Business in Action, Second Canadian Edition, In Class Edition, 2E Courtland L. Bovee Solution Manual

Type:

Solution Manual

Resource:

Business in Action

Edition:

2nd Edition

Author(s):

Courtland L. Bovee John V. Thill George Dracopoulos

INSTRUCTOR’S RESOURCE MANUAL George Dracopoulos to accompany

Business in Action Second Canadian Edition In‐Class Edition Courtland L. Bovée Grossmont College John V. Thill Communication Specialists of America George Dracopoulos Vanier College

CONTENTS Chapter 1: Understanding the Fundamentals of Business and Economics...................1 Chapter 2: Competing in the Global Economy ..........................................................29 Chapter 3: Practising Ethical Behaviour and Social Responsibility ..........................51 Chapter 4: Starting and Financing a Small Business .................................................73 Chapter 5: Selecting the Proper Form of Business Ownership and Exploring Business Combinations ……………………………………………..98 Chapter 6: Understanding the Functions and Roles of Management .......................148 Chapter 7: Organizing and Working in Teams .........................................................168 Chapter 8: Producing Quality Goods and Services...................................................193 Chapter 9: Managing Human Resources .................................................................219 Chapter 10: Motivating Today’s Workforce and Handling Employee–Management Relations ..................................................243 Chapter 11: Developing Product and Pricing Strategies ..........................................271 Chapter 12: Developing Distribution and Promotional Strategies ..........................299 Chapter 13: Analyzing and Using Financial Information ........................................322 Chapter 14: Understanding Banking and Securities ................................................349 Appendix A: The Canadian Legal System ..............................................................376

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Chapter 1: Understanding the Fundamentals of Business and Economics Learning Objectives 1 2 3 4 5 6 7

Define what a business is and identify four key social and economic roles that businesses serve Differentiate between goods-producing and service businesses. List five factors that explain the rise in the number of service businesses Differentiate between a free-market system and a planned system Explain how supply and demand affect price Explain the four major economic roles of the Canadian government Explain how a free-market system monitors its economic performance Identify five challenges that businesses are facing in the global economy as well as how companies are using the Internet to improve efficiency

Summary of Learning Objectives 1

Define what a business is and identify four key social and economic roles that businesses serve A business is a profit-seeking activity that provides goods and services to satisfy consumer needs. The driving force behind most businesses is the chance to earn a profit; however, non-profit organizations exist to provide society with a social or educational service. Businesses serve four key functions: they provide society with necessities; they provide people with jobs and a means to prosper; they pay taxes that are used by the government to provide services for its citizens; and they reinvest their profits in the economy, thereby increasing a nation’s wealth.

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Differentiate between goods-producing and service businesses. List five factors that explain the rise in the number of service businesses Goods-producing businesses produce tangible goods and tend to be capital-intensive, whereas service businesses produce intangible goods and tend to be labour-intensive.

The number of service businesses is increasing because (1) consumers have more disposable income to spend on taking care of themselves, (2) many services target consumer needs brought about by changing demographic patterns and lifestyle trends, (3) consumers need assistance with using and integrating new technology into their business operations and lifestyles, (4) companies are turning to consultants and other professionals for advice to remain competitive, and (5) in general, barriers to entry are lower for service companies than they are for goods-producing businesses.

3 Differentiate between a free-market system and a planned system In a free-market system, individuals have a high degree of freedom to decide what is produced by whom and for whom. Moreover, the pursuit of private gain is regarded as a worthwhile goal. In a planned system, governments limit the individual’s freedom of choice to accomplish government goals, control the allocation of resources, and restrict private ownership to personal and household items. The pursuit of private gain is non-existent under a planned system.

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4 Explain how supply and demand affect price In the simplest sense, supply and demand affect price in the following manner: When the price goes up, the quantity demanded goes down but the supplier’s incentive to produce more goes up. When the price goes down, the quantity demanded increases but the quantity supplied may (or may not) go down. When the interests of buyers and sellers are in balance, an equilibrium price is established. However, adjusting price or supply to meet or spur demand does not guarantee profitability. The important thing to remember is that in a free-market system the interaction of supply and demand determines what is produced and in what amounts.

5 Explain the four major economic roles of the Canadian government The Canadian government fosters competition by enacting laws and regulations and by approving mergers and acquisitions, retaining the power to block those that might restrain competition. It regulates certain industries where competition would be wasteful or excessive. It protects stakeholders from potentially harmful actions of businesses. Finally, the government contributes to economic stability by regulating the money supply and by spending for the public good.

6 Explain how a free-market system monitors its economic performance Economists evaluate economic performance by monitoring a variety of indicators, such as unemployment statistics, housing starts, durable-goods orders, and inflation.

They calculate the consumer price index (CPI) to keep an eye on price changes— especially inflation. In addition, economists measure the productivity of a nation by calculating the country’s gross domestic product (GDP)—the sum of all goods and services produced by both domestic and foreign companies as long as they are located within a nation’s borders.

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Identify five challenges that businesses are facing in the global economy as well as how companies are using the Internet to improve their efficiency.

The five challenges identified in the chapter are (1) producing quality products and services that satisfy customer’s changing needs, (2) starting and managing a small business in today’s competitive environment, (3) thinking globally and committing to a culturally diverse workforce, (4) behaving in an ethically and socially responsible manner, and (5) keeping pace with technology and electronic commerce. Nearly all aspects of business can be improved with the help of Internet technology. From improved communication in the supply chain to efficient 24-hour sales information to improved customer service and delivery, the Internet is a tool that, when used properly, can be a weapon for competitive advantage.

Brief Chapter Outline I. II.

Why study business?

What is a Business?

A. Business serves many functions in society and the economy.

B. Profit vs. Not-for-Profit Organizations C. Businesses generally fall into one of two categories: 1. Goods-producing businesses 2. Service-producing businesses

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D. Growth of the Service Sector Five key factors for this continued growth: 1. Consumers have more disposable income 2. Changing demographic patterns and lifestyle trends 3. Increasing number of complex goods and new technology 4. Greater need for professional advice 5. Barriers to entry are low for Service Businesses III. What is an Economic System?

A. Three basic questions: 1. what to produce 2. how much to produce 3. who gets what B. Factors of Production: 1. Natural resources 2. Human resources 3. Capitol 4. Entrepreneurs 5. Knowledge C. Types of economic systems: 1. Free-market system a. Capitalism b. Mixed capitalism 2. Planned System a. Communism b. Socialism D. Privatization.

IV. How Do Free Market Economies Work?

A. Supply and demand interact to determine prices and how much to produce: 1. Demand 2. Supply 3. Equilibrium price B. Competition in free-market economies 1. Pure Competition 2. Monopoly 3. Oligopoly 4. Monopolistic competition 5. Competitive advantage V. Government’s role in free-market economies 1. Enacts laws and creates regulation to foster competition.

2. Regulated v/s Deregulated Industries 3. Protects stakeholders rights 4. Contribute to economic stability a. Economic expansion b. Economic contraction c. Business Cycles d. Fiscal and Monetary Policy

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VI.

How a Free Market System Monitors its Economic Performance A. Testing the effectiveness of an economics system 1. Economic indicators a. Leading indicators b. Lagging indicators.

B. Watching Economic Indicators 1. Unemployment statistics 2. Housing starts 3. Durable goods orders C. Measuring Price Changes 1. Inflation 2. Deflation 3. Consumer Price Index D. Measuring a Nation’s Output: 1. Gross domestic product (GDP) 2. Gross national product (GNP) VII. Challenges of a Global Economy 1. Producing quality goods to deal with evolving customer needs.

2. Managing a business in a competitive global marketplace 3. Thinking globally and committing to cultural diversity 4. Behaving ethically and socially responsible 5. Keeping pace with technology and e-commerce

Lecture Notes and Chapter Outline I.

II.

Why Study Business?

1. Learn what it takes to run a business 2. Build business vocabulary and workplace skills 3. Learn about career opportunities What is a Business?

A. Businesses serves many functions in society and in the economy 1. Provide us with crucial goods and services such as food and housing 2. Create and foster prosperity 3. Generate taxes for public education, transportation, etc.

4. Reinvest profits in the economy, which in turn raises our standard of living and improves our quality of life.

B. Profit vs. Not-for-Profit Organizations 1. Profit organizations earn the difference between production and marketing costs and product price.

2. Not-for-Profit organizations provide goods and services, with the goal of breaking even in the process; they still must run effectively and efficiently, to continue to serve their customers.

C. Businesses generally fall into one of two categories: 1. Goods-producing businesses may pursue activities such as manufacturing, construction, mining, and agriculture in order to produce goods.

Most goods-producing businesses are generally Capital-intensive businesses. Capital-intensive: require lots of capital, and raw material.

Example: airline industry; automobile manufacturers

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Service-producing businesses provide intangible products such as finance, insurance, transportation, etc. a. Most service businesses are labour-intensive businesses. Labour intensive: rely mainly on worker skill and knowledge. Example: consulting firms D. 5.

Growth of the Service Sector Since the mid-1980s, the service sector has been the primary area of growth in the Canadian economy. Economists project that the growth in the service sector will continue to increase.

A. Five key factors for this continued growth: 1. Consumers have more disposable income a. Baby Boomers (people born between 1947 and 1966) are in their peak earning years with “disposable” income earmarked for investment, travel, and relaxation.

2. Changing demographic patterns and lifestyle trends a. Canada has more elderly, single, two-career households, and single parents than ever before. There is a growing need for services such as childcare, food service, and home maintenance.

3. Increasing number of complex goods and new technology a. As we continue to use technological goods in our homes, the need for specialized maintenance, repair, and support services increases, creating a market for such services.

4. Greater need for professional advice a. Consultants are often used to cut long-term costs and refine processes. b. E-commerce is the activity of buying and selling over the Internet.

5. Barriers to entry are low for Service Businesses FOR DISCUSSION Ask students to comment on how the growth of the service sector may affect businesses.

[Students may note that capital may be less important, and education more important for starting businesses. They may also note that initial investments in companies may be less costly, or that industries less invested in services may lose out.]

III. What is an Economic System?

A. An economic system allocates a nation’s resources to satisfy the needs of its citizens. An economic system seeks to answer three basic questions: 1. what to produce 2. how much to produce 3. who gets what B. Factors of Production: the basics used to produce goods and services are called factors of production. Businesses rely on five factors of production to optimize profits: 1. Natural resources: assets useful in their natural state (land, minerals, water, and forests).

2. Human resources: anyone involved in the production of goods and services

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3. Capitol: resources such as money, equipment, and buildings necessary for production of goods and services.

4. Entrepreneurs: innovative risk-takers who create and operate new businesses 5. Knowledge: the collective intelligence of an organization C. Types of economic systems: The degree to which governments control a country’s resources has spawned a continuum: 1. Free-market system: private individuals determine what to produce, how and when to produce, for whom, and at what price. a. Capitalism: Capitalism is a free-market system based on freedom and competition. Theories of capitalism are based on the ideas that: ¾ capitalism requires no outside regulation (laissez faire) ¾ markets produce goods in proportion to society’s wants b. Mixed capitalism (limited intervention): ¾ US ¾ Canada ¾ Germany ¾ Japan 2. Planned System: government controls all or part of a society’s resources and limit the freedom of choice in order to accomplish government goals. a. Communism is the most restrictive planned economy (Cuba, North Korea) ¾ Almost all resources are under government control ¾ Private ownership is restricted to personal and household items ¾ Resource allocation is handled through rigid centralized planning by a handful of government officials who answer the four basic economic questions. b. Socialism lies somewhere between capitalism and communism in the degree of economic freedom that it permits. Socialism involves: ¾ a high degree of government planning, ¾ some government ownership of land and capital resources ¾ high taxes for extensive coverage of social services. ¾ little private ownership and profit (restricted to industries less vital to common welfare) D. The trend toward privatization.

1. Privatization: a trend towards free-market enterprise systems.

Example: The Canadian government has sold its interests in many companies in the past two decades (i.e.: Petro-Canada & C.N.).

FOR DISCUSSION: Ask students which countries currently practise varying degrees of socialism (Great Britain, Mexico, Argentina, Israel, France, Sweden, China) and what evidence suggests that they are eager to change to more privatized systems.

IV. How Do Free Market Economies Work?

A. Supply and demand interact to determine prices and how much to produce: 1. Demand: the amount of a good or service that consumers will buy at a given time at various prices (buyers’ behaviour).

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2. Supply: the quantities of a good and service that producers will provide at a particular time at various prices (sellers’ behaviour). People get what they want and producers profit by keeping up with demand.

3. Equilibrium price: point at which quantity supplied equals quantity demanded.

B. Competition in free-market economies. Competition is a situation in which two or more suppliers of a product are rivals in the pursuit of the same customers. The four types of market competition are: 1. Pure Competition: multiple buyers choose from highly similar products or services and multiple sellers freely enter and exit the market (low barriers to entry). No single seller is powerful enough to set prices.

2. Monopoly: a single seller controls the supply of goods or services and the price.

3. Oligopoly: A few providers dominate the market place (e.g., oil companies).

4. Monopolistic competition: a large number of sellers, none of whom dominates the market, offer products distinguishable from one another in some way. Firms seek to establish a competitive advantage.

5. Competitive advantage: Effectively appealing to particular customers by providing a differentiated product in the areas of : a. price b. service c. quality d. innovation TEAM TALK Divide students into small groups. Have them choose an example of price competition and then devise a new competitive advantage strategy using innovation, quality, or service. After ten minutes, have each group report their new product or service ideas.

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Government’s role in free market economies.

Sometime governments intervene to: 1. Enact laws and create regulations to foster competition. a. In Canada, the Competition Act is a key piece of legislation that regulates business practices and promotes and encourages competition and efficiency in the system.

2. Regulates and deregulates certain industries a. In a regulated industry, close government control is substituted for free competition and competition is either limited or eliminated. b. Deregulation of certain industries may allow new industry competitors to enter the market, create more choices for consumers and keep prices in check. Governments relax or remove existing laws that impede healthy competition. Example: airlines 3. Protects stakeholders rights a. Stakeholders are groups that are affected by a business’s operations including: employees; supervisors; investors; customers; suppliers; and society at large.

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4. Contribute to economic stability a. Economic expansion occurs when the economy is growing and people are spending more money. Consumer purchases stimulate businesses to produce more goods and services, which in turn stimulates employment. c. Economic contraction occurs when spending declines; businesses cut back on production, employees are laid off, and the economy as a whole slows down. d. Business cycles: ups and downs in the economy ¾ Recession is a downward trend that consists of two consecutive quarters of decline in Real Gross Domestic Product. d. Fiscal and Monetary Policy: ¾ Monetary policy: adjusts the nation’s money supply by increasing or decreasing interest rates or the money supply to help control inflation. ¾ Fiscal policy: government plans to collect and spend tax revenues and expenditures to stimulate or slow down the economy. ¾ To manage business cycles, governments can: ¾ levy new taxes ¾ raise or lower current tax rates FOR DISCUSSION Ask students to contribute to a list of services that they would lose if we abolished taxes altogether today (no protection from crime, no highways, no public healthcare, homeless shelters, etc.). Also discuss how government spending boosts the economy (multiplier effect and the circular flow of money).

VI. How Do Economists know if the System is working?

A. Testing the effectiveness of an economics system: Economists monitor statistics on employment, interest rates, and price changes to measure the efficiency of our economic systems.

1. Economic indicators: statistics pointing toward major trends in our economic system.

2. Leading indicators: statistics pointing toward future trends. Example: unemployment shows potential future cutbacks in spending.

3. Lagging indicators: statistics that show a swing in the economy after the movement has begun.

B. Watching Economic Indicators 1. Unemployment statistics: signal future changes in consumer spending.

Example: When unemployment rises, people have less money to spend, and the economy suffers.

2. Housing starts: show where several industries are heading. Example: Housing is very sensitive to interest rates. If mortgage rates are high, fewer people can afford to build new homes which impacts furniture sales, appliances etc.

3. Durable goods orders: orders for goods that typically last for more than three years. Example: A rise in durable goods orders is a positive indicator that business spending is turning around.

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C. Measuring Price Changes 1. Inflation is a steady rise in the prices of goods ands services throughout the economy.

2. Deflation is the sustained fall in the general price level for goods and services.

3. Consumer Price Index measures the rate of inflation by comparing the change in prices of a representative basket of goods and services such as: clothing, food, housing, and utilities over time.

FOR DISCUSSION Ask students to imagine what goods and services make up the list of products in the Consumer Price Index. What goods and services represent our general economy or a “typical” consumer’s experience? What products do they see as essential to daily life, and what would it mean if those prices rose or fell drastically? Remind students that the CPI is an estimate, and not exact D. Measuring a Nation’s Output: 1.

Gross domestic product (GDP): measures a country’s dollar value production of goods and services during a specific period of time (usually a year) within its borders.

2. Gross national product (GNP): Measures the dollar value of all goods and services produced by domestic businesses in a given year (including receipts from operations overseas but excluding receipts from foreign owned businesses within the nation’s borders).

3. By comparing output with other nations or previous years, we can discover whether our economy is holding steady, growing, or faltering.

VII. Challenges of a Global Economy 1. Globalization: the increasing tendency of the world to act as one market instead of a series of national ones---opens new markets for a company’s goods and services.

2. Globalization creates tough competition and challenges for new businesses: a. Producing quality products and services that satisfy customer’s changing needs b. Starting and managing a small business in today’s competitive environment c. Thinking globally and committing to a culturally diverse workforce d. Behaving in an ethically and socially responsible manner e. Keeping pace with technology and electronic commerce FOR DISCUSSION Ask students to create a list of possible ethical problems that may be encountered in a global marketplace with different social and ethical rules applicable to different areas of commerce. (Students may come up with ideas such as the regulatory (i.e.: Health Canada, FDA) approval of products, environmental laws applicable only to certain countries, social conventions common in some areas and restricted in others, etc.)

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WHAT DO STUDENTS THINK? Have students take three to five minutes to write down technological changes that they have witnessed in the last five years. Most students will probably note the changes in the Internet, computers, iPod’s, hybrid cars etc. Ask students to project themselves into the future and guess at what changes may take place in five years.

Potential Difficulties and Suggested Solutions 1. Students may have difficulty in identifying the difference between Gross Domestic Product (GDP) and Gross National Product (GNP). It is important to present examples, in addition to those already listed in the textbook, such as the following to aid the students’ in their understanding of these two important concepts: ¾ Ask the students to imagine the following scenario: You are a Japanese citizen working in Canada. Would you be included in the GDP calculation for Canada? Answer: You would be included in the calculation of the GDP because you are physically located and working within Canada. ¾ Ask the students to imagine the following scenario: You are a Canadian Citizen working in China. Would your work be included in the Canadian GNP calculation? Answer: Yes, GNP looks at the source of the activity not the location where it was produced. **The students should be instructed to read the section of the textbook that discusses the differences between these two calculations carefully to ensure understanding.

2. Students may need additional examples in order to fully understand the differences between pure competition, monopoly, oligopoly, and monopolistic competition. ¾ Governments generally discourage monopolies in favour of competition.

Students need to realize that the formation of monopolies eliminates competition and, therefore, eliminates the freedom of choice for consumers. Competition drives the price down; ultimately, competition is good for the consumer. Despite these facts, governments create monopolies and regulate prices across the country in varying degrees in the following areas: hydro electricity, liquor commissions and lottery providers.

Behind the Scenes BlackBerry: The High-Tech Maple Leaf?

Test Yourself Answers to these questions can be found on the website: www.pearsoned.ca/bovee.

1. Does Research in Motion function in the goods-producing or service sector?

Research in Motion earns most of its revenues functioning primarily in the goods producing sector, however, as indicated in the text, the company has various revenue streams. It earns 76 percent from devices (goods) but also earns 16 percent from services, 5 percent from software and an additional 3 percent from other sources.

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2. How does Research in Motion’s history demonstrate the power and motivation behind the capitalist system, as advocated by Adam Smith?

According to Adam Smith, in a purely capitalist society the government must get out of the way and allow entrepreneurs, like the founders of Research in Motion, to pursue their goals without intervention. An entrepreneur’s will to succeed pushes him/her to develop innovative products and services that individuals are willing to pay for. The drive to succeed and profit from their efforts leads to greater productivity and innovation and an overall improvement in the quality of life for society as a whole. There were no Blackberry’s in Adam Smith’s time but he would surely point to this device as a tribute to the value of the entrepreneur and the free market system.

3. Explain the role that the factors of production play in the economy by providing examples from Research in Motion’s business activities.

Factors of production are the basic inputs that a society uses to produce goods and services, including natural resources, labour, capital, entrepreneurial skills, and knowledge. Natural and human resources are required to manufacture the products and deliver the services. Capital is required to conduct the research and development needed to create innovative products and purchase machinery, warehouses etc.

Entrepreneurs, like the company co-founders, are needed to provide the vision to move individuals and create the structure to exploit the resources. Finally, knowledge is a key element to success. As we saw in the opening case RIM takes this seriously and even gives back to the community by promoting the knowledge field with its involvement with the University of Waterloo among others.

4. Explain the basic theory of supply and demand using the BlackBerry as an example.

According to the basic theory of supply and demand consumers will buy more when the price is low and buy less when the price is high. Producers would offer more when the price is high and offer less when the price is low. The quantity supplied and the quantity demanded continuously interacts, and the balance between them at any given moment should be reflected by the current price on the open market. The point at which quantity demanded and supplied is called the equilibrium point.

The technology business is an interesting one. Research in Motion like most technology companies tries to maximize its revenue by launching new innovations at relatively high prices even though they know that less people will initially (demand) buy it at those high prices. It offers innovative customers a chance to procure the product ahead of the mass population and eventually lowers the price to make it appealing to more people. At the lower prices demand is much greater.

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Behind the Scenes (End of Chapter) BlackBerry: Communicating, Defending, and Expanding Its Global Reach Critical Thinking Questions 1. Describe how RIM meets the four key social and economic roles that businesses serve, as described in the chapter.

Businesses serve four key functions: 1) they provide society with necessities 2) they provide people with jobs and a means to prosper 3) they pay taxes that are used by the government to provide services for its citizens 4) they reinvest their profits in the economy, thereby increasing a nation’s wealth.

In addition to providing consumers with a new and improved means of communication; RIM employs over 6200 people; pays taxes to governments; donates money to universities and other causes. RIM is a solid corporate citizen and buys goods and services from other companies (everything form high tech equipment to pencils and paper.)

2. What challenges and opportunities does RIM encounter in today’s global economy?

The global economy means that companies such as RIM face competitive threats from companies around the world. It also means that consumers from around the globe now have easy access to their products. For RIM to continue its successful run it will need to stay in tune with the consumer on a global scale, anticipate the latest trends, and continue to be on the leading edge of technology.

3. Describe the role of governments as it relates to RIM. Refer to the foreign examples, but also examine the Canadian government. How does RIM’s experience help exemplify the difference between a planned and a freemarket economy?

Research in Motion is a very capable player in the global economy and thrives because of it. In the past, companies such as RIM, relied on, and received protection from governments in their home markets. This still occurs to a certain extent but companies are now much more independent and must thrive or perish in the global marketplace. Because many barriers have been eliminated it enables RIM to enter new markets more easily, however, as indicated in the text protectionist tactics and fears are still quite evident even in some of the most industrialized nations. This can make doing business in a particular market very difficult or impossible in the shortterm.

RIM’s experience with China illustrates the control exerted in a typical planned economy. It took eight years for RIM to get the rights to sell its BlackBerry in China.

In a planned economy the government controls access to information and has a parental level of control over the affairs of companies that wish to interact with its citizens.

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

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Answers to End-Of-Chapter Questions Test Your Knowledge Questions for Review 1. How do non-profit organizations apply the concepts that we associate with profit-seeking businesses?

Non-profit organizations exist to provide society with a social or educational service. Although non-profit organizations like the Big Brother and Big Sister organization do not have a profit motive, they must operate efficiently and effectively to achieve their goals.

2. Employment trends have shown a definite shift toward services and away from manufacturing. What are some of the key reasons for this shift?

The main reasons for the shift towards the service sector include: 1) low barriers to entry in the service sector relative to the goods sector, 2) changing demographics and lifestyles, 3) increasingly complex goods and technologies, 4) need for professional advice, 5) more disposable income.

3. How is capitalism different from communism and socialism in the way it achieves key economics goals?

Communism is characterized by state ownership of the factors of production and planned resource allocation. Socialism also relies on government-planned resource allocation, but permits private ownership and decision making in industries that are not considered vital. Capitalism is characterized by private ownership of the factors of production and private production and allocation decisions. Under capitalism, most firms operate to earn a profit.

4. Describe Adam Smith’s beliefs about the power of the capitalist system.

What did Smith warn against?

Capitalism owes its philosophical origins to eighteenth-century philosophers like Adam Smith. He warned against government intervention of any kind. He believed that the market should be left on its own to regulate itself. According to Smith, in the ideal capitalist economy (pure capitalism) the market (an arrangement between buyer and seller to trade goods and services) serves as a self-correcting mechanism—an “invisible hand” to ensure the production of the goods that society wants in the quantities that society wants, without regulation of any kind.

5. What is the difference between an oligopoly market and a monopoly market?

In a monopoly there is only one producer of a product in a given market, and thus the producer is able to determine the price. A situation in which an industry is dominated by only a few major producers is called an oligopoly.

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Questions for Analysis 6. What role do entrepreneurs play in the economy? Relate your answer to the factors of production.

Entrepreneurs are innovative individuals willing to take risks to make a profit.

They are an essential element of the factors of production. Entrepreneurs use natural and human resources, apply their capital and knowledge to create goods and services to meet the society’s needs.

7. 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 a goods-producing operation need substantial capital for the equipment needed to build the product, for the raw materials, for the warehouse, etc. Also, 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. Service businesses do not usually require as much capital; therefore, they are less restrictive.

8. How do governments intervene in a free-market system? Describe the difference between fiscal and monetary policy.

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

Fiscal policy refers to the government actions related to taxes and spending whereas monetary policy relates to the governments actions with regard to influencing the money supply.

9. How do countries know if the economic system is working?

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

10. ETHICAL CONSIDERATIONS: Because knowledge workers are in such high demand, you decide to enrol in an evening MBA program. Your company has agreed to reimburse you for 80% of your tuition. You have not told them, however, that once you earn your degree, you plan to apply for a management position at a different company. Is it ethical for you to accept your company’s tuition reimbursement, given your intentions?

Students’ answers will vary, but may reflect some of the following concerns: ¾ If you haven’t signed any “time-after-course” document, then it is legal but not ethical. ¾ An ethical relationship between employee and management depends on trust; not informing them is breaking a trust and your relations with them will deteriorate. ¾ The company may give bad references of your employment record. .

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The company may offer you a better job if you tell them that you think the course qualifies you for a management position.

Questions for Application 11. Company sales are skyrocketing and projections show that your computer consulting business will outgrow its current location by next year. What factors should you consider when selecting a new site for your business?

In the past, proximity to a center of business or growing area would greatly affect a business’s chance of surviving, but in the new era of business relations, these factors no longer matter as much. Because a growing number of companies conduct businesses on a global scale using telephones and e-mail to telecommute, proximity to business centers no longer has the same bearing on a company’s projected success. A computer consulting business based in Vancouver might very well consult a company in Halifax. Of course, location is still a factor, but it is no longer the key factor for choosing a site for a business. Other factors, such as how many phone lines are available (especially important for today’s telecommuting businesses), and how much space is available, outweigh the importance of location. Perhaps the most important factor in today’s competitive marketplace is keeping a low bottom line in order to maintain competitiveness.

Therefore, the most important factor in choosing an office space could very well be the rent.

12. How would a decrease in Old Age Security (OAS) 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 Old Age 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.

13. Think about the many ways that technology has changed your life as a consumer. Record your thoughts on a sheet of paper. On the same sheet of paper, make a second list of how you envision technology will change your life in the near future. Compare your thoughts to those of your classmates.

Student answers may vary; however, some possible ideas follow: ¾ E-commerce has changed the way consumers purchase their products by offering additional shopping avenues. Consumers can now shop online at any time in the convenience of their own homes. ¾ Technology has allowed speedy checkouts at grocery stores through the use of electronic scanning devices. At some retail establishments, consumers are even allowed to scan their own items in checkout. ¾ These and many other forms of technology will continue to positively impact the way in which business is conducted.

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Practise Your Knowledge Sharpening Your Communication Skills Select a local service business you are familiar with. How does that business try to gain a competitive advantage in the marketplace? Write a brief summary, as directed by your instructor, 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 to 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 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 economy: 1. Housing Starts Lowest in Months 2. The Bank of Canada Lowers the Target for the Overnight 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. Industry Jobs Go Unfilled as Area Unemployment Rate Sinks to 6 Percent 7. Telephone Reports 30-Day Backlog in Installing Business Systems Discuss each of those headlines with the other students on your team. 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. The Bank of Canada Lowers the Target for the Overnight 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 Bank of Canada lowers the Target for the Overnight 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.

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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 shows that businesses are willing to invest. This headline also indicates that businesses might be replacing labour with machines.

6. Industry Jobs Go Unfilled As Area Unemployment Sinks To 6 Percent This indicates a healthy economy with little unemployment; at the same time, inflationary pressure is present.

7. Telephone Reports 30-Day Backlog in Installing Business Systems This indicates growth in the economy, as businesses are growing. Inflationary pressure.

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.

Under Search by Occupation, enter “Economists.”

1. Briefly describe what economists do and their typical working conditions.

Economists study how society distributes scarce resources such as land, labour, raw materials, and machinery to produce goods and services. They conduct research, collect and analyze data, monitor economic trends, and develop forecasts. They research issues such as energy costs, inflation, interest rates, imports, or employment levels. Most economists are concerned with practical applications of economic policy. Economists devise methods and procedures for obtaining the data they need. Economists who work for government agencies may assess economic conditions domestically or abroad, in order to estimate the economic effects of specific changes in legislation or public policy.

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 and market and survey researchers is expected to grow faster than the average for all occupations through 2010. Many job openings are likely to result from the need to replace experienced workers who transfer to other occupations, retire, or leave the labour force for other reasons.

Employment growth of economists is expected to be as fast as average over the . 17

projection period, while growth for market research analysts and survey researchers is expected to be faster than average.

Opportunities for economists should be best in private industry, especially in research, testing, and consulting firms, as more companies contract out for economic research services. The growing complexity of the global economy, competition, and increased reliance on quantitative methods for analyzing the current value of future funds, business trends, sales, and purchasing should spur demand for economists. The growing need for economic analyses in virtually every industry should result in additional jobs for economists. Employment of economists in the Federal Government should decline more slowly than other occupations in the Federal workforce.

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?

Graduate education is required for many private sector economist and market and survey research jobs, and for advancement to more responsible positions.

Economics includes many specialties at the graduate level, such as advanced economic theory, econometrics, international economics, and labour economics.

Students should select graduate schools strong in specialties in which they are interested. 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.

Market and survey researchers may earn advanced degrees in economics, business administration, marketing, statistics, or some closely related discipline. Some schools help graduate students find internships or part-time employment in government agencies, economic consulting firms, financial institutions, or marketing research firms prior to graduation.

In addition to courses in business, marketing, and consumer behaviour, marketing majors should take other liberal arts and social science courses, including economics, psychology, English, and sociology. Because of the importance of quantitative skills to economists and market and survey researchers, courses in mathematics, statistics, econometrics, sampling theory and survey design, and computer science are extremely helpful.

Whether working in government, industry, research organizations, marketing, or consulting firms, economists and market and survey researchers with bachelor degrees usually qualify for most entry-level positions as a research assistant, administrative or management trainee, marketing interviewer, or any of a number of professional sales jobs. A master's degree usually is required to qualify for more responsible research and administrative positions. Many businesses, research and consulting firms, and government agencies seek individuals who have strong computer and quantitative skills and can perform complex research. A Ph.D. is necessary for top economist or marketing positions in many organizations. Many corporation and government executives have a strong background in economics or marketing.

A master's degree is usually the minimum requirement for a job as an instructor in community colleges. In most universities a Ph.D. is necessary for appointment as . 18

an instructor. A Ph.D. and extensive publications in academic journals are required for a professorship, tenure, and promotion.

Aspiring economists and market and survey researchers should gain experience gathering and analyzing data, conducting interviews or surveys, and writing reports on their findings while in college. This experience can prove invaluable later in obtaining a full-time position in the field, since much of their work, in the beginning, may center on these duties. With experience, economists and market and survey researchers eventually are assigned their own research projects.

Those considering careers as economists or market and survey researchers should be able to pay attention to details because much time is spent on precise data analysis. Patience and persistence are necessary qualities since economists and market and survey researchers must spend long hours on independent study and problem solving. At the same time, they must work well with others, especially market and survey researchers, who often oversee interviews for a wide variety of individuals. Economists and market and survey researchers must be able to present their findings, both orally and in writing, in a clear, concise manner.

Developing Your Research Skills Gaining a competitive advantage in today’s marketplace is critical to a company’s success. Look through recent copies of business journals and newspapers (online or in print) to find an article about a company whose practices have set that company apart from its competitors. Use your favourite online search engine to find out more information about that company online.

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

Student answers may vary depending upon selection of company and search engine.

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 and search engine.

3. Does the company have a website, and if so, how does the company use it?

What kinds of information does the company include on its website?

Student answers may vary depending upon selection of company and search engine.

Answers to Boxed Features Box1: Redefining Reality in the Electronic Economy Jumping on the Internet to check your test scores, reserve a plane ticket, or find an apartment might feel like business as usual to you these days, but the business and technology revolution that enabled these online conveniences has been anything but usual and it’s not over yet. No matter where your career takes you, inside the

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business arena or not, the electronic economy will affect you personally and professionally.

Throughout this course, you’ll get insights into the interplay of technology and business. As you explore the ins and outs of business management, pay attention to the Internet’s impact in areas such as these: ■ Competitive opportunities and threats. The Internet creates new business opportunities for some companies and creates new competitive threats for others.

Small companies can now reach customers halfway around the world—but the customers they used to have across the street can now shop just about anywhere as well.

■ The speed of business. The good news is that technology can accelerate virtually every aspect of business. That’s also the bad news. The faster things go, the faster everybody expects them to go. The pace can lead to rushed decision making and wear out both employees and managers.

■ Consumer power. Researching and shopping for many products used to be a time-consuming chore in many cases, leaving buyers wondering if they had really explored all their options and gathered enough information to make smart decisions.

Not anymore. The Internet shifts power from sellers to buyers, who can usually gather mountains of information within minutes and jump from one seller to the next with the click of a mouse.

■ Security and privacy. Online security issues are significant and cause many individuals to shy away from fully using the potential of the Internet. Dealing with issues like credit card scams, security breaches, and even spam is an unfortunate side of the medium.

With the dot.com boom and collapse far behind in the rear-view mirror, technology is getting down to business with an emphasis on sensible solutions to real-world problems. As you move into your career, you’ll no doubt encounter all these issues— and perhaps make your mark somewhere in the ever-changing world of electronic business.

Questions for Critical Thinking 1. Select a business that you purchase from regularly; how could the Internet help or threaten this company?

Students responses will vary depending on the business they choose.

2. How has the Internet helped (or perhaps hurt) your college experience?

Students responses will vary depending on their personal experiences with the Internet.

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Box 2: LivePerson Puts a Pulse on the Web You’re shopping online, but you want some more information. Does that sweater come in red? Will you get free shipping? Before you click and buy, sometimes you need the help of a real live person. That’s why Robert LoCascio developed LivePerson.com, a software company that puts the human touch into online shopping. Bell Canada is one of the many large corporations that use the company’s services.

LoCascio knows that many retail websites are ineffective. They confuse and frustrate shoppers and force them to look through page after page of details to find the information they need. As a result, many consumers give up and abandon their electronic shopping carts. But LoCascio’s LivePerson helps companies doing business on the Internet maximize their customers’ online shopping experience.

Websites with LivePerson services invite online shoppers to chat with a real live person. Shoppers simply click on the LivePerson icon and a pop-up window appears on the screen. Type in your name and you’re instantly greeted by a customer service rep who asks, “What can I do for you?”

Bell Canada uses LivePerson’s online sales solution to engage customers as they browse its business solutions website. This initiative targets small and medium enterprises (SME) and focuses on high-speed Internet and Web-hosting services.

The LivePerson reps can also help customers with unique product questions and selections. For instance, reps can suggest alternatives to customers by clicking on different web pages to show similar products. They can also supply customers with valuable information about their past purchases and previous visits to the website. As LoCascio explains, the reps “embrace the customer and help them through the process of shopping.”

All in all, LoCascio’s company helps e-commerce firms compete by providing a high level of customer service. “If you walk into a store and there’s no person there to help you, the experience is pretty bad,” says LoCascio. “The same thing is true online.”

Questions for Critical Thinking 1. How can a service like LivePerson help Internet retailers gain a competitive advantage?

A service like LivePerson helps Internet retailers gain a competitive advantage by providing them with instant assistance with their shopping needs. This service is unique and specific to the individual consumer. Technology allows for past records to be maintained and utilized so that the LivePerson can assist the consumer with any and all of their questions/concerns. This service is not readily available in physical store locations. Some consumers may favour this type of individualized shopping and, thus, may prefer online purchasing of their products.

2. A business is a profit-seeking activity that provides goods and services that satisfy consumers’ needs. What consumer needs does LivePerson try to satisfy?

It satisfies the following needs: .

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¾ ¾ ¾ ¾

Need for individualized attention Need to be informed Need to be responded to in a timely manner Need to feel important

Box 3: Economic Indicators and the New World Order: Windsor and the Shifting Front Lines The government of Canada carefully measures unemployment statistics, housing starts, durable-goods orders and many other key bits of information to make decisions about lowering interest rates, adjusting taxes, or taking other actions that will influence the economy and ensure that the system runs smoothly. Governments have a complicated task in trying to satisfy opposing needs in a vast economy like Canada. Despite errors and cynical opinions about bureaucrats, officials usually have the best intentions in mind and they try to balance the diverse needs as best they can.

But what happens when old models meet abnormal economic forces? Chrysler just signed an assembly deal with Chinese automaker Chery Automobile Company.

Workers on the assembly line in the province of Anhui earn 83 cents per hour as opposed to $73 per hour (when you add in all the benefits) for a US employee.

Canadian workers are slightly more of a bargain compared to their American counterparts, but how do you compete with figures as low as those offered by the Chery Automobile Company? You don’t need to put those figures into a supply and demand graph to get the picture. Major job cuts in North American plants are largely based on such figures. There is only so much that efficiency and cost reduction can accomplish.

How does this news affect Canadian autoworkers? Windsor, Ontario, has a long history as a manufacturing hub, especially in the auto sector. With Detroit just across the bridge, it is ideally located for traditional economic ties. Its status as a vital Canadian–US gateway city has led to a special connection and probably a greater awareness of economic forces. Since they are at the front lines of the traditional manufacturing sector “the people of Windsor are fond of saying that when it comes to economic slowdowns, their city is first in and first out. Windsor serves as a barometer for the country.” In the past, you could have even described the City of Windsor itself as a leading indicator. But something is changing and the old patterns are not quite the same anymore. A recent Globe and Mail article entitled “Welcome to a New Economic Cycle” was published on the same day that Statistics Canada announced that the economy had created 88 900 jobs in the previous month. Good News! However, it all seemed like a terrible joke to Windsor residents. With manufacturing plants shutting their doors and an unemployment rate nearly in double digits, the community that was accustomed to seeing the good news before it read about it in government reports wasn’t seeing it this time around.

But Windsor is still sending signals to the rest of the country. The message, in case you have not heard the first 20 warning bells, is that the economy has shifted and employees and communities had better adapt and focus on new opportunities. But also beware that the 83-cents-per-hour worker is interested in the service sector, too.

Adapt, but don’t get too comfortable. Most people no longer get a gold watch after . 22

30 years of service because employees shift from job to job and career to career so often. Stay current and don’t be afraid to change because nobody is quite sure what the economy will look like in another 10 or 15 years.

Questions for Critical Thinking 1. Why does the government examine key economic indicators such as unemployment and durable-goods orders?

Governments monitor the performance of the economy by watching a variety of key indicators. Unemployment statistics signal upcoming changes in consumer spending. When unemployment rises, people have less money to spend and the economy suffers. Durable-goods orders are orders for goods that typically last more than three years. A rise in durable-goods orders is a positive indicator that business spending is turning around. Besides unemployment data, housing starts, and durable-goods orders, economists closely monitor a nation’s price changes and output.

2. What can companies and workers in the manufacturing sector do to help maintain a manufacturing base in Canada?

Answers will vary.

The purpose of this question is to make students aware of the very difficult challenges that the global economy is presenting.

See It on the Web URLs for all Internet exercises are provided at the website for this book, www.pearsoned.ca/bovee. When you log on to the text website, select Chapter 1, then select Web Destinations, click on the name of the featured website, and follow the detailed navigational directions to complete these exercises.

