tutorial to a portfolio simulator. In a brief email message to your instructor, describe the benefits – and risks – of using this tool.

Students’ email messages may vary depending on the online tool they end up picking.

Practice Your Skills Sharpening Your Communication Skills Interviewing a full-service broker is one of the most important steps you can take before hiring that broker to execute you trades or manage your funds and investment portfolio. Practice your communication skills by developing two sets of questions:

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 1. Questions you might ask a stockbroker to help you decide whether you would use his or her services Questions students might ask include: ➢ How long have you been in this field? ➢ What motivated you to become a stockbroker? What is your educational background? ➢ How long have you worked for this particular firm? Why did you leave your last firm? ➢ Are you a full-service or a discount broker? ➢ How would you describe your track record? Could you give examples of the quality of your expertise? ➢ What are your transaction costs?

2. Questions you might pose to that broker to help you evaluate the merits of purchasing a specific security Questions students might ask include: ➢ How would you rate the company’s financial stability? ➢ What has the company’s track record been? ➢ How do S&P and Moody’s rate this company? ➢ Would you recommend this particular security? Why? ➢ Why would you recommend buying this security at this particular time? ➢ What risks would you say are involved in this purchase? ➢ Why would you recommend this security over ________?

Building Your Team Skills You and your team are going to pool your money and invest $5,000. Before you plunge into any investments, how can you prepare yourselves to be good investors?

First, consider your group’s goals. What will you and your teammates do with any profits generated by your investments? Once you have agreed on a goal for your team’s profits, think about how much money you will need to achieve this goal and how soon you want to achieve it.

Next, think about how much risk you personally are willing to take to achieve the goal. Bear in mind that safer investments generally offer lower returns than riskier investments—and certain investments, such as stocks, can lose money. Now hold a group discussion to find a level of risk that feels comfortable for everyone on your team.

After your team has decided how much risk to take, consider which investments are best suited to your group’s goals and chosen risk level. Will you choose stocks, bonds, a combination of both, or other securities? What are the advantages and disadvantages of each type of investment for your team’s situation? Then come to a decision about specific investment opportunities—particular stocks, for example— that your group would like to investigate further.

Compare your group’s goal, risk level, and investment possibilities with those of the other teams in your class and discuss the differences and similarities you see.

Students’ answers will vary widely depending on the profit and risk levels of the group members and their ability to reach good decisions.

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Developing Your Research Skills Stock market analysts advise investors (both individuals and institutions) on which stocks to buy, sell, or hold. Changes in their opinions are called upgrades or downgrades, depending on the direction of their outlook. Changing a “hold” recommendation to a “buy” recommendation is an upgrade, for example. Find a stock that has been recently upgraded or downgraded (you can use New Ratings, www.newratings.com , or a similar source), and then perform some research on that company so you can answer the following questions: 1. Why did the analysts change their rating on this stock? Was it in response to something the company said or did? Is the company performing better or worse than its competitors? Do you think the rating change is fair to the company?

Students’ answers will vary depending upon their choices of stocks.

2. How did the rating change affect the company’s stock price?

Students’ answers will vary depending upon their choices of stocks.

3. How has the company’s stock been performing relative to the Dow Jones Industrial Average (DJIA) and S&P 500 indexes?

Students’ answers will vary depending upon their choices of stocks.

CHECKPOINTS LEARNING OBJECTIVE 1: Distinguish between common and preferred stock, and explain the difference between market value and intrinsic value.

Critical thinking: (1) Assuming both can be calculated with reasonable accuracy, does book value or intrinsic value give a more accurate assessment of a company’s value? Why? Intrinsic value may have a slight edge in that book value is backward looking while intrinsic value is an attempt to establish what the firm is really worth.

(2) If the average p/e in a particular industry is 16, and you’ve identified a stock in that industry with a p/e of only 9, does this automatically mean it is a good buy? Why or why not?

Not necessarily. It is possible the stock represents a troubled firm in which investors have lost confidence.

It’s your business: (1) As an investor, how well do you think you could handle the volatility of the stock market, knowing the value of your investments could drop dramatically from time to time?

Students’ answers will vary depending on personal opinions.

(2) How could you apply your experiences as an employee and as a consumer to determine the intrinsic value of a stock?

Students’ answers will vary depending on personal experiences.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual LEARNING OBJECTIVE 2: Explain the three key variables that distinguish bonds, compare the advantages and disadvantages of owning bonds, and list the major types of bonds.

Critical thinking: (1) Why do bonds offer lower average rates of return than stocks?

Because bonds are generally considered less risky compared to stocks.

(2) If a company’s newest product flops in the marketplace, what effect is that likely to have on the current yield of the company’s bonds?

It will likely have a negative effect on the market value of the bond, causing the yield to rise.

It’s your business: (1) If you were approaching retirement age, would you have a higher percentage of bonds or stocks in your portfolio? Why? Students’ answers will vary depending on personal opinions but most financial advisors would recommend a higher percentage of bonds in portfolio when someone is approaching retirement age.

(2) Would you ever consider investing in high-yield (“junk”) bonds? Why or why not?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 3: Define mutual fund, and explain the advantages and disadvantages of this popular investment vehicle.

Critical thinking: (1) How might the constant scrutiny and demand for consistent results affect the long-term performance of a mutual fund?

Such scrutiny and demand may have very little effect on passively managed funds such as index funds but may have some effects on the actively managed funds.

(2) If many funds don’t outperform the market, why would anybody bother to invest in mutual funds, particularly in perennial laggards?

Because mutual funds provide a relatively inexpensive way to diversify investors’ holdings. Besides, performing at market average consistently (such as some index funds have done) may not be bad at all over the long run.

It’s your business: (1) Would your inclination be to invest in mutual funds or to do the research yourself and invest in individual stocks and bonds? Why? Students’ answers will vary depending on personal opinions.

(2) Would investing in socially responsible funds that share your personal values be an effective way to support causes you believe in? Why or why not?

Students’ answers will vary depending on personal opinions.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual LEARNING OBJECTIVE 4: Define derivative, and identify the major types of derivatives.

Critical thinking: (1) What is the perceived danger in over-the-counter derivatives?

The perceived danger is that parties involved in over-the-counter derivatives do not understand the risks involved, do not manage the risks responsibly, or make decisions based on faculty predictions.

(2) Would options and futures be a wise investment for someone getting close to retirement who wants to create a final boost to his or her nest egg before retiring?

Why or why not?

Probably not in this case, since options and futures can be extremely risky.

It’s your business: (1) Over-the-counter credit derivatives are private contracts between two companies; is it appropriate for the government to force them to be sold on regulated exchanges as commodities are? Why or why not?

Students’ answers will vary depending on personal opinions.

(2) Should speculating via derivatives be outlawed in the United States, as it is in some countries? Why or why not?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 5: Describe the four major types of financial markets.

Critical thinking: (1) What is the difference between the primary market and the secondary market?

Primary markets handle IPOs, while secondary markets handle all the buying and selling after that.

(2) Why do individual investors participate in the stock and bond markets but not in the money market?

Because unlike stocks and many bonds, the amounts traded in the money market are far beyond the reach of individual investors.

It’s your business: (1) What is your emotional reaction to the term “Wall Street”? Explain your answer.

Students’ answers will vary depending on personal opinions.

(2) Given all the calamity in the financial markets in recent years, are you now more or less inclined to pursue a career in financial services? Why? Students’ answers will vary depending on personal opinions.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual LEARNING OBJECTIVE 6: Describe four major steps required to become an investor.

Critical thinking: (1) If you want to buy a particular stock but are worried that demand from investors could push the price to an unreasonably high level before your order is executed, which type of order would you specify? Why? A limit order can be used in this case because it can specify the highest price you are willing to pay when buying.

(2) Does a low p/e ratio mean that a stock is a good buy? Explain your answer.

Not necessarily. It could mean that the company is a troubled and investors have lost confidence.

It’s your business: (1) Do you think you currently have the discipline needed to control your spending in order to free up cash for regular investing? If not, what changes could you make?

Students’ answers will vary depending on personal opinions.

(2) If someone gave you a “hot tip” on stock, how would you go about researching the opportunity before making an investment decision?

Students’ answers will vary depending on personal experiences.

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Chapter 20 THE MONEY SUPPLY AND BANKING Chapter Overview This chapter introduces students to the world of banking and money supply. It discusses money and its functions, and describes the commercial banking sector and the various institutions that offer savings and loans and other banking services. It then describes the forces behind the housing bubble of 2002-2006 and the subprime meltdown. Finally it highlights how the banking industry was restructured as a result of the subprime crisis.

Chapter Outline I.