Explore these chapter-related websites, review their content, and answer the following questions for each website you visit: 1. What is the purpose of this website?

2. What kinds of information does this website contain? Please be specific.

3. How is the information provided at this website useful for businesspeople?

Consumers?

4. How did you expand your knowledge of economics by reviewing the material at this website? What new things did you learn about this topic?

Find the Right Stuff Getting information on a specific company can be a challenge, especially if you don't know where to begin. One of the best starting points is the SEDAR website, www.sedar.com. This website provides an incredible amount of information on public companies in Canada. Public disclosure documents are available, including brief profiles, financial data, history, annual reports, and current events. So log on and use the toolbox to browse company data. Another site that provides some valuable information is Hoover's online site, www.hoovers.com.

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1. What is the purpose of this website?

While student responses may vary, the following will address some possible answers.

Sedar and Hoover’s deliver comprehensive company, industry, and market intelligence that drive business growth. Hoover’s provides sales, marketing, business development, and recruiting professionals with the global business intelligence they need to prospect and prepare for client meetings, sales presentations, vendor and partner negotiations, and other business opportunities.

2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers.

Through this website, Hoover's Online, Hoover’s more than 80-member editorial staff delivers continuously updated intelligence on public and private companies worldwide. Hoover's also delivers its information through corporate intranets and distribution agreements with licensees as well as via Hoover’s-branded print and CD-ROM products.

3. How is the information provided at this website useful for businesspeople?

Consumers?

While student responses may vary, the following will address some possible answers.

The information provided on this website is useful for businesspeople for many reasons. Implementing technology for your business and making informed decisions concerning software that would create a more effective and efficient environment for your business is crucial. Hoovers allows companies to search over 22,000 B2B software products and services. Compare solutions using the most comprehensive information available. Companies are allowed to purchase valuable data through Hoover’s Lead Finder to gain relevant contact information and target new customers. (Students may cite other reasons, as these are only a few answers students may have) The information provided on this website is useful for consumers because it allows consumers to track the companies, industries, and other business-related news that's most useful to them.

4. How did you expand your knowledge of economics by reviewing the material at this website? What new things did you learn about this topic?

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

Step Inside the Economic Statistics Briefing Room Want to know where the economy is headed? Visit the Statistics Canada website, www.statcan.ca, to find the latest economic indicators. Check out the statistics and graphs for new housing starts, unemployment, average hourly earnings, and more.

1. What is the purpose of this website? . 24

While student responses may vary, the following will address some possible answers.

The purpose of this service is to provide easy access to current economic indicators. It provides links to information produced by a number of agencies.

2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers.

Employment, Unemployment, and Earnings: Ex. Unemployment rate Prices: Ex. Consumer Price Index Production: Ex. GDP 3. How is the information provided at this website useful for businesspeople?

Consumers?

While student responses may vary, the following will address some possible answers.

Both consumers and businesses alike can use this website for information purposes.

Consumers may find the information presented on Interest rate fluctuations useful, while businesses may find any number of the above topics listed very informative.

4. How did you expand your knowledge of economics by reviewing the material at this website? What new things did you learn about this topic?

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

Discover What's in the CPI The consumer price index (CPI) is an important tool that allows analysts to track changes in prices over time. However, the CPI doesn't always match a given individual's inflation experience. Check out how the CPI measures homeowners' costs, how the CPI is used, what goods and services it covers, and who’s buying habits it reflects. Explore the Statistics Canada site to discover the CPI figures for your province. Then click onto the Bank of Canada website, www.bankofcanada.ca/en/inflation/index.htm, and look up the definition of core CPI. 1. What is the purpose of this website?

While student responses may vary, the following will address some possible answers.

The primary goal is to explain the role of CPI and evaluate the recent history and explain the key importance of the Consumer Price Index.

2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers.

This website contains information on the following: .

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¾ Inflation and consumer spending ¾ Price Stability ¾ Consumer Price Index 3. How is the information provided at this website useful for businesspeople?

Consumers?

While student responses may vary, the following will address some possible answers.

This website is useful for businesspeople because it provides access to price statistics and information in one central location. Information on all of the above bulleted items could be useful to businesses as well as the projections for the future in relation to our nation’s economic well-being.

4. How did you expand your knowledge of economics by reviewing the material at this website? What new things did you learn about this topic?

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

Chapter 1 Pop Quiz: 1. Which of the following statement is correct? a. Approximately 75% of all jobs in Canada are in the service sector b. A majority of men and women work in the goods sector c. A majority of men work in the goods sector d. Ten percent of men work in the service sector 2. Which of the following is not an example of a non-profit organization? a. museums b. public schools c. universities d. symphonies e. All of the above are examples of non-profit organizations 3. The growth of the service sector is attributed to all but which of the following? a. Consumers have more disposable income. b. Companies are increasingly seeking professional advice. c. Barriers to entry are extremely high for service businesses. d. Services are needed to support complex goods and new technology.

4. Which of the following is not a factor of production? a. natural resources b. capital c. competition d. human resources

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5. The Canadian economic system is best described as: a. capitalism b. mixed capitalism c. communism d. pure socialism 6. A market that is dominated by a few large and powerful companies is referred to as a(n) ___________. a. oligopoly b. pure competition c. monopoly d. perfect competition 7. The Government’s role in a free market economy consists of which of the following? a. it enacts laws and creates regulations to foster competition b. it regulates and deregulates certain industries c. it protects stakeholders’ rights d. it intervenes to contribute to economic stability e. All of the above are economic roles of the government 8. The Competition Act was designed to reduce competition and increase freedom of choice for suppliers. a. true b. false 9.

__________________occurs when the economy is growing and people are spending more money. Consumer purchases stimulate businesses to produce more goods and services, which it turn stimulates employment. ______________occurs when such spending declines. a. Economic Contraction; Economic Expansion b. Economic Gain; Economic Loss c. Economic Loss; Economic Gain d. Economic Expansion; Economic Contraction

10. The ___________________measures the rate of inflation by comparing the change in prices of a representative basket of goods and services such as clothing, food, housing, and utilities over time. a. gross domestic product b. consumer price index c. gross national product d. economic indicators

Answers to quiz: 1. a 2. e 3. c 4. c 5. b 6. a

7. e 8. b 9. d 10. b

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Chapter 2: Competing in the Global Economy Learning Objectives 1 2 3 4 5 6 7 8 9 10

Explain why nations trade Explain why nations restrict international trade and list four forms of trade restrictions Highlight three protectionist tactics nations use to give their domestic industries a competitive edge Explain how trading blocs affect trade Identify the role of emerging markets and the importance of the countries referred to as BRIC Understand the fundamental elements of currency exchange Highlight the opportunities and challenges of conducting business in other countries List five ways to improve communication in an international business relationship Identify five forms of international business activity Discuss the economic and social impact of global events such as avian flu, SARS, mad cow disease, and terrorism as they relate to globalization

Summary of Learning Objectives 1 Explain why nations trade Nations trade to obtain raw materials and goods that are unavailable to them or that are too costly to produce domestically. International trade benefits nations by increasing a country’s total output, offering lower prices and greater variety to its consumers, subjecting domestic oligopolies and monopolies to competition, and allowing companies to expand their markets and achieve production and distribution efficiencies.

2 Explain why nations restrict international trade and list four forms of trade restrictions Nations restrict international trade to boost local economies, shield domestic industries from head-to-head competition with overseas rivals, save specific jobs, and give weak or new industries a chance to grow strong, or protect a nation’s security. The four most commonly used forms of trade restrictions are tariffs (taxes, surcharges, or duties levied against imported goods), quotas (limitations on the amount of a particular good that can be imported), embargoes (the banning of imports and exports of certain goods), and sanctions (politically motivated embargoes).

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Highlight three protectionist tactics nations use to give their domestic industries a competitive edge From time to time countries give their domestic producers a competitive edge by imposing restrictive import standards, such as requiring special licences or unusually high product standards; by subsidizing certain domestic producers so they can compete more favourably in the global marketplace; or by dumping or selling large quantities of a product at a lower price than it costs to produce the good or at a lower price than the good is sold for in its home market.

4 Explain how trading blocs affect trade Trading blocs are regional groupings of countries in which trade barriers have been removed. These alliances ease trade among bloc members and strengthen barriers for non-members. Critics of trading blocs fear that as members become more protective of their regions, those not in the bloc could suffer.

Proponents see them as a way to help smaller or younger nations compete with producers in moredeveloped nations. The four most powerful trading blocs today are the Association of Southeast Asian Nations (ASEAN), Mercosur, the North American Free Trade Agreement (NAFTA), and the European Union (EU).

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5

Identify the role of emerging markets and the importance of the countries referred to as BRIC Emerging markets provide access to natural resources, inexpensive labour, and are important potential markets that all major companies want to access. Brazil, Russia, India, and China are four particularly interesting nations that have a huge population base and have been targeted by firms in recent years for their tremendous potential.

6 Understand the fundamental elements of currency exchange Foreign exchange refers to the conversion of one currency into an equivalent amount of another currency.

Most international currencies operate under a floating exchange rate system, which means that its price fluctuates in response to the forces of global supply and demand. Other countries fix their currencies to another foreign currency like the euro. As the euro rises, their currency rises proportionately. Devaluation, or the decline of a country’s currency, is not necessarily bad. It makes that country’s products cheaper to buy for foreigners and can actually boost the local economy by creating additional foreign demand for products. In general, an increase in the dollar is good for importers but bad for exporters and vice versa.

7 Highlight the opportunities and challenges of conducting business in other countries Conducting business in other countries can provide such opportunities as increased sales, better operational efficiencies, and exposure to new technologies and consumer markets. At the same time, it poses challenges such as the need to learn local laws, customs, and ethical standards. Furthermore, it exposes companies to the risks of political and economic instabilities, volatile currencies, international trade relationships, and the threat of global terrorism.

8 List five ways to improve communication in an international business relationship To improve international communication, learn as much as you can about the culture and customs of the people you are working with, keep an open mind and avoid stereotyping, anticipate misunderstandings and guard against them by clarifying your intent, adapt your style to match the style of others, and learn how to show respect in other cultures.

9 Identify five forms of international business activity Importing and exporting, licensing, franchising, strategic alliances and joint ventures, and foreign direct investment are five of the most common forms of international business activity. Each provides a company with varying degrees of control and entails different levels of risk and financial commitment.

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Discuss the economic and social impact of global events such as avian flu, SARS, mad cow disease, and terrorism as they relate to globalization The growing mutual dependence and interrelation between countries in the global business environment is inevitable. This fact leaves multinational firms vulnerable to events across the globe, but at the same time protects them from facing financial ruin when a devastating event occurs in any one region. Whether it is avian flu, mad cow disease, SARS, or terrorism, companies and governments will handle each event and then legislate and create protection measures to deal with these new threats.

Brief Chapter Outline I.

Fundamental of International Trade A. Why nations trade B. Advantages of trading internationally C. How international trade is measured 1. Balance of Trade 2. Balance of Payments D. Trade Restrictions 1. Protectionism 2. Effects of protectionism on economies in the long run .

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II.

III.

3. Commonly used forms of trade restriction a. Tariffs b. Quotas c. Embargoes d. Sanctions E. Protectionist Tactics 1. Restrictive Import Standards 2. Subsidies 3. Dumping F. Agreements and Organizations Promoting International Trade 1. General Agreement on Tariffs and Trade (GATT) 2. World Trade Organization (WTO) 3. International Monetary Fund (IMF) 4. The World Bank 5. Asia Pacific Economic Cooperation Council (APEC) 6. Trading Blocs a. Possible disadvantages b. Possible advantages c. Four powerful trading blocs ¾ European Union (EU) ¾ North American Free Trade Agreement (NAFTA) ¾ Association of Southeast Nations (ASEAN) ¾ South America’s Mercosur G. The Undeniable Force of Emerging Markets: BRIC and Beyond 1. BRIC: Brazil, Russia, India and China H. Foreign Exchange Rates and Currency Valuations 1. Foreign exchange 2. Exchange rate 3. Floating exchange 4. Devaluation 5. Pegging currency values Global Business Environment A. Effects of Global Business Environments B. Varying factors from country to country in global business C. Cultural differences in the Global Business Environment D. Prepare for business dealings by learning about various cultures E. Ways to improve intercultural communication F. Legal differences in the global business environment 1. Canadian companies conducting business with other countries must know: 2. Discrepancies between what is acceptable in Canada and what is acceptable in other countries.

G. Forms of international business activity 1. Importing and Exporting 2. Licensing 3. Franchising 4. Strategic Alliances and Joint Ventures H. Foreign Direct Investment 1. Wholly Owned Facilities 2. Multinational Corporations 3. Foreign Direct Investment I. Product Strategies for International Markets Dealing with economic shocks in a global business environment A. Some have pulled back global expansion plans B. World trade faces new obstacles .

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Lecture Notes and Chapter Outline I. II.

Fundamentals of International Trade A. Why nations trade 1. No single country has the resources to produce everything its citizens want or need 2. Countries specialize in the production of goods that they can make more efficiently than other countries: a. Absolute advantage: a nation’s ability to produce a particular product with fewer resources per unit of output than any other nation. ¾ Saudi Arabia has an absolute advantage in the production of crude oil. b. Comparative advantage: a nation’s ability to produce certain items more efficiently and at a lower cost than other items relative to other nations ¾ US has a comparative advantage in the production of steel ¾ Such specialization and exchange will increase a country’s total output and allow both trading partners to enjoy a higher standard of living.

B. Advantages of Trading Internationally 1. Increases a country’s total output 2. offers lower prices 3. offers greater variety to consumers 4. subjects domestic oligopolies and monopolies to competition 5. it allows companies to expand their markets and achieve cost, production and distribution efficiencies, thus it allows firms to achieve economies of scale C. How International Trade is Measured Two key measurements of a nation’s level of international trade are the balance of trade and the balance of payments 1. Balance of Trade: the total value of a country’s exports minus the total value of its imports, over some period of time a. Trade surplus: positive trade balance created when a country exports more than it imports b. Trade deficit: negative trade balance created when a country imports more than it exports 2. Balance of Payments: the total flow of money into the country minus the total flow of money out of the country over a specified period of time. Includes: a. balance of trade b. net dollars received and spent on foreign investments c. military expenditures d. tourists e. foreign aid D. Trade Restrictions 1. Protectionism: restricting trade with other countries. Reasons may include: a. shields a nation’s companies from international competition b. protects industries key to a nation’s defence c. gives weak companies a chance to grow and develop 2. Studies show that protectionism hurts economies in the long run 3. Most commonly used forms of trade restrictions are as follows: a. Tariffs: taxes, surcharges, or duties levied against imported goods. ¾ Raises cost of foreign items, giving domestic products a price advantage ¾ generates revenue for government b. Quotas: limit the amount of a particular good that countries can import during a year ¾ Limits can be set on quantities (such as bushels) or value (such as a dollar’s worth of tea) c. Embargoes: this most extreme trade restrictions completely bans the import or export of certain products ¾ Example: The Embargo on Canadian beef that followed the discovery of a case of “Mad Cow” disease, in 2003, translated into hardship for many in the industry. . 32

d. Sanctions: politically motivated embargoes that revoke a country’s normal trade relations status; they are often used as forceful alternative short of war. Sanctions can include: ¾ arms embargoes ¾ foreign assistance reductions and cut-offs ¾ trade limitations ¾ tariff increases ¾ import-quota decreases ¾ visa denials ¾ air-link cancellations STUDENT RESEARCH

Ask students to research sanctions and find examples of sanctions in recent newspaper articles or on the Web. What were the effects of these sanctions? Were they effective in deterring or encouraging behaviour in other countries? Did the author of the article share an opinion on sanctions? Ask students to share their personal opinions about whether they believe sanctions are an effective political tool.

E. Protectionists Tactics 1. Restrictive Import Standards a. Import Standards: Laws requiring imported goods to pass certain tests or obtain special licenses (makes importing difficult though not impossible) b. Example: Saudi Arabia restricts import licenses for pasteurized milk 2. Subsidies a. Subsidy: assistance given to domestic producers so that their prices will be lower than imports Example: Subsidy accusations are constantly emerging between Brazil and Canada; both countries accuse each other of subsidizing their respective, domestic aerospace industries in the fight between Embraer and Bombardier.

3. Dumping a. Dumping: the practice of selling large quantities of a product at a price lower than the production cost or below what the company would charge in its home market Example: The U.S. initially placed duties of 27.2% on Canadian softwood lumber, back in 2002, using the excuse of dumping as its justification. b. Often used to gain a larger share of the market, or reduce product surpluses HOT DEBATE Divide the class into two groups. One group represents autoworkers, and the other group represents computer manufacturers. Have the group representing auto workers argue for protectionist measures, and the group representing computer manufacturers argue against protectionist measures. Make sure that students understand why these particular groups have vested interests in their positions.

WHAT DO STUDENTS THINK? Ask students to write their opinion on the following question (five minutes). Is the practice of dumping ethical or not. Why would a country participate in such a practice?

Would it help its economy? Does it seem like dumping would be a profitable business method in the long run? Why or why not?

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F. Agreements and Organizations Promoting International Trade There are several international trade agreements and organizations which operate on the principles of free trade to make sure that international business is fair and orderly, and to be sure that trade disputes don’t escalate into wars.

1. General Agreement on Tariffs and Trade (GATT): a worldwide pact established after World War II. Focuses on non-discrimination by offering equal benefits to all countries; no GATT nation can be singled out for punishment. GATT established the World Trade Organization (WTO) in 1995 which replaced GATT as the forum for trade negotiations.

2. World Trade Organization (WTO): permanent forum for negotiating, implementing, and monitoring international trade procedures and for mediating trade disputes. WTO has a formal legal structure for settling disputes (may be more effective than GATT).

3. International Monetary Fund (IMF): now affiliated with the United Nations; provides shortterm loans to countries that are unable to meet their budgetary expenses.

4. The World Bank: founded to finance reconstruction following World War II. Provides lowinterest loans to developing nations for the improvement of transportation, telecommunications, health, and education.

5. Asia Pacific Economic Cooperation Council (APEC): an organization of 21 countries working towards liberalizing trade in the Pacific Rim (United States, Japan, China, Mexico, Australia, South Korea, and Canada.)

6. Trading Blocs: Comprised of neighbouring countries; to promote free trade among regional members; create barriers for goods and services produced outside the bloc a. Possible disadvantages: ¾ World splits into three major “camps” (Americas, Europe, and Asia) ¾ Overall world trade could decline, as member defend their blocs b. Possible advantages: ¾ Growth of commerce and availability of customers and suppliers within a trading bloc could be a boon to smaller or younger nations ¾ Lack of trade barriers within the bloc could help member industries compete with producers in more developed nations ¾ Emerging nations could be shielded from fluctuations of global economy ¾ Promotes sharing of knowledge, increased technology c. Four powerful trading blocs: North American Free Trade Agreement (NAFTA), European Union (EU), Association of Southeast Nations (ASEAN), South America’s Mercosur ¾ European Union ¾ One of the largest trading blocs; includes 27 countries ¾ May soon admit more countries (Croatia, Albania & Turkey) ¾ EU nations can function as a single market (like the US) ¾ 13 member nations: Economic & Monetary Union (EMU) European Central Bank ¾ Unified currency: the euro ($65 million billion saved in exchange costs)

FOR DISCUSSION Ask students to discuss the difficulties that they might face if there were a separate currency in each Canadian province and each American state. How would travel be different? How would stores operate differently? Banks? How would Internet commerce fare? Help students develop a clear picture of the similarities and differences between the North America and Europe. ¾ NAFTA ¾ Includes: Canada, Mexico, and the United States ¾ Phases out all tariffs and quotas formerly restricting trade between members .

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¾ Supporters would like to see the agreement expanded to include all of Central and South America---making it the largest free-trade zone on the planet ¾ There are calls from US politicians to re-open the agreement.

HOT DEBATE Divide students into two groups: one group will defend NAFTA, while the other group will attack NAFTA. Ask students to try to come up with concrete examples (from their own experiences if possible) of ways in which NAFTA has affected their lives.

Encourage students to think broadly about the benefits and negatives to trading blocs in general during this exercise. During the debate, develop a pro/con list on the board so students can appreciate the complexities of international business interactions.

G. The Undeniable force of Emerging Markets: BRIC and Beyond 1. BRIC is an acronym used to describe four very important emerging markets that are altering the business landscape and having a tremendous impact on employment and production: Brazil, Russia, India and China.

2. Emerging markets such as the BRIC nations are no longer simply sources of natural resources and cheap labour they are emerging as global players in many industries.

II.

H. Foreign Exchange Rates and Currency Valuations 1. Foreign exchange: the conversion of one currency into an equivalent amount of another currency 2. Exchange rate: the number of yen (or pounds) that must be exchanged for dollars (or euros), etc.

3. Floating exchange rate system: a currency’s value or price fluctuates in response to the forces of global supply and demand (determined in part by the state of the country’s own economy) a. Sometimes countries will intervene and adjust the exchange rate to keep the price of a nation’s goods and services more affordable in global markets ¾ protect economy from trade imbalances ¾ boost or slow down a country’s economy 4. Devaluation: drop in value of a nation’s currency relative to some fixed standard (products and services become more affordable, boosting exports, and the economy) 5. Some countries peg the value of their currencies to the value of more stable currencies (often the Euro, the US dollar or the Yen) a. when pegged the currency’s value fluctuates proportionally with the foreign currency’s value to which it is linked b. if one partner suffers economic hardship, demand for its currency will decline significantly and the exchange rate at which the two are pegged becomes unrealistic The Global Business Environment A. Global business environments can: 1. Generate increased sales 2. Produce operational efficiencies 3. Expose companies to new technologies 4. Provide greater consumer choices B. In a global business, many factors affecting business vary from country to country: 1. laws 2. customs 3. consumer preferences 4. ethical standards 5. labour skills 6. political stability 7. economic stability 8. volatile currencies . 35

9. international trade relationships 10. threat of terrorism Example: To go global, U.P.S. had to obtain air rights; learn customs laws, work ethics, and employment policies C. Cultural Differences in the Global Business Environment 1. differences in language 2. social values 3. ideas of status 4. decision-making habits 5. attitudes towards time 6. use of space 7. body language 8. manners 9. ethical standards D. To prepare for business dealings with other cultures, companies need to learn about a culture’s: 1. history 2. religion 3. politics 4. customs 5. gift-giving etiquette 6. proper attire for business meetings E. Ways to improve intercultural communication 1. be alert to the other person’s customs: expect the other person to have values, beliefs, expectations, and mannerisms different from yours 2. deal with the individual: do no stereotype the other person or react with pre-conceived ideas.

3. clarify your intent and meaning: clarify your true intent by repetition and example 4. adapt your style to the other person’s: if the other person appears to be direct and straightforward, follow suit 5. show respect: learn how respect is communicated in various cultures—through gestures, eye contact, and so on F. Legal Differences in the Global Business Environment 1. Canadian companies conducting business in other countries must know: a. Canadian law b. International law c. Laws specific to other countries where they plan to trade or do business (where they plan to do business) 2. Sometimes there are discrepancies between what is acceptable in Canada and what is acceptable in other countries a. Example: The Corruption of Foreign Public Officials Act (bans bribery of government officials) b. Other countries consider bribery a matter of course, and some business owners feel this law inhibits domestic companies from trading competitively on the world market G. Forms of International Business Activity There are five main forms of international business activity: importing and exporting; licensing; franchising; joint ventures; strategic alliances 1. Importing and Exporting: increased importing and exporting causes economies to become linked worldwide a. Importing: buying goods and services from a supplier in another country and bringing them into one’s own country b. Exporting: selling and shipping goods or services to another country c. Exporting: a company can contact customers directly or go through an intermediary ¾ Export management company: domestic firms who specialize in international marketing for a commission

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¾ Export trading company: general trading firms that buy products wholesale for resale overseas d. Other assistance for exporting include: ¾ foreign distributors: working through a foreign distributor with connections in the target country is often helpful to both large and small companies because such intermediaries can provide you with connections, expertise, and market knowledge you will need to conduct business in a foreign country. ¾ foreign trade offices ¾ professional agents ¾ local business people 2. Licensing a. Licensing: an agreement entitling one company to use some or all of another firm’s intellectual property (patents, trademarks, brand names, copyrights, or trade secrets) in return for a royalty payment.

Example: Jockey licenses the rights to use the Jockey name to certain foreign manufacturers of women’s active wear, sleepwear, and slippers. b. Benefits include: ¾ no shipping costs ¾ no trade barriers ¾ no uncertainties of entering foreign markets ¾ percentage of the profit 3. Franchising a. Franchise: An agreement in which the franchisee obtains the rights to duplicate a specific product or service (restaurant, DVD rental store etc.) and the franchiser obtains a royalty fee in exchange (example: Holiday Inn) b. Benefits include: ¾ minimized costs ¾ minimized risks ¾ bypassed trade restrictions 4. Strategic Alliances and Joint Ventures a. Strategic alliance: a long-term partnership between two or more companies to jointly develop, produce, or sell products in the global marketplace. Companies share ideas, resources, technologies, expertise, investment costs, risks, management, and profits ¾ Example: Strategic Alliance established between Air Canada, Singapore Airlines, United etc. Benefits include integrated frequent flyer programs, common airport lounges, more efficient ticketing among member carriers b. Joint venture: a special type of strategic alliance in which two or more firms join together to create a new business entity that is legally separate and distinct from its parents. ¾ In some countries, foreign companies are prohibited from owning facilities outright or from investing in local business. Therefore, establishing a joint venture with a local partner may be the only way to do business in that country. Example: Boeing in China, a joint venture with Xian H. Foreign Direct Investment 1. Wholly owned facilities: firms owned entirely by foreign investors, with varying levels of foreign staff and involvement.

Some benefits may include: a. Availability of raw materials b. low wage rates c. direct access to markets in other countries 2. Multinational Corporations: Companies with operations in more than one country 3. Foreign Direct Investment (FDI): this is when companies either establish production and marketing facilities in the countries where they operate or purchase existing firms. a. This foreign direct investment constitutes the highest level of international involvement.

.

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b. Example: Wal-Mart acquired large retail stores in Germany and Great Britain and later converted them into Wal-Mart SuperCenters TEAM TALK

Divide students into teams of three or four. Ask students to select a product they would like to market in China. Assign each team the task of exporting, licensing, franchising, joint venturing, or building a production facility for their product. Have students develop a list of questions they would want answered before commencing business. Ask students to describe the optimal situations for each type of business interaction and to list the benefits and risks of each type of trade.

I.

Product Strategies for International Markets 1. Standardize the product: sell the same product everywhere in the world (Kellogg) 2. Customize the product: to accommodate the lifestyles and habits of local target markets (Disneyland Paris) III. Dealing With Economic Shocks in a Global Business Environment A. Some high profile firms such as Merrill Lynch, Home Depot and Ford Motor Company have pulled back their global expansion plans B. Despite the hesitations of some firms others are heading into the global game without delay 1. KFC plans to open more than 1,000 stores a year overseas for the foreseeable future.

C. Markets are opening and opportunities are everywhere but firms trading in the international arena are learning that events in one part of the world can have an impact on trade and commerce around the globe as these examples demonstrate.

1. 911 Terrorist attacks 2. “Mad Cow” Disease 3. The “Bird Flu”

Potential Difficulties and Suggested Solutions 1. Students may think they understand cultural differences between countries; however, it may be necessary to encourage research into this in order to ensure thorough understanding of the subject matter. Students are often amazed at the many differences that do exist from country to country. ¾ As an additional class assignment, the instructor may want to assign a country to each student (have students choose from a hat to ensure fairness, as it is easier to find literature on some countries and rather difficult for others). Ask the students to pretend they are consultants to a firm that wishes to do conduct business in the country they chose. o What information would you need to know about that country before you attempt to do business there? Ask the students to consider hand gestures, table manners, attitudes toward time, etc.

2. Students may need more concrete examples involving the conduct of business in other countries. ¾ Instructors may want to use McDonald’s as an example of an international corporation. It often helps when students can learn from the experiences of other students. Does the food at McDonald’s in Ireland taste the same as the food at McDonald’s in North America. Also, students may note that the McDonald’s in Germany sells beer. Ask students why they believe this is so….adaptability and flexibility in international markets is the key. ¾ The Instructor may want to ask if any students in the class are from another country. If so, these students may be willing to share knowledge about conducting business in their country of origin. It is important for students to realize that an interview may very well be the best source for obtaining facts about doing business in a particular country. The information on the Internet may or may not be reliable depending on the source.

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Behind the Scenes Molson Canadian, eh?

Test Yourself Answers to these questions can be found on the website: www.pearsoned.ca/bovee.

1.

Why are established companies under increased pressure to compete with foreign-based companies? What factors are influencing this pattern? Explain.

As indicated in the opening case, a lot has changed in the two centuries since Molson began to sell beer.

In fact, an awful lot has changed in the past two decades. National borders no longer offer companies the type of protection that they once did. In the past, companies could rely on national patriotism (language differences and customs) and if that failed governments would routinely step in and impose trade restrictions which made it very difficult for foreign companies to compete. Today most of these protections have either been eliminated or reduced. Major companies like Molson must compete in the international arena because those international brands are now competing freely in their domestic market.

2.

Why did Molson’s Brazilian acquisition pose such a challenge for the company?

Companies make such acquisitions with the best intentions: merging operations, creating synergies and implementing new effective systems. Quite often those goals are difficult to meet especially when the purchase is in a foreign country. This acquisition was in a culturally distinct market. Their brands are sold in Brazil. Tapping into this market became a very difficult task. Building Brazilian brands in Canada Marca Bavaria- was an expensive and unsuccessful proposition as well. To sum it up, it was not a great fit.

3.

Did Molson really need a partner? Do you think that Coors was a good choice?

Student answers will vary.

The key point to bring up from this question is that Molson was really feeling the pressure from a consolidating industry. Its market standing was becoming very small on the global stage so a partnership was important to truly compete on the global stage. Coors has more international recognition and strength in the US.

Behind the Scenes (End of Chapter) Molson Coors: A Global Partnership Critical thinking Questions 1.

How does Molson’s partnership with Coors enhance the company’s market position?

The newly merged company becomes the fifth largest brewery and their combined strengths make the unified company a bigger player with more influence and the ability to compete with the top four. In addition, the merged company now boasts a better rounded portfolio of beer brands to build it market share worldwide.

2.

How does the three region strategy help Molson Coors capitalize on market opportunities?

The three region strategy allows the company to more carefully address the marketplace and tap into the diverse needs. Molson obviously has the best knowledge of the Canadian marketplace and Coors has the same knowledge when it comes to the USA. Coors Brewers limited focuses more directly on the various international markets. As a whole the company benefits from the relationships built by all three regions.

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3.

What role do licensed brands play in the success of Molson Coors’ Canadian operations?

As indicated in this case, even before the merger, Molson and the various beer brewers have used the licensing vehicle as a primary tool in their global beer expansion. Key brands such as Corona and Heineken are a major part of the picture. Licensing allows the Molson Coors to generate additional revenue and licensing their brands in other markets enables the company to tap into additional markets.

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

Answers to End-Of-Chapter Questions Test Your Knowledge Questions for Review What is meant by the term absolute advantage? What is meant by comparative advantage?

Explain both and provide examples.

The comparative advantage theory states that a country should produce and sell to other countries those items it produces most efficiently. An absolutebsolute advantage means that a country can produce a particular item more efficiently than all other nations, or it is virtually the only country producing that product.

Absolute advantages rarely last, however, unless they are based on the availability of natural resources.

1.

2. 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.

3. What are the advantages and disadvantages of trading blocs like NAFTA and the European Union?

The arguments in favour of trading blocs include the following: wider markets, trading blocs foster economic growth, they help smaller nations, and they promote competition. The arguments against such trading blocs include the following: trade restrictions for non members, economic isolation, and the potential decline in overall world trade.

4. What is meant by currency devaluation?

Currency devaluation refers to a drop in the value of a nation’s currency relative to the value of other currencies. This can at times boost a country’s economy because it makes the country’s products and services more affordable in foreign markets while it increases the price of imports. Because fewer units of foreign currency are required to purchase the devalued currency, such situations tend to raise a country’s exports and lower its imports.

5. 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. 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 decisions.

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Questions for Analysis 6.

What is the difference between an embargo and a tariff? Which one is more restrictive from a manufacturer’s point of view?

Tariffs are taxes, surcharges, or duties levied against imported goods. Sometimes tariffs are levied to generate revenue for the government, but more often they are imposed to restrict trade or to punish other countries for disobeying international trade laws. An embargo refers to a total ban on trade with a particular nation (a sanction) or of a particular product and is more restrictive.

7. The trend away from protectionism and toward free trade has been undeniable in recent years and has been pushed by the big developed countries like Canada and the United States. However, governments sometimes fall back on their old protectionist ways while dealing with trading partners. Under what circumstances might a country do this?

The trend towards free trade and away from protectionism has been pushed by major industrialized nations like Canada and the US. Yet both countries have been accused of employing protectionist measures. Sometimes it seems like free trade proponents have adopted a “do as I say, not as I do philosophy.” The defences used are that trading partners are breaking agreements and manipulating the rules in their favour. This often leads to unilateral actions which are then copied by other nations and can eventually lead to a trade dispute or a downward spiral towards a trade war. Resorting to protectionist tactics is a potentially dangerous approach regardless of the reason. Countries routinely end up at the WTO with their complaints.

8. 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 problems. 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. They 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.

9. Which of the following international expansion strategies is more risky: foreign direct investment or joint ventures (with foreign companies)? Why? A joint venture is a special type of strategic alliance in which two or more firms join together to create a new business entity that is legally separate and distinct from its parents. There is major risk for companies engaging in this approach such as the potential for the loss of trade secrets. However, some multinational corporations increase their involvement in foreign countries by establishing foreign direct investment (FDI). That is, they either establish production and marketing facilities in the countries where they operate or purchase existing foreign firms. Such foreign direct investment constitutes the highest level of international involvement. Moreover, it carries much greater economic and political risk and is more complex than any other form of entry into the global marketplace.62 10.

ETHICAL CONSIDERATIONS: Should the Canadian government more closely regulate the practice of giving trips and other incentives to foreign managers to win their business?

Is this bribery?

Answers will vary depending on student opinions. The Corruption of Public Officials Act is already in place. Possible benefits of tighter regulation include: (1) a more ethical business environment, (2) a level playing field for smaller companies that can’t afford to pay for trips and gifts, and (3) higher quality business transactions (as companies are forced to compete exclusively on their own merits). Possible drawbacks to closer regulation include: (1) loss of contracts to foreign competitors, (2) costs of demonstrating compliance with federal regulations, and (3) companies will probably continue to be compelled to offer incentives, which means that more companies will be breaking the law. Giving trips . 41

and other non-monetary incentives to foreign managers is not technically bribery, but one can argue that it amounts to the same thing.

Questions for Application 11. Suppose you own a small company that manufactures hockey 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?

Who is currently serving the market? 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, 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.

12. Because your Brazilian restaurant caters to Western businesspeople and tourists, much of the food you buy is imported from North American sources. Lately, the value of the real (Brazil’s currency) has been falling relative to the U.S. dollar. This change makes your food imports much more costly, and it negatively affects your profitability. You have three options: which one will you choose? (a) Raise menu prices across the board (b) Accept only US dollars from customers (c) Try to purchase more of your food items locally. Please explain your selection. a. This may be a good temporary fix. However, if the real continues to fall, you will be forced to continue raising prices. If, on the other hand, the real regains its strength, you may find that your prices are too high for the market. b. This would limit your business too much. Most locals and many travelers will not be carrying U.S. dollars. c. This is your best option in the long run. The more local food you are able to purchase, the less exposed you will be to currency fluctuations.

13. INTEGRATED: Review the theory of supply and demand discussed in Chapter 1. Using this theory, explain how a country’s currency is valued and why governments sometimes adjust the value of their currency.

A country’s currency value is determined in part by what is happening in the country’s own economy. For example, if Brazil’s economy is suffering from unemployment and inflation, foreign investors will tend to invest elsewhere, lessening the demand for Brazilian currency and causing its value to be lower than other countries not experiencing economic problems. However, sometimes countries adjust the rate to boost or slow the economy or in order to remain competitive with other economies. For example, if the exchange rate for British goods is too high, then demand will drop because other currencies can sell their goods at a lower exchange rate. However, if the currency value is too low, then money is lost in exchange, and confidence in the country’s economy drops, causing rates to drop even lower. Therefore, in order to remain competitive, a nation’s currency should be neither too high nor too low. For this reason, nations sometimes devalue or revalue their currencies to keep the rate stable.

14. INTEGRATED: 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?

Student answers will vary, but should show evidence of answering the key ethical questions that are developed further in chapter 3.

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Practise Your Knowledge 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 Canadian 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.

Student answers will vary, but the point of this exercise is to emphasize the number of idioms Canadians 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 After nearly three decades in the shadows of the US dollar the Canadian Loonie is making a stand and is now outperforming the US greenback. In recent years, the dollar climbed from a low of 61.79 on January 21, 2002, to a 31-year high of 1.005 on September 28, 2007. Of course, these rates vary daily. By the time you read this, the dollar may have slipped or may be in new uncharted territory. a) With your team, brainstorm a list of at least three Canadian companies and describe some of the ways that a rising/falling Canadian dollar influences their financial performance.

Answers depend on the current situation and will vary. b) Consider the probable short-term effect of the rising dollar on each of the following companies: ■ A Canadian film production studio that caters to US movie production companies.

■ A Canadian steel manufacturer that sells 70 percent of its production to US companies.

■ A US food producer that sells its products in Sobeys and Loblaw stores across Canada.

Select a spokesperson to provide and explain your answers and your team’s reasoning to the rest of the class. Compare your recommendation with those of your classmates.

Answers depend on the current situation and will vary.

Expand Your Knowledge Discovering Career Opportunities If global business interests you, consider working for a Canadian government agency that supports or regulates international trade. For example, Export Development Canada offers a Student Summer Employment Program. The EDC provides trade finance services to support Canadian exporters and investors in over 200 markets.

Visit their website at www.edc.ca, go to the Student Summer Employment Program Section and answer these questions. Who can apply for these positions? Where are the work terms located?

What are the positions for this upcoming summer?

The latest student summer job openings at the EDC can be located at http://www.edc.ca/english/student_9351.htm

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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 Canadian dollar relative to the U.S. dollar. As you complete this exercise, make a note of the sources and search strategies you used.

1. How many Canadian dollars do you need to buy one US dollar buy right now? Find yesterday’s foreign exchange rate for the U.S. dollar in the Globe and Mail or on the Internet.

Answers will vary depending on when students check the exchange rates.

2. Investigate the foreign exchange rate over the past month. Is the Canadian dollar growing stronger (buying more US dollars) or growing weaker (buying fewer US dollars)?

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

Answers to Boxed Features Box 1: China’s Counterfeit Economy The vast economy in the People’s Republic of China has come alive in recent years now that the communist government is embracing many principles of free-market economics. Despite the recent headlines and product recalls, the quality of most Chinese products has risen dramatically, and many of the world’s best-known companies now rely on Chinese manufacturers to build some of their products for them.

Unfortunately, the Chinese manufacturing phenomenon is not limited to legitimate products. China also produces more counterfeit products than any other nation—everything from cars to aircraft parts, beer to razor blades, soap to shampoo, and TVs to toilets. Nearly half of the world’s 14 billion batteries are produced in China, but most of them are fake versions of Panasonic, Duracell, and other big brands. Bikes with names like Yamaha zip along the roads from Beijing to Tibet, but Yamaha didn’t make most of them. Procter & Gamble (P&G) claims counterfeiters sell $150 million of fake P&G products annually.

More than 90 percent of all music CDs sold in China are pirated copies, and according to the Motion Picture Association of America, Chinese pirating of DVDs costs the industry more than $2 billion in lost revenue each year. Microsoft has invested several billion dollars in China, but has yet to generate a nickel of profit, since more than 90 percent of the application software sold in the country is counterfeit.

According to estimates, 90 percent of DVDs and CDs sold in China are pirated copies.

Most counterfeiters work at small to mid-sized factories, but many stay at home, doing things like filling Head & Shoulders bottles with concoctions from large vats in their living rooms, or translating subtitles for pirated movies. Overall, the amount of China’s manufacturing base that is dependent on illegal knockoffs is estimated to be 10 to 30 percent…and growing.

Raids do occur daily, but even the government’s efforts aren’t reducing the number of counterfeiters.

Local officials are hesitant to stop the pirates because they create millions of jobs. “Entire villages live off counterfeiting. If you suddenly throw these people out of work, you’ll have riots,” says one spokesperson for a leading private anti-counterfeiting agency. Shutting down the fakes at Yiwu—China’s largest wholesale distribution centre, where it is estimated that 80 percent of the consumer goods sold are counterfeits—would cripple the city’s economy because many hotels, restaurants, and businesses cater to the trade.