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The Money Supply and the Federal Reserve System A. Money (p. 463) is anything generally accepted as a means of paying for goods and services. It has 4 functions: 1. Medium of exchange – a tool for simplifying buyer/seller transactions 2. Unit of accounting – a measure of value 3. Temporary store of value – a way of accumulating wealth until it is needed 4. Standard of deferred payment – it can be used to represent debt obligations B. The money supply (p. 464) is the amount of money in circulation at any given time within an economy C. The Federal Reserve System (the Fed) is the central banking system of the U.S. and is responsible for regulating banks and implementing monetary policy. Tools to manage money supply are: 1. Setting two key interest rates: a. Federal funds rate – the rate that member banks charge each other to borrow money overnight from the funds they keep in the Federal Reserve accounts b. Discount rate – the rate that member banks pay when they borrow money from the Fed 2. Changing the percentage of deposits bank must keep on hand in the form of reserves (p. 465) – sums of money equal to a certain percentage of their deposits 3. Setting margin requirements – the percentage of the purchase price that an investor must pay in cash when purchasing a stock or bond on margin D. Other government banking agencies and institutions include: 1. Federal Deposit Insurance Corporation (FDIC) – federal agency responsible for protecting money in customer accounts and managing the transition of assets when a bank fails 2. Federal National Mortgage Association (FNMA or Fannie Mae) – the government-sponsored enterprise responsible for guaranteeing and funding home mortgages

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Bovee/Thill, Business in Action 6/e Instructor’s Manual a. Fannie Mae created the secondary mortgage market – the financial market in which mortgages are bought and sold 3. Freddie Mac (p. 466) – a secondary mortgage institution similar to Fannie Mae II. The Financial Services Industry A. Commercial banks are financial institutions that accept deposits, offer various types of checking and savings accounts, and provide loans. Five major types: 1. Retail banks provide financial services to consumers 2. Merchant banks (p. 467) offer financial services to businesses 3. Thrift banks offer deposit accounts and focus on offering home mortgage loans 4. Credit unions are not-for-profit, member-owned cooperatives that offer deposit accounts and lending services to consumers and small businesses 5. Private banking is a range of banking services for wealthy individuals and families B. Investment banks offer a variety of services related to initial public stock offerings, mergers and acquisitions and other investment matters C. Independent mortgage companies originate mortgages using their own funds D. Mortgage brokers initiate loans on behalf of a mortgage lender in exchange for a fee E. Finance companies (p. 468) are nonbank institutions that lend money to consumers and businesses F. Credit rating agencies are companies that offer opinions about the creditworthiness of borrowers and of specific investments III. Banking’s Role in the Economy, Part 1: The Housing Market A. An economic bubble (p. 469) occurs when demand for assets such as stock or real estate pushes the price of that asset far beyond its intrinsic value B. Through the 1980’s home mortgages were more difficult to obtain 1. Borrowers needed proof of income, collateral and a good credit history to qualify for a mortgage 2. There was a higher maximum loan-to-value (LTV) (P. 471) - the percentage of an asset’s market value that a lender was willing to finance 3. Interest rates were fixed and mortgages were fully amortized C. Factors contributing to the housing bubble of 2002-2006 included: 1. Introduction of adjustable rate mortgages (ARMs) – mortgages with variable interest rates over the life of the term a. An option ARM lets borrowers choose from several repayment options b. If the payments on an option ARM did not cover accruing interest on the mortgage, the borrower experienced negative amortization – the balance owed on the loan increased over time rather than decreased 2. An increase in low-documentation and no-documentation loans in which borrowers did not have to provide the usual proof of income and assets 3. The mortgage industry began lowering lending standards a. Prime mortgages (p. 472) were available only to borrowers with reliable income, sufficient assets and good credit histories