The sale of fake or pirated products is not limited to the Chinese market either; these items are exported around the globe—to Europe, Russia, and the Middle East. Unilever says that fake Dove soap is making its way from China into Europe. Bose, a maker of high-end audio systems, is also finding Chinese fakes in overseas markets. These exports are made possible by the growing sophistication of Chinese . 44

manufacturing. Ten years ago, China’s knockoffs were below Western standards. Now, many fake Duracell batteries look so genuine that Gillette (the maker of Duracell batteries) has to send them to a forensics lab to analyze them.

So what are pirated brand owners to do? For the most part, companies hope to encourage greater government enforcement, but it’s a tough task. Although US-based Oakley has convinced Chinese authorities to close counterfeit sunglasses factories, new ones just pop up in their place.

Some multinationals are shutting down or shrinking some product lines in China because these products are overrun by counterfeits. But China’s market is so vast and promising that few companies are willing to pull out. General Motors recently announced a US$3 billion additional investment based on the expectation that China will become the world’s largest car market by 2025. Given the magnitude of the problem and the number of people who are dependent on this shadow economy, the situation won’t be solved anytime soon, if ever.

Questions for Critical Thinking 1.

Honda recently set up a joint venture to make and sell motorcycles with a Chinese company that used to produce Honda knockoffs. Why would Honda do this?

Honda would set up a joint venture with this Chinese company to make and sell motorcycles to ensure the adequate use of the Honda name. If Honda chose not to set up this joint venture, the Chinese company would probably continue to create “fake” Hondas, sold at lower prices with potentially less than sufficient quality. With this joint venture, Honda hopes to gain some control back in the Chinese market.

2.

How might counterfeiting in China affect consumers in Canada?

Counterfeiting in China can impact consumers in Canada in multiple ways. Some of the contraband products make their way to foreign markets. In addition counterfeit sales may mean that costs are being spread out over a smaller quantity of goods which has an inflationary affect on legitimate product prices.

Box 2: How to Avoid Business Blunders Abroad Doing business in another country can be extremely tricky. Here are some issues to consider when you conduct business abroad.

THE IMPORTANCE OF PACKAGING Numerous problems result from the failure to adapt packaging for other cultures. Sometimes only the colour of the package needs to be altered to enhance a product’s sales. For instance, white symbolizes death in Japan and much of Asia; green represents danger or disease in Malaysia. Using the wrong colour in these countries might produce negative reactions.

THE LANGUAGE BARRIER Some product names travel poorly. For instance, Esso found out that its name means “stalled car” in Japan. However, some company names have travelled well. Kodak may be the most famous example. A research team deliberately developed this name after searching for a word that was pronounceable everywhere but had no specific meaning anywhere. Canadian firms have an advantage over companies that operate in a unilingual country with a more homogeneous population; domestic companies are trained in cultural diversity just from dealing with the idiosyncrasies of cultural and linguistic adaptation here at home. For example, before expanding into the Quebec market, Medicine Hat, Alberta–based Spitz Sunflower Seeds sent personnel to the market to assess the competition, design packaging, and adapt its approach for the francophone market.64

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PROBLEMS WITH PROMOTIONS In its promotions, one company had effectively used this sentence: “You can use no finer napkin at your dinner table.” The company decided to use the same commercials in England because, after all, the British do speak English. To the British, however, the word napkin or nappy actually means “diaper.” The ad could hardly be expected to boost sales of dinner napkins in England.

LOCAL CUSTOMS Social norms vary greatly from country to country and it is difficult for any outsider to be knowledgeable about all of them, so local input is vital. For example, one firm promoted eyeglasses in Thailand with commercials featuring animals wearing glasses. However, in Thailand animals are considered a lower life form; humans would never wear anything worn by an animal.

RIM’s famous BlackBerry has finally entered into the Japanese market with the help of NTT CoCoMo, Japan’s largest mobile phone operator. It remains to be seen if the BlackBerry will gain equivalent acceptance in a country where most important business communication is still conducted face to face and email plays a smaller role, with employees routinely lingering in their offices after hours.

TRANSLATION PROBLEMS The best translation of an advertising message conveys the concept of the original but does not precisely duplicate it. PepsiCo learned this lesson when it discovered that its slogan “Come alive with Pepsi” was translated into German as “Come alive out of the grave with Pepsi.” In Asia, the slogan was once translated as “Bring your ancestors back from the dead.” This did not go over well in a region that reveres their elders and ancestors.

THE NEED FOR RESEARCH Proper market research may reduce or eliminate most international business blunders. Market researchers can uncover needs for product adaptations, potential name problems, promotional requirements, and useful market strategies. Good research may even uncover potential translation problems.

As you can see, doing business in other cultures can be risky if a company is unprepared. However, awareness of differences, consultations with local people, and concern for host-country feelings can reduce problems and save money.

Questions for Critical Thinking 1. If you were thinking of selling a breakfast cereal in Japan, what issues might you want to consider?

If you are selling breakfast cereal in Japan, among the issues that you might want to consider are: the name of the cereal, its meaning and the language on the package; packaging—size, color, etc.; taste and preferences of the consumers; competition and the market characteristics; legal and regulatory issues; appropriate promotional strategies; and local customs. Students should be encouraged to brainstorm and research each of these issues.

2. What steps can companies take to avoid business blunders abroad?

Proper market research may reduce or eliminate most international business blunders. Market researchers can uncover needs for product adaptations, potential name problems, promotional requirements and useful market strategies. In addition to proper market research, companies should consider cultural differences, consult with local people, and be considerate to host-country feelings.

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See It on the Web URLs for all Internet exercises are provided at the website for this book, www.pearsoned.ca/bovee. When you log on to the text website, select Chapter 2, then select Web Destinations, click on the name of the featured website, and follow the detailed navigational directions to complete these exercises.

Explore these chapter-related websites, review their content, and answer the following questions for each website you visit: 1. What is the purpose of this website?

2. What kinds of information does this website contain? Please be specific.

3. How is the information provided at this website useful for businesspeople? Consumers?

4. How did you expand your knowledge of conducting business in the global environment by reviewing the material at this website? What new things did you learn about this topic?

Navigating Global Business Differences In today's global marketplace, knowing as much as possible about your international customers' business practices and customs could give you a strategic advantage. To help you successfully conduct business around the globe, navigate the resources at www.edc.gc.ca. Specifically, take a look at the following sections: Exporting 101 and Country Information.

1. What is the purpose of this website?

The purpose of this website is to provide information about Export Development Canada, a Crown corporation that provides trade finance and risk management services to Canadian exporters and investors in over 200 countries. EDC has a strong commitment to small business and entrepreneurs (90% of the clientele). This website helps to provide information to link businesses to the services offered.

2. What kinds of information does this website contain? Please be specific.

Student answers may vary, but may include any of the following: ¾ Provide overviews for doing business in more than 200 countries with information on market conditions, best export prospects and financing. ¾ Provides financial services options available to clients such as: i. credit insurance ii. bonding and guarantees iii. political risk insurance iv. direct loans to buyers and lines of credit in other countries to encourage buyers to 'buy Canadian.' v. joint ventures for projects involving long-term leasing arrangements and equity participation 3. How is the information provided at this website useful for businesspeople? Consumers?

Student answers may vary, but may include any of the following: Refer to the previous question for ways in which this website is a useful resource for businesspeople.

4. How did you expand your knowledge of conducting business in the global environment by reviewing the material at this website? What new things did you learn about this topic?

Students’ responses will depend, in large part, on the material currently posted on the website. Refer them to specific cases on the site for additional research.

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Banking on the World Bank The World Bank plays an important role in today's fast-changing, closely meshed global economy. Do you know what this organization of five closely associated institutions does? Do you know who runs the bank, where the bank gets its money, and where the money goes? Learn how this organization's programs and financial assistance help poorer nations as well as affluent ones. Log on to the World Bank website and find out why global development is everyone's challenge. www.worldbank.org 1. What is the purpose of this website?

This site will help you find information about IBRD, IDA, IFC, MIGA and ICSID - the institutions that comprise the World Bank Group, learn about projects, services and products the Bank Group offers, and procedures and safeguards that guide this work...

2. What kinds of information does this website contain? Please be specific.

Student answers may vary, but may include any of the following: This website provides information on all of the following: ¾ General information about the World Bank ¾ The World Bank Group consists of five institutions that specialize in different aspects of development, but use their comparative advantages to work collaboratively toward the same overarching goal---poverty reduction ¾ The main strategies guiding the work of the World Bank Group as it assists developing countries in fighting poverty. ¾ Established policies and procedures that help ensure its operations are economically, financially, socially, and environmentally sound. Policies and procedures are codified in the Bank's Operational Manual. They are subject to extensive review while being formulated, and to compliance monitoring once approved.

3. How is the information provided at this website useful for businesspeople? Consumers?

Student answers may vary, but may include any of the following: Refer to above for ways in which this website is useful for businesspeople.

The World Bank Group is one of the world's largest sources of development assistance. It works in developing economies with the primary focus of helping the poorest people and the poorest countries.

For all its clients the Bank emphasizes the need for: ¾ Investing in people, particularly through basic health and education ¾ Focusing on social development, inclusion, governance, and institution-building as key elements of poverty reduction ¾ Strengthening the ability of the governments to deliver quality services, efficiently and transparently ¾ Protecting the environment ¾ Supporting and encouraging private business development ¾ Promoting reforms to create a stable macroeconomic environment, conducive to investment and long-term planning Information concerning all of the above is detailed on the website for both consumers and businesses alike.

The information provided by this website may also provide both consumers and businesses with: resources, knowledge, building capacity, and forged partnerships in the public and private sectors.

The publications provided on this website may serve as an informative tool both for businesses and consumers. . 48

The World Bank Institute creates learning opportunities for countries, World Bank staff and clients, and people committed to poverty reduction and sustainable development. WBI's work program includes training, policy consultations, and the creation and support of knowledge networks related to international economic and social development. Information on this is provided on the website.

The Development Education Program helps students and teachers around the world explore the meaning of "sustainable development" through exercises, data, research, and case studies.

For Schools is a portal to the World Bank's resources, including school Internet projects, scholarships, and learning materials.

Development Challenge is an educational game encouraging students to use their imaginations to build a better world.

4. How did you expand your knowledge of conducting business in the global environment by reviewing the material at this website? What new things did you learn about this topic?

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

Chapter 2 Pop Quiz: 1.

BRIC is a term used to describe four important emerging markets that are having a major impact on global business operations. The four nations are: Brazil, _____________, India and China. a. Romania b. Russia c. Rwanda d. Republic of Ireland

2. The total value of products a nation exports minus the total value of products it imports, over some

period of time is referred to as a nation’s a. balance of payments b. balance of trade c. trade surplus d. trade deficit 3. Which of the following is a form of international business activity? a. international franchising b. strategic alliances c. joint ventures d. foreign direct investment e. all of the above 4. Which of the following is NOT a reason for restricting international trade? a. to boost local economies b. to force domestic industries into head-to-head competition with overseas rivals c. to give weak or new industries a chance to grow strong, d. all of the above

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5. Global terrorism poses new challenges to world trade. Which of the following is not one of the challenges that exist due to global terrorism? a. Tighter security b. border crossing delays c. cargo restrictions d. lower transportation costs.

6. Wal-Mart purchased large retail stores in Germany and Great Britain and later converted them into Wal-Mart SuperCenters. Wal-Mart, in this example, is engaging in what type of international business activity? a. franchising b. joint venturing c. foreign direct investment d. exporting 7. International trade has many benefits. Which of the following is a benefit of international trade? a. International trade encourages competition, and therefore creates choices for consumers b. it offers higher prices c. it prohibits companies from achieving economies of scale d. it limits the choices available for consumers 8. Saudi Arabia has a(n) _________________in crude oil production because of its huge, developed reserves. It makes sense for Saudi Arabia to specialize in providing the world with oil and to trade for other items its country needs. a. absolute advantage b. comparative advantage c. import advantage d. export advantage 9. If a country’s imports exceed its exports, a ____________ results. a. trade surplus b. trade deficit c. trade restriction d. trade inclusion 10. Placing a limit on the amount of a particular product that can be sold in a country is known as a(n) ___________. a. quota b. tariff c. embargo d. sanction

Answers to Quiz 1. b 2. b 3. e 4. b 5. d 6. c 7. a 8. a 9. b 10. a .

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Chapter 3: Practising Ethical Behaviour and Social Responsibility Learning Objectives 1 2 3 4 5 6 7

Discuss what it means to practise good business ethics and highlight three factors that influence ethical behaviour Identify three steps that businesses are taking to encourage ethical behaviour and explain the advantages and disadvantages of whistle-blowing List four questions you might ask yourself when trying to make an ethical decision Explain the difference between an ethical dilemma and an ethical lapse Discuss the relationship between corporate social responsibility and profits Explain how businesses can become more socially responsible Outline activities that the government and businesses are undertaking to improve the environment

Summary of Learning Objectives 1

Discuss what it means to practise good business ethics and highlight three factors that influence ethical behaviour Businesspeople who practise good business ethics obey all laws and regulations, compete fairly and honestly, communicate truthfully, and do not cause harm to others by putting themselves ahead of others or by placing themselves in a conflict of interest situation. Of the many factors that influence ethical behaviour, the three most common are cultural differences, knowledge of the facts and consequences involving a decision or action, and the ethical practices and commitment to ethical behaviour at a place of work.

2

Identify three steps that businesses are taking to encourage ethical behaviour and explain the advantages and disadvantages of whistle-blowing Businesses are adopting codes of ethics, appointing ethics officers, and establishing ethics hotlines. In spite of these efforts, if illegal, unethical, or harmful practices persist, an employee may need to blow the whistle or disclose such problems to outsiders. Doing so may force the company to stop the problematic practices. But bringing these issues into the public eye has consequences. It can hurt the company’s reputation, take up managers’ time, damage employee morale, and affect the informant’s job with the company.

3 List four questions you might ask yourself when trying to make an ethical decision When making ethical decisions, ask yourself: (1) Is the decision legal? (Does it break any law?), (2) Is it balanced? (Is it fair to all concerned?), (3) Can you live with it? (Does it make you feel good about yourself?), (4) Is it feasible? (Will it work in the real world?).

4 Explain the difference between an ethical dilemma and an ethical lapse An ethical dilemma is an issue with two conflicting but arguably valid sides, whereas an ethical lapse occurs when an individual makes a decision that is illegal, immoral, or unethical.

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

In fact, being a socially responsible company can help improve profits and being profitable can help companies stick to their social mission.

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6 Explain how businesses can become more socially responsible Companies can conduct social audits to assess whether their performance is socially responsible, they can engage in cause-related marketing by using a portion of product sales to help support worthy causes, or they can become philanthropic by donating their money, time, goods, or services to charitable, humanitarian, or educational institutions. Companies can also protect and improve the environment by taking a variety of actions to reduce pollution. They can become good citizens by considering consumers’ needs and respecting their four basic rights: the right to safe products; the right to be informed—which includes the right to know a product’s contents, use, price, and dangers; the right to choose which products to buy; and the right to be heard (that is, the right to voice a complaint or concern). Businesses can look out for a company’s investors and protect the value of their interests and they can foster good employee relationships by treating employees fairly and equally and by providing a safe working environment.

7

Outline activities that the government and businesses are undertaking to improve the environment The federal government improved upon the Canadian Environmental Protection Act in 1999, making changes that went much further than the previous Act. The Canadian government is actively working with the international community and ratified the Kyoto Protocol in 2002. Even though it doesn’t appear that Canada will be able to honour its Kyoto commitments by 2012, the government is still working with industries to reduce pollution as much as possible. The federal government also signed the North American Agreement on Environmental Cooperation as part of the North American Free Trade Agreement.

Brief Chapter Outline I.

II.

III.

IV.

Ethics in the workplace A. Ethics and Social Responsibility In the Workplace 1. Companies are responsible to many people 2. Social Responsibility 3. Ethics 4. High Profile Scandals B. What is Ethical Behaviour 1. In business, besides obeying all laws and regulations, practising good ethics means: a. Competing Fairly and Honestly b. Communicating Truthfully c. Not Causing Harm to Others Factors Influencing Ethical Behaviour A. Cultural Differences B. Knowledge C. Organizational Behaviour How do You Make Ethical Decisions?

A. Ask your self a series of questions to determine if a decision is ethical B. Does it respect stakeholders?

C. Does it follow a philosophical approach?

D. Ethical situations can be divided into two general types 1. Ethical Dilemma 2. Ethical Lapse Perspectives on Corporate Social Responsibility A. The Evolution of Social Responsibility 1. The Traditional Perspective: The Business of Business is Making Money 2. The Contemporary Perspective: Ethics Pays 3. An Emerging Perspective: Dynamically Balancing Ethics and Profits .

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V.

VI.

Business’s Efforts to Increase Social Responsibility A. Efforts to increase social responsibility 1. Social audit 2. Cause-related marketing 3. Philanthropy B. Responsibility to society and environment 1. consumers 2. workers 3. society 4. investors C. The Pervasiveness of Pollution 1. Pollution 2. Government effort to reduce pollution 3. The Kyoto Protocol and Clean Air Initiatives 4. Business effort to reduce pollution D. Responsibility to consumers 1. The right to safe products 2. The right to be informed 3. The right to choose which products to buy 4. The right to be heard E. Responsibility to investors F. Responsibility to employees 1. The push for equality in employment a. Employment Equity Act b. Diversity initiatives 2. Occupational safety and health Ethics and social responsibility around the world A. Bribery B. Environmental Abuse C. Unscrupulous business practices

Lecture Notes and Chapter Outline I.

Ethics in the workplace A. Ethics and Social Responsibility in the Workplace?

1. Companies are responsible to many stakeholders a. Stakeholders: employees, suppliers, government, investors, the community etc.

Companies must keep these people in mind when deciding the ethics of a company.

2. Social Responsibility: the idea that business has certain obligations to society beyond the pursuit of profits.

3. Ethics a. Ethics: the principles and standards of moral behaviour that are accepted by society as right versus wrong b. Business ethics: the application of moral standards to business situations 4.

High Profile Scandals have been in the news in recent years and have put pressure on companies to create new control mechanisms. High Profile cases discussed in the text include: Enron, Arthur Anderson, Nortel, Tyco, WorldCom, Conrad Black, Ford and Firestone.

B. What is Ethical Behaviour?

1. In business, besides obeying all laws and regulations, practising good ethics means: Competing fairly and honestly, communicating truthfully, and not causing harm to others. a. Competing Fairly and Honestly ¾ Companies are expected to not knowingly deceive, intimidate, or misrepresent customers, competitors, clients, or employees

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¾ Some companies knowingly break laws or take questionable steps in their zeal to maximize profits and gain a competitive advantage: they engage in corporate spying, stealing patents, hiring employees from competitors to gain trade secrets, or electronically eavesdropping. b. Communicating Truthfully ¾ Companies that practise good ethical behaviour refrain from issuing false or misleading communications.

Example: Publisher’s Clearing House just recently paid $34 million to settle lawsuits claiming that it deceived consumers by mailing “you are winner” notices that looked like checks for large amounts. c. Not Causing Harm to Others ¾ Placing one’s personal welfare above the welfare of the organization can cause harm to others. Example: Investment scams, shady accounting practices ¾ Business executives may take advantage of the investor my using company’s earnings or resources for personal gain. ¾ Insider trading: selling company secrets to competitors or using confidential, nonpublic information gained from one’s position in a company to benefit from the purchase and sale of stocks ¾ Conflict of Interest: this exists when choosing a course of action will benefit one person’s interests at the expense of another or when an individual chooses a course of action that advances his or her personal interests over those of his or her employer.

II. Factors Influencing Ethical Behaviour Although many factors influence the ethical behaviour of businesspeople, the following three have the most impact: cultural differences, knowledge, and organizational behaviour.

A. Cultural Differences 1. What may be considered unethical in one country may be an accepted practice in another culture. Example: Bribes are considered illegal in Canada, but are considered a simple common business practise in some nations.

B. Knowledge 1. A well-informed person is in a position to make better decision and avoid ethical problems.

Making decisions without all the facts or a clear understanding of the consequences could harm employees, customers, the company, and other stakeholders.

C. Organizational Behaviour 1. Organizations that strongly enforce company codes of conduct and provide ethics training help employees recognize and reason through ethical problems.

2. Companies with strong ethical practices (ethics training, newsletters on ethics) set a good example for employees to follow.

3. Code of ethics: defines the values and principles that should be used to guide decisions (Exhibit 3.2 provides an example for the students) ¾ 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 4. Companies can establish a system for reporting unethical or illegal actions at work. Example: ethics hotline 5. Whistle-blowing: an employee’s disclosure to the media or government authorities of illegal, unethical, or harmful practices by the company. ¾ High costs associated with whistle blowing: a public accusation of wrongdoing hurts the business’s reputation, requires attention from managers who must investigate the accusations, and damages employee morale. ¾ Risks associated with whistle-blowing: risk of being fired or demoted, career setbacks, financial strain, and emotional stress III. How do You Make Ethical Decisions?

A. Ask yourself a series of questions to determine if a decision is ethical: 1. Is the decision legal? (Does it break any laws?) . 54

2. Is it balanced? (Is it fair to all concerned?)

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

4. Is it feasible? (Will it actually work in the real world?)

B. Does it respect stakeholders?

1. Will outsiders approve? (Does it benefit community members, etc.?)

2. Will supervisors approve? (Did management receive accurate information?)

3. Will employees approve? (Will it affect employees positively?)

C. Does it follow a philosophical approach?

1. Is it a utilitarian decision? (Does it produce the greatest good for the greatest number of people?)

2. Does it uphold individual, legal, and human rights? (Does it protect people’s own interests?)

3. Does it uphold principles of justice? (Does it treat people fairly and impartially?)

FOR DISCUSSION Ask students to either scan the Internet or bring in a newspaper article for recent business decisions or protests against a particular firm’s choices. Ask the students to refer to Exhibit 3.4 in the text; how did the company stand up to this test? Why do students think that these firms chose the actions they did? Is there evidence of ethical deliberation in the article? Is there a controversy over the ethics displayed by the choice of action?

D. Ethical situations can be divided into two general types: 1. ethical dilemma: a situation in which one must choose between two conflicting but arguably valid sides.

Example: when a company must decide whether to continue operating a production facility that is suspected, but not proven, to be unsafe.

2. ethical lapse: a situation in which an individual makes a decision that is clearly wrong, such as divulging trade secrets to a competitor Example: inflating prices for certain customers; selling technological secrets to unfriendly foreign governments; switching someone’s long distance service without their consent; slipping unauthorized charges into phone bills.

IV. Perspectives on Corporate Social Responsibility A. The Evolution of Social Responsibility Social responsibility: the idea that business has certain obligations to society beyond the pursuit of profits—developed in the early 20th century.

1. The Traditional Perspective: The Business of Business is Making Money 19th Century and early twentieth century industrialists focused on profits. a. “Let the buyer beware” or Caveat emptor was the rule of the day. b. Famous quote of William Vanderbilt (son of Cornelius Vanderbilt) emphasizes this principle: “The public be damned, I’m working for the shareholders.” c. Mid-20th century Milton Friedman’s view of a company’s responsibility toward society Friedman believed the only social responsibility of business was to provide jobs and pay taxes.

2. The Contemporary Perspective: Ethics Pays a. Most people now reject the notion that a corporation’s only role is to make money. b. A new view states that businesses not only have a responsibility to society, but that doing good deeds for society helps companies do well for themselves. c. Companies that support this line of thinking link the pursuit of socially responsible goals with their overall strategic planning. . 55

3.

V.

An Emerging Perspective: Dynamically Balancing Ethics and Profits a. Ethics needs to be one of the cornerstones of business, but in the real world profits and ethics are often at odds. Managers need to evaluate every situation within the context of the organization’s “moral personality.” b. In some cases, the ethical approach will pay off financially, but in others it won’t.

Business’s Efforts to Increase Social Responsibility A. Efforts to increase social responsibility: Companies can increase social responsibility in several ways: 1. Social audit: a systematic evaluation and reporting of the company’s social performance Ex: Telus performs a social audit that addresses company operations and the impact on employees, customers, shareholder, and the environment 2. Cause-related marketing: donating a portion of product sales to support worthy causes Example: Johnson & Johnson gives the World Wildlife Fund a cut from sales of a special line of children’s toiletries.

3.

Philanthropy: donating money, time, goods, or services to charitable, humanitarian or educational institutions Example: GE, Dell, & Wal-Mart donate billions in cash and products yearly to charity B. Responsibility to society and environment: Businesses must often balance the needs of investors, society, and consumers. Responding to environmental issues demonstrates the careful balance business must attempt to maintain as they seek to please: 1. consumers (who want quality products) 2. workers (who need safe surroundings and fair wages) 3. society (which needs as little pollution as possible) 4. investors (who want lower costs, efficient production, high profits) HOT DEBATE Ask students to debate over the level of social responsibility a business should have to the community. Should businesses become MORE socially responsible? Should businesses take the attitude of William Vanderbilt (“The public be damned, I’m working for the shareholders”)? In either case, have students come up with a thorough list of consequences to both extremes.

C. The Pervasiveness of Pollution 1. Pollution: the contamination of the natural environment by the discharge of harmful substances a. Air, water, and land can easily be tainted by industrial discharges, aircraft and motor vehicle emissions, and a number of chemicals that spill out into the environment as industrial waste products. b. Pollution in any one element can easily taint the other. Example: acid rain which is caused when emissions from coal and electric energy react with air) 2. Government effort to reduce pollution: a. Ecology is the study of the balance of nature. b. The New Canadian Environmental Protection Act (CEPA) entitles companies, individuals and government agencies to request independent reviews. c. International treaties have recognized the importance of environmental concerns. d. The North American Agreement on Environmental Cooperation (NAAEC) came into effect when NAFTA was signed.

3. The Kyoto Protocol and Clear Air Initiatives a. Original Meeting was held in December of 1997; 160 countries met in Kyoto Japan b. Goal: to reduce greenhouse gas (GHG) emissions and set specific targets c. Canada’s Commitment: reduce GHGs to 6 percent below 1990 levels by 2012. .

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d. Government officials concede that these levels will not be met by 2012 e. Additional Clean Air agreements are being negotiated to deal with GHGs 3. Business effort to reduce pollution: a. Considering environmental issues a part of everyday business and operating decisions b. Accepting environmental staff members as full-fledged partners in improving the company's competitiveness c. Measuring environmental performance d. Tying compensation to environmental performance e. Determining the long-term environmental costs before such costs occur f. Considering environmental impact in the product-development process g. Challenging suppliers to improve environmental performance h. Conducting environmental training and awareness programs D. Responsibility to consumers Consumerism: a movement that puts pressure on businesses to consider consumer needs and interests. This movement prompted businesses to create consumer-affairs departments to handle customer complaints, state and local agencies to set up bureaus to offer consumer information and assistance. Another key moment was when former US president John F. Kennedy created a “consumer bill of rights”. These rights are listed below along with agencies and measures that are being used to ensure that they are being met.: 1. The right to safe products a. Canadian Standards Association: membership based non-profit organization that serves government, industry and consumers. b. Federal government enforcement (example: food inspection) 2. The right to be informed: consumers have a right to know the sales price of goods or services and the details of purchase contracts. Consumer rights are also protected by government legislation and agencies. a. Consumer Packaging and Labelling Act b. Competition Bureau 3. The right to choose which products to buy: the government ensures fair competition and variety among products businesses offer. Product variety is expected and protected although the government does ensure that certain warnings are placed on dangerous products. a. Example: Health Canada forces tobacco manufacturers to include warning labels on cigarette packages 4. The right to be heard: Many companies offer toll-free numbers so that consumers can give and receive information about products E. Responsibility to investors: Businesses are responsible toward their investors 1. Misrepresenting the investment: millions of investment scams occur yearly 2. Concerned investors are targeting board members who fail to attend meetings, who sit on the boards of companies with which their own firms do business, who are underinvested, etc.

3. Audit committee signs off on all financial statements and is supposed to protect shareholders, acting as a check on management’s corporate reporting methods and asking tough questions about accounting practices.

F. Responsibility to employees: employee relationships must be ethical and supportive 1. The push for equality in employment a. Employment Equity Act (established in 1995): the goal is to achieve equality in the workplace so that no person shall be denied employment opportunities or benefits for reasons unrelated to ability. The key groups addressed are: women; aboriginals, visible minorities and the disabled. b. Diversity initiatives: company policies designed to enhance opportunities for minorities and promote understanding of diverse cultures, customs, and talent.

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2. Occupational safety and health: in Canada the Canadian Centre for Occupational Health and

Safety has the mandate to promote this issue in the workplace. a. Ergonomic safety regulations protect millions of workers form repetitive stress injuries (carpel tunnel syndrome) and back injuries.

VI. Ethics and social responsibility around the world The issues of ethics and social responsibility can be complicated for businesses; however, these issues grow even more complex when cultural influences are applied in the global business environment.

A. Bribery B. Environmental Abuse C. Unscrupulous business practices

Potential Difficulties and Possible Solutions 1. Students may need to spend a considerable amount of time focusing on a specific unethical situation in order to identify and realize the impact of unethical business practices on stakeholders. The chapter begins with a quick look at major scandals such as Enron’s collapse. It is important for students to identify the unethical behaviour of Enron. Enron serves as an example of how negligent conduct by a company’s managers and advisors and the failure to communicate truthfully to stakeholders can severely harm a company’s employees, investors, customers, and other innocent stakeholders. ¾ The instructor may ask the students to contribute more to the discussion of Enron by stating additional facts that are not discussed in the case study. (Some students may recall the faces of the elderly individuals employed by Enron who no longer had retirement) Additional questions can result from student input. ¾ You may ask students if they are aware of any other company or individuals that is or has been accused of unethical business practices. (Students may mention Conrad Black, Norbourg etc.)

2. This may be the first time students are introduced to the concept of social responsibility. Additional examples may create awareness in the future. ¾ Ask the students if they remember seeing commercials about the United Way and the NFL. The NFL has used these commercials to communicate their efforts towards social responsibility. ¾ Ronald McDonald Houses for sick children and their families

Behind the Scenes Telus: Setting Clear Profit and Sustainability Targets Test Yourself Answers to these questions can be found on the website: www.pearsoned.ca/bovee.

1.

How does Telus balance their profit-seeking motive with their environmental agenda?

Telus treats the environmental agenda as an important strategic element. The company takes proactive steps to set and enforce standards and to push the industry forward in a socially responsible way. Most of the initiatives discussed in this opening case are in complete alignment with its profit seeking goals.

Energy conservation is positive for the environment and the bottom line.

2.

What concrete measures can a company like Telus take to ensure that it is acting in a responsible and sustainable manner?

The opening case provides a few concrete examples: telecommuting reduces fuel consumption and pollution; recycling programs reduce waste; education programs inform employees and help reinforce proper behaviour.

3.

Does a good corporate conscience translate into customer loyalty benefits?

This is a difficult question. In many ways it does. Company’s like Telus and the Body Shop are heavily involved in positive initiatives that demonstrate a good corporate conscience. Most knowledgeable . 58

customers appreciate and may prefer to do business with ethically sound organizations but to what extent is it a driver of loyalty? An unethical company can definitely be damaged by a poor reputation and a good corporate citizen can gain an improved brand image, which can lead to loyalty, but at the same time it must not be seen as exploiting its positive contributions for credit.

Behind the Scenes Telus: Green Leadership Critical Thinking Questions 1. Which of the company's stakeholders are most affected by Telus’ environmentalism?

In addition to the following, students may mention other stakeholders, as well: ¾ suppliers and contractors (who must meet the company's environmental standards) ¾ customers (most customers are unaware of the company’s record; sometimes firms with environmental agendas carry higher costs but this is not the case with Telus; many of these actions actually help reduce company costs) ¾ the company’s shareholders benefit from the favourable corporate image; a lapse in ethical actions and in their environmental record could have a negative effect on shareholder prices.

2. What is meant by triple bottom-line accounting? Should this practice be implemented as a standard accounting practise in Canada?

Accounting practices usually focus on the financial accomplishments of a company. Under the triplebottom line approach the firm also sets goals and measures standards for environmental and social issues.

Targets and specific goals are required; when the company’s employees see a clear direction they are more likely to achieve them.

3. Telus’s system failure at Strathcona Mountain, B.C., was a test of the company’s green image. If you were the public relations officer at that time, what elements would you include in a press release to deal with the problem? Would you deny the allegations?

If there is one lesson that we can all learn from former US President, Bill Clinton, it is that lying about a scandalous problem will not make it go away. Denying allegations, leads to more speculation and makes the problem bigger. If it is clear that the issue exists, it is best to face up to it and chart out the corrective actions that will be made. 1) The company needs to address the error 2) fix the current short-term problem 3) set up the long-term procedure to ensure it does not re-occur and finally 4) follow up once the issue is completely resolved.

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

Answers to End-Of-Chapter Questions Test Your Knowledge Questions for Review 1. What factors influence ethical behaviour in a company?

Guided by written policies, unwritten standards, and examples set by top managers, every individual in an organization makes choices that have moral implications. Some companies have created an official position—the ethics officer—to guard morality. Ethical behaviour starts at the top, however; the CEO and other senior managers must set the tone for people throughout the company.

2. What is insider trading? How does this practice hurt investors and damage the reputation of a company?

Insider trading is the use of unpublicized information that an individual gains from the course of his or her job to benefit from fluctuations in the stock market. . 59

Why do companies spend considerable time creating and implementing practices that are written in a code of ethics?

A code of ethics defines the values and principles that should be used to guide decisions. It is the company’s official statement to its employees and stakeholders on how the company and its members will behave. By itself, however, a code of ethics cannot accomplish much. 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.

3.

4. What is a social audit?

A social audit is a systematic evaluation and reporting of the company’s social performance. The report typically includes objective information about how the company’s activities affect its various stakeholders.

5. What rights do consumers have?

Consumers have many rights; above all they have the right to vote with their hard earned dollars on which products to buy and which companies to support. There are also various consumer rights organizations that look out for consumers. In addition, government laws and departments, like the Competition Bureau, protect consumer interests. South of the border, a key moment for the consumerism movement can be traced to President John F. Kennedy, who announced a “bill of rights” for consumers, laying the foundation for a wave of consumer-oriented legislation. These rights include the right to safe products, the right to be informed, the right to choose, and the right to be heard.

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. Why is it increasingly important that the government and the private sector continue to pay attention to diversity initiatives?

Diversity initiatives58 include increasing minority employment and promotion, contracting with more minority vendors, adding more minorities to boards of directors, and targeting a more diverse customer base. Many companies also offer employees diversity training to promote understanding of the unique cultures, customs, and talents of all employees. This is becoming increasingly important because each year 220 000 newcomers arrive in Canada and 70 to 80 percent are visible minorities. The Aboriginals population will also play a major role in the next 10 to 20 years. DD 8. Whether it is Kyoto or some other clean-air legislation, do you think the government is doing enough to reduce greenhouse gas emissions? Explain.

Student answers will vary.

Most will likely say that the government is not doing enough at this time. In answering this question it is important to guide the students to research the latest developments in this area.

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 that social problems were the concern of the government. 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 . 60

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: How do business scandals such as Enron, Nortel, and WorldCom impact all businesses?

Several acts of unethical behaviour have been uncovered; there are a half dozen examples in the text on page 71. These major scandals have placed a large spotlight on the issue of ethical behaviour leading to an increased call for transparent measures and increased accountability in all businesses. New laws have been created and executive officers are more accountable than they were a few years ago.

Questions for Application 11. You sell musical gifts on the Web and in quarterly catalogs. Your 2-person partnership has quickly grown into a 27-person company, and you spend all your time on quality matters. You’re losing control of important environmental choices about material suppliers, product packaging, and even the paper used in your catalogs. What steps can you take to be sure your employees continue making choices that protect the environment?

Most companies are concerned about ethical issues, and many are trying to develop approaches for improving their ethics. Boeing, for example, requires all employees to undergo at least one hour of ethical training a year, and senior managers five hours. Lockheed Martin has created a newspaper called Ethics Daily that runs articles based on ethical problems employees have faced and how they resolved them.

Additionally, more than 80 percent of large companies have adopted a written code of ethics, which defines the values and principles that should be used to guide decisions. Some companies have created an official position—the ethics officer—to guard morality.

12. At quitting time, you see your new colleague filling her briefcase with expensive software programs that aren’t supposed to leave the premises. What do you do? Explain your answer.

You might consider asking yourself a series of questions: 1. Is the action legal? (Does it break any laws?) Is there a written company policy on the situation? Does the policy spell out the penalty for breaking the law?

2. Is it balanced? (Is it applied to all concerned?) Does the practice of removing software packages apply to all employees or only to you and not your colleague?

3. Can you live with it? (Does it make you feel good about yourself?) Would you feel good about pretending that you didn’t see the act?

4. Is it feasible? (Will it actually work in the real world?) Is there a special situation that requires the software programs to be taken off premises regularly?

If the answers to the questions are no, you need to approach the colleague and question the appropriateness of their action.

13. Integrated: In chapter 1 we identified knowledge workers as the key economic resource of the 21st century. If an employee leaves a company to work for the competitor, what types of knowledge would be ethical for the employee to share with the new employer and what types of knowledge 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. Integrated: Is it ethical for provincial and municipal governments to entice businesses to relocate their operations to that province 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: 1. 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?

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

3. 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? . 61

4. 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 technically unethical by governments, but widely practised.

Ask the students if they would risk losing a business that supplies 10,000 jobs in the name of ethics.

(Student debate)

Practise Your Knowledge SHARPENING YOUR COMMUNICATION SKILLS All organizations, not just corporations, 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 school.

Start by thinking about who will be protected by this code of ethics. What stakeholders should the school consider when making decisions? What negative effects might decisions have on these stakeholders?

Then think about the kinds of situations you want your school’s code of ethics to cover. One example might be employment decisions; another might be disclosure of confidential student information.

Next, using Exhibit 3.2 as a model, draft your school’s code of ethics. Write a general introduction explaining the purpose of the code and who is being protected. Then write a positive statement to guide ethical decisions 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 of 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.

Building Your Team Skills Choosing to blow the whistle on your employees or co-workers can create all kinds of legal, ethical, and career complications. Here are five common workplace scenarios that might cause you to search your soul about whether or not to go public with potentially damaging charges. Read them carefully and discuss them with your team-mates. Then decide what your team would do in each situation.

1. You believe your company is overcharging or otherwise defrauding a customer or client.

Students could decide to blow the whistle or elect to attempt to fix the problem internally.

2. With all of the headlines generated by sexual harassment cases lately, you’d think employees wouldn’t dare break the law. But it’s happening right under your company’s nose.

Students should decide to discuss their opinion with their manager and propose gathering actual data for a factual claim.

3. You discover that your company, or one of its divisions, products, or processes, presents a physical danger to workers or to the public.

Students should decide to blow the whistle.

4. An employee is padding overtime statements, taking home some of the company’s inventory, or stealing equipment.

Students should decide to blow the whistle. . 62

5. You smell alcohol on a co-worker’s breath and notice that individual’s work hasn’t been up to standard lately.

Students should decide to approach the co-worker and advise him of his non-standard work.

Expand Your Knowledge Discovering Career Opportunities Businesses, government agencies, and non-profit organizations offer numerous career opportunities related to ethics and social responsibility. How can you learn more about these careers?

1.

Search through Appendix C of this text to identify jobs related to ethics and social responsibility. One example is an occupational health and safety manager, a job 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 for further consideration. Following the suggestions in Appendix C, what sources of employment information might provide more details about this job? Which of these sources are available in your school or public library? What additional sources can you consult for more information about the daily activities of this job and for ideas about locating potential employers?

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 key words do you think employers would search for when scanning electronic resumés submitted for this position?

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

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: ¾ Environmental issues, such as pollution, acid rain, and hazardous-waste disposal ¾ Employee or consumer safety measures ¾ Consumer information or education ¾ Employment discrimination or diversity initiatives ¾ Investment ethics ¾ Industrial spying and theft of trade secrets ¾ Fraud, bribery, and overcharging ¾ 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) are affected? What lasting effects will be felt by (a) the company and (b) these stakeholder group(s)?

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

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3. Writing a letter to the editor is one way a consumer 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.

Answers to Boxed Features Box 1: Actions Speak Louder Than Codes Once you write a code of ethics and establish an ethics hotline, what more does your business need to do?

A lot more, according to experts. Some companies develop detailed codes of behaviour and establish ethics hotlines only to pay them lip service. Perhaps that’s why 81 percent of top managers believe they use ethics in day-to-day decision making, whereas 43 percent of employees believe managers routinely overlook ethics. When leaders make decisions that clearly show profits winning out over ethics, employees become sceptical and mistrustful—attitudes that lead to unethical behaviour.

To avoid the lip-service trap, support your ethics programs with a dose of reality: ■

Inspire concretely. Tell employees how they will personally benefit from participating in ethics initiatives. People respond better to personal benefits than to company benefits.

■ Acknowledge reality. Admit errors. Discuss what went right and what went wrong. Solicit employee opinion: What do you think? What’s your view? Act on those opinions.