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Bovee/Thill, Business in Action 6/e Instructor’s Manual b. To provide loans to more borrowers, mortgage originators began to offer subprime mortgages – home loans for borrowers with low credit scores, and the likelihood of default increased i. Default is a situation in which borrowers stop making payment on a loan 4. Mortgage fraud also increased, including falsification of income and assets, and inflation of appraised value IV. Banking’s Role in the Economy, Part 2: The Securitization of Debt A. The secondary mortgage market allows mortgage originators to sell their loans to investors. Selling loans: 1. provides lenders with cash to be able to make future loans 2. transfers the risk associated with these loans B. Securitization (p. 474) is the process in which debts such as mortgages are pooled together and transformed into investments 1. Asset-backed securities (ABSs) are credit derivatives based on auto loans, credit card debts and other loan assets 2. Mortgage-backed securities (MBSs) are credit derivatives based on home mortgages a. Some tranches (or levels) of MBSs became highly speculative because they contained risky debt such as option ARMS, nodocumentation loans and subprime mortgages 3. Investments such as collateralized debt obligations (CDOs) can be created using bonds from multiple MBSs and other debt pools a. Some CDOs were given high credit ratings, even though they contained low-quality MBSs C. Beginning in 2006, home prices began to fall, interest rates began to rise, and many homeowners could not meet their mortgage payments, refinance to get lower payments or sell their homes 1. This resulted in wide-spread defaults and foreclosures (p. 476), in which lenders take possession of homes after borrowers default on their mortgage payments V. The Meltdown of 2008 A. Property values and home sales continued to fall throughout 2007 and the U.S. fell into a recession B. In 2008, major mortgage companies and banks began failing as defaults continued 1. Investment banks that had invested in MBSs also failed 2. The government bailed out insurance company AIG, which had invested in subprime mortgages and insured other subprime investors against losses C. The result was a liquidity crisis (p. 478), a severe shortage of liquidity throughout a sector of the economy, during which companies cannot get enough cash to meet their operating needs 1. Businesses were caught in a credit freeze – a situation in which credit was virtually unavailable and, without access to credit, many companies had to resort to layoffs D. The U.S. officially exited the recession in 2009 but there is still high unemployment and economic stagflation

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Bovee/Thill, Business in Action 6/e Instructor’s Manual VI. Recovery and Reform A. The most significant piece of legislation to emerge as a result of the subprime meltdown is the Dodd-Frank Act (p. 481) B. This legislation was aimed at reforming the banking industry and offering consumers greater protection C. Key aspects include: 1. Monitoring for systemic risk, risks that affect a significant portion of the economy 2. Protecting consumers so that they obtain clear and accurate information about financial services 3. Closer scrutiny of the derivatives market 4. Ending taxpayer bailouts of companies 5. Tougher regulation of credit rating agencies

Classroom Activities Break-out Group Discussion: Credit Cards vs. Debit Cards.

Goal: Asks students to discuss the pros and cons of credit cards vs. debit cards and discover when they use each type of cards.

Time Limit: 15 minutes.

Details: 1. Break students into groups of four or five. (2 minutes) 2. Ask each group to come up with two or three advantages and disadvantages of using credit cards. Then ask them to do the same for debit cards. Have the group summarize when best to use each type of cards. (Hint: Some advantages of using credit cards are they are convenient and allow people to postpone payment on purchases they make. In the case of fraud, cardholders are usually liable for up to $50 of charges. Some disadvantages of using credit cards are: Many credit card issuers charge an annual fee for Visa and MasterCard credit cards, and all charge interest on any unpaid credit card balance. Debit cards are ideal for customers who must control their spending or stick to a budget. Debit card issuers also charge an annual fee and offer less protection in the case of fraud.) (10 minutes) 3. Ask representatives/speakers from each group to present their results to the whole class, either verbally or written (on the blackboard). (3 minutes)

End-of-Chapter Behind the Scenes JPMorgan Chase Says Thanks but No Thanks to the Subprime Bubble Questions for Critical Thinking 1. How might the pressures of being public corporations have affected the decision making of JPMorgan Chase’s competitors?

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Such pressures might have made competitors focus more on maximizing shareholder value by taking potentially high profit but also high risk ventures such as subprime mortgage-backed securities and credit default swap.

2. What might have happened if JPMorgan Chase’s competitors had tried to bail out of the subprime market at the same time as Dimon was directing his company to do so?

In that case, the subprime crisis might have been less severe or might have been averted altogether.

3. Did the executives at companies that chose to stay in the subprime market behave unethically by not bailing out when JPMorgan Chase did? Why or why not?

Students’ answers will vary depending personal opinion but such executives may or may not have been fully aware the risks involved with the subprime market prior to the crisis.

Learn More Online Visit the JPMorgan Chase website at www.jpmorganchase.com and explore the company’s three major banking brands. Read Business Principles, available in the About Us section. What does the company say about managing risk in financial markets? Read the latest annual Corporate Responsibility Report, available in the Corporate Responsibility section. What does the company say about its financial responsibility to investors and customers?