■ Incorporate reality into your solutions. Use practical strategies that can be accomplished in the time available. Obtain real feedback by asking employees to name three realities the company isn’t facing, three reasons the company won’t meet its goals, and three competitive weaknesses the company exhibits in the marketplace.

■ Be honest. Tell employees what you know as well as what you don’t know. Talk openly about real results, not about what you’d like them to be. Accept criticism—and listen to it.

Make personal benefits, company errors, and tactical solutions more concrete by being straightforward and specific. By acknowledging the realities in every situation, you turn your words into action and build trust with your employees.

Questions for Critical Thinking 1. How does building trust encourage employees to be more ethical?

If employees trust that their employers are acting in accordance with the ethical guidelines of the company, they are more apt to do the same. When leaders make decisions that demonstrate that profits are winning out over ethics, employees become sceptical and mistrustful, attitudes that lead to unethical behaviour. Being straightforward and leading by example is helpful in building a trusting relationship.

2. Some companies ask job candidates to take pre-employment tests such as drug tests or lie detector tests. Does such testing build trust with potential employees? Explain.

Students’ answers may vary.

Box 2: Banning Light Bulbs: Greener Days Ahead No, we are not heading into the Dark Ages. According to a recent announcement, traditional light bulbs will be banned by 2012. In their place will be more energy-efficient products such as compact fluorescents and halogen light bulbs. Traditional 60-watt light bulbs are replaced with 15-watt compact fluorescent bulbs that provide an equivalent light source with reduced energy consumption and a longer life. Many people have already begun to make the environmentally friendly change. . 64

Light Bulb Math Light bulbs are often used as a symbol to display the emergence of a great idea. So is this new legislation a good idea? Let’s examine a few important questions: Q: How many households are there in Canada?

A: Approximately 12 million households.

Q: How many light bulbs does that represent?

A: If each household replaces 16 light bulbs it would amount to 192 million light bulbs.

Q: What impact, if any, would that have on greenhouse gas emissions?

A: It would reduce GHG emissions by 6.3 million tonnes per year—the same as removing 1 million cars from the road.

Who knew? The lowly light bulb is taking its place in the fight for a greener environment. Now you can change your light bulbs and go fire up your SUV with a guilt-free grin. You get the picture—even small changes can make a big difference.

Of course, every piece of legislation that restricts access or forces a change is greeted by resistance or concern, especially from those in the industry being affected. That is not the case for the Montreal-based Globe Electric Company, though. CEO Edward Weinstein says that the company got a head start in the North American market a few years ago when it observed the trends in Europe and Asia and invested heavily to establish its presence as a leader in energy-efficient lighting. The company created its Globe Enersaver brand and was confident that the North American market would catch up with more energyefficient parts of the world. This consciousness is being accelerated as the environmental debate moves more and more to the forefront and governments begin to legislate on the issue. Consumers see new products, some companies see problems, but the smart companies see opportunities just ahead of the curve and take advantage.

Questions for Critical Thinking 1.

Do you believe that governments should force people and companies to take environmentally friendly actions? Do you think incentive programs or energy-saving rebates are more appropriate?

This may lead to some debate since most students understandably would stand on the side of individual freedom of choice. But a few important points should be made. Governments have a long history of forcing people and companies to take actions. People started wearing seat belts while driving cars and helmets while driving motorcycles partially because it is safer and to a major extent because they wanted to avoid paying tickets. Car manufacturers have made cars more environmentally friendly to comply with laws. Governments have been monitoring, supporting and enforcing environmentally friendly initiatives to ensure that action is taken.

2.

How can companies like Globe Electric take advantage of such legislation in their marketing efforts for the mutual benefits of the firm and the environment?

Globe Electric is already on the right track. Company’s like this one need to continue to produce more environmentally sound products and they can also, through their promotions, get the word out on the positive benefits of purchasing energy saving products for the consumer and the environment. Such laws present a tremendous opportunity.

Box 3 – Ben & Jerry’s: A Double Scoop of Irony?

Copyright © 2009 Pearson Education Canada

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Few companies have a better reputation for environmental and social responsibility than Ben & Jerry’s, the folksy ice cream company. Since its origins in 1978, the company has donated 7.5 percent of pre-tax profits to various causes, including saving the family farm, promoting world peace, saving the world’s rainforests, and keeping French nuclear testing out of the South Pacific. Even as the company grew, it managed to stay focused on Ben Cohen and Jerry Greenfield’s mission and their intent to be a different kind of company. Cohen and Greenfield brought in professional management to balance the desire to do good with the need to maintain financial viability. To the surprise of many, the vision even survived a corporate buyout in 1999, when the company was purchased by Unilever, a $45 billion global food giant.

Today, Ben & Jerry’s continues to put its money where its mouth is, promoting a variety of admirable causes.

Here’s the catch. Well, three of them, actually. First, even with the company’s high standards of environmental responsibility—and you’d have to look far and wide to find a company with higher standards—it can be hard to make a case that the production of ice cream is an environmentally friendly process. For instance, ice cream requires refrigeration at every step of the manufacturing and distribution process, and refrigeration requires large amounts of electricity. And while the company has done a great job of removing chlorine and other nasty elements from the production of its ice cream cartons, those cartons are delivered to your local grocery store by fume-spewing diesel trucks. Second, obesity is now considered a huge health problem, and most of Ben & Jerry’s products are high in fat and high in calories.

Third, all of this discussion concerns products that no one really needs. After all, this is ice cream, not medical supplies or drinking water.

Ben & Jerry’s may well be the most environmentally and socially responsible ice cream company in history, but that still leaves the question: Should anybody be in the ice cream business?

Questions for Critical Thinking 1. Could Ben & Jerry’s environmental stance be considered hypocritical, given the electricity demands of the ice cream industry? Why or why not?

Student answers may vary as they interpret and analyze whether it is hypocritical to donate monies and work to improve the environment which may be harmed during the manufacturing process of Ben & Jerry’s ice cream products.

2. How might Ben & Jerry’s respond to the three issues discussed above while still remaining true to its philosophical roots?

Student answers will vary.

Box # 4: Voisey’s Bay: Native Canadians Exercise Right to be Heard When Inco (CVRD Inco as of 2007) purchased the rights to the Voisey’s Bay property back in 1996 for $4.3 billion, they could not have imagined that obstacles would delay this potential site from reaching operational status for nearly a decade. Inco spent the next few years negotiating the terms of the project with the Newfoundland-Labrador government and stakeholders such as the local Innu and Inuit. The early years of the project were characterized by a drop in the price of nickel and costly, time-consuming environmental reviews.

The right to be heard is a concept that extends beyond consumer rights. Various stakeholders can play key roles in project approval and development stages, in influencing opinions of corporate image, and in pressuring governments to respond to local needs. In the Voisey’s Bay case, the Innu and Inuit population had a tremendous stake in the potential development of this project. Inco was spending its time considering estimated reserves, annual production capacity, and expected daily activity and workforce requirements. Meanwhile, locals were considering how the increased ship traffic would affect hunting season, which is dictated largely by ice in Labrador. What did these miners know about the way in which . 66

local communities use the waterways and land? Did they care? According to some locals, the company saw ice as something that needed to be broken whereas the native population sees it as a way to get around. Needless to say, the education process was lengthy.

In 2002, after years of negotiating and many lessons, Inco, through its subsidiary Voisey’s Bay Nickel Company, struck a deal with the Innu nation and the Labrador Inuit Association. The agreement addresses issues ranging from employment targets to supplying traditional food on-site to plans that nurture aboriginal joint ventures. Furthermore, Inco managed to agree that shipping would be suspended twice a year—when ice is forming and when it is melting—to minimize impact on wildlife and hunting patterns.

Since this agreement was reached, Inco has made attempts to solidify the relationship. For example, it sponsored the Nunatsiavut Drum Dancers and brought the group to Toronto to participate in the First Night Festival. Inco finally began production in 2005 and has bridged the stakeholder gap. It has also given back by donating $20 million to Memorial University for the development and operation of the Inco Innovation Centre located at the St. John’s campus. It appears that the company has learned from the experience and is making every effort to engage its stakeholders.

Questions for Critical Thinking 1.

What were the key factors behind the Voisey’s Bay project delays? List three.

A project of this size and scope must meet with the needs of various stakeholders such as: investors, the local community, suppliers, the government and the consumer. The project was delayed for many reasons notably: time-consuming environmental reviews; the drop in the price of nickel; government interests and bureaucracy; and important negotiations with the local Innu and Inuit populations.

2.

What lesson(s) can other companies learn from the Inco’s experience at Voisey’s Bay? What is the significance of Inco’s donation to Memorial University?

A project of this magnitude is complicated and there is no simple playbook in making such deals. The key lesson that this case demonstrates is that all stakeholders must be respected in the process. In the end, the local native population and their “right to be heard” and respected was a major factor not a powerful, rival multi-national corporation. The donation to Memorial University is a good sign that the firm is in touch with its major stakeholders and is willing to give back to the community.

See It on the Web URLs for all Internet exercises are provided at the website for this book, www.pearsoned.ca/bovee. When you log on to the text website, select Chapter 3, then select Web Destinations, click on the name of the featured website, and follow the detailed navigational directions to complete these exercises.

Explore these chapter-related websites, review their content, and answer the following questions for each website you visit: 1. What is the purpose of this website?

2. What kinds of information does this website contain? Please be specific.

3. How is the information provided at this website useful for businesspeople? Consumers?

4. How did you expand your knowledge of starting and financing a small business by reviewing the material at this website? What new things did you learn about this topic?

Build a Better Business . 67

One way to distinguish a business as an ethical organization is to join the Better Business Bureau (BBB).

Members of this private, non-profit business group agree to maintain specific standards for operating ethically and addressing customer complaints. The BBB website is packed with information about the organization, member businesses, and programs that benefit businesses and consumers alike. You can find reports on companies, register complaints, get help with consumer problems and access publications on all kinds of consumer issues, such as avoiding business scams and investigating charitable organizations. www.bbb.org

1. What is the purpose of this website?

A wholly owned subsidiary of the Council of Better Business Bureaus, BBBOnLine's mission is to promote trust and confidence on the Internet through the BBBOnLine Reliability and Privacy Seal Programs. BBBOnLine's website seal programs allow companies with websites to display the seals once they have been evaluated and confirmed to meet the program requirements.

2. What kinds of information does this website contain? Please be specific.

The BBB website is packed with information about the organization, member businesses, and programs that benefit businesses and consumers alike. You can find reports on companies, register complaints, get help with consumer problems and access publications on all kinds of consumer issues, such as avoiding business scams and investigating charitable organizations.

3. How is the information provided at this website useful for businesspeople? Consumers?

While student responses may vary, the following will address some possible answers.

In a world where information can uncover new possibilities, being smart about privacy is essential for consumers and businesses alike. The Better Business Bureau believes that consumers must be able to choose how their personal information is used to better meet their everyday needs. This website provides some simple tips to keep your information private, both online and off. We also have a variety of tools and resources to help businesses become more knowledgeable about good privacy practices. The BBB is working hard to help build trust between consumers and businesses so that everyone can reap the rewards of today's information-driven economy.

Businesses-----The BBBOnLine Reliability Seal confirms a company is a member of their local Better Business Bureau, has been reviewed to meet truth in advertisement guidelines and follows good customer service practices. The BBBOnLine Privacy Seal confirms a company stands behind its online privacy policy and has met the program requirements regarding the handling of personal information that is provided through its website Consumers------Use our safe shopping site to locate companies that are members of their local Better Business Bureau pledge to meet the BBBOnLine Reliability standards for ethical online business practices and have agreed to resolve complaints using the BBB's dispute resolution program or a similar program. Companies must live up to these promises or lose the right to remain in our program.

4. How did you expand your knowledge of ethics and social responsibility in business by reviewing the material at this website? What new things did you learn about this topic?

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

Protect the Environment . 68

The Canadian Environmental Protection Act (CEPA) has ushered in a more stringent approach to environmental protection. The goal is a cleaner, healthier environment for Canadians. Visit the following website, http://www.ec.gc.ca/CEPARegistry/the_act/, to learn more about the act, including the codes of practice; policies, enforcement and compliance; substance lists; and orders. Also, go to the Transport Canada site and find out the details of the ecoAUTO Rebate Program. http://www.tc.gc.ca/programs/environment/ecotransport/ecoauto.htm

1. What is the purpose of this website?

This website is used to educate consumers and businesses alike about environmental protection issues.

CEPA provides guidance in the nation's environmental science, research, education and assessment efforts. It oversees Environment Canada and Health Canada programs dealing with priority substances, new chemicals and biotechnology products, the development of regulatory and non-regulatory control options for toxic substances, amendments to CEPA and its regulations and other related issues.

Environment Canada's mandate is to preserve and enhance the quality of the natural environment, including water, air and soil quality; conserve Canada's renewable resources, including migratory birds and other non-domestic flora and fauna; conserve and protect Canada's water resources; carry out meteorology; enforce the rules made by the Canada - United States International Joint Commission relating to boundary waters; and coordinate environmental policies and programs for the federal government (Department of Environment Act). In addition, the Transport Canada site provides details of the ecoAUTO Rebate Program which is designed to encourage the purchase of environmentally friendly cars.

2. What kinds of information does this website contain? Please be specific.

Student answers will vary but the following is a list of possible answers.

Principles of CEPA enforcement; Prosecutions under CEPA; Statistical and Detailed Reports on Environmental Protection Enforcement Activities

3. How is the information provided at this website useful for businesspeople? Consumers?

While student responses may vary, the following will address some possible answers. The site provides information on: 1) Guidelines and codes of practice 2) Policies 3) Plans 4) Codes of Conduct 5) Enforcement 4. How did you expand you knowledge of ethics and social responsibility in business by reviewing the material at this website? What new things did you learn about this topic?

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

Focusing On E-business in Action The Biggest Audience in the Whole World Wide Web . 69

Questions for Critical Thinking 1.

What advantages do North American e-commerce companies have over their Chinese counterparts? What disadvantages?

The biggest advantage is in the area of infrastructure especially with basic issues like financial payments for purchases. In North America the credit card is in widespread use and it makes electronic transactions much easier to execute. In addition the government control is a bigger issue in China as well. These are key home market issues but when North American e-commerce companies try to enter the Chinese market they are faced with a very different model.

2.

Why is a country’s infrastructure an important factor in e-commerce development and success?

Internet access is a major infrastructure issue as well as the level of high speed access in the market. In addition, the financial mechanisms to conduct e-commerce can be a major hurdle for such companies.

3.

How might government control of information affect the growth of e-commerce in China?

Government control can stunt the growth of any industry. Every hurdle that is constructed by a government makes it more difficult for new companies to enter. However, in the case of the Chinese Internet experience, despite clear hurdles, the e-commerce sector is ready for a major expansion despite the restrictions. Companies are lining up to take advantage.

Chapter 3 Pop Quiz: 1. A(n)_____is a situation in which one must choose between two conflicting but arguably valid sides. .

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a. b. c. d.

ethical dilemma ethical lapse ethical mishap ethical solution

2. Which of the following is not a risk associated with whistle blowing? a. risk of being fired or demoted b. risk of suffering a career setback c. risk of financial strain d. risk of emotional stress. e. all of the above are risks associated with whistle blowing 3. The foundation of an ethical business climate is ethical awareness. a. true b. false 4. Which of the following is an example of an ethical dilemma? a. A company continues to operate the facility even after the site has been proven unsafe. b. A company is faced with deciding whether to continue operating a production facility that is suspected, but not proven, to be unsafe. c. A company is inflating prices for certain customers d. A company hiring employees from competitors to gain trade secret 5. Altruistic actions, such as donating money, time, goods, or services to charitable, humanitarian, or educational institutions is known as: a. an ethical dilemma b. social auditing c. philanthropy d. stake-holding 6. Companies can address environmental concerns by taking all but which of the following actions? a. Considering environmental issues a part of everyday business and operating decisions b. Accepting environmental staff members as full-fledged partners in improving the company's competitiveness c. Refusing to measure environmental performance d. Tying compensation to environmental performance 7. Written statements setting forth the principles that guide an organizations decisions are known as: a. code of ethics b. social audits c. philanthropic code d. social responsibility report 8. Many companies have established toll-free numbers for consumer information and feedback, and print these numbers on product packages. The companies are honouring the consumer’s a. right to be heard b. right to safety c. right to be informed d. right to choose which products to buy 9. The ____________ was established in 1978 as a federal departmental corporation that reports

to the parliament of Canada through the minister of labour. The department’s mandate is to promote health and safety in the workplace and improved cooperation between federal, provincial and territorial jurisdictions. . 71

a. Agriculture Department b. Federal Health and Safety Commission c. Canadian Centre for Occupational Health and Safety d. Occupational Health and Safety Board 10. Executives doing business abroad find which of the following legal and accepted practices in some foreign countries? a. bribery b. environmental abuse c. unscrupulous business practices d. all of the above

Answers to Quiz 1. a 2. e 3. a 4. b.

5. c 6. c 7. a 8. a 9. c 10. d

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Chapter 4: Starting and Financing a Small Business Learning Objectives 1 2 3 4 5 6 7

Highlight the major contributions small businesses make to the Canadian economy Identify the key characteristics that differentiate small businesses from larger ones Discuss three factors contributing to the increase in the number of small businesses Cite the key characteristics common to most entrepreneurs List three ways of going into business for yourself Identify three sources of small business assistance Highlight several factors you should consider when evaluating financing options, and discuss the principal sources of small business private financing

Summary of Learning Objectives 1

Highlight the major contributions small businesses make to the Canadian economy Small businesses bring new ideas, processes, and vigour to the marketplace.

According to Statistics Canada’s Survey of Employment Payroll and Hours (SEPH), 48 percent of the private labour force was employed by small enterprises with fewer than 100 employees. Small businesses introduce new goods and services, provide specialized products, and supply the needs of large corporations. Additionally, they spend almost as much as big businesses in the economy each year.

2

Identify the key characteristics that differentiate small businesses from larger ones In general, small businesses tend to sell fewer products and services to a more targeted group of customers. They have closer contact with their customers and tend to be more open-minded and innovative because they have less to lose than established companies. Small business owners generally make decisions faster and give employees more opportunities for individual expression and authority. Because they have limited resources, however, small business owners must work harder and perform a variety of job functions.

3

Discuss three factors contributing to the increase in the number of small businesses.

One factor is the advancement of technology and the Internet, which makes it easier to start a small business, compete with larger firms, or work from home. A second factor is the increase in the number of women and minority entrepreneurs entering the workforce. Finally, corporate downsizing and outsourcing have made selfemployment or small business ownership an attractive and viable option.

4 Cite the key characteristics common to most entrepreneurs Entrepreneurs are highly disciplined, intuitive, innovative, ambitious individuals who are eager to learn and like to set trends. They prefer excitement and are willing to

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take risks to reap the rewards. Few start businesses for the sole purpose of making money.

5 List three ways of going into business for yourself You can start a new company from scratch, you can buy a going concern, or you can invest in a franchise. Each option has advantages and disadvantages when it comes to cost, control, certainty, support, and independence.

6 Identify three sources of small business assistance One source for small business assistance is the Business Development Bank of Canada (BDC), a federally owned organization that provides financial and consulting services to a select group of firms. Incubators are another source. They provide facilities, business resources, and all types of start-up support. Finally, the Internet is an excellent resource for product and market research, business leads, advice, and contacts.

7

Highlight several factors you should consider when evaluating financing options, and discuss the principal sources of small business private financing When assessing financing options, you should consider the cost and risk of capital and the firm’s special needs and circumstances. You should also weigh the term for which financing is needed and the advantages and disadvantages of debt versus equity financing, including impact on ownership control. Bank loans are a principal source of private financing. Family and friends are another. Other alternatives include big businesses, venture capitalists, angel investors, and credit cards. Finally, the Canadian Small Business Financing (CSBF) Program can assist entrepreneurs by guaranteeing small bank loans for up to 85 percent of the amount borrowed.

Brief Chapter Outline I.

Understanding the Work of Small Business A. Canadian Economic System Founded on Small Business B. Economic Role of Small Businesses 1. Provide jobs 2. Introduce new products 3. Supply the needs of large corporations 4. Provide specialized goods and services C. Characteristics of Small Business 1. Two distinct types of small businesses a. Lifestyle Businesses b. High-Growth Ventures 2. Small companies tend to have limited resources 3. Innovation 4. Big companies cannot move as quickly D. Factors Contributing to the Increase in the Number of Small Businesses 1. Technology and the Internet 2. Rise in the number of female small business owners 3. Downsizing and outsourcing . 74

II.

III.

Starting a Small Business A. Characteristics of Entrepreneurs B. The Importance of Preparing a Business Plan 1. Business start-up checklist 2. What is a business plan 3. Preparing a business plan serves two important functions C. Small Business Ownership Options D. The Franchise Alternative 1. Three basic types of franchises a. production franchise b. manufacturing franchise c. business-format franchise 2. Evaluating a Franchise 3. Advantages of Franchising 4. Disadvantages of Franchising E. Why New Businesses Fail 1. New businesses fail for a variety of reasons a. Lack of management skills b. Lack of experience c. Lack of proper financing d. Uncontrolled growth e. Stray too far from original product line F. Sources of Small Business Assistance 1. Local business professionals 2. Business Development Bank of Canada (BDC) 3. Incubators 4. Internet Financing a New Business A. Process of Financing an Enterprise B. Length of Term 1. Short-term financing 2. Long-term financing C. Cost of Capital D. Debt Versus Equity Capital 1. Debt financing 2. Benefits of debt financing 3. Equity financing 4. Benefit of equity financing 5. Disadvantages of equity financing E. Private Financing Sources 1. Personal assets 2. Family and friends 3. Strategic partners and customers 4. Big business 5. Bank loans 6. Venture capitalists 7. Angel investors 8. Credit card financing

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Lecture Notes and Chapter Outline I.

Understanding the World of Small Business A. The Canadian Economic System is Founded on Small Businesses: Family Farmers, Shopkeepers, Craftsmen 1. Big business emerged as a primary economic force Improvements in transportation and communication made production cheap.

Small independent businesses could not compete.

2. 1990s was a golden era for entrepreneurship.

Small businesses capitalized on Internet technology to take advantage of market opportunities.

3. Difficult to define “small business.” a. Industry Canada uses the following definitions: ¾ independently owned and operated ¾ not dominant in its field ¾ relatively small in terms of annual sales ¾ fewer than 500 employees B. Economic Role of Small Businesses: Important Roles small business plays in the economy are as follows: 1. Provide jobs: small and medium sized businesses provide about 60% of private sector employment.

2. Introduce new products: most “radical” new-product developments spring from small firms 3. Supply the needs of large corporations: many small businesses act as distributors, servicing agents, and suppliers to large corporations 4. Provide specialized goods and services C. Characteristics of Small Business 1. Small business are of two distinct types: a. Lifestyle Businesses: firms built around personal/financial needs of individuals, families. b. High-growth Ventures: ¾ run by team rather than individual ¾ expand rapidly via large investment capital ¾ introduce new products/ services to a large market 2. Small companies tend to have limited resources a. Lack of support services b. Lack of conveniences c. Lack of fringe benefits available in large corporations 3. Innovation: Case studies show that being small can stimulate innovation: a. Small businesses can make decisions faster b. The owners of small businesses are more accessible c. Employees have a greater opportunity for individual expression 4. Big companies cannot move as quickly a. Require proposals, research reports, meetings b. To combat slowness, large firms are dividing companies into small units c. Some companies hire intrepreneurs: ¾ Intrepreneurs: people who create innovation within an organization ¾ Entrepreneurs: risk takers in the private enterprise system .

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II.

D. Factors Contributing to the Increase in the Number of Small Businesses: technological advances, an increase in the number of female business owners, and corporate downsizing and outsourcing 1. Technology and the Internet a. Internet allows small companies to compete with large businesses on a level playing field b. Small companies can use the Internet to communicate with customers and suppliers all over the world c. Small companies can access information that was previously available only to larger firms d. Easier to work at home (e.g., Consultants, accountants, lawyers).

2. Rise in Number of Female Small-Business Owners a. By 2010, the number of self-employed women in Canada is expected to reach 1 million (up from 877,000). b. Women are becoming owners of small businesses for two reasons: ¾ More flexible work arrangements ¾ Barriers to advancement (glass ceilings) in large corporations 3. Downsizing and Outsourcing a. During hard times, many companies downsize or lay off talented employees, who then have little to lose by pursuing self-employment ¾ Downsizing: reducing employees to improve profits b.

To make up for layoffs of permanent staff, some companies outsource work. The increased use of outsourcing provides opportunities for smaller businesses to service the needs of larger enterprises. ¾ Outsourcing: subcontracting special projects and secondary business functions to experts outside the organization.

Starting a Small Business A. Characteristics of Entrepreneurs: 1. Are highly disciplined 2. Like to control their destiny 3. Listen to their intuitive sense 4. Relate well to others 5. Are eager to learn skills necessary for success 6. Learn from their mistakes 7. Stay abreast of market changes 8. Willing to exploit new opportunities 9. Seldom follow trends (rather, they spot and interpret trends) 10. driven by ambition 11. Think positively 12. Prefer the excitement and potential rewards of risk taking over security 13. Most start with relatively small sums of money and operate informally 14. Most have diverse backgrounds in education and business experience 15. Often have innovative ideas or better ways of performing tasks B. The Importance of Preparing a Business Plan 1. Business start-up checklist (refer to exhibit 4.3 in text) a. Be sure that a market exists b. Attempt to foresee some of the potential problems that may arise and figure out how you will cope with them: main supplier may go out of business; tough competition; changing styles and trends

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2. Business Plan: a written document that summarizes an entrepreneur’s proposed business venture, communicates the company’s goals, highlights how management intends to achieve those goals, and shows how consumers will benefit from the company’s products or services 3. Preparing a Business plan serves two important functions: a. Guides the company operations and outlines a strategy for turning an idea into reality b. Helps persuade lenders and investors to finance your business C. Small Business Ownership Options 1. Start-up options: start from scratch; buy an existing business; obtain a franchise a. Start-up companies: starting from scratch rather than buying an existing operation or inheriting the family business. Refer to Exhibit 4.4 of the text for Advantages and disadvantages of starting a business from scratch. b. Buy an existing business can be advantageous because there are reduced risks; known products and services; financial backing more easily obtained. Disadvantages may include: obsolete inventory and equipment; unsatisfactory location; and outstanding bills. c. Obtaining a Franchise: ¾ Franchisee: the small business owner who contracts to sell the goods or services ¾ Franchisor: the supplier STUDENTS RESEARCH Ask students to interview the owner of a small business. What were the challenges he or she faced? What sources did the owner turn to for assistance? What was most helpful during the start-up phase of the business? What challenges does the small business owner face now?

BUSINESS START-UP CHECKLIST 9 Choose a business name, verify the right to use it, and register it.

9 Reserve a corporate name if you will be incorporating.

9 Register trademarks.

9 Apply for a patent if you will be marketing an invention.

9 Write a business plan.

9 Choose a location for the business.

9 File partnership or corporate papers.

9 Get any required business licenses or permits.

9 Have business phone lines installed 9 Check into business insurance needs.

9 Apply for sales tax number.

9 Apply for an employee identification number if you will have employees.

9 Open business bank account(s).

9 Have business cards and stationery printed.

9 Purchase equipment and supplies.

9 Order inventory.

9 Order signage.

9 Order fixtures.

9 Print brochures and other sales literature.

9 Send out publicity releases.

9 Call everyone you know and tell them you are in business. . 78

D. The Franchise Alternative 1. There are three basic types of franchises: a. Product franchise: gives you the right to sell trademarked goods, which are purchased from the franchisor and resold. Car dealers fall into this category. b. Manufacturing franchise: gives you the right to produce and distribute the manufacturer’s products, using supplies purchased from the franchisor. Soft-drink bottling plants fall into this category. c. Business-format franchise: gives you the right to open a business using the franchisor’s name and format for doing business. Fastfood chains such as: Harvey’s, Taco Bell, and Second Cup typify this form of franchising.

2. Evaluating a Franchise: a. Study the opportunity carefully before you commit. Determine the financial condition of the franchisor and ascertain whether the company has been involved in lawsuits with franchisees. b. Consult an attorney c. Evaluate the Franchisor by interviewing other franchisees d. Evaluate the costs (see exhibit 4.5)

TEN QUESTIONS TO ASK BEFORE SIGNING A FRANCHISE AGREEMENT 1. What does the initial franchise fee cover? Does it include a starting inventory of supplies and products?

2. How are the periodic royalties calculated and when are they paid?

3. Are all trademarks and names legally protected?

4. Who provides and pays for advertising and promotional items?

5. Who selects the location of your business?

6. Are you assigned an exclusive territory?

7. If the territory is not exclusive, does the franchisee have the right of first refusal on additional franchises established in nearby locations?

8. Is the franchisee required to purchase equipment and supplies from the franchisor or other suppliers?

9. Under what conditions can the franchisor and/or the franchisee terminate the franchise agreement?

10. Can the franchise be assigned to heirs?

3. Advantages of franchising: a. Viable business (instant name recognition, such as Tim Hortons) b. If the franchise is well-established, you benefit from instant name recognition, national advertising programs, standardized quality of goods and services, and a proven formula for success. c. Instant access to support networks (blueprint for building a business) d. Services (site-location studies, market research, training, etc.) e. Financial assistance 4. Disadvantages of Franchising: a. No guarantee of wealth b. Monthly payment, or royalty, that must be turned over to the franchisor

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c. Little independence: franchisors can prescribe virtually every aspect of the business d. Bound by contracts to sell only authorized goods, often supplied by the franchisor itself at the price the franchisor wants to charge

FOR DISCUSSION Ask students to name some franchises, and consider the effect that franchises have on their view of businesses. For example, has McDonald’s set the standard for fast-food?

E. Why New Businesses Fail 1. New businesses fail for a variety of reasons a. Lack of management skills b. Lack of experience c. Lack of proper financing d. Uncontrolled growth: Growing companies must do the following: ¾ install more sophisticated systems and processes. ¾ staff positions that never existed and learn how to delegate responsibilities and control ¾ hire experienced managers ¾ stay focused e. Stray too far from the original product or market F. Sources of Small Business Assistance 1. Many local business professionals are wiling to serve as mentors an can help you to avoid the pitfalls of business 2. The Business Development Bank of Canada offers a variety of services to help small businesses grow.

3. Incubators: Centers that provide “newborn” businesses with office space, expert advice, legal and accounting services, clerical services, marketing support, contacts, and more. a. Studies show that firms that start out in incubators typically increase sales by more than 400 percent form the time they enter until the time they leave 4. Internet: The Internet provides access to business forums as a source of assistance, information on licensing a product, valuable business leads, etc.

III. Financing a New Business A. Process of Financing an Enterprise 1. Assess the firm’s financing needs and determine whether funds are needed in the short or the long term 2. Assess the cost of obtaining financing 3. Weigh the advantages and disadvantages of financing through debt or equity, taking into consideration the firm’s special needs and circumstances

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B. Length of Term: 1. Short-term financing: any financing that will be repaid within one year a. The primary purpose of short-term debt financing is to ensure that the company maintains its liquidity, or its ability to meet financial obligations (such as inventory payments) as they become due.

2. Long-term financing: financing that will be repaid in a period longer than one year a. Long-term financing is used to acquire long-term assets such as buildings and equipment or to fund a start-up and expansion via any number of growth options.

C. Cost of Capital: the average rate of interest a company must pay on its financing 1. Cost of capital depends on three major factors: a. The risk associated with the company b. The prevailing level of interest rates c. Management’s selection of funding vehicles D. Debt Versus Equity Capital 1. Debt financing refers to what we normally think of as loan. A creditor agrees to lend money to a debtor in exchange for repayment, with accumulated interest, at some future date. Loans can be secured or unsecured: a. Secured loans are those backed by something of value (collateral), which may be seized by the lender in the event that the borrower fails to repay the loan. b. Unsecured loans are ones that require no collateral. Instead, the lender relied on the general credit record and the earning power of the borrower.

2. Benefits of debt financing include: a. The lender does not gain an ownership interest in the business b. A firm’s obligations are limited to repaying the loan 3. Equity financing is achieved by selling shares of a company’s stock. a. Initial shares offered for sale are the company’s initial public offering (IPO) 4. Benefit of Equity Financing: a. It allows the firm to obtain funds without pledging to repay a specific amount of money at a particular time 5. Disadvantages of Equity financing include the following a. Expensive and time-consuming process b. Public companies must file a variety of statement with securities commissions, pay costly fees and prepare audited financial statements c. The firm must give up some ownership control E. Private Financing Sources: Most new companies obtain start-up capital from one or a combination of the following: 1. Personal assets 2. Family and friends 3. Strategic partners or customers 4. Big business (companies such as Microsoft fund young companies in exchange for stock or exclusive rights to future products)

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5. Bank loans (Obtaining financing through bank loans can be difficult for most start-ups because of the following: a. Banks consider start-ups risky so they shy away from lending money to new businesses. b. The risk inherent in some start-ups justifies higher interest rates than banks are allowed to charge by law. c. Most banks will finance a start-up only if they can obtain payment guarantees from other financially sound parties or to the extent that the business has marketable collateral, such as buildings and equipment, to back the loan 6. Venture Capitalists: raise capital from large private and institutional sources a. Provide money and management expertise in return for a large portion of ownership b. Sell their interest to other investors for profit once business is profitable c. Hard to find, and price of financing is high 7. Angel Investors: put their own money into start-ups a. Wealthy individuals b. Loan smaller amounts of money for longer periods of time 8. Credit Card Financing: companies use credit cards for funding a. Credit card companies don’t care how the money is used b. High interest rates make it difficult to pay back c. Recipe for disaster

Potential Difficulties and Suggested Solutions 1.

Students may not realize the time and effort it takes to start your own business. Small business owners have to be extremely dedicated and committed in order to be successful. While there are many benefits of owning your own business, there are some evident drawbacks. In order to be successful, small business owners often have to spend a great deal of time working, including nights, weekends, and holidays. In order for students to get a real-world perspective on the world of small business, you may ask them to do the following: ¾ Interview a small business owner in your community. Inquire about the benefits and drawbacks of owning your own business.

2. Likewise, students may think that investing in a franchise is an easy way of owning your own business. The commitment and dedication factors remain the same here as franchisees have to spend a great deal of time working to start and ensure success of the business. In order for students to understand the dedication and commitment that is necessary for success, you may ask them to do the following: ¾ Interview a franchisee in your community. Inquire about the benefits and disadvantages of obtaining a franchise. Also, ask about details of the franchise agreement (specifically, how much flexibility does the franchisee have?).

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Behind the Scenes Itech: An Entrepreneurs Clear Vision Test Yourself Answers to these questions can be found on the website: www.pearsoned.ca/bovee.

1.

What are the challenges of starting a business from scratch? Provide examples from Robin Burns’ experience in creating Itech.

A new business enables the owner to maintain control over all aspects of the business and benefit from all of the profits if the business succeeds. However, there are many potential disadvantages. For example, income is no longer secure and there is a risk of losing the initial investment. In this case, it is attached to long hard work hours, total responsibility for all decisions, and a great deal of stress. The early days of Itech, in which Robin Burns developed the prototype and had to jump through hoops to get his product to market, at great personal financial risk, is typical of most start-up businesses.

2.

What entrepreneurial characteristics did Robin Burns demonstrate in creating his company?

Robin Burns demonstrated tremendous vision to not only create his new company but to establish a new product variation that revolutionized a product category. Students can refer to many of the characteristics listed below: They are highly disciplined.

■ They like to control their destiny.

■ They listen to their intuitive sense.

■ They relate well to others.

■ They are eager to learn whatever skills are necessary to reach their goal.

■ They learn from their mistakes.

■ They stay abreast of market changes.

■ They are willing to exploit new opportunities.

■ They are driven by ambition.

■ They think positively.

■ They prefer the excitement and potential rewards of risk taking over security 3.

How do companies like Itech help to fulfill the economic roles of society?

Companies like Itech create new products and services in order to earn a profit. In carrying out those goals the provide jobs to individuals that range from manufacturing the products to support staff roles. In sum, Itech contributes to the economic system by creating products, providing employment and paying taxes.

Companies like Itech 4. How can Itech diversify its product line? Should it consider a merger with another industry player?

Itech has already demonstrated the ability to innovate and diversify. The company did not rest on its past. Over the years they developed many new product lines including gloves and goalie pads. As discussed in the closing case the company merged with Mission in order to gain industry strength and compete more effectively.

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Behind the Scenes Mission-Itech: Growing, Diversifying, and Competing Critical Thinking Questions 1. Do you think that the merger with Mission was a good fit for Itech? Why? Why not?

Most students will mention the fundamental reasons stated in the case. It is a good fit because the two companies were already important players in the industry and they sold somewhat complementary products with strong brand equity. They were facing very tough competition by industry giants that were getting stronger because of mergers and acquisitions in the industry.The fundamentals of the deal, from an exterior perspective, appear sound. It is important to point out to the students that other factors will also play a role in the long-term relationship. Will corporate cultures clash? A California based company, such as Mission, that has its roots in Roller hockey probably has a different perspective and approach than Itech.

Diverse perspectives can be a strength if it is properly harnessed but it can also be a source of conflict.

2. How will this agreement allow the new firm to compete more efficiently in the industry?

Student answers may vary; however, below is a possible response.

The new company is now in a better position to offer a more complete product line to the major retailers. Their combined resources and market knowledge allows them to better fend off the big industry bullies that they are up against. They will need to nurture their strong brand names in order to continue to maintain visibility in this consolidating business.

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

Answers to End-of-Chapter Questions Test Your Knowledge Questions for Review 1. What are the primary economic roles of small business?

Small businesses help to meet the following economic roles: ■ They provide jobs.

■ They introduce new products.

■ They supply the needs of large corporations ■ They provide specialized goods and services.

Today, people are experiencing more pressure to balance personal demands with work responsibilities. Many small businesses have been created to deal with this problem.

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2. Explain the terms “downsizing” and “outsourcing.”

Downsizing is when a company decides to layoff workers and consolidate its employee base. OOOutsourcing refers to subcontracting work to outside companies often in other countries.

3. What role does the Business Development Bank of Canada play in the economy?

The Business Development Bank of Canada (BDC) is a financial institution wholly owned by the Government of Canada; it offers a variety of financial products designed to help Canadian businesses grow (term loans, subordinate financing, and venture capital). BDC is also a major player in helping businesses improve their management techniques by providing tailored consulting services through a national network of consultants.

4. What are the elements of an effective business plan?

The key elements of an effective business plan are listed below: 1) Summary, 2) Mission and objectives 3) Company and industry, 4) Products or services, 5) Market and competition, 6) Management, 7) Marketing strategy, 8) Design and development plans, 9) Operations plan, 10) Overall schedule, 11)Critical risks and problems, 12) Financial projections and requirements, 13)Exit strategy.

5. What are the advantages and disadvantages of buying 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.

6.

List five potential sources of financing for a new business and briefly describe each.

A business can be financed through debt or equity financing. Most people begin this process with financing from personal savings or from friends and family. The next common step is to get a bank loan. Some individuals even play with fire and use credit cards and their dangerous and very expensive interest rates. However, there are many other sources of financing; two are listed below.

Venture capitalists- are investment specialists who provide money to finance new businesses or turnarounds in exchange for a portion of the ownership Angel Investors- put their own money into start-ups with the goal of eventually selling their interest for a large profit. These wealthy individuals are willing to loan smaller amounts of money than VCs, and they are willing to stay involved with the company for a longer period of time.

7.

What occurs when a company goes public? What is meant by an initial public offering?

Going public is an effective method of raising needed capital, but it can be an expensive and time-consuming process. Public companies must file a variety of statements, pay costly fees, and prepare audited financial statements. An IPO refers to the first initial sale of company stock on the market.

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Questions for Analysis 8. Why is writing a business plan an important step in starting a new business?

Most people think the sole purpose of a business plan is to secure financing. The truth is that the primary beneficiary of writing a business plan is the business owner.

By writing a plan, you force yourself to think things through, plan ahead, understand your market, know your competition, find your weaknesses, build on your strengths, and make decisions that are financially sound. Also, a good plan will force you to narrow your focus and not spread yourself too thin—a trap that most new businesses fall into.

9. What’s the difference between a secured and an unsecured loan?

Secured loans are those backed by something of value, known as collateral, which may be seized by the lender in the event that the borrower fails to repay the loan.

Unsecured loans are ones that require no collateral. Instead, the lender relies on the general credit record and the earning power of the borrower.

10. Why is it important to establish a time limit for a new business to generate profit?

Even with a winning business plan, success is not guaranteed. Without an established time limit, entrepreneurs may just end up exhausting financial resources that might have been saved had they known when to call it quits.

11. Take a look at Exhibit 4.7. How do you explain the recent trend in venture capital financing in Canada?

The spike in 2000 and 2001 can be attributed to the dot.com bubble; the fallout of those unwise investments has meant a lower overall investment level since then.

Many VCs have become more selective in whom they lend money to. In the last four years VC investment has been fairly steady from $1.67 to 1.84 billion but fewer firms received funding in each of the last four years.

12. Is it easier to start a business from scratch or to purchase a franchise? In answering this question evaluate each option both in the short term and in the long term.

Starting a business from scratch is the most difficult option. It provides the entrepreneur with a great deal of freedom; however, there is no structure to help guide you. In the short-run it is much easier to buy a franchise because you are getting a proven business model and good franchises come with solid training and support as well as a recognized brand. However, in the long-run many entrepreneurs feel stifled by the rules and procedures that characterizes the franchise format.

13. If you were opening up a new business would you try to get the support of a local business incubator? In what practical ways do incubators help businesses survive? What psychological advantage is gained by the support provided by these organizations?

Incubators are centres that provide “newborn” businesses with just about everything a company needs to get started—office space, expert advice, legal and accounting services, clerical services, marketing support, contacts, and more.

Studies show that firms that start out in incubators typically increase sales by more than 400 percent from the time they enter until the time they leave. Furthermore, 8 out of 10 businesses nurtured in incubators succeed beyond five years.

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14. Ethical considerations: You’re thinking of starting your own hotdog and burger stand. You’ve got the perfect site in mind, and you’ve analyzed the industry and all the important statistics. It looks like all systems are go.

Uncle Daniel is even going to back you on this one. You really understand the fast-food market. In fact, you’ve become a regular at a competitor’s operation (down the road) 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 Heather’s fancy fries. No, you’re actually spying. You’re learning everything you can about the competition so you can outsmart them. Is this 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 15. Briefly, describe an incident in your life pertaining to a particular failure.

What was it and what did you learn from this experience?

Students’ answers will vary.

16. Take the Entrepreneur Test at www.wd.gc.ca/tools/xindex_e.asp to assess your entrepreneurial skills. What did you learn about yourself from this test? How can tests like these help you to fine-tune your business skills?

Students’ answers will vary. The “Entrepreneur Quiz” is intended to represent a measurement of characteristics that studies have found to be common in successful business owners. This test can be used as a guideline for building your skills as you work toward your goal of becoming a business owner.

17. Integrated: Entrepreneurs are one of the five factors of production discussed in Chapter 1. Review that material plus Exhibit 1.2 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. The examples listed in Exhibit 1.2 also demonstrate that a weakness in capital can be counterbalanced by one of the strengths of entrepreneurs—their ingenuity.

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

The question can serve the chapter’s goals in several ways. By examining a “reallife” small business, the student can start applying some of the concepts discussed in the chapter, including the 12 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.

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Practise Your Knowledge 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.

Building Your Team Skills The ten questions in Exhibit 4.4, on page 119, 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 Harvey’s franchise. First, brainstorm with your team to draw up a list of sources (such as printed sources, Internet sources, and any other suitable sources) where you can locate basic background information about the franchisor. Also list at least two sources you might consult for detailed information about buying and operating a Harvey’s franchise. 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?

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Students’ lists will vary, but should include questions regarding issues like: franchise fees and expenses; training programs; marketing services; and expected return on investment. In addition, potential franchisees should establish which services (property taxes, advertising, payroll, insurance, audits, etc.) are covered by the franchisor and which are covered by the franchisee.

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 4.3. 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 new business.

2. Using library sources, find a self-test on entrepreneurial qualities. Analyze the test’s questions. Which of the characteristics discussed in this chapter are mentioned or suggested by questions included in this test?

Answers will vary. Most (if not all) of the statements in the test are clearly related to the individual characteristics discussed in the chapter.

3. Answer all the questions in the self-test you have selected. Which of these questions seem the most critical for entrepreneurial success? How did you score on this self-test—and on the questions you think are most critical?

Before you go into business for yourself, which characteristics will you need to work on?

Students’ assessments will vary. To encourage them to examine their choices and assumptions in more depth, the instructor may want to ask the students to explain why they have determined one question or another to be most critical.

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 Canada. 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 .

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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

Answers to Boxed Features Box 1: Create a Winning Website These days, anyone can learn to design and construct web pages. All you need is the right web-authoring software and a reasonably good computer to create pages with text, photos, and animated graphics. An estimated 75 percent of small Canadian businesses are on the Web. But if you want to create a winning website, here are a few tips to consider: ■ Present a professional corporate image. Be sure to provide a corporate profile that tells people a little bit about your company. Include news releases or articles about your business so that customers can see how well-known or dynamic you are in the industry. Make sure your material is accurate, interesting, and related to your products. Identify the key benefits of your product (include product details on a second page). Check out other websites for inspiration—especially your competitors’ sites—and decide what you like or dislike about their appearance. Think of ways to distinguish your site.

■ Don’t forget the basics. Always give visitors a person to call and a place to send a request for more information to. Be sure to list your postal and email addresses and phone and fax numbers. Remember that the Internet is international, so list the nation where your company or its dealers are located.

■ Make your website easy to use. Web surfers have a short attention span, so keep large graphics (which take forever to load) to a minimum. If you must include any large, embedded graphics or photos, provide an option for users to select a textonly interface, or provide small images of photos (called thumbnails) for users to click on if they want to view larger, more detailed versions. Always provide hyperlinks at the bottom of each page to allow users to move backwards and forward through a multi-page site.

■ Anticipate your customers’ needs. Plan ahead. By including answers to frequently asked questions, chances are you’ll cover about 90 percent of your customers’ concerns. Remember, users tend to provide both frank and useful input, but only if you ask them for it. So be sure to include an active customer feedback mechanism such as email, open feedback forms, or structured survey forms. Don’t require users to register before they can see your site. You may drive them away.

■ Promote your website. Be sure to list with numerous search engines—giant indexes that allow web users to find information by entering key words. Most of these listings are free. Maximize the number of times your site will be listed by . 90

jamming in as many words as you can that best describe your site. Take out an ad in the newspaper and list your company in the Internet yellow pages. Finally, don’t just sit back and expect your website to perform magic. Use it to find out as much as possible about your customers. Ask yourself: How can I benefit from all this customer information?

Questions for Critical Thinking 1. Why do web surfers have a short attention span?

No one wants to wait for large graphics to load on a website. If this is the case, web surfers are prone to move on to other websites that are easier and to use in order to use time most efficiently.

2. List some of the ways companies can benefit from having a website on the Internet.

Increasing visibility and getting new business are the most obvious benefits, but there are others. A company’s home page can serve as a two-way communication vehicle.

In addition to providing an excellent means for learning more about consumers— what they like, what they want, and who they are—a website can also serve as an effective agent for conveying information about the company, including prices, promotion lists, company events, and industry news. A site can also be used to solicit such resources as distributors and future employees.

Box 2: Blueprint for a Comprehensive Business Plan Although the business plan has a simple, straightforward purpose, it still requires a great deal of thought. For example, before you open your doors, you have to make important decisions about personnel, marketing, facilities, suppliers, and distribution.

A written business plan forces you to think about those issues and develop programs that will help you succeed. If you are starting out on a small scale and using your own money, your business plan may be relatively informal. But at a minimum, you should describe the basic concept of the business and outline its specific goals, objectives, and resource requirements. A formal plan, suitable for use with banks or investors, should cover the following points: ■ Summary. In one or two pages, summarize your business concept. Describe your product or service and its market potential. Highlight some things about your company and its owners that will distinguish your firm from the competition.

Summarize your financial projections and the amount of money investors can expect to make on their investment. Be sure to indicate how much money you will need and for what purposes.

■ Mission and objectives. Explain the purpose of your business and what you hope to accomplish.

■ Company and industry. Give full background information on the origins and structure of your venture and the characteristics of its industry.

■ Products or services. Give a complete but concise description of your product or service, focusing on its unique attributes. Explain how customers

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■ ■ ■

■ ■ ■ ■ ■

■

will benefit from using your product or service instead of those of your competitors.

Market and competition. Provide data that will persuade the investor that you understand your target market and can achieve your sales goals. Be sure to identify the strengths and weaknesses of your competitors.

Management. Summarize the background and qualifications of the principals, directors, and key management personnel in your company.

Include resumés in the appendix.

Marketing strategy. Provide projections of sales and market share, and outline a strategy for identifying and contacting customers, setting prices, providing customer services, advertising, and so forth. Whenever possible, include evidence of customer acceptance, such as advance product orders.

Design and development plans. If your product requires design or development, describe the nature and extent of what needs to be done, including costs and possible problems.

Operations plan. Provide information on the facilities, equipment, and labour needed.

Overall schedule. Forecast development of the company in terms of completion dates for major aspects of the business plan.

Critical risks and problems. Identify all negative factors and discuss them honestly.

Financial projections and requirements. Include a detailed budget of start-up and operating costs, as well as projections for income, expenses, and cash flow for the first three years of business. Identify the company’s financing needs and potential sources.

Exit strategy. Explain how investors will be able to cash out or sell their investment, such as through a public stock offering, sale of the company, or a buyback. When covering these points, keep in mind that your audience wants short, concise information—not lengthy volumes—and realistic projections for growth.

Questions for Critical Thinking 1. What details should you know about your business before writing a business plan?

Before writing a business plan, you should know specifics about the business mission and your objectives; the characteristics of your industry; the products or services you will be selling or providing; the market and the competition; the background and the qualifications of management; the marketing strategy; the design, development, and operational plan; critical risks and problems; financial projections and requirements; and the exit strategy. Specifics of these factors are given in the box.

2. Why is it important to identify critical risks and problems in a business plan?

It is important to identify critical risks and problems in a business plan for a variety of reasons. For one, it is ethical and the right thing to do. If you identify honestly, it shows that you have done your homework, are aware of issues facing the business, and are trustworthy. It helps establish credibility and may also protect from certain liabilities. Investors and lenders will want to know the risks and problems before investing in any ventures.

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See It on the Web URLs for all Internet exercises are provided at the website for this book, www.pearsoned.ca/bovee. When you log on to the text website, select Chapter 4, then select Web Destinations, click on the name of the featured website, and follow the detailed navigational directions to complete these exercises.

Explore these chapter-related websites, review their content, and answer the following questions for each website you visit: 1. What is the purpose of this website?

2. What kinds of information does this website contain? Please be specific.

3. How is the information provided at this website useful for businesspeople?

Consumers?

4. How did you expand your knowledge of starting and financing a small business by reviewing the material at this website? What new things did you learn about this topic?

The ABCs of IPOs Taking a company public is not for the faint of heart. But like a Broadway opening, a successful debut can launch a relatively unknown company into stardom—or allow it to quietly disappear from the public eye. Even today’s largest corporations were at some point small start-ups looking for public financing. Which company is the next AOL, RIM, or Microsoft? How do IPO’s work? How does a young company play the IPO game? You can find the answer to these questions and more by checking out the Beginners Guide to IPO’s at Hoover’s IPO Central, http://www.hoovers.com/global/ipoc/index.xhtml. Then visit www.baystreet.ca and learn about the latest Canadian listings.

1. What is the purpose of this website?

Hoover's wants to be the homepage of the business world. The company provides proprietary online business information through the Internet, wireless devices, and co-branding agreements with more than 30 other online services. Its Web site, Hoover's Online, features a database of information on more than 12 million corporations and organizations (more than 18,000 are profiled by Hoover's inhouse editorial staff). Offering both free and for-pay information, the company focuses primarily on selling subscriptions (about 67% of revenue) to marketing, sales, and business development professionals. It also publishes books and CDROMs. 2. What kinds of information does this website contain? Please be specific.

Student answers may vary, but may include any of the following: Hoover's, Inc. (Nasdaq: HOOV) delivers comprehensive company, industry, and market intelligence that drives business growth. Hoover’s provides sales, marketing, business development, and recruiting professionals with the global business intelligence they need to prospect and prepare for client meetings, sales presentations, vendor and partner negotiations, and other business opportunities.

Hoover’s, Inc. provides business-information products and services of the highest . 93

quality, accuracy, and readability. It provides market news, industry news, and information on specific companies. It also details the latest pricings and filings of IPO’s and IPO updates. It provides a Beginners Guide to IPO’s at Hoover’s IPO Central.

3. How is the information provided at this website useful for businesspeople?

Consumers?

Student answers may vary, but may include any of the following: This website provides a place for businesspeople to obtain industry and market information. Businesspeople can also sign up to receive free newsletters about current business topics/trends via e-mail. Hoover’s provides sales, marketing, business development, and recruiting professionals with the global business intelligence they need to prospect and prepare for client meetings, sales presentations, vendor and partner negotiations, and other business opportunities.

The website provides the latest business headlines so consumers can remain informed. It also has a link to explore potential job opportunities.

4. How did you expand your knowledge of starting and financing a small business by reviewing the material at this website? What new things did you learn about this topic?

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

Starting a Business in Canada Thinking about starting your own business? Canada Business Services for Entrepreneurs website puts you in touch with a wealth of resources to assist you in your start-up. Perhaps you would like some professional business counselling, financial assistance, or advice on developing a business plan. Starting a new business or buying an existing one can be an overwhelming process. But you can increase your chances of success by taking your first steps with the Business Start-up Assistant. Log on to find out if entrepreneurship is for you. Then do your research and discover some of the secrets of success. http://www.canadabusiness.ca/gol/cbec/site.nsf/en/index.html

1. What is the purpose of this website?

To provide resources on specific business-management issues.

2. What kinds of information does this website contain? Please be specific.

Student answers may vary, but may include any of the following: This website contains information on the following: writing a business plan; leadership and strategy; starting a business; information technology; human resources; buying a business or franchise; personal and professional growth; sales; finance and capital; office and operation; e-commerce; marketing and advertising; customer service; law and taxation; Internet and business.

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3. How is the information provided at this website useful for businesspeople?

Consumers?

Student answers may vary, but may include any of the following: For businesspeople, this website provides information on all of the above. All of the topics listed above are essential to successful business operations.

For consumers, the website provides a place for consumers to locate businesses of their choice.

4. How did you expand your knowledge of starting and financing a small business by reviewing the material at this website? What new things did you learn about this topic?

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

Financing a New Business Canadaone.com has an outstanding selection of articles and advice on buying, owning, and running a small business that you won’t want to miss. If you’re considering a franchise, the tools and tips at this site will help you find your ideal business. Concerned about financing? Check out the articles on raising start-up capital, finding an angel, or attracting venture capital. Running a small business is no easy feat, so get a head start by visiting www.canadaone.com.

1. What is the purpose of this website?

The site is a resource for potential and current small business owners. It is designed to help customers and constituencies, small business owners and potential entrepreneurs to start or continue successful and legal business operations.

2. What kinds of information does this website contain? Please be specific.

Student answers may vary, but may include any of the following: The website provides information on the following: starting a small business; financing your business; business opportunities; offices and services; laws and regulations, etc…

3. How is the information provided at this website useful for businesspeople?

Consumers?

Student answers may vary, but may include any of the following: Businesspeople can use this website as a resource to learn about small business ownership and potential solutions to problems that may arise. A listing of laws and regulations that impact small business owners is also available. Information on obtaining loans and financial management of a growing business is also provided on this website.

4. How did you expand your knowledge of starting and financing a small business by reviewing the material at this website? What new things did you learn about this topic? . 95

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

Chapter 4 Pop Quiz: 1. Which of the following are contributions small businesses make to the Canadian economy? a. introduce new goods and services b. provide specialized products c. supply the needs of large corporations d. provide jobs e. all of the above are contributions small businesses make to the Canadian economy 2.

Small business owners generally make decisions faster than large corporations and they give employees more opportunities for individual expressions and authority. a. true b. false

3. Which of the following is NOT a factor contributing to the increase in the number of small businesses? a. advancement of technology and the Internet b. increase in the number of female small business owners c. political instability in Canada d. corporate downsizing and outsourcing 4. Which of the following is NOT a characteristic found in most entrepreneurs? a. highly disciplined b. innovative c. unwilling to take risk d. ambitious 5. Which of the following is NOT a source of small-business assistance? a. BDC b. Internet c. incubators d. all of the above are sources of small-business assistance 6.

To make up for layoffs of permanent staff, some companies ____________ special projects and secondary business functions to experts outside the organization. a. outsource b. downsize

7. A business plan a. is a written document that summarizes an entrepreneur’s proposed business venture . 96

b. highlights how management intends to achieve goals c. shows how consumers will benefit from the company’s products or services. d. includes all of the above mentioned elements 8.

The ______________is the small-business owner who contracts to sell the goods or services, while the _____________ is the supplier. a. franchisor; franchisee b. franchisee; franchisor

9.

Most car dealers and gasoline stations sell trademarked goods, which are purchased from the franchisor. This type of franchise is referred to as a ______________ franchise. a. manufacturing b. business-format c. product

10.

Which of the following is NOT a benefit of investing in a franchise? a. national advertising programs, b. standardized quality of goods and services c. restricted access to a support network d. training and technical assistance

Answers to Quiz 1. e 2. a 3. c 4. c 5. d 6. a 7. d 8. b 9. c 10. c

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Chapter 5: Selecting the Proper Form of Business Ownership and Exploring Business Combinations Learning Objectives 1 2 3 4 5 6 7 8 9 10

List five advantages and four disadvantages of sole proprietorships List five advantages and five disadvantages of partnerships Explain the differences between common and preferred shares from a shareholder’s perspective Highlight the advantages and disadvantages of public share ownership Cite four advantages and three disadvantages of corporations Describe the three groups that govern a corporation and the role of each List advantages and disadvantages offered by the cooperative business format Explain the important role of income trusts to the economy in recent years Identify some of the synergies companies hope to achieve by combining their operations Identify methods a public company can use to fight a hostile takeover

Summary of Learning Objectives 1 List five advantages and four disadvantages of sole proprietorships Sole proprietorships have five advantages: (1) They are easy to establish, (2) they provide the owner with control and independence, (3) the owner reaps all the profits, (4) profits are taxed at individual rates, and (5) the company’s plans and financial performance remain private. The four main disadvantages of a sole proprietorship are (1) the company’s financial resources are usually limited, (2) management talent may be thin, (3) the owner is liable for the debts and damages incurred by the business, and (4) the business may cease when the owner dies.

2 List five advantages and five disadvantages of partnerships In addition to being easy to establish and having profits taxed at individual rates, partnerships offer a greater ability to obtain financing, longevity, and a broader base of skills. The main disadvantages of partnerships are unlimited liability for general partners, the potential for personality and authority conflicts, having to share profits (regardless of how abundant or meagre they may be), the potential of having to deal with an unproductive partner, and the added complexity to decision making.

3 Explain the differences between common and preferred shares from a shareholder’s perspective Common shareholders can vote and can share in the company’s profits through discretionary dividends and adjustments in the market value of their shares. In other words, they can profit from their investment if the value of the shares rise above the price they paid for them, or they can lose money if the value of the shares fall below the price they paid for them. In contrast, preferred shareholders cannot vote, but they can get a fixed return (dividend) on their investment, and they have a priority claim on assets after creditors if the business ceases operations.

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4 Highlight the advantages and disadvantages of public shares ownership Public shares ownership offers a company increased liquidity, enhanced visibility, financial flexibility, and an independently established market value for the shares.

The disadvantages of public ownership are high costs, burdensome filing requirements, loss of ownership control, heightened public exposure, and loss of direct control over the market value of the company’s shares.

5 Cite four advantages and three disadvantages of corporations Because corporations are a separate legal entity, they have the power to raise large sums of capital, they offer shareholders protection from liability, they provide liquidity for investors, and they have an unlimited lifespan. In exchange for these advantages, businesses pay large fees and have to file excessive paperwork to incorporate, and they are subject to double taxation. Finally, if publicly owned, corporations must adhere to strict government reporting requirements.

6 Describe the three groups that govern a corporation and the role of each Shareholders are the basis of the corporate structure. They elect the board of directors, who in turn elect the officers of the corporation. The corporate officers carry out the policies and decisions of the board. In practise, the shareholders and board members usually follow the lead of the chief executive officer. However, some board members are more active than others. This is especially true of young dot.com corporations that appoint directors for their management expertise and industry connections.

7 List advantages and disadvantages offered by the cooperative business format Cooperatives provide the following advantages: strength in numbers, buying power, a democratic system, and year-end surplus earnings. Cooperatives have the following disadvantages: a long decision-making process, extensive record keeping, less incentive to invest in additional capital, and potential conflicts among members.

8

Explain the important role of income trusts in the economy in recent years The growing popularity of income trusts from 2002 to 2006 became a political issue when many major corporations began to convert. This format has the advantage of allowing profits to flow directly to unit-holders to be taxed at individual rates (as opposed to the double taxation profits from corporations are subject to). This was beginning to become a drain on government revenues, causing the federal government to eventually step in and announce a 34 percent levy on income trusts to level the playing field with corporations.

9 Identify some of the synergies companies hope to achieve by combining their operations By combining their operations, companies hope to eliminate redundant costs, increase their buying power, increase their revenue, improve their market share, eliminate manufacturing overcapacity, and gain access to new expertise and personnel.

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Identify methods a public company can use to fight a hostile takeover 10 Corporate boards and executives have come up with a number of techniques (poison pill, golden parachute, shark repellent, white knight) to defend public companies against unwanted takeovers. These approaches can devalue a company in the eyes of potential investors and transform an attractive opportunity into something far less desirable.

Brief Chapter Outline I.

II.

Choosing a Form of Business Ownership A. Sole Proprietorship 1. Advantages of Sole Proprietorship 2. Disadvantages of Sole Proprietorship B. Partnership 1. Two basic types of partnerships a. General Partnership b. Limited Partnership 2. Advantages of Partnerships 3. Disadvantages of Partnerships 4. Partnership Agreement C. Corporation 1. Corporations are a vital force in today’s economy 2. Ownership a. Shareholders b. Stock c. Stock Certificate d. Common Shares e. Preferred Shares 3. Private Corporation 4. Public Corporation a. Advantages of going public b. Disadvantages of going public 5. Advantages of Corporations 6. Disadvantages of Corporations 7. Subsidiary Corporation 8. Corporate Governance a. Chief Executive Officer b. Shareholders c. Board of Directors D. Cooperatives 1. Cooperatives are another important form of business organization 2. Advantages of Cooperatives 3. Disadvantages of Cooperatives E. Income Trusts Understanding Business Corporations A. Merger B. Acquisitions C. Advantages of Mergers and Acquisitions D. Disadvantages of Mergers and Acquisitions E. Current trends in Mergers and Acquisitions F. Merger and Acquisition Defences

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1. Hostile takeovers 2. All companies who sell stock are vulnerable to takeovers 3. Two ways in which hostile takeovers can be launched a. Tender offer b. Proxy fight 4. Steps companies take to protect themselves a. Poison pill b. Golden parachute c. Shark repellent d. White knight e. Taking a company private H. Strategic Alliances and Joint Ventures 1. Strategic Alliance a. Advantages of strategic alliances 2. Joint Venture a. Advantages of joint ventures

Lecture Notes and Chapter Outline I.

Choosing a Form of Business Ownership A. Sole Proprietorship: a business owned by one person (although it may have many employees); it is the easiest and least expensive form of business to start. Some examples of sole proprietorships: farms, retail establishments, small service businesses 1. Advantages of Sole Proprietorships a. Easier and less expensive to start b. Satisfaction of working for yourself c. Make your own decisions (what hours to work, whom to hire) d. All profits kept by proprietor e. Privacy (do not have to reveal performance or plans to anyone) 2. Disadvantages of Sole Proprietorship a. Unlimited liability (any legal debts incurred by the business are the owner’s responsibility) b. Success depends on talents of the proprietor c. Difficult to obtain substantial amounts of money d. Limited life (the owner’s death may mean the demise of the business) B. Partnership: a legal association of two or more people as co-owners of a business for profit 1. Two basic types of partnerships: a. General partnerships (all partners considered equal by law and are liable for the business’s debt) b. Limited partnerships (one or more people run business, others invest passively) ¾ general partners: run the business ¾ limited partners: passive investors (the amount of money they can lose is limited to the amount of their capital contribution.

2. Advantages of Partnerships a. Easy to form partnerships

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b. Tax advantages: profits are taxed at individual income-tax rates rather than at corporate rates c. Easier to obtain funds (strength in numbers) d. Diversity of skills (leads to innovation in products, services, and processes e. Shared liability f. Broadens the pool of capital g. Increase chances that the organization will endure (new partners can be drawn into the business to replace those who die or retire) 3. Disadvantages of Partnerships a. Unlimited liability of general partners b. Shared debts c. Interpersonal problems d. Disputes over profits e. Lack of privacy (easy access to information) f. Fierce competition 4. Partnership Agreement: a written document that states all the terms of operating the partnership by spelling out the partner’s rights and responsibilities. a. Law does not require a written partnership agreement b. Partnership agreement should address the following ¾ sources of conflict that could result in battles between partners ¾ division of profits ¾ decision-making authority ¾ expected contributions ¾ dispute resolution ¾ buy-sell agreement (the steps a partner must take to sell his or her partnership interest or what will happen if one of the partners dies) STUDENT ACTIVITY Divide students into several groups. Give each group the task of forming either a partnership or sole proprietorship. Once they have made these choices, give them each situations in which partnerships and sole proprietorships run into problems. For example, a sole proprietorship can run into financial problems or have trouble finding financing. A partnership shares liability equally between partners regardless of whether or not both partners are responsible for creating debt. Tell students that they can either come up with solutions to the problem or switch forms of ownership. However, if they switch forms of ownership, they must justify this change. Ask the students to present problems and solutions to the class in order to show the diverse situations that can arise in each form of ownership.

C. Corporation: a legal entity with the power to own property and conduct business 1. Corporations are a vital force in today’s economy a. Emerged in the 19th century with advent of railroads (no individual could raise enough money on their own) b. Corporations can receive, own, and transfer property, make contracts, sue or be sued

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c. Corporations sell shares to investors who share in profit, but don’t manage d.

Ownership may change hands many times while management remains the same 2. Ownership a. Shareholders: owners of a corporation (but not managers) b. Stock: share in a company c. Stock Certificate: proof of ownership d. Common Shares ¾ voting privileges, ability to elect board of directors ¾ voting rights for major policies such as mergers ¾ dividends (profits paid on shares of company profits, they are declared by the board of directors but their payment is not mandatory) ¾ cash dividend: dividend paid in the form of cash ¾ stock dividend: dividend paid in the form of additional stock ¾ risky investment because of the volatility of the stock market e. Preferred Shares ¾ does not usually carry voting rights ¾ gives stockholders right of first claim on the corporation’s assets after debts (important if a company folds) ¾ less control but more safety FOR DISCUSSION Ask students to weigh the advantages and disadvantages of common and preferred stock.

Which would they prefer to buy and why? The point of this exercise is to have students think through the differences. If students have stocks, ask them to volunteer information about why they chose the stocks they did. Are the stocks suited to particular shareholders?

What would be an ideal stock for a student? A child? A CEO? Help students see that knowledge and interest are important for common stock but not preferred stock.

3. Private Corporations (also referred to as close corporations or closely held companies) a. Withhold stock from public sale so that owners can: ¾ retain control over operations ¾ protect business from unwelcome takeover attempts ¾ example: Hallmark, Pattison, Cirque Du Soleil 4. Public Corporations: held by and available for sale to the general public a. Advantages of going public: ¾ increased liquidity ¾ establishment of an independent market value for the company ¾ enhanced visibility b. Disadvantages of going public: ¾ expensive to go public ¾ burdensome to file documents with the appropriate securities commission ¾ ownership control is lost ¾ administrative and legal demands of heightened public exposure .

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¾ value of companies stock becomes subject to external forces beyond the company’s control Advantages of Corporations a. Compilation of money, resources, talent b. Diverse labour pool c. Greater financing options d. Expanded research and development capabilities e. Limited liability f. Liquidity (investors can easily convert their stock into cash by selling it on the open market) g. Shareholders can easily transfer their shares to someone else h. Ability to finance projects internally Disadvantages of Corporations a. Paperwork and costs associated with incorporation can be burdensome b. Double taxation c. Public corporations are required by law to publicly disclose financial information Subsidiary Corporations a. Subsidiary Corporations ¾ partly owned by another corporation (parent company) Corporate Governance: Shareholders own a business, but rarely run it; instead they elect a board of directors a. Chief Executive Officer (CEO) ¾ the centre of power in a corporation ¾ responsible for establishing company policies ¾ responsible for managing corporate direction ¾ responsible for making the big decisions that will affect the company’s growth and competitive position b. Shareholders ¾ individuals, other companies, mutual funds, not-for-profits ¾ common stockholders elect directors or give over the right by proxy ¾ more shareholders means less impact per shareholder ¾ institutional investors (pension funds, insurance companies) invest an increasing number of shares of stock, empowering themselves with voting power ¾ employees are sometimes major shareholders (gives them a voice on how the company is run) example: Avis, WestJet c. Board of Directors ¾ responsible for declaring dividends ¾ responsible for guiding corporate affairs ¾ responsible for reviewing long-term strategic plans ¾ responsible for selecting corporate officers ¾ responsible for overseeing financial performance ¾ power to vote on major management decisions ¾ several may be inside directors, company employees ¾ some boards act independently of the company while others act as rubber stamps ¾ directors are involved in corporate strategy, evaluation of executives, etc.

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¾ directors are often compensated with stock to give them a stake in their decisions ¾ evidence shows that companies whose directors own large amounts of stock outperform other companies ¾ critics claim that this practice of compensating in the form of additional stock could compromise their independent decision making by placing too much focus on a company’s short-term stock performance ¾ conflict-of-interest situations may arise if directors profit from consulting fees or other forms of business transactions as a result of their company board position FOR DISCUSSION Ask students to speculate on why a board of directors is made up of both inside and outside members.

What would happen if a board was made up entirely of inside members? What is the problem? Students will hopefully recognize that inside information can be useful but sometimes limiting. What might happen if a board were made up entirely of outside members? In this case, the emphasis on profit might outweigh the emphasis on quality, excellent performance, and ethical issues. Help students to see that a balance must be struck.

D. Cooperatives 1. Cooperatives are another important form of business organization 2. Advantages of Cooperatives include: strength in numbers; democratic system; surplus profits distributed to members; and provide each member an equal say.

3. Disadvantages of Cooperatives include: a longer decision making process; lower incentive to invest; and potential disagreements among members.

E. Income Trusts 1. Income trusts became a major issue between 2002 and 2006 as many companies in Canada had moved or were moving to this format in order to benefit from the cash flow and tax implications.

2. The Tax Fairness plan introduced in 2006 put an end to the hysteria.

II. Understanding Business Combinations A. Merger: one company buys another (or parts of another) and emerges as the controlling corporation.

1. The controlling corporation assumes all debts and contractual obligations of the company it acquires, which then ceases to exist B. Acquisition: purchasing another company’s voting stock in exchange for cash, stock, security C. Advantages of Mergers and Acquisitions (all advantages are grouped under umbrellas terms such as economies of scale, efficiencies, synergies----i.e. the benefits of working together will be greater than if each company continued to operate independently.)

1. Eliminate expenditures from combined resources 2. Increase buying power 3. Increase revenue by cross-selling each other’s products 4. Increase market share by combining product lines to provide a more comprehensive offering 5. Eliminate manufacturing overcapacity 6. Gain access to new expertise, systems and teams of employees who already know how to work together . 105

D. Disadvantages of Mergers and Acquisitions 1. 65%-85% of these deals are not as efficient as hoped 2. Culture clash (different belief systems and acceptable ways of behaving within the company structure) 3. Burden of high risk corporate debt E. Current trends in Mergers and Acquisitions 1. More and more companies are facing the dangers of global competition by joining forces with former domestic competitors to strengthen and to deal with consolidating industries.

2. Simultaneously some of the largest companies are shedding unprofitable acquisitions and focusing on generating internal growth from their core businesses. (i.e Molson) F. Merger and Acquisition Defences 1. Hostile takeovers: when one party fights to gain control over another company against the wishes of existing management 2. All companies who sell stock to the public are vulnerable to takeovers 3. A hostile takeover can be launched in one of two ways: a. Tender offer: raider offers to buy a certain number of stocks in the corporation at a specific price (usually more than current price for stock, so stockholders motivated to sell) b. Proxy fight: raider launches a public relations battle for shareholder votes hoping to enlist enough votes to oust board and management 4. Steps companies take to protect themselves c. Poison pill: deliberately making the company less valuable to the raider d. Golden parachute: assures benefits to top executives in the event of a takeover or buyout making it very expensive on the raider to take over. e. Shark repellent: Requires stockholders representing a large majority of shares to approve any takeover attempt. f. White knight: friendly buyer takes over company before a raider, usually allows current management to remain in place g. Taking a company private: purchasing all of the company stock in order to make a public company private.

G. Strategic Alliances and Joint Ventures: alternative to mergers, and acquisitions 1. Strategic Alliance: long-term partnership between companies to jointly develop, produce, or sell products a. Advantages of strategic alliances: ¾ can accomplish many of the same goals as mergers, and acquisitions without requiring a painstaking process of integration ¾ can help a company gain credibility in a new field ¾ can help a company expand its market presence ¾ can help a company gain access to technology ¾ can help a company diversify its offering ¾ share best practices without forcing the partners to become fast friend for life ¾ easier to dissolve

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2. Joint Venture: special type of strategic alliance in which two or more firms jointly create a new business entity that is legally separate and distinct from its parents a. Advantages of joint ventures: ¾ allow companies to use each other’s complementary strengths that might otherwise take too long to develop on their own ¾ allow companies to share what may be the substantial cost and risk of starting a new operation

Potential Difficulties and Possible Solutions 1. It may be necessary to reemphasize the difference between private and public corporations, outlining the major differences between the two. To initiate discussion, the following questions could be posed: ¾ Why might a closely held corporation choose to remain private?

Answer: as a means of retaining control over the firm to protect their businesses from unwelcome takeover attempts. ¾ Why might a closely held corporation choose to become a publicly traded corporation?

Answer: Increased liquidity; Establishment of an independent market value for the company; Enhanced visibility 2. To emphasize the importance of legal contracts forming partnerships and alliances, you may want to pose the following questions: ¾ What are the ramifications of not having a legally binding agreement in the creation of a partnership or an alliance?

Answer: Legal contracts are advisable in business dealings to avoid misunderstandings and ensure that both parties respect the agreement. In most business dealings, there is a lot of money and time on the line. The risk of losing this is far too great; therefore, a legally binding agreement is necessary (even if it is not required).

Behind the Scenes Canadian Home Renovation Centres: Strategic Battleground Test Yourself Answers to these questions can be found on the website: www.pearsoned.ca/bovee.

1.

Rona transformed itself from a cooperative to a corporation. What are the advantages of creating a public corporation?

A corporation is a legal entity with the power to own property and conduct business.

A public corporation enables the firm to generate large sums of money by selling shares on the stock market. The corporate format is a great vehicle to enable a company, like Rona, to attain substantial growth while still providing shareholders with limited liability.

2.

How do shareholders of corporations like Rona benefit from the success of the companies they invest in? What are dividends?

Shareholders in corporations like Rona benefit if the company succeeds with capital appreciation. Quite simply if you purchase 100 shares at $10 (100*10=1000) and the share price rises over a period of lets say 5 years to $30 the investor can sell the

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shares (100*30=3000) get back his or her investment of 1000 and in addition they earn a capital gain of 2000. Many public companies also distribute dividends to their shareholders every year. A company may decide to distribute a portion of their profits to each shareholder in each of the five years that this individual held the stock.

3.

Rona has acquired many companies in its quest to become the dominant home renovation company. What are the key advantages of such acquisitions? Are there any potential disadvantages?

Rona’s appetite for acquisition in recent years has been impressive. It has allowed the company to increase its market share across the country and transform itself from a regional player to a national player. Such acquisitions are not without their problems; it is not easy to integrate a company with traditions and beliefs into your corporate structure. Resistance is normal. However, in making such acquisitions Rona gains valuable retail locations in malls and important real estate across the country. It also gains local expertise from the acquired company and in addition it eliminates a competitor.

Recruiting the Independent Retailer Questions for Critical Thinking 1. Rona's decision to become a publicly traded company was an important element of their expansion plan. How has this decision helped Rona in realizing additional growth?

Transforming Rona from its roots as a cooperative into a publicly traded corporation has been a major reason for the growth and expansion of the company. First, as a public corporation Rona can raise funds more easily to pursue its growth strategy.

Second, this move has helped Rona recruit independent retailers because of the opportunity for stock appreciation for owners that make the decision to join Rona.

2. Home Hardware has maintained its strategy as a privately held cooperative.

What is the primary goal of such a cooperative?

The cooperative system provides some of the advantages of the corporate format without many of the restrictions. Small independent retailers may have a tough time competing but if they join forces within a cooperative they can take advantage of strength in numbers and economies of scale. Home Hardware’s merchants benefit from reduced cost of supplies and shared promotional costs within a democratic system that gives members an equal voice in the decision-making process.

3. Evaluate the business decision being faced by independent Canadian hardware retailers. Make a list of pros and cons for each option. a. Join Rona’s corporate growth machine Pros: recognized retail brand name, heavily promoted; potential stock appreciation; efficient supply system Cons: Up front cost and commitment; loss of control; no voice in the system; low priority compared to the big box corporate stores b. Join Home Hardware’s cooperative business model Pros: recognized retail brand name, heavily promoted; an equal voice; terms are not quite as restrictive as the corporate form; share in surpluses

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Cons: conform to the norms of the cooperative group; democratic vote but still a very diluted vote; dramatic stock appreciation (Rona) not possible c. Continue operating as an independent Pros: maintain control; make independent decisions to meet the needs of the local community Cons: Poor buying power makes it difficult to compete in a consolidating industry; no advertising support 4. If you owned an independent home renovation retail outlet, which model would you opt for? Explain your answer.

Answers will vary based on personal choice but they should be backed up by the key points examined in question 3.

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

Answers to End-of-Chapter Questions Test Your Knowledge Questions for Review 1. What are the main advantages of a cooperative?

The primary advantage of the cooperative form is the strength provided by being affiliated with a group. When a cooperative negotiates with a manufacturer on behalf of its members, it possesses buying power. Each member has one equal vote—all voices are heard. At the end of the year surplus earnings are distributed to members based on their level of service usage. Finally, members of a cooperative enjoy the protection of limited liability 2. What is the difference between preferred and common shares?

Owners of common shares have voting rights and get one vote for each share they own. They can elect the company’s board of directors in addition to voting on major policies that will affect ownership. Common shareholders have the last claim on distributed profits and assets Preferred shares do not usually carry voting rights. They do, however, give preferred shareholders the right of first claim on the corporation’s assets (in the form of dividends) after all of the company’s debts have been paid if the company ever goes out of business. Preferred shareholders also get their dividends before common shareholders do.

3. What is meant by liquidity? Why is this an advantage for corporations over the sole proprietorship and partnership business formats?

Corporations that sell shares to the general public have the advantage of liquidity, which means that investors can easily convert their shares into cash by selling it on the open market. This option makes buying shares in a corporation attractive to many investors. In contrast, liquidating the assets of a sole proprietorship or a partnership can be difficult.

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4. What is a leveraged buyout?

A leveraged buyout occurs when one or more individuals purchase a company’s publicly traded shares by using borrowed funds. The debt is expected to be repaid with funds generated by the company’s operations and, often, by the sale of some of its assets. For an LBO to be successful, a company must have reasonably priced shares and easy access to borrowed funds.

5. What is the difference between a merger and an acquisition?

A merger is a form of business combination in which two companies combine forces to create a new single entity. A company can also acquire another firm by purchasing that firm’s voting shares. This transaction is generally referred to as an acquisition and is completed when the shareholders of the acquired firm tender their shares for either cash or shares in the acquiring company.

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. The small landscaping company that you started two years ago is growing quickly.

You have hired three new workers in the past year and have added a second truck.

New contracts are being negotiated with some large industrial clients. Is it wise to incorporate at this point in time?

As a company grows it becomes increasingly logical to incorporate a company in order to provide the owner with limited liability protection. In other words, the owners are only legally liable for the funds that they put into the business they cannot be sued personally if something major occurs with one of these industrial contracts. If this company is not already incorporated it would be wise to do so.

8.

Should the board of directors be composed almost exclusively of members from outside the organization? What are the benefits of such an arrangement? What are the potential drawbacks?

At most large corporations, boards are composed exclusively of directors from outside the company, with only the CEO and a senior executive or two from inside the organization. This arrangement helps ensure that the board provides diligent and independent oversight.18 But the debate over the optimal number of inside versus outside directors continues. Too many insiders can give management too much power over a group whose function is to protect shareholders’ rights and investments.

However, outside directors are at a serious information disadvantage. Thus, they must rely largely on the CEO’s portrayal of the firm’s condition and prospects.

9.

If you were an executive for a company that was the target of a takeover attempt, which type of defence would you recommend? Explain.

Answers will vary. Students should refer to some of the following options: poison pill, golden parachute, sSshark repellent and or the and or thwhite knight.