Students’ responses will depend, in large part, on the materials currently posted on the website.

Test Your Knowledge Questions for Review 1. What are the primary responsibilities of the Federal Reserve System?

The primary responsibilities of the Federal Reserve System are conducting monetary policy including managing the money supply, supervising and regulating financial institutions, maintaining the overall stability of the economy, and providing a variety of transactional services, including facilitating payments between banks and processing checks.

2. How do commercial banks differ from investment banks?

Commercial banks accept deposits, offer various types of checking and saving accounts and provide loans while investment banks offer a variety of services related to IPOs, mergers and acquisitions, and other investment matters.

3. What is a bubble?

A bubble is a market situation in which frenzied demand for an asset pushes the price of that asset far beyond its true economic value.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual 4. What is a subprime mortgage?

A subprime mortgage is a home loan that is offered to the borrowers with the lowest credit scores.

5. What does securitization of debt mean?

Securitization of debt is a process in which debts such as mortgages are pooled together and transformed into investments.

Questions for Analysis 6. How does the money supply affect the cost and availability of credit?

When money supply is increased, the federal funds rate will decrease, the availability of credit will increase, and the cost of credit will decrease.

7. Generally speaking, what effect did the repeal of the Glass-Steagall Act have on the banking industry?

The repeal of Glass-Steagall Act along with several other regulatory changes over the past 30 years have removed the barriers that once separated various kinds of banking, investing, and insurance services, paving the way for colossal, multifaceted firms such as JPMorgan Chase and Bank of America.

8. How did the decline in landing standards contribute to the financial meltdown of 2008?

The decline in landing standards made it possible for home loans to be given to people with no income, no jobs and no assets and substantially increased the default risk of such loans. Such loans, along with subprime mortgages and adjustable rate mortgages, significantly contributed to the financial meltdown of 2008.

9. How did low interest rates contribute to the housing bubble and the subsequent financial crisis?

Low interest rates made cheap credit possible and encouraged many of the risky lending behaviors that eventually led to the housing bubble.

10. Ethical Considerations. How did the decoupling of risk and reward contribute to the problems in the subprime mortgage industry?

Such decoupling of risk and reward encouraged many in the subprime mortgage industry to take extremely high risks without worrying about possible negative consequences. Such industry-wide risk-taking led to the subprime mortgage crisis.

Questions for Application 11. If you were in charge of monetary policy and wanted to lower the federal rate, would you buy or sell Treasury securities on the open market? Why? In this case, the Fed would buys treasuries, since that will increase money supply and in turn lower the federal funds rate.

12. If a consumer with a relatively low credit score applied for a loan from your bank, what other criteria might you consider before deciding to grant a loan?

Student answers may vary depending on personal opinion but points of consideration include the borrower’s income level, assets, the amount of loan and

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Bovee/Thill, Business in Action 6/e Instructor’s Manual the percentage of the house’s value that this amount represents and the nature of the repayment plan.

13. As a corporate financial manager, what steps could you take to protect your company from a liquidity crisis?

While student answers may vary, points of consideration include diversifying sources of financing, including securing both debt and equity financing as well as both short-term and long-term financing.

14. Concept Integration. In what ways did the housing bubble and subprime crisis violate the responsibilities suggested by the stakeholder model (see page 74)?

Students’ answers will again vary but points of consideration include the fact that lenders as well as investment banks were more interested in maximizing their own profits and their shareholders’ values than protecting the interests of the borrowers.

Expand Your Knowledge Discovering Career Opportunities Is a career in community banking for you? Bankers in smaller banks deal with a wide variety of customers, products, transactions, and inquiries every working day.

To get a better idea of what community bankers do, explore the Independent Community Bankers of America website at www.icba.org and visit a local independent bank branch.

1. Talk with a customer service representative or an officer about the kinds of customers this bank serves. Does it handle a high volume of business banking transactions, or is it more geared to consumer banking needs? How does the mix of consumer and business customers affect the branch’s staffing and working hours?

Students’ answers will vary depending on their choices of financial institutions.

2. What banking services are offered by this bank? Does the bank have specialized experts on staff to service these customers? What kind of skills, experience, education, and licenses must these experts have?

Students’ answers will vary depending on their choices of financial institutions.

3. What kinds of entry-level jobs in this bank are appropriate for your background? What are the advancement opportunities within the bank and within the bank organization? Now that you have a better idea of what community banking is, how does this career fit with your interests and goals?