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10. Ethical Considerations. Your father sits on the board of directors of a large, well-admired, public company. Yesterday, while looking for an envelope in his home office, you stumbled on a confidential memorandum.

Unable to resist the temptation to read the memo, you discovered that your father’s company is talking with another publicly traded company about the possibility of a merger, with your father's company being the survivor. Dollar signs flashed in your mind. Should the merger occur, the value of the other company’s stock is likely to soar. You’re tempted to log on to your E*Trade Canada account in the morning and place an order for 1000 shares of that company’s stock. Better still, maybe you’ll give a hot tip to your best friend in exchange for the four Nickelback tickets that your friend has been flashing in your face all week. Would either of those actions be unethical? Explain your answer.

When exploring the question of whether any of these actions are unethical, students might benefit from going back to the discussions in Chapter 3, including the checklist in Exhibit 3.4. In addition, the question of illegality—i.e., insider trading—should also be addressed. (Insider trading involves buying and selling shares of stock or other securities based on special knowledge not available to others.)

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?

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

Because of the potential danger inherent in 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 the owners, and the fact that all will probably be leading expeditions, a limited partnership (if permitted by law in this jurisdiction) is not a viable option either.

Since 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.

12. Selling antiques on the Internet has become more successful than you imagined. Overnight your website has grown into a full-fledged business-now generating some $200,000 in annual revenue. It’s time to think about the future. Several competing online antique dealers have approached you with a proposal to merge their website with yours to create the premier online antique store. The money sounds good, but you have some concerns about joining forces. What might they be? What other growth options should you consider before joining forces with another business?

Students’ answers will vary. Combined entities hope to eliminate expenditures for redundant resources; increase their buying power as a result of larger size; increase revenue by cross-selling products to each other’s customers; increase market share by combining product lines to provide more comprehensive offerings; and gain access to new expertise, systems, and teams of employees who may already know how to work together. Part of the problem with mergers is that

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companies often borrow immense amounts of money to fund the merged entity; another obstacle that companies face when combining forces is culture clash.

Other growth options might: (1) public stock ownership; that will offer increased liquidity, enhanced visibility financial flexibility and an independently established market value for the stock, and (2) a partnership with one other online antique dealer to investigate the possibility of a larger merger of dealers.

13. INTEGRATED: In Chapter 2 we discussed international strategic alliances and joint ventures. Why might a Canadian company want to enter into those types of arrangements instead of merging with a foreign concern?

Two competing companies might establish a joint venture to make them both more competitive by sharing technology, finances, and human resources. By pooling resources, both companies can accomplish goals that would be more difficult to accomplish alone. In a merger, the participating companies completely combine their operations into a single company. Joint ventures, on the other hand, allow the participating companies to keep their autonomy, even though they may work together on a project or even create a new separate company.

14. INTEGRATED: Look back at Chapter 4. How might each of these smallbusiness scenarios impact your selection of a form of business ownership? a. You have decided to purchase a franchise operation instead of starting a business from scratch.

When you buy a franchise operation, 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. In addition, financing an existing business is often much easier than financing a new one; lenders are reassured by the company’s history and existing assets and customer base. b. You can’t tap into your personal financial resources or rely on friends or family for financial assistance.

The sole proprietorship is the least expensive form of business to start. Given the fact that you have little financial resources at your disposal, it may be best to start a home-based business that does not require a significant investment from the start. c. You are a hard worker, a visionary, a risk taker, highly disciplined, and very bright. But you lack managerial experience.

Because you are lacking managerial experience, it may be more beneficial to form a partnership with someone who does possess a significant amount of proven managerial experience and success. The diversity of skills that good partners bring to an organization leads to innovation in products, services, and processes, which improves your chances of success.

Practise Your Knowledge Sharpening Your Communication Skills You have just been informed that your employer is going to merge with a firm in Germany. Since you know very little about the German culture and business practices, you think it might be a good idea to do some preliminary research, just in case you have to make a quick trip overseas. Using the Internet or library sources, find information on the German culture and customs and prepare a

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short report discussing such cultural differences as German social values, decision-making customs, concepts of time, use of body language, social behaviour and manners, and legal and ethical behaviour.

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

Building Your Team Skills Directors often have to ask tough questions and make difficult decisions, as you will see in this exercise. Imagine that the director general 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 director general to fill this vacancy next semester.

First, generate a list of the qualities and qualifications you think the school should seek in a new director general. What background and experience would prepare someone for this key position? What personal characteristics should this individual possess? 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 director general. 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 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 have completed their presentations, discuss the differences and similarities among credentials proposed by all the teams for evaluating candidates. 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.

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 or law firm; and one that operates as a corporation, such as Petro-Canada or Telus.

1. Write down what you think you would like about being the sole proprietor, one of the partners, and the corporate manger 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

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you like having limited responsibility when you work for other people in the corporation?

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.

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

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.

Answers to Boxed Features Box 1: Pattison: The Potential of the Private Corporation You may be thinking that for a corporation to truly reach its potential it must go public and reap the rewards of being a listed company on the stock exchange.

However, there are many successful companies in a range of businesses from production to entertainment to retailing to advertising that show how the private corporation has a great deal of potential for growth and long-term success.

The Jim Pattison Group is one such company. Jim Pattison may be known in some circles as the invisible billionaire, but his influence is clear. If you live in British Columbia you are all too familiar with the Pattison empire. From car dealerships to media outlets, the company is front and centre. However, the reach of this company extends well beyond BC. In fact, it reaches more than 400 worldwide locations. The employee roster totals over 29 000 people, and its revenues surpass $6.3 billion. The .

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Jim Pattison Group, Canada’s third-largest private corporation, has diverse businesses that include automotive, media, packaging, food sales and distribution, magazine distribution, entertainment, exports, and financial industries. Jim Pattison also has substantial investments in companies like Canfor, a major lumber producer with 30 production plants in the United States and Canada and $3.6 billion in annual sales.

Without the pressure of the public eye watching their every step, private corporations can thrive and focus on long-term goals. Far too often, public corporations are caught looking at the scoreboard (share prices) rather than focusing on the game (the company’s goals). Next time you are driving down the highway or strolling down a street, pay attention to the billboards or bus stop posters—you will more than likely find a Pattison logo attached to it.

Questions for Critical Thinking 1. Why do you think The Jim Pattison Group has resisted the temptation to become a public corporation?

By withholding their shares from public sale, the owners retain complete control over their operations and ownership. They do not have to disclose company financials to the general public and they have the freedom to operate without having to worry about the latest stock valuations. Companies like The Jim Pattison Group finance their operating costs and growth from company earnings or other sources like bank loans.

2. Go to The Jim Pattison Group website at www.jimpattison.com and list all the various businesses that fall under the umbrella of this diverse company.

Answers will be based on the most up to date information.

Box 2: Hey, Do You Want to Lose a Few Billion? We Have a Sure Deal for You If you were about to make a multibillion-dollar deal but statistics suggested you had an 80 percent chance of failure, would you go for it? Sure you would, if you work in the slightly wacky world of corporate mergers and acquisitions.

Studies consistently show that the vast majority of mergers and acquisitions fail to meet their primary goal of increasing shareholder value. In many cases, the only people who win in these deals are the shareholders in acquired companies, when eager buyers shell out more for their shares than they are really worth.

How can so many otherwise talented people keep making so many mistakes?

Although no one answer applies to every situation, experts cite these common mistakes: ■ Companies often rush into deals in search of synergies, but then fail to develop them. Once the merger is done, management doesn’t follow through to make sure that the computer programmers, sales representatives, engineers, and others responsible for carrying out the details are able to cut costs and boost revenues according to plan.

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■ Companies pay excessively high premiums for the companies they acquire.

According to one expert, any time an acquiring company pays a premium of 25 percent or more over the trading price of the acquired company’s shares, the acquiring company is exposing itself and its shareholders to substantial risk.

■ Companies are unable to deal with differences in corporate cultures. A successful merger requires more than simply respecting each partner’s differences.

Procedures must be established to settle disputes and to integrate workforces and product lines strategically.

Without question, some mergers and acquisitions are beneficial to companies and shareholders in both the short term and the long term. However, managers need to approach mergers and acquisitions with caution by answering these questions: Will the regulatory environment change? How will competitors respond? Do the expected gains justify the up-front costs and disruption to business operations? Will the cultures, systems, processes, and product lines of the two companies blend well?

Executives will continue to believe they can beat the odds and craft successful deals, but without seeking honest answers to these questions first they’re likely to only find themselves adding to the depressing statistics about mergers and acquisitions.

Questions for Critical Thinking 1.

If you were on the board of directors at a company and the CEO announced plans to merge with a competitor, what types of questions would you want answered before you gave your approval?

This decision begins with the financial data and market analysis that makes or breaks the case for the acquisition. In addition to the numbers certain questions should be asked: Is there a good fit between the organizations? Do the companies have complementary skills and competencies? How difficult will it be to merge the two organizational cultures? What are the potential synergies in this deal? How will we ensure that we maximize the potential? What are the strategic steps to fully integrate the two firms?

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?

This is an interesting question. The job of the CEO is to do what is best for the company and act in a manner that will lead to long term success for the firm and its shareholders. The decision to acquire usually has far less opponents, assuming the firm is financially sound and ready for the move. The decision to merge with a company is usually surrounded by emotions and traditions which complicate matters.

In the past few years we have seen companies like Molson merge with other firms for the sake of long-term strength. If the move will improve the company’s long term prospect the decision should be made, however, in practise this is one of the greatest challenges for a CEO and can often lead to the end of his or her reign at the helm.

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See It on the Web URLs for all Internet exercises are provided at the website for this book, www.pearsoned.ca/bovee. When you log on to the text website, select Chapter 5, then select Web Destinations, click on the name of the featured website, and follow the detailed navigational directions to complete these exercises.

Explore these chapter-related websites, review their content, and answer the following questions for each website you visit: 1. What is the purpose of this website?

2. What kinds of information does this website contain? Please be specific.

3. How is the information provided at this website useful for businesspeople?

Consumers?

4. How did you expand your knowledge of forms of business ownerships and business combinations by reviewing the material at this website? What new things did you learn about this topic?

Choose a Form of Ownership Which legal form of ownership is best suited for a new business? Answering this question can be a challenge-especially if you're not familiar with the attributes of sole proprietorships, partnerships, corporations and cooperatives. That's where Industry Canada's Strategis website, http://strategis.ic.gc.ca, can help. Because there's no right or wrong choice, your job is to understand how each legal structure works and then pick the one that best meets your needs. Start your research by typing "Starting a Business" in the search box on the Strategis site. From there be sure to check out the award-winning business start-up assistant site.

1. What is the purpose of this website?

This website provides small businesses with information for starting a business, choosing a business structure, and writing a business plan. It provides an information centre for potential and current business owners to understand the legal structure of each form of ownership.

2. What kinds of information does this website contain? Please be specific.

Student answers may vary, but may include any of the following: This website provides information about the following: evaluating your business idea, writing a business plan, choosing a business name; finding and renting space for your business; legal structures of small business; employing workers; business financing; bookkeeping and accounting; business taxes; marketing and advertising; small business legal concerns; home businesses; doing business online; protecting your business’ intellectual property, etc.

3. How is the information provided at this website useful for businesspeople?

Consumers?

Student answers may vary, but may include any of the following: It is useful for businesspeople as a resource to obtain information. The website serves as a valuable resource for businesspeople.

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Consumers may find this site useful because it provides information concerning labour standards and other business obligations to its stakeholders.

4. How did you expand your knowledge of forms of business ownerships and business combinations by reviewing the material at this website? What new things did you learn about this topic?

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

Follow the Fortunes of the Fortune 500 Quick! Name the largest corporation in the world, as measured by annual revenues.

Give up? Check Fortune magazine's yearly ranking of the 500 largest companies.

The Fortune 500 not only ranks corporations by size but also offers brief company descriptions along with industry statistics and additional measures of corporate performance. You can search the list by ranking, by industry, by company name, or

by CEO. http://money.cnn.com/magazines/fortune/fortune500/

1. What is the purpose of this website?

Student answers may vary, but may include any of the following: This website provides rankings on corporations and offers brief company descriptions along with industry statistics and additional measures of corporate performance. Fortune also provides rankings and information on the following: best companies to work for, most admired companies (domestic and global), top small businesses, etc.

2. What kinds of information do these websites contain? Please be specific.

Student answers may vary, but may include any of the following: This website contains information on the following: investments, careers, companies, company profiles, rankings in regards to best companies to work for, most admired companies (domestic and global), fastest growing companies, small business, CEO’s; articles pertaining to technology.

3. How is the information provided useful for businesspeople? Consumers?

Student answers may vary, but may include any of the following: Businesspeople may be able to search through the company profiles to see how the most successful companies are operating. To enhance their business operations, businesspeople may emulate some business practices of these most successful firms.

The site helps individuals look for a company that best fits their personality and profile. They list the best companies to work for so that consumers are aware of the business practices of these companies. It also offers a wide range of articles that pertain to possible solutions to work problems. Information on investments are also provided.

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4. How did you expand your knowledge of forms of business ownerships and business combinations by reviewing the material at this website? What new things did you learn about this topic?

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

Globe and Mail Top 1000 Canadian Businesses The Globe and Mail lists the top 1000 publicly traded companies as measured by assets. Visit its site, http://www.reportonbusiness.com/top1000, to view this listing.

Globe and Mail top 1000 Canadian Businesses 1. What is the purpose of this website?

Student answers may vary, but may include any of the following: This website provides rankings on corporations and offers brief company descriptions along with industry statistics and additional measures of corporate performance.

2. What kinds of information do these websites contain? Please be specific.

Student answers may vary, but may include any of the following: This website contains the list as well as information on the following: investments, careers, companies, company profiles, rankings in regards to best companies to work for, most admired companies (domestic and global), fastest growing companies, small business, CEO’s; articles pertaining to technology.

3. How is the information provided useful for businesspeople? Consumers?

Student answers may vary, but may include any of the following: Businesspeople may be able to search through the company profiles to see how the most successful companies are operating. To enhance their business operations, businesspeople may emulate some business practices of these most successful firms.

4. How did you expand your knowledge of forms of business ownerships and business combinations by reviewing the material at this website? What new things did you learn about this topic?

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

Building a Great Board Want a great board of directors? This inc.com guide contains the best resources for entrepreneurs who are ready to recruit outside directors for their boards. Find out how to recruit board members and how to persuade top-notch people to come on

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board. Once you've selected your members, learn how to maximize your board's impact and resolve conflicts among board members. www.inc.com/guides/growth/20672.html

1. What is the purpose of this website?

Student answers may vary, but may include any of the following: This inc.com guide contains the best resources for entrepreneurs who are ready to recruit outside directors for their boards. This website offers advice on how to maximize your board’s impact and resolve conflicts among board members. It offers guideline to help you build and use your board.

2. What kinds of information does this website contain? Please be specific.

Student answers may vary, but may include any of the following: This website provides information concerning the following: building the board; persuading top-notch people to join your advisory board; finding diverse candidates for your board; board conflict resolution; board evaluation problems and solutions; tips for first-time board members.

3. How is the information provided on this website useful for businesspeople?

Consumers?

Student answers may vary, but may include any of the following: This information is useful for businesspeople who are building a board of directors. (refer to answer for question #2) Consumers can learn more about how companies build their boards.

4. How did you expand your knowledge of forms of business ownerships and business combinations by reviewing the material at this website? What new things did you learn about this topic?

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

Focusing On E-business in Action Why Did the Dot-Coms Fall to Earth?

Questions for Critical Thinking 1. Why did many dot-com businesses fail at the beginning of the twenty-first century?

Experts now cite these reasons for the dot-com shakeout: poor management; unrealistic goals; going public too soon; fighting the laws of supply and demand; extravagant spending; locked out of cash.

2. How did the attitude of dot-come investors change? Why did it change?

Entrepreneurs learned the hard way that successfully launching a public company was much different from successfully running one. Cyberspace got crowded.

New dot-coms went unnoticed. Desperate to get consumers attention and business, e-tailers spent lavishly on advertising. Some pumped out discount offers and free-shipping promises—haemorrhaging cash and piling up losses.

This turn of events prompted investors to take a second look and change their

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minds—overnight. Profits, it seemed, mattered after all. Many investors watched in shock as dot-com stock prices fell through the floor.

3. If you had the opportunity to invest in a dot.com business today, what questions would you ask before investing your money?

The first key point is that the investor must ask a lot of questions. As we saw in this case, at the turn of the century, too many companies were getting large sums of money without the sort of due diligence that is necessary. Today’s entrepreneur has more reasonable expectations about the time and effort required to build a business. The old economy rules still apply. Treat this business like a regular bricks and mortar firm. Ask to see the business plan and take a close look at the overall strategy and the financials.

Chapter 5 Pop Quiz: 1. Which of the following is NOT a characteristic of a sole proprietorship? a. sole proprietorships are easy to establish b. sole proprietorships provide the owner with control and independence c. sole proprietorships may cease when the owner dies d. sole proprietorships are subjected to double taxation 2. A disadvantage of a sole proprietorship is that the owner is liable for the debts and damages incurred by the business. a. true b. false 3. Which of the following is NOT a disadvantage of partnerships? a. unlimited liability b. potential for personality conflicts c. must adhere to strict government reporting requirements d. potential for authority conflicts 4.

________ shareholders can vote and can share in the company’s profits through discretionary dividends and adjustments in the market value of their stock. a. common b. preferred

5. ______________ shareholders cannot vote, but they can get a fixed return (dividend) on their investment and a priority claim on asset after creditors. a. common b. preferred 6. Which of the following is an advantage of public stock ownership? a. high costs b. strict filing requirements c. heightened public exposure d. financial flexibility

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7. A __________________is a business owned by one person (although it may have many employees), and it is the easiest and least expensive form of business to start. a. sole proprietorship b. partnership c. corporation 8. In a __________ partnership, all partners are considered equal by law, and all are liable for the business’s debts. To guard against personal liability exposure, some organizations choose to form a __________ partnership. a. general; limited b. limited; general 9.

A partnership agreement is a written document that states all the terms of operating the partnership by spelling out the partners’ rights and responsibilities. a. true b. false

10. Dividends can be paid in the form of cash or additional stock. a. true b. false

Answers to Quiz: 1.

2.

2.

3.

4.

5.

6.

7.

8.

9.

10.

d a c a b d a a a a a

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Chapter 6: Understanding the Functions and Roles of Management Learning Objectives 1 2 3 4 5 6 7 8 9 10

Define the four basic management functions Outline the tasks involved in the strategic planning process Explain the purpose of a mission statement List the benefits of setting long-term goals and objectives Cite three leadership styles and explain why no single style is superior to the others in every situation Identify the importance of contingency leadership and distinguish between transactional and transformational leadership List the challenges involved in managing organizational change and identify the strategies to overcome them Clarify how total quality management (TQM) is changing the way organizations are managed Understand some of the reasons why managers fail and identify key strategies for success Identify and explain the three types of managerial skills

Summary of Learning Objectives 1

Define the four basic management functions The four basic management functions are (1) planning—establishing objectives and goals for the organization and translating them into action plans; (2) organizing—arranging resources to carry out the organization’s plans; (3) leading—influencing and motivating people to work effectively and willingly toward company goals; and (4) controlling—monitoring progress toward organizational goals, resetting the course if goals or objectives change in response to shifting conditions, and correcting deviations if goals or objectives are not being attained.

2

Outline the tasks involved in the strategic planning process The strategic planning process begins with a clear vision for the company’s future. This vision is then translated into a mission statement so it can be shared with all members of the organization.

Next, managers develop forecasts about future trends that affect their industry and products. Then they analyze the competition, paying close attention to their strengths and weaknesses so this information can be used to gain a competitive edge. With an eye on the company’s vision and mission as well as on competition, managers establish company goals and objectives. Finally, they translate these goals and objectives into action plans.

3

Explain the purpose of a mission statement A mission statement defines why the organization exists, what it does, what it hopes to achieve, and the principles it will follow to meet its goals. It is used to bring clarity of focus to members of the organization and to provide guidelines for the adoption of future projects.

4

List the benefits of setting long-term goals and objectives Goals and objectives establish long- and short-range targets that help managers fulfill the company’s mission. Setting appropriate goals increases employee motivation, establishes standards by which individual and group performance can be measured, guides employee activity, and clarifies management’s expectations.

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5

Cite three leadership styles and describe when each style is most appropriate to use Three leadership styles are autocratic, democratic, and laissez faire (also called free-rein). Each may work best in different situations—autocratic when quick decisions are needed, democratic when employee participation in decision making is desirable, and laissez faire when fostering creativity is a priority.

6

Identify the importance of contingency leadership and distinguish between transactional and transformational leadership Contingency leadership emphasizes the need to adapt—good leaders are flexible enough to respond with the best approach for the situation. The difference between a transactional and a transformational leader is important. The transactional leader focuses on the task at hand and emphasizes getting the specific job done, while the transformational leader has the ability to inspire and lead beyond the tedious day-to-day tasks.

7

List the challenges involved in managing organizational change and identify the strategies to overcome them People don’t like change because they tend to fear the unknown and are comfortable in their routines. They may distrust the motives of the change or just feel that the change is bad for the company. To facilitate change in an organization, managers can take the following steps: (1) Identify what needs to change; (2) identify the forces acting for and against the change; (3) choose the approach or combination of approaches best suited to the situation; (4) reinforce changed behaviour and monitor continued progress; (5) cultivate constant change on a small scale.

8

Explain how total quality management (TQM) is changing the way organizations are managed Total quality management is both a management philosophy and a management process that focuses on delivering quality to customers. TQM redirects management to focus on four key elements: (1) Employee involvement, including team building and soliciting employee input on decisions; (2) customer focus, which involves gathering customer feedback and then acting on that feedback to better serve customers; (3) benchmarking, which involves measuring the company’s standards against the standards of industry leaders; (4) continuous improvement, which requires an ongoing commitment to reducing defects, cutting costs, slashing production and delivery times, and offering customers innovative products.

9

Understand some of the reasons why managers fail and identify key strategies for success Managers fail for many reasons, including poor people skills, personal qualities, poor fit with the organization, lack of skills, or lack of experience. Companies must carefully pick management personnel to match the needs of the job. Simply promoting a star employee without evaluating the needs of the position can often lead to both the loss of a star employee and the hiring of an ineffective manager all in one action.

10

Identify and explain the three types of managerial skills Managers use (1) interpersonal skills to communicate with other people, work effectively with hem, and lead them; (2) technical skills to perform the mechanics of a particular job; and (3) conceptual skills (including decision making) to see the organization as a whole, to see it in the context of its environment, and to understand how the various parts relate.

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Brief Chapter Outline I. The Four Basic Management Functions: Planning, Organizing, Leading and Motivating A. In the course of performing the four basic management functions, managers play a number of roles that fall into three main categories 1. Interpersonal Roles 2. Informational Roles 3. Decisional Roles B. The Planning Function: Understanding the Strategic Planning Process 1. Strategic plans outline the firm’s long-range (two-five years) organizational goals and set a course of action the firm will pursue to reach its goals.

2. Strategic planning consists of six steps: developing a clear vision, creating a mission statement, developing forecasts, analyzing competition, establishing goals and objectives, and developing action plans. a. Develop a clear vision b. Translate the vision into a meaningful mission statement c. Develop forecasts d. Analyze the competition e. Conducting a SWOT Analysis f. Establish company goals and objectives g. Develop action plans 3. Planning for a crisis C. The Organizing Function 1. Organizing: The process of arranging resources to carry out the organization’s goals 2. Evaluate activities of employees, facilities, and equipment and determine who will have authority to make decisions.

3. Most organizations undergo constant change 4. Levels of corporate hierarchy (management pyramid) a. Top managers b. Middle managers c. First-line managers D. The Leading Function 1. Leading: The process of influencing and motivating people to work effectively and willingly 2. Successful managers are good at influencing others’ opinions and motivating others 3. Good leaders tend to have high emotional quotients (EQ) 4. Adopting an effective leadership style a. Leadership style b. Autocratic leaders c. Democratic leaders d. Laissez-faire leaders e. Contingency leadership f. Situational Leadership g. Transformational vs. transactional leadership h. Coaching and mentoring i. Managing change j. Building a strong organizational culture E. The Controlling Function 1. Controlling means monitoring a firm’s progress toward meeting its organizational goals 2. Involves resetting the course if goals or objectives change 3. The control cycle F. Total Quality Management (TQM): both a management philosophy and a strategic management process that focuses on delivering the optimum level of quality to customers by building quality into every organizational activity . 150

II.

1. Goal of TQM 2. Four key elements of TQM a. Employee involvement b. Customer focus c. Benchmarking d. Continuous improvement Management Skills A. Interpersonal Skills: the personal skills required to communicate with other people, work effectively with them, motivate them, and lead them B. Technical Skills: the knowledge and ability to be able to perform the mechanics of a particular job C. Conceptual Skills: the skills required to see the organization as a whole, in the context of its environment, and to understand how the various parts interrelate

Lecture Notes and Chapter Outline I. The Four Basic Management Functions: Planning, Organizing, Leading and Motivating A. In the course of performing the four basic management functions, managers play a number of roles that fall into three main categories 1. Interpersonal Roles a. Ceremonial obligations b. Provide leadership to employees c. Build a network of relationships with bosses, peers, and employees d. Act as liaison to groups and individuals both inside and outside the company 2. Informational Roles a. Gather information by questioning people both inside and outside the organization b. Distribute information to employees, other managers, and outsiders 3. Decisional Roles a. Encourage innovation b. Resolve unexpected problems that threaten organizational goals c. Decide how organizational resources will be used to meet planned objectives d. Negotiate with suppliers, employees, unions B. The Planning Function: Understanding the Strategic Planning Process 1. Strategic plans outline the firm’s long-range (two-five years) organizational goals and set a course of action the firm will pursue to reach its goals. a. Strategic Plans deal with market standing, innovation, human resources, financial resources, physical resources, productivity, social responsibility, financial performance b. A good strategic plan answers the following questions: ¾ Where are we going? ¾ What is the environment? ¾ How do we get there?

2.

Strategic planning consists of several steps: developing a clear vision, creating a mission statement, developing forecasts, analyzing competition, conducting a SWOT analysis, establishing goals and objectives, and developing action plans. a. Develop a clear vision ¾ vision: a realistic, credible, and attainable view of the future that grows out of and improves on the present b. Translate the Vision into a Meaningful Mission Statement ¾ mission statement: a brief document that defines why the organization exists, what it seeks to accomplish, and the principles that the company will adhere to as it tries to reach its goals (see Exhibit 6.2) ¾ typical components of a mission statement are as follows: ¾ company’s products or services ¾ primary market ¾ fundamental concern for survival, growth, and profitability .

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c.

d.

e.

f.

¾ managerial philosophy ¾ commitment to quality and social responsibility ¾ should bring clarity and focus to members of the organization ¾ helps employees understand how their role is tied to the organization’s greater purpose ¾ must be congruent with the organization’s core values Develop forecasts ¾ managers must make a number of educated assumptions about future trends and events and modify those assumptions once new information becomes available. ¾ quantitative forecasts: typically based on historical data or tests and involve complex statistical computations (example: statistically analyzing the cycles of economic growth and recession over several decades to predict when the economy will take a downward turn) ¾ qualitative forecasts: based on intuitive judgment or consumer research (example: making predictions about sales of a new product on the basis of experience and consumer responses to a survey ) Analyze the Competition ¾ analyzing the competition gives management a realistic view of the market, the company’s position in it, and its ability to attain certain goals. ¾ process of competitive analysis ¾ identify existing and potential competitors ¾ determine the competencies, strengths, and weaknesses of major competitors ¾ identify ways to capitalize on a competitor’s weaknesses or match or surpass their strengths to gain a competitive edge ¾ three competitive strategies: ¾ differentiation: developing a level of service, product image, unique product feature, or new technologies that distinguish a company’s product from a competitor’s product ¾ cost leadership: aim to become the low-cost leader in the industry by producing or selling products more efficiently and economically than competitors. ¾ focus: companies concentrate on a specific regional market or consumer group.

Establish company goals and objectives ¾ goal: broad, long range accomplishment that the organization wishes to attain in typically five or more years ¾ objective: short-range target designed to help reach the goal of an organization ¾ organizational goals and objectives should be specific, measurable, relevant, challenging, attainable, and time limited in order to be effective ¾ setting appropriate goals has many benefits: ¾ increases employee motivation ¾ established standards for measuring individual and group performance ¾ guides employee activity ¾ clarifies management’s expectations Develop Action Plans ¾ tactical plans lay out the actions and the allocation of resources necessary to achieve specific , short-term objectives that support the company’s broader strategic plan. ¾ focus on departmental issues ¾ define short-term results necessary to achieve strategic goals ¾ operational plans designate the actions and resources required to achieve the objectives of tactical plans ¾ focus on accomplishing a firm’s specific objectives ¾ define actions for less than one year

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3. Planning for a Crisis a. Crisis management: a plan for handling unusual and serious problems such as product failure, a breakdown in routine operations (as a result of fire or other natural disaster), or an environmental accident b. Goal of crisis management: keep the company functioning smoothly both during and after the crisis c. Successful crisis management requires comprehensive contingency plans d. Top management should communicate to employees that the company will do whatever it can to control the situation, find the cause, and prevent a future occurrence.

FOR DISCUSSION Ask students to add to a list of companies who have recently experienced a crisis. Was the public well-informed? Panicked? What other examples of crisis management can students come up with?

How effective was the crisis management, and how did the public respond? Consider giving students time to research this topic on the Internet or as a homework assignment. Help students to see that effective crisis management can reduce the impact of the crisis if handled well.

C. The Organizing Function 1. Organizing: the process of arranging resources to carry out the organization’s goals 2. Evaluate activities of employees, facilities, and equipment and determine who will have authority to make decisions.

3. Most organizations undergo constant change a. Employees come and go b. Equipment breaks down or needs upgrading c. Trends change d. Competitors actions affect markets e. Shifts in the economy and politics affect markets 4. Levels of corporate hierarchy (management pyramid) a. Top managers: upper-level managers who have the most power and who take overall responsibility for the organization ¾ establish structure of the organization ¾ select the people to fill upper-level positions ¾ make long-range plans ¾ establish major policies ¾ represent the company to the outside world at official functions and fund-raisers b. Middle managers: are responsible for one division or unit ¾ develop plans for implementing the broad goals set by top managers and coordinate the work of first-line managers ¾ often serve as team leaders who are expected to supervise and lead small groups of employees in a variety of job functions c. First-line managers (supervisory managers): oversee the work of operating employees ¾ put into action the plans developed at higher levels D. The Leading Function 1. Leading: The process of influencing and motivating people to work effectively and willingly 2. Successful managers are good at influencing others’ opinions and motivating others 3. Good leaders tend to have high emotional quotients (EQ) a. Self-awareness: ability to recognize one’s own feelings b. Self-regulation: ability to control or reduce disruptive behaviours c. Motivation: drive to achieve beyond expectations d. Empathy: ability to consider others’ feelings e. Social skill: ability to find common ground with many people .

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4. Adopting an Effective Leadership Style a. Leadership style: the way a manager uses authority to lead others b. Autocratic leaders: make decisions without consulting others c. Democratic leaders: delegate authority and involve employees in decision making d. Laissez-faire leaders: take the role of consultant, encouraging employees ideas (hands-off approach) WHAT DO STUDENTS THINK?

Ask students to write (for three to five minutes) about leadership styles they have encountered.

Tell them to think back to managers they have worked within the past and try to identify the forms of leadership. Was the style of leadership effective for the job? Would another leadership style have been more appropriate? Did their managers use combined or conflicting leadership styles?

Ask students to share their experiences and impressions, and remind them that styles of leadership can be effective in different areas. For example, in the military, autocratic leading is effective, whereas it might not work as well in an advertising agency. e. Contingency leadership: adapting leadership style to current business circumstances f. Situational leadership: leader adapts their style based on the readiness of the employees to accept changes and responsibilities g. Transactional vs. transformational leadership: Transactional leaders focus on meeting established goals and making sure things run smoothly whereas transformational leaders reshape the destinies of their organization by inspiring employees to rise above self interest h. Coaching and Mentoring ¾ coaching involves taking the time to meet with employees, offering suggestions and encouragement; Requires the ability to observe, judge sensibly, and take appropriate action ¾ mentoring involves guiding employees through the corporate maze, and acting as a role model; a mentor is usually an experienced manager or employee that possess deep knowledge of the business and can explain office politics and provide valuable advice about how to succeed within the organization. ¾ mentoring offers benefits for both parties: The less-experienced employee gains from the mentor’s advice and ideas; the mentor gains new networking contacts, in addition to personal satisfaction i. Managing Change ¾ managers must negotiate change at an accelerated pace as competition increases ¾ effective leaders must create and react to change ¾ effective leaders must work effectively with employees to ensure smooth change ¾ effective leaders must cultivate trust with employees long before change happens j. Building a Strong Organizational Culture ¾ organizational culture: values, norms, and practices shared by firm (a company’s way of doing things) ¾ influences the way people treat and react to each other at work ¾ shapes the way employees feel about the company and the work they do ¾ shapes the way employees interpret and perceive the actions taken by others ¾ shapes employee expectations regarding changes in their work or in the business ¾ shapes employee ability to lead, be productive, and choose the best course of action E. The Controlling Function 1. Controlling means monitoring a firm’s progress toward meeting its organizational goals 2. Involves resetting the course if goals or objectives change 3. The Control Cycle a. Quality: a measure of how closely goods or services conform to predetermined standards and customer expectations . 154

II.

b. Firms usually control quality through a four step process that involves all levels of management and all employees (refer to Exhibit 6.6) ¾ Top management set standards or criteria for measuring performance of the organization as a whole. The establishment of these control standards largely depends on information supplied by employees, customers, and other external sources. ¾ Managers assess performance, using both quantitative (specific, numerical) and qualitative (subjective) performance measures. ¾ Managers compare performance with the established standards and search for the cause of any discrepancies. ¾ If performance falls short of the standards, then mangers need to take corrective action by either adjusting performance or re-evaluating the standards.

F. Total Quality Management (TQM): both a management philosophy and a strategic management process that focuses on delivering the optimum level of quality to customers by building quality into every organizational activity (refer to Exhibit 6.7) 1. Goal of TQM: create an environment that encourages people to grow as individuals and to learn to bring about continuous and breakthrough improvement 2. Four key elements of TQM: a. Employee involvement: ¾ involves every employee in quality assurance ¾ trains workers in quality methods ¾ exemplifies participative management style (the sharing of information at all levels of the organization) b. Customer focus: ¾ finds out what customers really want and provides it ¾ relies on accurate research rather than assumptions ¾ requires developing long-term relationships with customers c. Benchmarking: ¾ compares a firm’s processes and products against the world’s best and then work to match or exceed those standards d. Continuous Improvement ¾ requires an ongoing effort to reduce defects, cut costs, slash production and delivery time, and offer customers innovative products ¾ improvements are often small and add up to greater competitiveness over time ¾ it is management’s job to provide employee incentives that will motivate them to want to improve Management Skills A. Interpersonal skills: the personal skills required to communicate with other people, work effectively with them, motivate them, and lead them 1. Activities that require interpersonal skills are as follows: a. Encouraging employees to work together toward common goals b. Interacting with employees and other managers c. Negotiating with partners and suppliers d. Developing employee trust and loyalty e. Fostering innovation 2. Effective communication: a. Increases the manager’s and the organization’s productivity b. Shapes the impressions made on colleagues, employees, supervisors, investors, and customers c. Allows you to perceive the needs of these stakeholders and helps you to respond to those needs d. Shows consideration of the different needs, backgrounds, and experiences of people in the workforce

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B. Technical Skills: the knowledge and ability to be able to perform the mechanics of a particular job 1. Most important at lower organizational levels 2. Administrative skills: technical skills necessary to manage an organization such as the abilities to make schedules; gather information, analyze data, plan, and organize.

C. Conceptual skills: the skills required to see the organization as a whole, in the context of its environment, and to understand how the various parts interrelate.

1. Extremely important to top managers 2. A key managerial activity requiring conceptual skills is decision making. a. Decision making: a process that has five distinct steps: ¾ recognizing the need for a decision ¾ identifying, analyzing, and defining the problem or opportunity ¾ generating alternatives ¾ selecting an alternative and implementing it ¾ evaluating the results

Potential Difficulties and Possible Solutions 1. Students may need additional assistance in understanding communications and the way in which communication has changed since the introduction of the Internet, emphasis on computers, etc. To allow students to gain a better understanding, you may want to pose the following questions: ¾ In our age of computers and e-mail, do you think face-to-face communications are still necessary at times? Why or Why not? ¾ What are the advantages of using a method of communication such as e-mail?

Student answers may vary for both questions; however, all students should realize the importance of the use of proper English and writing skills in communications. Some students have difficulty understanding why they are required to enrol and complete so many English courses. Good writing skills and proper English will result in effective communication and clarity in communication across the organization.

Behind the Scenes Apple iTunes and- Steve Jobs: A Strong Leader with a Clear iVision Test Yourself Answers to these questions can be found on the website: at www.pearson.ca/bovee.

1) How does this case demonstrate the important concept of managerial vision?

Managerial vision is a vital element to the success of an organization. Steve Jobs has been called many names by people that may dislike him but at the same time the clear consensus is that this man is a visionary leader. There were plenty of companies in the music business that were better positioned to exploit the Internet and build a new model for music distribution but iTunes was developed thanks in large part to a company willing to redefine an industry and a leader with a strong vision for the future.

2) How has Apple used its strengths in order to take advantage of the online music business?

Apple used its strengths in a few important ways. First, the company used its vast resources to develop the iPod; in essence Apple created a vehicle to truly penetrate the industry in a new revolutionary way.

This product gave the company a new level of recognition with music fans that were hungry for more content for their devices. Apple used this strength and put a lot of resources into developing a site and negotiating deals with record companies that were trying to find ways to recover lost industry revenues. iTunes could have just as easily been developed by a company like HMV; however Steve Jobs and his staff were a step ahead of the game.

3)

What external threats and opportunities are looming over the music industry in the next few years? . 156

The music industry model has been ripped to pieces in recent years. Independent music stores are going out of businesses with less people buying music in the traditional way. Companies are struggling to find new revenue streams. Nobody is quite sure what the solution will be but record companies are looking for new opportunities. Four major record labels recently signed deals with MySpace in search of the new model to generate revenue.

4) How does this case relate to the four functions of management?

Planning- establishing objectives and goals for an organization and determining the best ways to accomplish them. OOrganizing- tthe process of arranging resources to carry out an organization’s plans.

LL L eading- the process of guiding and motivating people to work toward organizational goals.

Controlling- the process of measuring progress against goals and objectives and correcting deviations if results are not as expected. Steve Jobs is the type of leader that can motivate and lead an organization to produce industry changing innovations. Under his leadership Apple has done so on numerous occasions.

Apple’s managers have demonstrated tremendous long range planning, organizing and control in developing the iPod device and content provider iTunes.

Behind the Scenes (End of Chapter) Moving Music at Apple iTunes and Taking Advantage of New Opportunities Critical Thinking Questions 1.

Based on this case, would you describe Steve Jobs as a transactional or a transformational leader?

Transactional leaders focus on meeting established goals, making sure employees understand their roles in the organization, making sure the correct resources are in place, and so on. Transformational leaders inspire their employees to perform above and beyond the everyday responsibilities of their jobs. These transformational leaders can reshape the destinies of their organizations by inspiring employees to see the world in new ways, to find creative solutions to business challenges, to rise above self-interest, and to create new levels of success for the company as a whole. Based on these definitions Steve Jobs would have to be a considered a pure example of a transformational leader.

2.

In the context of this case, explain the importance of setting clear goals and objectives?

Establishing goals and objectives is the key task in the planning process. A goal is a broad, long-range accomplishment that the organization wishes to attain in typically five or more years, whereas an objective is a specific, short-range target designed to help reach that goal. For Apple iTunes, a goal might be to increase its volume of downloaded songs by 50 percent over the next five years, and an objective might be to sell 750 million songs in the next 12 months. To be effective goals and objectives must be measurable and time specific.

3.

Perform a SWOT analysis for the Apple iTunes business unit. What do you think of the future of this division will be? Will it continue to grow? What challenges does it face?

Strengths- Brand recognition, millions of existing iPod users looking for content, Apple’s proven ability to make technology products easier to use. Weaknesses- despite early success Apple is still a newcomer to this side of the music business and must continue to negotiate with established industry players as the business model evolves. Opportunities-there are tremendous opportunities to leverage the iTunes platform; Apple has already introduced iTV and there is potential for tremendous growth in this area.

Threats- competitors are looking for ways to cut into iTunes growth. Sales could be affected by record label direct competition that looks to cut out or reduce the strength of the middlemen. It can also come from struggling retailers like HMV launching and improving sites to alter their declining futures and taking market share away from Apple.