Students’ answers will vary depending on their choices of financial institutions.

Improving Your Tech Insights: Identity Theft Detection Systems Identity theft, which Chapter 4 defines as the theft and fraudulent use of personal information, is a huge problem for consumers and the banks, financial services companies, and retailers that handle their confidential personal information.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual To help combat the problem, the Fair and Accurate Credit Transactions Act (FACTA) requires financial institutions, retailers, and service providers such as mobile phone companies to have procedures in place to catch suspicious activities.

These “Red Flags Rules” are designed to identify suspicious transactions, documents, and other events or elements that could signal a case of identity theft.

Given the millions of consumer transactions that occur every day, singling out suspicious behavior is no small task. To help companies implement the FACTA Red Flags Rules, a variety of software companies offer automated monitoring, verification, and authentication tools. Research one of these software solutions, such as that offered by RSA (www.rsa.com). In a brief email message to your instructor, explain how it helps banks and other firms meet the Red Flags Rules.

You can also read more about the rules at www.ftc.gov/redflagsrule.

Students’ emails may vary depending on research they conducted.

Practice Your Skills Sharpening Your Communication Skills As a loan officer at Long Isle Community Bank, your responsibilities include the unpleasant task of informing some applicants that their loans have not been approved.

Today you need to write a letter to Geoff Winders, a customer who applied for a home mortgage but was turned down by the bank’s loan committee because his credit score was too low. You can temper the bad news with the suggestion that Mr. Winders attend the free credit repair seminar, Back on Track, that Long Isle offers every Saturday afternoon from 1:00 to 3:00. Write a brief letter that opens by thanking Mr. Winders for being a customer of the bank and for considering the bank for his home mortgage needs. Explain the reason his application was rejected and extend the offer of attending the free seminar.

Students’ letters will vary but they need to explain at a minimum the importance of credit scores in the loan approval process.

Building Your Team Skills With teammates as assigned by your instructor, choose a type of business that you would like to own and manage. Next, identify three institutions in your town or city that could provide the banking services your company would need, based on your growth plans for the first five years (make up any details you need). Choose a branch of a national bank, a smaller community bank, and a credit union. Research the services and capabilities of each and decide which one is the right choice for your company. Present your results using presentation slides, a wiki, or whatever media option your instructor indicates.

Students’ presentations will vary depending on their choices of financial institutions.

Developing Your Research Skills Many observers criticized the role played by the credit rating agencies Moody’s, Standard & Poor’s, and Fitch in the subprime crisis. Two particular criticisms are that bond rating agencies are paid by bond issuers, who could lead them to issue biased ratings, and that the agencies gave their top ratings to mortgage-backed securities that

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Bovee/Thill, Business in Action 6/e Instructor’s Manual contained low-quality debts. Do the research necessary to find answers to the following questions: 1. Have any major changes in the debt rating process been proposed or enacted, such as having a not-for-profit organization provide impartial ratings instead of or in addition to the commercial agencies?

Students’ answers will vary depending on the timing of their research.

2. Have any investors or other parties successfully sued a rating agency for providing misleading information?

Students’ answers will vary depending on the timing of their research.

3. Has Congress or any federal agency taken any steps to change the laws and regulations that affect the operation of credit rating agencies?

Students’ answers will vary depending on the timing of their research.

CHECKPOINTS LEARNING OBJECTIVE 1: Describe the money supply, and explain the functions of the Federal Reserve System.

Critical thinking: (1) Why does the Fed want to avoid an “overheating” economy?

Because an “overheating” economy tends to trigger higher-than-average inflation, causing prices of goods and services to rise significantly beyond rise in income.

(2) Why can’t the Fed just control inflation directly?

Because inflation is not something the Fed can directly control. Inflation is the tendency for prices of goods and services to rise over time. Fed can control inflation indirectly by controlling money supply.

It’s your business: (1) In general terms, how might Fed decisions over the next several years affect your life?

Students’ answers will vary depending on personal opinions.

(2) If you are hoping to get a loan to expand your business, will you welcome the news that the money supply is expanding? Why or why not?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 2: Identify the most common types of commercial banking institutions, and distinguish commercial banking from investment banking.

Critical thinking: (1) Why might credit unions want to promote themselves as not being banks in the popular usage of the term?