The future of this division is up for debate; however, the past has been about as good as it could get for a new upstart division in a complicated multi-layered industry. To continue to grow and make this division

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profitable Apple will need to continue what it is doing. Watch out for the current players and stay one step ahead of the potential competition.

Learn More Online Answers will vary based on what’s currently available online.

Answers to End-of-Chapter Questions Test Your Knowledge Questions for Review 1. Explain the important role of management vision. How does management vision relate to the mission statement?

Management vision is vital for the long-term growth of an organization. To be effective it should be rooted in the future but must improve on the present. To transform vision into reality, managers must define specific organizational goals, objectives, and philosophies. A starting point is to write a company mission statement, a brief document that defines why the organization exists, what it seeks to accomplish, and the principles that the company will follow as it tries to reach its goals. A mission statement communicates what the company is, what it does, and where it’s headed.

2. What is the purpose of a SWOT analysis?

A SWOT analysis is a tool used to analyze the current situation that the company is facing. It identifies a company’s strengths, weaknesses, opportunities, and threats. Strengths and weaknesses are the internal capabilities and represent things that the firm has direct control over. Opportunities and threats are based on assessment of external factors that the company does not control. Companies must take advantage of opportunities and deal with threats. Companies cannot control the economy, the weather, or the political climate, but they must make plans to deal with these external situations.

3. What is the difference between transactional and transformational leadership?

Transactional leaders tend to focus on meeting established goals, making sure employees understand their roles in the organization, making sure the correct resources are in place, and so on. Transformational leaders can reshape the destinies of their organizations by inspiring employees to see the world in new ways, to find creative solutions to business challenges, to rise above self-interest, and to create new levels of success for the company as a whole.

4. What are the four key elements of total quality management (TQM)?

The four key elements of TQM are: employee involvement, customer focus, benchmarking, and continuous improvement.

5. Strong conceptual skills are most important for managers at which level of the organization?

Managers need conceptual skills to see the organization as a whole, in the context of its environment, and to understand how its various parts relate. Conceptual skills are especially important to top managers.

These managers are the strategists who develop the plans that guide the organization toward its goals.

Questions for Analysis 6. How do effective managers balance the demands of the four functions of management as described in this chapter?

One of the great challenges of management is to effectively execute all four functions. Some managers are excellent at the organizing and control aspect and forget to effectively plan for the future and lead an organization forward. Other managers are so consumed by the future that they neglect the present. An effective manager can get the job done today while planning for tomorrow. Time management skills, focus and a strong character are vital to the long term success of a manager and their organization.

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7. What is meant by the term emotional quotient? How does this term relate to effective management?

Individuals that possess a high emotional quotient have the following characteristics: self-awareness, selfregulation, motivation, empathy and social skill. Studies have shown that managers with strong interpersonal skills and emotional quotients tend to be more effective leaders.

8. Describe the three main leadership styles discussed in this chapter. Is there an ideal leadership style? Explain.

Autocratic leaders make decisions without consulting others. “My way or the highway” summarizes this style, which tends to go well with traditional, hierarchical organizational structures. In contrast, democratic leaders delegate authority and involve employees in decision making. The third leadership style, laissez faire, is sometimes referred to as free-rein leadership. The French term laissez faire can be translated as “leave it alone,” or more roughly as “hands off.” More and more businesses are adopting democratic and laissez-faire leadership as they reduce the number of management layers in their corporate hierarchies and increase the use of teams. However, experienced managers know that no one leadership style works every time. In fact, new research shows that leaders with the best results do not rely on only one leadership style; instead they adapt their approach to match the requirements of the particular situation.24 Adapting leadership style to current business circumstances is called contingency leadership.

9. Mentoring and coaching techniques have been adopted by many high-profile companies. What is the value of such programs from the perspective of the participants? What is the value from the organization’s perspective?

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.

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 not act. 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. 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 specific, measurable, and time bound.

Students’ answers will vary, of course. Their answers should, however, 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: “It is better to state ‘increase our customer base by 10 percent over the next three years’ than ‘substantially increase our customer base.’”

12. Do you have the skills it takes to be an effective manager? Find out by taking the Keirsey Temperament Sorter II personality test at www.keirsey.com.

Student analysis will vary.

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13. INTEGRATED: Using Dell Company’s mission statement in Exhibit 6.2 as a model and the material you learned in Chapter 3, develop a mission statement for a socially responsible company such as Telus or Ben & Jerry’s.

Students’ answers will vary, 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 3 (conducting social audits, engaging in cause-related marketing, and engaging in philanthropy).

14. INTEGRATED: What is the principal difference between a business plan (as discussed in Chapter 4) and a strategic plan?

A business plan plays a principal role in the creation 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.

Practice Your Knowledge Sharpening Your Communication Skills As the manager of Martin’s Restaurant Supply, you see a huge potential for selling company products on the Internet to customers around the world. Your company already has a website but it’s geared to Canadian sales only. Before you propose your ideas to senior management, however, you’re going to do your homework. Studies have shown that companies selling products in the global marketplace benefit by modifying their websites to accommodate cultural differences. For instance, a mailbox with a raised flag has no meaning in many foreign countries.

Your task is to review the websites of several leading global companies and take notes on how they adapt their websites for global audiences. Once you’ve gathered your notes, write a short memo to management highlighting (via bullet points) some of the ways these leaders make their websites effective for a global audience.

Student answers will vary.

Building Your Team Skills A good mission statement should define the organization’s purpose and ultimate goals and outline the principles that are to guide managers and employees in working toward those goals. Using library sources such as annual reports or Internet sources such as organizational websites, locate mission statements from one non-profit organization, such as a school or a charity, and one company with which you are familiar.

Bring these statements to class and, with your team, select four mission statements to evaluate. How many of the mission statements contain all five of the typical components (product or service; primary market; concern for survival, growth, and profitability; managerial philosophy; commitment to quality and social responsibility)? Which components are most often absent from the mission statements you are evaluating? Which components are most often included? Of the mission statements your team is analyzing, which is the most inspiring? Why? Now assume that you and your team-mates are the top management team at each organization or company. How would you improve these mission statements? Rewrite the four mission statements so that they cover the five typical components, show all organization members how their roles are related to the vision, and inspire commitment among employees and managers.

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Summarize your team’s work in a written or oral report to the class. Compare the mission statement that your team found the most inspiring with the statements that other teams found the most inspiring. What do these mission statements have in common? How do they differ? Of all the inspiring mission statements reported to the class, which do you think is the best? Why? Does this mission statement inspire you to consider working for or doing business with this organization?

In addition to helping students to further improve their team skills, this exercise will deepen their knowledge of mission statements, as well as expose them to how mission statements are actually developed (or underdeveloped) in the real world of business. Students should evaluate how their selected statements address (or omit) all five of the typical components: (1) product or service; (2) primary market; (3) concern for survival, growth, and profitability; (4) managerial philosophy; commitment to quality and social responsibility. Each team should then rewrite the mission statements so that, in addition to covering all components, they show the relationship of organizational roles to the vision, as well as inspire commitment.

Finally, teams can then compare mission statements they found most inspiring and observe how the statements are similar or different. Last of all, the students can determine which mission statement they found to be the best overall and discuss whether it inspires them to work for, or to do business with, the organization.

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.

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 or a non-profit 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.

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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.

Answers to Boxed Features Box 1: Learning Simple Lessons Can Define a Leader’s Legacy Business texts, journals, and newspapers are full of fancy terms that try to capture the essence of effective leadership. Important studies have yielded valid terms describing leader types under headings like: Architect, Coach, Mobilizer, the Taskmaster, and the Expert, to name just a few. All of these terms try to highlight a different angle of leadership. One thing is certain, Leaders come in many forms. Steve Jobs is a strong business leader but so is Jack Welch who has taught and influenced many additional great leaders from his days as chairman and CEO at GE. A recent article in the Globe and Mail had the following headline: “Looking for A Leader? Just Look for a GE Graduate.” Of course, leadership is not reserved for the business field.; Wayne Gretzky is a great leader and so are Oprah Winfrey, Ghandi, and Nelson Mandela. It takes quite a list to pinpoint what makes each of these unique people effective. Instead of defining the ultimate characteristics of a leader, we will just examine some keys lessons for success: Key Lessons Don’t Limit Yourself.: If you believe it, it is possible. If you stop yourself, your organization will not grow. You will not succeed. If you make the effort and work hard, you have a chance. Most people are capable of much more than they ever accomplish but their fear limits them. A leader must be willing to push the boundaries.

Good Leaders Listen. There is a time to talk and a time to listen. It is not a sign of weakness to step back for a moment and hear what others have to say. No leader can accomplish anything without the hard work and support of a team. Motivation can come from great speeches but it also develops when an employee feels that their opinions are being acknowledged (observe, show interest, and learn) and they feel connected to the process.

Be Open and Honest. Don’t be afraid to address issues up front and be responsive to the feedback and expectations of others.

Confidence not Arrogance. There is nothing more frustrating than an indecisive leader. A leader should get their facts straight, analyze a situation, and make clear decisions, but a leader must not get too full of themselves. Confidence crosses over to arrogance when leaders dismiss other views and expect their subordinates to conform (see recent political decisions).

Simple Advice According to Jack Welch, the best advice he ever received occurred came during his first or second board meeting at GE. It was from Paul Austin, a former chairman of Coke,; who looked at a slightly nervous Mr. Welch and said: “Be Yourself!” There are so many terms used to describe leaders because there are so many types of individual leaders. Effective leaders don’t try to conform to a simple definition. They use their own talents and strengths to become successful and lead organizations and causes to success in their own way. So whether you are leading your football team, work team, non-t-for profit organization, business team, or political party —BE YOURSELF—- just don’t be scared to IMPROVE YOURSELF.

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Questions for Critical Thinking 1.

Be Yourself! This simple advice is a powerful message when it is actually applied. Take a few moments and list your strengths and weaknesses.

Responses will vary for each student.

2.

From your experience as a student, work partner, employee, or manager, which lesson from this mini-case do you consider to be the is the most important one of all? Provide examples to support your answer.

Responses will vary for each student based on their own personal experiences and beliefs.

Box 2: How Much Do You Know About the Company’s Culture?

Before you accept a job at a new company, it’s a good idea to learn as much as possible about the company’s culture. Use this list of questions to guide you in your investigation.

COMPANY VALUES ■ Is there a compelling vision for the company?

■ Is there a mission statement supporting the vision that employees understand and can implement?

■ Do employees know how their work relates to this vision?

■ Is there a common set of values that binds the organization together?

■ Do officers/owners follow these values, or is there a gap between what they say and what they do?

PEOPLE ■ How are people treated?

■ Is there an atmosphere of civility and respect?

■ Is teamwork valued and encouraged, with all ideas welcomed?

■ Are employee ideas acknowledged, encouraged, and acted upon?

■ Are employees given credit for their ideas?

■ Is there a positive commitment to a balance between work and life?

■ Is there a commitment from top management to support working parents?

COMMUNITY INVOLVEMENT ■ Is the company involved in the community?

■ Is there a corporate culture of service?

■ Is there a stated policy of community involvement by the company and its employees?

COMMUNICATION ■ Is there open communication?

■ Do officers/owners regularly communicate with employees at all levels?

■ Are the customer service and financial results widely distributed?

■ Is there meaningful two-way communication throughout the organization?

■ Are employee surveys on workplace issues conducted and published? Are employees asked for input on solutions?

■ Is there an open-door policy for access to management?

EMPLOYEE PERFORMANCE ■ How are personnel issues handled?

■ Is employee feedback given regularly? .

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■ ■

Are employee evaluations based on agreed-upon objectives that have been clearly communicated?

Are employees asked to provide a summary of their accomplishments for placement into their evaluations?

Questions for Critical Thinking 1. How might a job candidate find the answers to these questions?

A job candidate may use several different resources to find the answers to these questions; the Internet; company literature, library research; interviews from current employees.

2. Why is it important to learn about the company’s culture before accepting a job?

Students’ answers may vary; however, it is important for students to mention that a potential employee should feel comfortable with the company culture before accepting a job. The potential employee should be sure that the company’s ethical policies are in line with their moral standards, for example.

See It on the Web URLs for all Internet exercises are provided at the website for this book, www.pearsoned.ca/bovee. When you log on to the text website, select Chapter 6, then select Web Destinations, click on the name of the featured website, and follow the detailed navigational directions to complete these exercises.

Explore these chapter-related websites, review their content, and answer the following questions for each website you visit: 1. What is the purpose of this website?

2. What kinds of information does this website contain? Please be specific.

3. How is the information provided at this website useful for businesspeople? Consumers?

4. How did you expand you knowledge of management by reviewing the material at this website? What new things did you learn about this topic?

Become a Better Manager The Emerald for Managers website can help you become a better manager. Focused on management theory and practice, this website is a management portal that explores in-depth management issues including leadership, time management, training, strategy, knowledge management, personal development, customer relationship management, and more. Each channel provides lengthy articles, advice, and a collection of carefully annotated links. Log on today and join the site to become information rich and well organized. Learn why knowledge management is important. Discover what emotional intelligence is all about and find out why companies form strategic alliances. http://managers.emeraldinsight.com/index.htm

1. What is the purpose of this website?

The simple purpose of this website is to help individuals become better managers.

2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers.

This website is a management portal that explores in-depth management issues including: leadership; time management; training; strategy; knowledge management; personal development; customer relationship management; management styles, and more. Each channel provides lengthy articles, advice, and a collection of carefully annotated links. This website states why knowledge management is important, what emotional intelligence is, and why companies form strategic alliances.

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3. How is the information provided at this website useful for businesspeople? Consumers?

While student responses may vary, the following will address some possible answers.

The information presented at this website is useful for managers based on above answer. (refer to answer for question #2) Consumers are provided with the opportunity to learn about hot topics such as e-management and change management.

4. How did you expand you knowledge of management by reviewing the material at this website?

What new things did you learn about this topic?

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

Learn from the Best—and the Worst Every year, BusinessWeek magazine profiles the managers who've done the best and worst jobs of leading their respective companies. See who the magazine's editors and reporters select each year, and find out what they've done. www.businessweek.com/magazine (then click on "Special Sections" and look for "The Best and the Worst Managers of the Year").

1. What is the purpose of this website?

While student responses may vary, the following will address some possible answers.

This website exists to provide rankings on managers and to also offer brief company descriptions along with industry statistics and additional measures of corporate performance. It also provides rankings and information on the following: best companies to work for, most admired companies (domestic and global), top small businesses, etc.

2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers.

This website contains information on the following: investments, careers, companies, company profiles, rankings in regards to best companies to work for, most admired companies (domestic and global), fastest growing companies, small business, best companies for minorities, CEOs, articles pertaining to technology.

3. How is the information provided at this website useful for businesspeople? Consumers?

While student responses may vary, the following will address some possible answers.

Businesspeople may be able to search through the company profiles to see how the most successful companies are operating. To enhance their business operations, businesspeople may emulate some business practices of these most successful firms.

It may help individuals in looking for a company that best fits their personality and profile. It also lists the best companies to work for so that consumers are aware of the business practices of these companies. It also offers a wide range of articles that pertain to possible solutions to work problems.

Information on investments is also provided.

4. How did you expand you knowledge of management by reviewing the material at this website?

What new things did you learn about this topic?

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

Looking to Organizational Change Looking for more information on every aspect of organizational change management? You'll find a comprehensive collection of links on the website of the Management Assistance Program for Nonprofits.

This is the place to access articles, discussion groups, and other resources related to organizational change . 165

in businesses and in non-profit organizations. Start with the overview, which sets the stage for browsing the many links devoted to exploring management and employee perspectives on the challenges and goals of managing change. www.managementhelp.org/org_chng/org_chng.htm 1. What is the purpose of this website?

This website attempts to provide some basic perspective about the concept of organizational change.

2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers.

This website contains a comprehensive collection of links on the website of the Management Assistance Program for Nonprofits. This is the place to access articles, discussion groups, and other resources related to organizational change in businesses and in not-for-profit organizations. There are many links devoted to exploring management and employee perspectives on the challenges and goals of managing change.

3. How is the information provided at this website useful for businesspeople? Consumers?

While student responses may vary, the following will address some possible answers.

Businesspeople can use the information provided by this website (refer to answer for question #2) to aid them in effectively managing change in their organization. Consumers---N/A 4. How did you expand you knowledge of management by reviewing the material at this website?

What new things did you learn about this topic?

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

Chapter 6 Pop Quiz: 1. A manager is interviewing applicants to fill a job position. What management function is he/she performing? a. planning b. organizing c. leading d. controlling 2. A ____________________ defines why the organization exists, what it does, what it hopes to achieve, and the principles it will abide by to meet its goals. a. strategy b. goal c. mission statement d. objective 3. A company can gain an edge from three main competitive strategies. Which of the following is NOT one of these strategies? a. differentiation b. cost leadership c. focus d. all of the above are competitive strategies 4. A _______ is a broad, long-range accomplishment that the organization wishes to attain in typically five or more years, whereas a(n) _________is a specific, short-range target an organization usually wished to attain in less than one year. a. goal, objective b. objective, goal c. strategy, vision . 166

d. vision, mission 5. Which of the following is NOT a benefit of setting long-term goals and objectives? a. decreased employee motivation b. clarifies management’s expectations c. guides employee activity d. established standards for performance measurement 6. Managers need _____________ skills to communicate with other people, work effectively with them, and lead them. a. technical b. conceptual c. interpersonal d. laissez faire 7. An ugly fight for control of a company, a product failure, a breakdown in routine operations (as a result of fire, for example), or an environmental accident could initiate the need for _______________. a. conceptual management b. crisis management. c. total quality management d. technical management 8. _________________ leaders make decisions without consulting others. a. Laissez-faire b. Democratic c. Autocratic d. Egalitarian 9. A manager that is capable of getting people to work harder and even work beyond their own self interest would best be described as a _________ leader. a. transformational b. transactional c. situational d. autocratic 10. _____________ involves comparing your company’s processes and products against the standards of the world’s best companies and then working to match or exceed those standards. a. Participative Management b. Benchmarking c. Corporate Culture d. Organizing

Answers to Quiz: 1. b 2. c 3. d 4. a 5. a 6. c 7. b 8. c 9. a 10. b . 167

Chapter 7: Organizing and Working in Teams Learning Objectives 1 2 3 4 5 6 7 8 9

Discuss the function of a company’s organization structure Explain the concepts of accountability, authority, and delegation Define five major types of organizational structure Describe the five most common forms of teams Highlight the advantages and disadvantages of working in teams List the characteristics of effective teams Review the five stages of team development Highlight six causes of team conflict and three styles of conflict resolution Identify key factors that lead to effective team meetings

Summary of Learning Objectives 1

Discuss the function of a company’s organizational structure An organizational structure provides a framework through which a company can coordinate and control the work, divide responsibilities, distribute authority, and hold employees accountable. An organization chart provides a visual representation of this framework.

2

Explain the concepts of accountability, authority, and delegation Accountability is the obligation to report work results to supervisors or team members and to justify any outcomes that fall below expectations. Authority is the power to make decisions, issue orders, carry out actions, and allocate resources to achieve the organization’s goals. Delegation refers to the assignment of work and the transfer of authority and responsibility to complete that work.

3

Define five major types of organizational structure Companies can organize in four primary ways: by function, which groups employees according to their skills, resource use, and expertise; by division, which establishes self-contained departments formed according to similarities in product, process, customer, or geography; by matrix, which assigns employees from functional departments to interdisciplinary project teams and requires them to report to both a department head and a team leader; and by network, which connects separate companies that perform selected tasks for a headquarter organization. In addition, many companies now combine elements of two or more of these organizational designs into hybrid structures.

4

Describe the five most common forms of teams The five most common forms of teams are (1) problem-solving teams, which seek ways to improve a situation and then submit their recommendation to management; (2) self-managed teams, which manage their own activities and seldom require supervision; (3) functional teams, which are composed of employees within a single functional department; (4) cross-functional teams, which draw together employees from various departments and expertise and . 168

which can be set up in a number of formats, such as task forces, specialpurpose teams, or committees; and (5) virtual teams, which bring together employees from distant locations.

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Highlight the advantages and disadvantages of working in teams Teamwork has the potential to increase creativity, motivation, performance, and satisfaction of workers and thereby can lead to greater company efficiency, flexibility, and cost savings. The potential disadvantages of working in teams include the difficulties of managing employees’ changing roles; the possibilities of free riders, groupthink, and expert-think; and the costs and time needed to coordinate members’ schedules and project parts.

6

List the characteristics of effective teams Effective teams have a clear sense of purpose, communicate openly and honestly, build a sense of fairness in decision making, think creatively, stay focused on key issues, manage conflict constructively, and select team members wisely by involving stakeholders, creative thinkers, and members with diverse views. Effective teams have an optimal size of between 5 and 12 members.

7

Review the five stages of team development Teams typically go through five stages of development. In the forming stage, team members become acquainted with each other and with the group’s purpose. In the storming stage, conflict often arises as coalitions and power struggles develop. In the norming stage, conflicts are resolved and harmony develops. In the performing stage, members focus on achieving the team’s goals. In the adjourning stage, the team dissolves upon completion of its task.

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Highlight six causes of team conflict and three styles of conflict resolution Conflict can arise from competition for scarce resources; confusion over task responsibility; poor communication and misinformation; differences in values, attitudes, and personalities; power struggles; and goal incongruity.

Conflict can be resolved by avoiding it and hoping that it will go away, by defusing it through downplaying team member differences or focusing on member similarities, or by confronting it and working hard to resolve the issues at hand.

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Identify key factors that lead to effective team meetings A meeting can lead to a productive session or a waste of valuable time. The tone of the meeting is set by the team leader. Here are some important tips to remember: (1) Clarify the purpose of the meeting; (2) Select participants carefully; (3) Establish a clear agenda; (4) Keep the meeting on track; (5) Follow agreed-upon rules; (6) Encourage participation; (7) Close effectively.

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Brief Chapter Outline I.

II.

Designing an Effective Organization Structure A. Identifying Job Responsibilities B. Defining the Chain of Command 1.

Span of Management 2. Centralization Versus Decentralization C. Organizing the Workforce 1.

Functional Structures 2.

Divisional Structures 3.

Matrix Structures 4.

Network Structures 5.

Hybrid Structures Working in Teams A. What Is a Team?

B. Types of Teams 1.

Problem-Solving Teams 2.

Self-Managed Teams 3.

Functional Teams 4.

Cross-Functional Teams 5.

Virtual Teams C. Advantages and Disadvantages of Working in Teams D. Characteristics of Effective Teams E. Five Stages of Team Development F. Team Conflict 1.

Causes of Team Conflict 2.

Solutions to Team Conflict G. Conducting Productive Team Meetings

Lecture Notes and Chapter Outline I.

Designing an Effective Organization Structure Organization structure provides a framework for managers to: 1. Divide responsibilities 2. Hold employees accountable for their work 3. Effectively distribute authority to make decisions 4. Coordinate and control organization’s work 5. Organizational chart: provides visual representation of how employees and tasks are grouped, a framework known as the formal organization 6. Informal organization: network of interactions that develop on a personal level among workers A. Identifying Job responsibilities Work Specialization: the degree to which organizational tasks are broken down into separate jobs; it can improve organizational efficiency by enabling each worker to perform tasks that are well defined and that require specific skills 1. Organizations can overdo specialization a. Employees may feel bored, unchallenged, alienated b. Important to balance specialization with motivation for employee morale c. Team approach allows specialization and motivation

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B. Defining the Chain of Command: unbroken line of authority that connects each level of management 1. Makes two things clear: a. Who is responsible for each task b. Who has the authority to make official decisions 2. Responsibility: the obligation to perform the duties and achieve goals and objectives associated with their jobs 3. Accountability: the obligation to report the results of their work to supervisors or team members and to justify outcomes that are below expectations WHAT DO STUDENTS THINK? Should a manager be accountable for everything his or her employees do? Ask students to consider the following situation and decide whether or not the decision made was ethical, fair, or appropriate. During a routine visit, a regional manager of a retail chain caught an employee stealing. She fired the thief on the spot, and later fired the manager although she knew that the manager knew nothing about the theft and had not stolen himself. The regional manager based her actions on the principal of accountability; was her decision right?

4. Authority: the power to make decisions, issue orders, carry out actions, allocate resources 5. Delegation: the assignment of work and the transfer of authority and responsibility to complete that work (Seniors delegate authority to other managers who are responsible for making decisions but are accountable to those up the chain of command) 6. Line organization: clear line of authority flowing from top to bottom a. Problematic when specialized knowledge is needed 7. Line-and-staff organization: managers in the chain of command are supplemented by functional groupings of people known as staff, who provide specialized services but are not in the line organization’s chain of command 8. Span of Management (span of control): the number of people a manager directly supervises a. Flat organizations: relatively few levels in the management hierarchy (span of management is wide) b. Tall organizations: many hierarchical levels, usually with only a few people reporting to each manager (span of management is narrow) e.g.: GM with 22 layers of management c. Factors affecting span of management ¾ manager’s personal skill and leadership abilities ¾ skill of workers ¾ motivation of workers ¾ nature of the job 9. Centralization vs. Decentralization a.

Centralization: centers decision-making near the top of the chain of command ¾ utilizes top management’s rich experience, and broad view of goals

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b.

Decentralization: pushes decision-making authority down to lower levels ¾ eases burden on top executives, and offers challenges to lower level employees ¾ decentralization is current trend in businesses ¾ not effective in every situation ¾ GE: $25 million to individual firms created growth and profit C. Organizing the Workforce: links the activities at the top of the organization with those at the middle and lower levels Helps managers delegate authority and define jobs In a vertical organization, companies define jobs and activities by using departmentalization--the arrangement of activities into logical groups Fours common ways of departmentalizing are by function, division, matrix, and network.

1. Functional Structures a. Employees are grouped according to skills, resource use, and expertise ¾ marketing ¾ human resources ¾ operations ¾ finance b. Advantages to departmentalization by function ¾ uses resources efficiently ¾ encourages development of in-depth skill ¾ enables unified direction by top management ¾ enhances communication and the coordination of activities within departments c. Disadvantages to departmentalization by function ¾ creates communication barriers ¾ slows response to environmental changes ¾ hinders effective planning for products and markets ¾ overemphasizes work specialization ¾ employees may become too narrowly focused on departmental goals and lose sight of larger company goals.

2. Divisional Structures: establish self-contained departments that encompass all the major functional resources required to achieve their goals a. Product divisions ¾ grouping companies that make similar products into appropriate divisions b. Process divisions ¾ process-complete departments are based on the major steps of a production process c. Customer divisions ¾ concentrate on satisfying specific groups of customers d. Geographic divisions ¾ group companies according to geographic areas in order to enable companies spread over a national or international area to respond more easily to local customs, styles, and product preferences

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e. Advantages of divisional departmentalization ¾ react quickly to change ¾ offer better services to customers because each division specializes in a single product ¾ top managers can focus on problem areas more easily f. Disadvantages of divisional departmentalization ¾ can increase costs by duplicating resources such as facilities ¾ poor coordination between divisions can cause employees to lose sight of larger goals ¾ divisions may compete with one another for employees, money, and other resources, causing rivalries that hurt the organization as a whole FOR DISCUSSION Ask students to discuss organizations of which they have been members, including jobs, clubs, teams, church groups, choirs, etc. Broaden the scope to include organizations other than jobs. Ask students which types of organizations they felt were successful, and whether they were horizontal or vertical. Does the success of the group depend on the style of organization? How successful would the group be if it were organized differently?

3. Matrix Structures: structural design in which employees from functional departments form teams to combine their specialized skills a.

Advantage of matrix departmentalization: ¾ can help big companies function like smaller ones by allowing teams to devote their attention to specific projects or customers without permanently reorganizing the company’s structure ¾ facilitates the pooling of resources across departments so can respond better to changes in business environments b. Disadvantages of matrix departmentalization: ¾ team members usually continue to report to their functional department heads as well as to a project team leader ¾ authority tends to be more ambiguous and up for grabs, creating power struggles and other interpersonal conflicts. ¾ companies may find it difficult to coordinate the tasks of dicers (functional specialists) so that projects are completed efficiently 4. Network Structures: method of electronically connecting separate companies that perform selected tasks for a headquarters organization a.

Outsource marketing, research, accounting and other functions b.

Also called a virtual organization c.

Advantage of network departmentalization: ¾ flexible and responds quickly to needs ¾ react to change quickly ¾ works especially well for international operations ¾ organization can continually redefine itself ¾ employees have greater job variety and satisfaction (because of lean structure)

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d.

II.

Disadvantages of network departmentalization ¾ lacks hands-on control (the functions are not in one location or company) ¾ lack of employee loyalty (emotional connection between the employee and the organization is weak) ¾ lack of team spirit: if one company in the network fails, it can bring the entire project down with it 5.

Hybrid Structures: combine elements of functional, divisional, matrix, and network organizations Working in Teams A. What is a Team?: a unit of two or more people who work together to achieve a goal 1. Teams have a shared mission and are collectively responsible for outcomes B. Types of Teams 1. Problem-solving teams (quality circles) a. Usually consists of 5 to 12 employees from the same department who meet voluntarily to find ways of improving quality, efficiency, and the work environment 2. Self-managed teams a. Manage their own activities and require minimum supervision b. Typically control the pace of work and determination of work assignments c. Require management to give up significant control 3. Functional teams (command teams) a. Organized along the lines of the organization’s vertical structure and thus may be referred to as vertical teams b. Composed of managers and employees within a singly functional department 4. Cross-functional teams (horizontal teams) a. Draw together employees from various functional areas and expertise b. Advantages of cross-functional teams ¾ facilitate exchange of information between employees ¾ generate ideas for how to best coordinate organizational units ¾ encourage ideas for how to best coordinate the organizational units that are represented ¾ encourage new solutions for organizational problems ¾ aid the development of new organizational policies and procedures c. Cross functional teams can take on a variety of formats: ¾ task force: formed to work on specific activity with a completion point ¾ special purpose teams: created as temporary entities to achieve specific goals; exist outside formal organization hierarchy ¾ committee: deals with regularly recurring tasks; has long life span

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5. Virtual teams: bring together geographically distant employees to accomplish goals; use computer networks, teleconferencing, e-mail, global transportation to build teams a. Primary advantage of virtual teams: ¾ members are able to work together even if they are thousands of miles and several time zones apart b. Three primary factors that differentiate virtual teams from face-toface teams: ¾ absence of nonverbal cues ¾ a limited social context ¾ the ability to overcome time and space constraints c. Team members require certain competencies: ¾ project-management skills ¾ time management skills ¾ ability to use electronic communication and collaboration technologies ¾ ability to work across cultures ¾ heightened interpersonal awareness C. Advantages and disadvantages of working in teams 1. Advantages of working in teams a. Higher-quality decisions based on the combined intelligence of the group b. Teams lead to increased acceptance of a solution c. Team members who participate in making a decision are more likely to enthusiastically support the decision and encourage others to accept it d. Unleashes workers' creativity and energy, knowledge and skills e. Increases motivation and performance f. Reduces boredom, stress, tension g. Greater efficiency and cost reduction h. Allows flexibility in company as a whole 2. Disadvantages of working in teams a. Power within the organization sometimes becomes realigned with teams b. Jobs lost because fewer supervisors needed c. Allows free riders—team members who don’t contribute their fair share to the group’s activities because they are not being held individually accountable for their work d. High cost of coordinating group activities e. Team may develop groupthink: a situation in which pressures to conform to the norms of the group cause members to withhold contrary or unpopular opinions f. Teams can also foster an environment where expert-think emerges; it is the tendency of groups to censor new ideas and follow the consensus of experts in the field D. Characteristics of Effective Teams 1. Optimal size for a team is usually 5-12 a. Prevents factionalism, absenteeism, and turnover 2. Team member roles (refer to exhibit 7.6) a. Task specialists (focus on reaching goals)

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b. Socioeconomic role (supports emotional needs and strengthens the team’s social unity) c. Dual role (contributes to task and emotional needs) d. Non-participator role (contributes little to either) 3. clear sense of purpose: more likely to be effective if clearly understand the task at hand 4. open and honest communications: all team members participate as a result 5. creative thinking: consider options beyond the usual 6. focused: focused on key issues 7. decision by consensus: no easy, quick votes are taken E. Team Development 1. Five stages of team development a. Forming: Period of orientation and ice-breaking b. Storming: Members show personalities and assert roles ¾ conflict and disagreement often arises c. Norming: Team harmony develops, conflict are resolved d. Performing: Problems are solved, disagreements handled, members are really committed to the teams’ goals e. Adjourning: Issues are closed and team dissolved 2. During growth team becomes cohesive (committed to project and group) and develops norms (standards of conduct created by group) a. Factors influencing team cohesiveness: ¾ competition ¾ evaluation b. Norms can be established in various ways: ¾ from early behaviours that set precedents for future actions ¾ from significant events in the team’s history ¾ from behaviours that come to the team through outside influences ¾ from a leader’s or members’ explicit statements that have an impact on other members F. Team Conflict: the antagonistic interactions resulting from differences in ideas, opinions, goals, or ways of doing things.

1. Constructive conflict: if it increases the involvement of team members and results in the solution to a problem 2. Destructive conflict: if it diverts energy from more important issues, destroys the morale of teams or individual team members, or polarizes or divides the team.

3. Causes of team conflict: a. Teams may feel they are in competition for scarce resources (money, information) b. Teams may disagree about who is responsible for a specific task c. Teams may communicate poorly, causing misunderstandings or misperceptions d. Team members may have basic differences in values, attitudes, and personalities e. Power struggles may result f. Conflicts can arise when individuals pursue different goals

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4. Solutions to Team Conflict a. Avoidance: may involve ignoring the conflict in the hope that it will subside on its own, or it may even involve physically separating the conflicting parties b. Diffusion: may include downplaying differences and focusing on similarities between team members or teams, compromising on the disputed issue, taking a vote, appealing to a neutral party or higher authority, or redesigning the team c. Confrontation: an attempt to work through the conflict by getting it out in the open, which may be accomplished by organizing a meeting between the conflicting parties G. Conducting Productive Team Meetings a. Establish clear goals that require the efforts of every member (team reduces the chance that members will battle over their objectives or roles) b. Develop well-defined tasks for each member (team leader ensures that all parties are aware of their responsibilities and the limits of their authority) c. Facilitate open communication (team leader can ensure that all members understand their own tasks and objectives as well as those of their team-mates)

Potential Difficulties and Possible Solutions 1.

Students may have some difficulty understanding the two organizational hierarchies: flat organizations and tall organizations. To improve their understanding of the subject matter, you may want to ask them to analyze certain firms to identify their organizational hierarchy and the rational for choosing that hierarchy. For example: ¾ What type of organizational hierarchy do you think high-tech and ecommerce firms prefer? (answer: flat organizational hierarchy) Ask the students to think about what benefits this organizational hierarchy offers them? What possible disadvantages do they face?

Because of the rapidly changing technological environment, these high-tech firms need to possess a high degree of flexibility.

Benefits: These jobs carry a high degree of authority and decision-making power because the employees are well-trained and educated in their field. If all decisions had to be made by top management, the decision-making process would be slowed down tremendously. Therefore, it is imperative for these employees to make decisions at the lower levels so as to remain competitive in this ever-changing business environment.

Disadvantages: Possible duplication of effort and difficulty transmitting information accurately may prove to be the disadvantages of choosing the flat organizational hierarchy.

2. Students often need situational examples to thoroughly understand some concepts. This may be the case with: responsibility and authority. To further explain these concepts, you may want to ask the students to consider the following: ¾ What do you think happens if a manager is given responsibility without authority? It is important to include the following in your discussion: The manager is likely to be ineffective because he/she has duties to . 177

perform without the power to make necessary decisions, delegate tasks, or control the work of his/her subordinates. The result will likely be poor performance and a frustrated manager.

Behind the Scenes The Teamwork behind the Events at Altitude Concepts Test Yourself Answers to these questions can be found on the website: www.pearson.ca/bovee.

1.

As organizations like Altitude Concepts grow, formal organizational structures replace informal planning approaches. Why is a company’s organizational structure so important? Can two companies in the same industry take different approaches?

One of the greatest challenges that companies face is to move from a free-wheeling entrepreneur centered operational model into a structured company with formal procedures. In the early years, entrepreneurs often channel all activities through themselves as they drive an organization from obscurity to success. The entrepreneur is often a great salesman or a tremendously creative source that puts the company on the map. Eventually the entrepreneur’s control has to be spread out to other individuals to ensure continued growth. A proper structure helps to ensure that a company is using its resources efficiently and that people are accountable for their actions.

Companies in the same industry will often have the same sort of structure because of the type of business activities that are vital for the success of an organization.

However, two companies may have totally different structures based on historical functioning or just because one company has a different operating philosophy. There are no set rules.

2.

What are the challenges of working in teams and how do these challenges apply to an event-planning organization like Altitude Concepts?

There are many challenges to working in teams. The first challenge is to form effective teams that will function as a unit rather than an uncoordinated group.

Potential disadvantages of working in teams include the difficulties of managing employees’ changing roles; the possibilities of free riders, groupthink, and expertthink; and the costs and time needed to coordinate members’ schedules and project parts. In the case of an event planning organization like Altitude Concepts the use of teams is essential to the success of the firm since the company’s model is based on short term teams forming, executing projects and then moving to the next project.

Based on this structure employees must buy into the team structure and learn to work effectively as a unit or else they will not be effective members of the organization and they will not last very long.

3.

What are the benefits of using a cross-functional team approach to plan an event?

As we can see in this case, cross-functional teams draw together employees from various functional areas and expertise. Cross-functional teams have many benefits: They facilitate the exchange of information between employees, they generate ideas for how to best coordinate the organizational units that are represented, and they

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encourage new solutions for organizational problems. Every member has their area of expertise but in working in unison they put together the elements of an effective event.

Behind the Scenes (End of Chapter) Once in a Lifetime, Twice in a Month: The Rogers Cup Critical Thinking Questions 1.

Describe the role of meetings at Altitude Concepts. How do communications flow in this organization and why are the “cardio” meetings essential?

Meeting play are a very important part role for Altitude Concepts because it is essential for a company that is executing multiple projects in locations across the continent simultaneously. They enable teams to work together cohesively and they ensure that everyone is pulling in the same direction. The cardio meetings allow the central office to keep in touch with project managers on the field. It is a tool to ensure timelines are being met and to identify gaps that need extra resources to avoid a problem. In addition, these meetings are an important avenue of motivation.

2.

A quickly evolving business like Altitude Concepts is not always easy to define.

Using terminology from the chapter, describe the structure of this organization.

Altitude concepts uses cross functional teams to accomplish company goals. The company uses a hybrid workforce structure as it grows. Based on the current model it appears likely to move to a pure matrix structure if it grows significantly in the next few years.

3.

Teams have many advantages and disadvantages. In your opinion, what is the likelihood that a work team at Altitude Concepts may experience (a) free riders and (b) groupthink?

Free riders are team members who don’t contribute their fair share to the group’s

activities because they aren’t being held individually accountable for their work. The free-ride attitude can lead to the non-fulfillment of certain tasks. Students are quite familiar with this concept because many groups in the educational setting lead to complaints of members that do not contribute. In that case, the team is actually a group and the members go their separate ways. In the case of a company like Altitude Concepts this may occur in the short run, however, in the long run since the overall structure is based on team participation it will likely lead to conflict that will be addressed.

A team may also develop groupthink, a situation in which pressure to conform to the norms of the group causes members to withhold contrary or unpopular opinions.

Groupthink can hinder effective decision making because some valid possibilities will be overlooked. In the case of Altitude Concepts this is more likely when a deadline is pressing and members are just trying to get the job done. However, the “cardio meetings” allow another member of the organization to examine the overall situation from a fresh perspective to avoid such tendencies.

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

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Answers to End-Of-Chapter Questions Test Your Knowledge Questions for Review 1. What is the difference between the formal and informal organization?

An organization chart depicts the official design for accomplishing tasks that lead to achieving the organization’s goals, a framework known as the formal organization.

Every company also has an informal organization—the network of interactions that develop on a personal level among workers. Sometimes the interactions among people in the informal organization parallel their relationships in the formal organization, but often interactions don’t follow formal boundaries. An employee who is lower on the organizational chart may actually have more power to influence opinion than an individual higher up on the chart because of his or her informal influence.

2. What are the characteristics of tall organizations and flat organizations?

Tall organizations have many levels of hierarchy with a narrow span of management at each level, and most of the authority and responsibility are concentrated at the top.

Flat organizations are decentralized and characterized by few levels and wide spans of management.

3. What factors are considered when determining the span of management?

No absolute formula exists for determining the ideal span of management. How well people work together is more important than the number of people reporting to one person. Still, several factors affect the number of people a manager can effectively supervise, including the manager’s personal skill and leadership ability, the skill of the workers, the motivation of the workers, and the nature or complexity of the job.

In general, employees who are highly skilled or who are trained in many work tasks don’t require as much supervision as employees who are less skilled.