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Bovee/Thill, Business in Action 6/e Instructor’s Manual Because credit unions might want to differentiate themselves from commercial banks, emphasizing that credit unions are not-for-profit and member-owned cooperatives rather than “banks”, who are profit-maximizing business entities.

(2) With the demise or transformation of the great investment banks of Wall Street, has the need for investment banking disappeared? Explain your answer.

The need for investment banking has not disappeared. For instance, stocks and bonds still need to be underwritten, and mergers and acquisition deals still need to be advised and structured.

It’s your business: (1) Do you know your credit rating? You can get free credit reports through www.ftc.gov/freereports.

Students’ answers will vary depending on personal opinions.

(2) Does the not-for-profit, member ownership aspect of credit unions appeal to you?

Why or why not?

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 3: Explain the meaning of an economic bubble, and describe the innovations and evolutions in mortgage lending that expanded home ownership but ultimately triggered the subprime meltdown.

Critical thinking: (1) Can bubbles be avoided? After all, they involve lots of human emotion triumphing over logic. Explain your answer.

Students’ answers will vary depending on whether they believe logic will prevail over human emotion or vice versa.

(2) Governments frequently enact laws and regulations that prevent people from making decisions and behaving in ways that could harm them. Should the government outlaw option ARMS that allow negative amortization to occur? Why or why not?

Students’ answers will again vary depending on how much of a role they believe that government should play in housing.

It’s your business: (1) Would you agree to an ARM with low teaser rates if you weren’t positive you would be able to afford the higher monthly payments that would kick in after the teaser rate reset to the permanent fixed rate? Why or why not?

Students’ answers will vary depending on personal opinions.

(2) How would you respond if a mortgage lender offered a way to get you into a more expensive home than you know you can afford?

Students’ answers will vary depending on personal experiences.

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Bovee/Thill, Business in Action 6/e Instructor’s Manual LEARNING OBJECTIVE 4: Explain how debt securitization increased the funds available for home lending but also helped inflate the housing bubble.

Critical thinking: (1) Is tranching of pooled-debt securities necessarily a bad idea? Why or why not?

They are not necessarily bad ideas in theory because they tailor different risk/return balances to individuals with different risk preferences. However, in practice they helped contribute to the subprime crisis.

(2) Would the housing bubble have grown as big and collapsed so destructively if there had been no secondary mortgage market? Explain your answer.

Probably not, since the secondary mortgage market made it more difficult to quantify and gauge the exact risks of the mortgage market.

It’s your business: (1) What is your reaction to John Devaney’s statement that “the consumer has to be an idiot to take on” an option ARM? Students’ answers will vary depending on personal opinions.

(2) What would you do if you needed a new residence during a housing bubble, knowing that prices were inflated and likely to fall at some point? Explain your answer.

Students’ answers will vary depending on personal opinions.

LEARNING OBJECTIVE 5: Describe the key events that triggered the meltdown of 2008 and sent the economy into a global recession.

Critical thinking: (1) Should the federal government try to jump-start a lifeless economy through monetary policy? Why or why not?

Students’ answers will vary depending on how much of a role they believe that government should play in the economy and the effectiveness of using monetary policy.

(2) What will it take for the economy to get unstuck and start moving in a healthy way again?

Students’ answers will vary depending on personal opinions.

It’s your business: (1) How were you or your family affected by the credit freeze that spread after the 2008 subprime meltdown? Did it affect your college plans?

Students’ answers will vary depending on personal experience.

(2) What impact might the meltdown have on your career? Explain your answer.

Students’ answers will vary depending on personal opinions and their choice of career.

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20-11

Bovee/Thill, Business in Action 6/e Instructor’s Manual LEARNING OBJECTIVE 6: Outline the efforts to reform the banking industry in the wake of the subprime crisis.

Critical thinking: (1) Should the government limit any company’s ability to grow to the point that its failure could seriously damage the overall economy? Why or why not?

Students’ answers will again vary depending on how much of a role they believe that government should play in the banking industry.

(2) Do you think everyone in the financial services industry “learned their lessons” and won’t repeat the mistakes that led to the 2008 meltdown? Why or why not?

Students’ answers will vary depending on personal opinions.

It’s your business: (1) How have the lingering effects of the recession changed the way you manage your personal finances?

Students’ answers will vary depending on personal experiences.

(2) As a consumer, what lessons can you take away from the subprime mess?

Students’ answers will vary depending on personal opinions.

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20-12