4. What are the advantages and disadvantages of decentralization?

Advantages- decentralization pushes decision-making authority down to lower organizational levels and makes the company more responsive; decisions don’t have to be passed up the hierarchy.

Disadvantages- A decentralized organization may have managers that are working in different directions. At times, strong authority from the top of the chain of command may be needed to keep the organization focused on immediate goals. Managers should select the type of structure that will most effectively serve the organization’s needs given its circumstances 5. What steps can a manager take to help ensure that a meeting is as effective as possible?

Managers should employ the following tips to ensure that meetings are effective as possible: clarify the purpose of the meeting, select participants carefully, establish a clear agenda, keep the meeting on track, follow agreed-upon rules and encourage participation, close effectively.

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Questions for Analysis 6. Why would you expect a manager of a group of nuclear physicists to have a wide span of management?

Since nuclear physicists are highly skilled scientists requiring little supervision, one would expect their managers to have a wide span of supervision.

7. Why is it important as a team leader to understand the five stages of team development?

The five stages of team development are: forming, storming, norming, performing, and adjourning. It is important for a team leader to understand this natural process in order to effectively manage the stages and understand the likely dynamics before they occur and as they occur.

8.

Under what circumstances would a task force be more appropriate over a committee to address an issue?

A task force is a type of cross-functional team formed to work on a specific activity with a completion point. Several departments are usually involved so that all parties who have a stake in the outcome of the task are able to provide input. However, once the goal has been accomplished, the task force is disbanded. A committee usually has a long lifespan and may become a permanent part of the organizational structure.

Committees typically deal with regularly recurring tasks.

9. How can companies benefit from using virtual teams?

Virtual teams enable a company to bring together geographically distant employees and coordinate their work. The technologies that make virtual teams possible also enable a company to find new opportunities by expanding its geographic reach. This can help the company develop competitive advantages by reducing both product development and global distribution times. In addition, the exchange of information and ideas between people from around the world can lead to a better sense of the organization’s overall goals and allow for greater innovation in products and services.

10. ETHICAL CONSIDERATIONS: You were honoured 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 $5,000 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).

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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 parties agreeing to accept the outcome. If this fails, the leader can turn to a neutral third party to mediate the dispute.

12.

Your warehouse operation is currently functioning at capacity. To accommodate new business, your company must either build a major addition to your current warehouse operation or build a new warehouse that would be located at a distant site. As director of warehouse operations, you would like several people to participate in this decision. Should you form a task force, committee, or a special-purpose team? Explain your choice.

Student answers should reflect upon the nature of these different styles of teams. All answers should rule out the possibility of a committee because the goals of this particular project are short term with a specific completion point. Both task forces and special-purpose teams are created to deal with short-term goals. Whether a special-purpose team or a task force should be used is debatable. A special-purpose team would have more freedom to explore ideas and consider innovations.

Otherwise, a task force should be used to study the advantages of building an addition or moving to another site.

13.

INTEGRATED: 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 horizontal structure and uses lots of cross-functional teams. Your company is organized under a traditional vertical structure that departmentalizes by function. Using your knowledge about culture clash, explain the likely issues you will encounter if these two organizations merge.

The differences between a vertical structure and a horizontal structure are vast.

When a company uses a traditional vertical structure, authority comes from above, functions are discrete, and employees have little creativity. On the other hand, horizontally organized structures tend to have fewer levels of management, functions are less discrete, and employees have greater creativity. Each of these styles of organization creates a unique culture. Merging companies would bring together these two disparate styles of organization and the distinctive cultures they create. The clash of these cultures will take patience and strong leadership among managers.

Depending on how CEO’s decide to combine companies, employees may lose or gain freedom in ways that they are unaccustomed to. This could create conflict, anger, confusion, fear, and stress among employees. Strong leadership skills would be necessary to make the transition as smooth as possible.

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14.

INTEGRATED: In Chapter 6 we discussed three style of leadership: autocratic, democratic, and laissez-faire. Using your knowledge about the differences in these leadership styles, indicate which style you would expect to find under the following organization structures: (a) vertical organization—departmentalism by function; (b) vertical organization— departmentalism by matrix; (c) horizontal organization; (d) self-directed teams. a.

When an organization runs under 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. Laissez faire leaders would be too unstructured for this organization, and autocratic leaders would be too rigid. 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 self-directed team to function on its own.

Practise Your Knowledge Sharpening Your Communication Skills Write a brief memo to your instructor describing a recent conflict you had with a peer at work or at school. Be sure to highlight the cause of the conflict and steps you took to resolve it. Which of the three conflict resolution styles discussed in this chapter did you use? Did you find a solution that both of you could accept?

Student answers will vary; however, be sure to stress that the resolution of the conflict is more important than describing the conflict itself. Otherwise, students may end up writing with the sole purpose of “venting” about their colleagues. If there is time, share some good examples of conflict-resolution during class and ask students to suggest other possible ways to resolve the problem at hand.

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 . 183

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 schoolwhat 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 colleges tend to be rich with examples of different types of organizational structures. There are usually many committees, and task forces, as well as “tall” organizational structures to examine. This blending of structures is a good example for students to explore because it demonstrates the ways in which different types of structures can coexist. Students may tend to overlook the informal committees, groups, and networks; be sure to encourage them to notice the informal as well as the formal structures

Expand Your Knowledge Discovering Career Opportunities Whether you’re a top manager, middle manager, or first-line manager (supervisor), your efforts will affect 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. Click on “Majors Exploration” and select “Business” then “Management” in the drop-down menu. Then scroll down and read about careers in management.

1. What can you do with a degree in management? ¾ Management or management trainee is a first step towards overall direction of a department, a division, or even a whole company. ¾ Supervision of employees in corporate, retail, or many other environments takes advantage of what you've learned about people and businesses. ¾ Management decision-making relies on well-founded analysis of facts and trends to improve how a business is run. Management majors are trained to conduct these kinds of analyses. ¾ Management students are trained to understand the human resource needs of organizations and to develop programs for recruitment, training, retention, and development of employees. ¾ 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.

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.

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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 the 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.

Answers to Boxed Features Box 1: Team Building Activities Creating an effective work team is not an easy task. For the most part, we were all taught at a young age that individuals excel. From elementary school we learned that good boys and girls earn stars for their performance. As adults we often find the same reward systems in place. Based on these simple individualistic socialization factors it should not be surprising that companies often struggle to transform work groups into highly functioning work teams. In order to improve the transition process, many firms are using experiential group activities. These activities are designed to force groups to work effectively and transform into teams. “Companies can spend between $5000 and $15 000 for a session. Some major firms are spending as much as $50 000 a session to have employees learn valuable teamwork skills through diverse activities like mountain climbing, cooking, rowing, and improv theatre.”

Outward Bound Canada is an organization that offers a wide variety of outdoor experiences such as canoeing and mountaineering. They organize activities across the country, including expeditions in the Yukon, the Rockies, and the east coast.

Outward Bound’s client list includes companies like Sobeys, HSBC Bank Canada, and Purolator Courier. www.outwardbound.ca/default.asp At Niagara-based Good Eats Cooking, teamwork essentials are taught in the kitchen.

The chefs assign groups the task of cooking a four- or five-course meal that forces team members to work together. The setting is less threatening than an obstacle course and yet the same group dynamics need to be employed in order to achieve success. www.goodearthcooking.com/corporate_events.htm Fort Angrignon, in Montreal, offers obstacle courses and brain-teasing activities that pit groups of individuals against each other in team competitions. The groups are awarded points for each activity. The competition concludes with a ceremony identifying the most effective teams and leads naturally to a discussion on effective strategies for success. www.fortangrignon.com

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Alberta-based Mountain Quest offers a hands-on program that costs companies about $150 per person and forces individuals to work together to accomplish tasks such as conquering the “Electric Fence” (see photo). www.mountainquest.ca A group of employees work in unison to overcome the “Electric Fence” obstacle course at a Mountain Quest facility. In the process of conquering the game they are forced to realize that success requires cooperation and team communication.

Regardless of the approach, these activities share certain common results: They force employees to break down imaginary walls and move away from the routine. They help nurture bonds among employees and open lines of communication in a team setting. Each of these programs offers a different approach, but the goals are essentially the same.

Questions for Critical Thinking 1. What are the advantages and disadvantages of holding team building activity days?

Team building activity days allow employees to let loose and learn; they enable employers to break down barriers and get people away from their routines and their daily social patterns. If it is effective, the employees will enjoy the day and only realize the lessons that they have learned during a debriefing session. Ideally, by the end of the session employees can identify parallels between the day’s activities and their real jobs and teams.

From a negative perspective these activity days are not cheap; they cost the company direct fees as well as lost employee productivity. However, if the exercises help employees tear down communication barriers, improve morale and identify unnecessary negative patterns the company will end up ahead in the long-run.

2. If you were in charge of organizing a corporate group activity, which option would you choose? Explain your answer.

Student answers will vary. They should discuss the goal of the day in providing their answers. They should also make reference to the type of group and individuals they are dealing with in justifying their choice.

Box 2: Don’t Leave Home to Go to Work: American Express Company’s Virtual Environment “Don’t leave home without it!” sends a powerful message about the dangers of travelling without an American Express card tucked into your pocket. Millions of customers listen to that advice each day, making American Express the world’s largest travel agency and a leading provider of financial services. But providing a seamless network of services for customers around the globe requires effective teamwork from all employees, whether they’re working from the New York headquarters or Canadian locations in Edmonton, Halifax, and Ottawa or telecommuting from home in Los Angeles. Employees have everything they need to work together and contribute to the company’s success—even if they don’t leave home to go to work.

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As president of American Express Global Network and Establishment Services, the division that recruits new American Express merchants, David House encourages his staff members to work together to achieve their goals. But uniting employees in sales offices across long distances demands more than a few rousing pep talks. To build a successful team, House uses technology to promote communication within his division. He provides every employee with access to the company’s highly efficient computer network. He offers employees the opportunity to work from home, eliminating the time, expense, and stress of daily commutes to the office. He even provides employees with computer training, software and hardware setup, and selection and delivery of office furniture to complete their virtual office environment.

Nevertheless, House knows that effective teams need more than equipment to produce quality work. They need to communicate. House’s telecommuters conduct virtual meetings with colleagues around the world, taking advantage of e-mail and videoconferencing to brainstorm and collaborate on projects. Several units in House’s division use a buddy system that requires remote workers to chat with on-site colleagues by phone every morning, covering topics from new customers to office politics. Other telecommuters report to a local or regional office several times each week, meeting with co-workers for specific purposes.

House’s knack for developing and using virtual teams at American Express has indeed paid off. Not only do virtual teams save the company time and travel costs, but they have increased employee productivity and improved customer satisfaction rates. Moreover, by using virtual teams, House initially reduced the number of field offices from 85 to 7, resulting in large cost savings for the company.

Questions for Critical Thinking 1. How does American Express support virtual teams?

The president of American Express Global Establishment Services uses technology to promote communication within his division. He provides every employee with access to the company’s highly efficient computer network. He offers employees the opportunity to work from home, eliminating the time, expense, and stress of daily commutes to the office. He even provides employees with computer training, software and hardware setup, and selection and delivery of office furniture to complete their virtual office environment. Telecommuters conduct virtual meetings with colleagues around the world, taking advantage of e-mail and videoconferencing to brainstorm and collaborate on projects.

2. How do American Express telecommuters stay in touch with the company and with each other?

Several units use a buddy system that requires remote workers to chat with on-site colleagues by phone every morning, covering topics from new customers to office politics. Other telecommuters report to a local or regional office several times each week, meeting with co-workers for specific purposes.

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See It on the Web URLs for all Internet exercises are provided at the website for this book, www.pearsoned.ca/bovee. When you log on to the text website, select Chapter 7, then select Web Destinations, click on the name of the featured website, and follow the detailed navigational directions to complete these exercises.

Explore these chapter-related websites, review their content, and answer the following questions for each website you visit: 1. What is the purpose of this website?

2. What kinds of information does this website contain? Please be specific.

3. How is the information provided at this website useful for businesspeople?

Consumers?

4. How did you expand you knowledge of organizing and working in teams by reviewing the material at this website? What new things did you learn about these topics?

Build Teams in the Cyber Age Creating effective teams in a virtual environment is a complicated task. Log on to the following site and read all about some of the effective approaches and strategies.

Increase your effectiveness as a team member by learning more about how teams work, the stages of team development, tips for communicating with team members during a project, and some creative problem-solving techniques. http://reviewing.co.uk/toolkit/teams-and-teamwork.htm#21stcentury

1. What is the purpose of this website?

Student answers may vary, but may include any of the following: Teamworks, the Virtual Team Assistant, is a website developed to provide support for the group communication processes, especially for designing teams in engineering and other practical arts and sciences.

2. What kinds of information does this website contain? Please be specific.

Student answers may vary, but may include any of the following: Teamworks consists of nine informational modules, each of which contains background information, instruments for self-assessment, lessons to develop team work skills, and links to helpful resources. The nine modules cover the following topics: team building; project management; team problem-solving; team conflict; team feedback; team leadership; participation in discussions; oral and written presentations; teaching with teams.

3. How is the information provided at this website useful for businesspeople?

Consumers?

Student answers may vary, but may include any of the following: Businesspeople who work in teams can refer to this website to: increase their effectiveness as a team member (by learning more about why teams work); the stages of team development; tips for communicating with team members during a project; and some creative problem-solving techniques. . 188

4. How did you expand you knowledge of organizing and working in teams by reviewing the material at this website? What new things did you learn about these topics?

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

Be Direct If you want to learn more about building effective teams, you can read many excellent books on the subject. But you might be surprised by just how much information on team building you can find on the Internet. One good starting point is the Self-Directed and Self-Managed Work Teams page. This site's designers are passionate about teamwork, and they want to make it easier for people to work effectively in teams. Read the Frequently Asked Question (FAQ's) about selfmanaged teams. Then explore some of the links to discover more about teams and teamwork. http://www.managementhelp.org/grp_skll/slf_drct/slf_drct.htm 1. What is the purpose of this website?

Student answers may vary, but may include any of the following: The overall goal of the library is to provide leaders and managers (especially those with very limited resources) basic and practical information about personal, professional and organizational development, specifically through the use of team management and group dynamics.

2. What kinds of information does this website contain? Please be specific.

Student answers may vary, but may include any of the following: This website contains information on the following: self-directed work teams; self-managed work teams; conflict management; group performance management; meeting management; problem solving and decision-making; team building; valuing diversity; virtual teams.

3. How is the information provided at this website useful for businesspeople?

Consumers?

Student answers may vary, but may include any of the following: Businesspeople can use this website to learn more about all of the topics listed above (refer to answers to question #2).

Through this information, businesspeople can learn how to work in teams, manage teams, and lead teams in an effective manner. This site could also serve as a learning tool for college students studying the effectiveness of teams.

4. How did you expand you knowledge of organizing and working in teams by reviewing the material at this website? What new things did you learn about these topics?

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

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Resolve Conflict like a Pro The field of conflict resolution has been growing very quickly and includes practices such as negotiation, mediation, arbitration, international peace building, and more.

Learn more about each of these topics along with basic information about conflict resolution by visiting CR Info. Be sure to check out the web resources, where you'll find links to communication and facilitation skills, consensus building, and more.

Find out why BATNA is important. Discover what a mediator does. Learn how to conduct effective meetings. And don't leave without testing your knowledge of common negotiation terms. www.crinfo.org

1. What is the purpose of this website?

Student answers may vary, but may include any of the following: To provide information concerning conflict resolution processes.

2. What kinds of information does this website contain? Please be specific.

Student answers may vary, but may include any of the following: This website provides information on the following: negotiation, mediation, arbitration, international peace building, basic information about conflict resolution, communication and facilitation skills, consensus building, BATNA, how to conduct effective meetings.

3. How is the information provided at this website useful for businesspeople?

Consumers?

Student answers may vary, but may include any of the following: Businesspeople can find information pertaining to the following through this website: locate website on specific conflicts; find current news stories about world conflicts and dispute resolution; search for conflict resolution organization; search for books and articles on particular types of conflict or conflict resolution processes; search for books and article on particular conflicts, etc.

Consumers who are interested can search for information on the following through this website: process of conflict resolution; websites on conflict type; websites on conflict processed; website on specific conflicts, current news stories about world conflicts and dispute resolution, conflict resolution organizations, etc.

4. How did you expand you knowledge of organizing and working in teams by reviewing the material at this website? What new things did you learn about these topics?

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

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Chapter 7 Pop Quiz 1. The pathway for the flow of authority from one management level to the next is called ______________. a. Chain of command b. Delegation c. Accountability d. Responsibility

2. A local rental car establishment has specific employees that deal with commercial employees and other employees assigned to deal with individuals wishing to rent cars for personal reasons. What type of departmentalization scheme is this rental car establishment exhibiting? a. departmentalization by division b. departmentalization by matrix c. departmentalization by network d. departmentalization by function 3. _______________ teams seek ways to improve a situation and then submit their recommendation to management. a. Problem-solving b. Self-managed c. Functional d. Cross-functional 4.

Every company has a(n) ___________ organization which is the network of interactions that develop on a personal level among workers. a. formal b. informal c. structural d. social

5. An organization in which a large number of people report directly to one person and there are few levels in the management hierarchy is known as a _____________ organization. a. tall b. flat c. narrow d. none of the above 6. ________________ is the obligation to report work results to supervisors or team members and to justify any outcomes that fall below expectations, while _____________ is the power to make decisions, issue order, carry out actions, and allocate resources to achieve the organization’s goals. a. Delegation; authority b. Authority; delegation c. Accountability; Authority d. Authority; Accountability

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7. ____________benefits a company by utilizing top management’s rich experience and broad view of organizational goals. ____________ pushes decision-making authority down to lower organizational levels. a. Decentralization; Centralization b. Centralization; Decentralization 8. The team leader in a department meeting repeatedly dismissed any ideas that did not conform with what industry analysts were saying about the future of the market. All innovative ideas were examined based on the consensus in the industry. This is an example of a. expert-think b. groupthink c. free rider approach d. analyst brainstorming.

9._________________ teams draw together employees from various functional areas and expertise. a. Problem-solving b. Self-managed c. Functional d. Cross-functional 10.

__________ teams are groups of physically dispersed members who work together to achieve a common goal while communicating using a variety of technological formats and devices such as: company intranets; e-mail; electronic meeting software; and telephones. a. Virtual b. International c. Special-purpose d. Task force

Answers to Quiz 1. a.

2. a 3. a 4. b 5. b 6. c 7. b 8. a 9. d 10. a

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Chapter 8: Producing Quality Goods and Services Learning Objectives 1 2 3 4 5 6 7

Explain what production and operations managers do Highlight the unique challenges of providing efficient and effective servicedelivery systems Explain the role of the supply chain and identify key tasks in designing a production process Discuss the role of computers and automation technology in production Explain the strategic importance of coordinating the supply chain and managing inventory Distinguish among JIT, MRP, and MRP II inventory management systems Highlight the differences between quality control and quality assurance

Summary of Learning Objectives 1

Explain what production and operations managers do

Production and operations managers design and oversee an efficient conversion process—the sequence of events that convert resources into goods and services. To do this, they must coordinate a firm’s resources and optimize output from each resource. Additionally, production and operations managers perform the four basic functions of planning, organizing, leading, and controlling, but the focus of these activities is on the production of a company’s goods and services.

2 Highlight the unique challenges of providing efficient and effective servicedelivery systems Most of the concepts associated with goods manufacturing apply to services as well, but there are some unique challenges: (1) Customers are usually involved in—and can affect the quality of—the service delivery; (2) There is no inventory; most services are consumed at the same time they are produced; (3) Services are usually people intensive; (4) Customers often dictate when and where services are delivered; (5) Service quality can be more subjective than goods quality.

3 Explain the role of the supply chain and identify key tasks in designing a production process The supply chain consists of all companies involved in making a finished product.

Today, more and more companies are managing their supply chains to be more responsive to the changing needs of their customers by reducing the number of firms in their supply chain and developing long-term relationships with remaining members.

Designing an effective production process is one of the key responsibilities of production and operations managers. It involves six important tasks: identifying the supply chain, forecasting demand, planning for capacity, choosing a facility location, designing a facility layout, and scheduling work. Managers prepare production forecasts, or estimates of future demand for the company’s products. Next they must . 193

consider capacity, which is a business’s volume of manufacturing or service delivery.

The next step is to find a facility location that minimizes regional costs, transportation costs, and raw materials costs. Once a location has been selected, managers need to consider facility layout—the arrangement of production work centres and other facilities (such as material, equipment, and support departments) needed for the processing of goods and services. Finally, managers must develop a master production schedule.

4

Discuss the role of computers and automation technology in production.

Computers and automation technology improve the production process in several ways: (1) Robots perform repetitive or mundane tasks quickly and with great precision; (2) CAD and CAE systems allow engineers to design and test virtual models of products; (3) CAM systems easily translate CAD data into production instructions; (4) CIM systems link the people, machines, databases, and decisions involved in each step of producing a good; and (5) flexible manufacturing systems (FMS) reduce setup costs and time by linking programmable, multifunctional machine tools through a computer network and an automated materials-handling system.

5 Explain the strategic importance of coordinating the supply chain and managing inventory Efficiently coordinating the supply chain is a vital issue; it can help reduce costs and it is essential for the proper flow of inputs and outputs. The goods and materials kept in stock for production or sale make up inventory, which must be managed to minimize costs and ensure that the right supplies are in the right place at the right time. Having too much inventory is costly and increases the risk that products will become obsolete; having too little inventory can result in production delays and unfilled orders.

6

Distinguish among JIT, MRP, and MRP II inventory management systems

Just-in-time (JIT) systems reduce waste and improve quality by producing only enough to fill orders when they are due, thus eliminating finished-goods inventory.

Furthermore, under the JIT system, parts or materials are ordered only when they are needed, thus eliminating supplies inventories. Material requirements planning (MRP) and perpetual inventory systems are used to determine when materials are needed, when they should be ordered, and when they should be delivered. A more advanced system is manufacturing resource planning (MRP II), which brings together data from all parts of a company (including financial, design, and engineering departments) to better manage inventory and production planning and control.

7

Highlight the differences between quality control and quality assurance

Quality control focuses on measuring finished products against a pre-set standard and weeding out any defects. On the other hand, quality assurance is a system of companywide policies, practices, and procedures that build quality into a product and ensure that each product meets quality standards.

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Brief Chapter Outline I.

Understanding Production and Operations Management A. What Is Production?

B. The Value Chain and the Conversion Process C. The Unique Challenges of Service Delivery D. Mass Production, Mass Customization, and Customized Production E. Outsourcing II. Designing the Production Process A. Establishing the Supply Chain B. Forecasting Demand C. Planning for Capacity D. Choosing a Facility Location E. Designing a Facility Layout F. Scheduling Work III. Improving Production Through Technology A. Computer-Aided Design and Computer-Aided Engineering B. Computer-Aided Manufacturing and Computer-Integrated Manufacturing C. Flexible Manufacturing Systems D. Electronic Data Interchange IV. Managing and Controlling the Production Process A. Coordinating the Supply Chain 1. Just-in-Time Systems 2. Material Requirements Planning 3. Manufacturing Resource Planning 4. Supply Chain Management B. Assuring Product Quality 1. Statistical Quality Control and Continuous Improvement 2. Global Quality Standards

Lecture Notes and Chapter Outline I.

Understanding Production and Operations Management A. What is Production?

1. Production: the transformation of resources into goods or services that people need or want 2. Production and Operations Management (POM): refers to all the activities involved in producing a firm’s goods and services. a. Principal responsibilities include designing and overseeing an efficient conversion process—one that lowers costs by optimizing output from each resource used in the process. These resources include money, materials, inventories, people, buildings, and time.

B. The Value Chain and the Conversion Process 1. Conversion is the sequence of events that converts resources (or inputs) into products or services 2. This transformation is at the core of the company’s value chain, which includes all business functions necessary to support the transformation process. Includes marketing, accounting, human resources, etc. . 195

II.

3. Conversion is of two basic types: a. Analytic system: breaks raw material into one or more distinct products, which may or may not resemble the original material in form and function.

Example: meatpacking b. Synthetic system: combines two or more materials to form a single product.

Example: steel manufacturing 4. The Unique Challenges of Service Delivery a. Results in an intangible act b. Requires much higher degree of customer contact, is subject to greater variability. Is more labor intensive, and results in a lower uniformity of output than the production of goods.

C. Mass Production Versus Mass Customization 1. Mass production: manufacturing goods in large quantities—means little or no customization. a. Reduces production costs per unit b. Makes products available to more people c. Challenge: Competitive pressures of the global economy often require production techniques that are flexible, customer focused, and quality oriented 2. Mass customization: using mass production techniques to produce customized goods a. Consumers have individual needs and are best served by products that can be easily customized for them D. Outsourcing all or part of the manufacturing function may include product design and manufacturing 1. Nearly every aspect of a business has the potential to be outsourced 2. Advantages allow the company to redirect capital and resources spent on marketing to other areas including new product research and development, marketing, customer service 3. Many outsourcing contract manufacturers are industry specialists with state-of-the art facilities and production efficiencies that are costly to duplicate 4. Outsourcing, however, is not without its critics or controversy as it results in lost jobs, etc.

Designing the Production Process A. Establishing the Supply Chain Supply Chain- the collection of suppliers and systems that provide all of the materials to create and deliver products to final customers. The supply chain is part of the overall value chain and it is crucial to a company’s success Key decisions include: which materials are needed, who can supply them and where they should be stored B. Forecasting Demand: first step in designing an effective production process for a manufacturing operation is to determine how much the company will need to produce in a certain time span.

1. Involves determining how much product a company will need to produce in a time period using: a. Customer feedback b. Market research c. Past sales figures . 196

d. Industry analysis e. Educated guesses about future behavior of economy and competitors f. Production forecasts ¾ estimate future demand for product or service ¾ estimate used to plan, budget, and schedule resource use C. Planning for Capacity 1. Capacity: refers to the volume of manufacturing or service capability an organization can handle 2. Capacity planning: a. Involves long term strategic decision to establish level of resources needed to meet customer demand b. Influences significant decisions such as expanding facilities, constructing new facilities, phasing out unneeded facilities 3. Capacity planning can be risky for two reasons: a. Large shifts in demand are difficult to predict b. Long-term capacity choices can be difficult to undo D. Choosing a Facility Location 1. When choosing a facility location, companies seek to: a. Minimize cost b. Increase operational efficiency c. Increase product quality HOT DEBATE Is it ethical to move production facilities to other countries with less stringent environmental policies? Are we doing a disservice to other countries by bringing in our factories? Or are the benefits of increased job opportunities, and stronger economies worth the potential damage to the environment? Divide students into two groups. Have one group argue for companies locating production abroad and one group argue against locating production abroad. Have students make a list of pros and cons as the debate progresses.

2. Cost Factors Affecting Location Choice a. Land b. Construction c. Labor d. Local taxes e. Energy f. Local living standards g. Transportation costs 3. Appropriate skill levels a. Companies needing highly trained laborers often locate near a University b. Companies seeking low cost, unskilled laborers often locate wherever it’s cheapest (often in other countries such as Mexico or Taiwan) 4. Service Organizations a. Service organizations seek locations with the greatest profit potential b. Services focus on customer driven factors, and locate where target markets are large and sustainable

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E. Designing a Facility Layout 1. Facility layout: the arrangement of production work centers and other elements (such as materials, equipment, and support departments) needed to process goods and services 2. Layout involves selecting a location for: a. Departments b. Processes c. Machines d. Support functions 3. Facility layout affects: a. On-hand inventory b. Efficiency of materials handling c. Utilization of Equipment d. Productivity and morale of employees 4. Service and Goods operations seek to: a. Minimize materials-handling costs b. Reduce bottlenecks in moving material or people c. Provide flexibility d. Provide ease of supervision e. Use space efficiently and effectively f. Reduce hazards g. Facilitate coordination and communications whenever necessary 5. Types of layout a. Process layout (functional layout): ¾ concentrates everything needed to complete one phase of production in one area ¾ often used in machine shops & service industries b. Product layout (assembly line layout) ¾ production occurs along a line ¾ flow of production is continuous: products in process move from one workstation to the next c. Cellular layout ¾ groups dissimilar machines into work centers (or cells) ¾ improves efficiency and maintains flexibility ¾ employees can work on a product from start to finish d. Fixed position layout ¾ labor, equipment, materials brought to one location where a good or service is being produced ¾ e.g.: roads, bridges, airplanes, e. Routing ¾ specifies the sequence of operations and path through facility of products ¾ depends on type of product and plant layout

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CLASS EXERCISE Layout can affect the efficiency and flow of production, and even ruin a company’s ability to function competitively. Have students experiment with layout using this simple exercise. Have students work in a mock production setting by laying out groups of desks as workstations.

Create a three-step layout in which three students will produce a simple product such as a peanut butter sandwich. Have the student working on step 2 work at half the pace of the other two steps. Also, create barriers between step 2 and step 3 such as placing a series of desks and chairs in the way. Students will quickly see how layout design affects production. Have remaining students rearrange layout to streamline the process.

F. Scheduling Work 1. Scheduling: determines how long each operation takes and sets a start and finish for each 2. Master production schedule: schedule of planned completion of items 3. Gantt chart: bar chart showing the amount of time required to accomplish each part of the process 4. Program Evaluation and Review Technique (PERT): planning tool that helps managers identify the optimal sequencing of activities, the expected time for project completion, and the best use of resources within a complex project a. To use PERT managers must: ¾ identify the activities to be performed ¾ determine the sequence of activities ¾ establish the time needed to complete each activity ¾ diagram the network of activities ¾ calculate the longest path through the network that leads to project completion ¾ refine the network’s timing or use of resources as activities are completed b. Critical path: longest path through the network that represents the minimum amount of time needed to complete the project c. PERT uses four figures: ¾ optimistic estimate (if things go well) ¾ pessimistic estimate (if they do not go well) ¾ most likely estimate (how long the task usually takes) ¾ expected time estimate (average of the above three estimates) 5. Dispatch: part of the scheduling function that issues work to department supervisors a. Dispatch orders specify work to be done and schedule for its completion

III. Improving Production Through Technology A. Two major advances in production technology 1. Computers 2. Robots: programmable machines that work with tools and materials to perform various tasks B. Computer-aided design and computer-aided engineering 1. Computer-aided design: application of computer graphics and mathematical modeling to the design of products . 199

2. Computer-aided engineering: engineers use computer-generated threedimensional images and computerized calculations to test products a. Subjects proposed products to temperature change, stress, and simulated accidents b. Virtual reality allows designers to see how products will look when complete 3. Both computer aided design and engineering save time and money 4. Faster than hand drawing and building models C. Computer-aided manufacturing (CAM) and computer-integrated manufacturing(CIM) 1. CAM systems a. Computer-aided design data are converted directly into processing instructions for production equipment to manufacture b. Increases output, speed, and precision of assembly c. Allows computer departments to share designs over Internet and Intranet 2. CIM systems a. All elements of production are integrated into one automated system b. Strategy that uses technology for organizing and controlling factories c. Role is to link the people, machines, databases, and decisions involved in each step of producing a good D. Flexible Manufacturing Systems 1. Generally, manufacturing systems have been inflexible and expensive to change 2. In flexible manufacturing systems, programmable machine tools are linked by an automated materials-handling system a. Changing from one product design to another requires a few signals from a central computer b. Machines change tools automatically c. Saves time and set up costs d. Producers can outmaneuver less agile competitors e. Adapt quickly to changing customer needs E. Electronic Information Systems 1. Many companies link themselves with customers via information systems a. Enables companies to respond immediately to customer issues b. Supports rapid changes in customer needs c. Offers customers made-to-order products d. Allows customers to track their products e. Promotes better communication within the company F. Electronic Data Interchange (EDI) 1. EDI systems transmits specially formatted documents (such as invoices and purchase orders) from one company’s computer to another's a. Reduces time, paperwork, and cost associated with order processing IV. Managing and Controlling the Production Process A. Inventory Management 1. Inventory: the goods and materials kept in stock for production or sale 2. Important to keep inventory adequate but not oversupplied 3. Companies are changing the way they purchase and handle materials 4. Purchasing: the acquisition of raw materials, parts, components, supplies, and finished products required to produce goods and services .

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5. Lead time: the period of time elapsed between placing the supply order and receiving materials 6. In the past, firms purchased quantities of supplies to ensure inventory during peak production 7. Benefits and problems with carrying large amounts of inventory: a. Cost is cheaper when bought in bulk b. Customer demand can be met quickly c. Ties up company’s money d. Increases risk of products becoming obsolete 8. Inventory control a. Determines the right quantities of supplies and products to have on hand b. Tracking where those items are 9. Methods companies use to control inventory and manage the production process: a. Just-in-time Systems (JIT) ¾ goal of JIT systems is to have only the right amount of materials when needed (tries to maintain “zero inventory”) ¾ encourages factories to run smoothly ¾ exposes a company to great risk (easy to disrupt flow of production) ¾ places heavy burden on suppliers to meet production schedule of customers ¾ includes multifunctional teams, flexible manufacturing, smallbatch production, strict production control, quick setups, consistent production levels, preventive maintenance, and reliable supplier networks. ¾ lean production: doing more with less ¾ JIT concepts can also be used to reduce inventory and cycle time for service organizations b. Materials Requirements Planning (MRP) ¾ helps manufacturers get correct materials where and when needed without stockpiling ¾ use computers to calculate orders, timing, and delivery so that storage costs will be minimal ¾ perpetual inventory: Computers monitor inventory levels and automatically generate purchase orders when supplies fall beyond a certain level Example: price scanners at checkout counters part of this inventory system c. Manufacturing Resource Planning (MRPII): ¾ made up of various modules: ¾ inventory control ¾ purchasing ¾ customer order entry ¾ production planning ¾ shop-floor control ¾ accounting ¾ capacity planning ¾ marketing ¾ finance . 201

¾ with the addition of more and more modules that focus on capacity planning, marketing, and finance, an MRP system evolves into a manufacturing resource planning (MRPII) system. ¾ employees can now draw on data (inventory, unpaid bills) once available only for top executives ¾ capable of tracking each step of production ¾ MRPII systems are capable of running simulations that enable managers to plan and test alternate strategies ¾ Enterprise Resource Planning (ERP): an extension of MRPII which expands the scope of the production planning process to include customer and supplier information

B. Quality Assurance 1. Quality control: measuring quality against established standards after the good or service has been produced and weeding out any defects 2. Quality assurance: a system of company-wide policies, practices, and procedures to ensure that every product meets preset quality standards a. Includes quality control as well as doing the job right the first time by designing tools and machinery properly, demanding quality parts from suppliers, encouraging customer feedback, training employees, empowering them, and encouraging them to take pride in their work. b. Builds quality into every activity within an organization 3. Statistical Quality Control and Continuous Improvement a. Statistical Quality Control (SQC): all aspects of the production process are monitored so that managers can see whether the process is operating as it should b. Statistical Process Control (SPC): takes samples from process periodically and plots observations of the samples on a control chart c. Statistical quality control is not limited to goods-producing industries: E.g., GE uses SQC to monitor billing processes, improving customer satisfaction d. Continuous improvement ¾ encourages all employees to spot quality problems, generate ideas for improvement, and adjust work routines as needed 4. Global quality standards a. ISO (International Organization for Standardization) b. ISO 9000, ISO 9001, and ISO 9004: international quality standards assuring a minimum level of acceptable quality for companies doing business with Europe ¾ set by International Organization for Standardization in Geneva ¾ standards are recognized in over 158 countries ¾ about ¼ of the world’s corporations insist that all their suppliers be ISO certified. ¾ ISO standards help companies become world-class manufacturers: a term used to describe the level of quality and operational effectiveness that puts a company among the top performers in the world. c. ISO 9000: applied mostly to products that have health and safetyrelated features

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d. ISO 9001 and ISO 9004: maintain a greater focus on customer satisfaction, user needs, and continuous improvement ¾ focus on internal production and process issues ¾ focus on health and safety related features ¾ help companies develop world class manufacturing (benchmarks against world-class standards)

Potential Difficulties and Suggested Solutions 1. It is often necessary for students to think beyond what is presented it a text; in this chapter the student can benefit from an additional discussion on inventory.

You may want to ask students to consider the following scenario: ¾ Assume you own a medical supply company. The medical equipment, including IVs and respiratory devices you have on hand are now obsolete.

You have purchased the new equipment necessary to conduct business operations as usual and now your inventory includes both new and obsolete equipment. What should you do with the obsolete equipment? **This is often the case in many industries (technical, medical, etc.). So it is necessary for students to think about this issue that is applicable to real-world situations. Student answers will vary, but one possible solution is to export this obsolete medical equipment to the developing countries (either sell it at a very inexpensive price or donate it to display social responsibility). As students should be aware, medical and technical equipment that is obsolete in Canada may not be obsolete in developing countries.

Behind The Scenes Magna International: Assembling, Designing, Engineering, and Planning in the Dynamic Auto Sector Test Yourself Answers to these questions can be found on the website: www.pearson.ca/bovee.

1. Why do companies like GM, BMW, and Mercedes outsource their production to companies like Magna?

Major companies such as the ones listed above will outsource production to companies like Magna in order to reduce costs or deal with a time crunch when their resources are spread on other projects. In short, these major companies will outsource when they can benefit from it and they may pull resources back in house (as was the case for the X3) when they want to take control of a product or when they are ready to allocate resources internally.

2. Describe the challenges of managing the supply chain for a company like Magna International.

The supply chain consists of all companies involved in making a finished product.

Today, more and more companies are managing their supply chains to be more responsive to the changing needs of their customers by reducing the number of firms in their supply chain and developing long-term relationships with remaining members. Managing or coordinating the supply chain involves balancing inventory levels to reduce cost while ensuring that the supply on hand is enough to cover the product’s lead time demands. Purchasing and inventory control are vital elements of . 203

effective coordination. This challenge is especially complex for a company like Magna because it is involved in so many aspects of the supply chain and has different sometime multiple roles with the different companies it deals with.

3. What are some of the industry tools used to reduce design and engineering development times?

Computers and automation technology improve the design and engineering process in several ways: CAD and CAE systems allow engineers to design and test virtual models of products; CAM systems easily translate CAD data into production instructions; CIM systems link the people, machines, databases, and decisions involved in each step of producing a good.

4. What elements need to be considered in developing the production process?

Designing an effective production process is one of the key responsibilities of production and operations managers. It involves six important tasks: identifying the supply chain, forecasting demand, planning for capacity, choosing a facility location, designing a facility layout, and scheduling work. Managers prepare production forecasts, or estimates of future demand for the company’s products. Next they must consider capacity, which is a business’s volume of manufacturing or service delivery.

The next step is to find a facility location that minimizes regional costs, transportation costs, and raw materials costs. Once a location has been selected, managers need to consider facility layout—the arrangement of production work centres and other facilities (such as material, equipment, and support departments) needed for the processing of goods and services. Finally, managers must develop a master production schedule.

Behind The Scenes (End of Chapter) Planning Capacity and Exploring New Opportunities 1. How does BMW’s decision to move the X3’s production in-house affect Magna’s short-, medium-, and long-term operations?

In the short to medium term the decision was something to be alarmed at but based on the agreement the expectation was that Magna would continue to produce the X3 until 2010 when the next generation would be launched and produced “in house.” In the medium to long term it was a very major issue since the X3’s production accounted for nearly half of Magna Steyr’s assembly capacity. The company had to fill the gap or else it would need to make certain cuts to deal with the production gap.

2. Magna’s attempt to purchase Chrysler did not succeed; however, it was still a sign of Magna’s ambitious growth plans. What impact, if any, could this move have on its relationship with other automobile manufacturers?

Had the move gone through it might have had an impact, however, the move did not succeed and as this case clearly demonstrates the automotive business is filled with examples of company’s sharing resources and creating alliances and joint ventures to bring down or share overall costs.

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3. How will Magna’s Russian expansion positively and negatively impact its various divisions around the world?

At this point it is difficult to say, but it is clear that Magna is trying to get to the front of the line in a key market that is growing at approximately 20 percent annually. It may mean that some divisions may be adversely affected but the company as a whole seems positioned to expand from this opportunity.

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

Answers to End-Of-Chapter Questions Test Your Knowledge Questions for Review 1. What is meant by the value chain?

All of the functions required to transform inputs into outputs (goods and services) along with the business functions that support the transformation process.

2. What are the unique challenges of service delivery?

Service providers face some unique challenges. 1) Customers are usually involved in—and can affect the quality of—the service delivery. 2) Unlike goods, which can usually be built ahead of time and stored in inventory until customers buy them, most services are consumed at the same time they are produced. 3) Services are usually people intensive, whether it’s manual skills (carpentry, landscaping) or intellectual or creative skills (advertising, freelance writing). 4) Customers often dictate when and where services are delivered. 5) Service quality can be more subjective than goods quality.

3. What factors need to be considered when selecting a site for a production facility?

The primary goal when selecting a location for a production facility is to minimize three different categories of costs: (1) regional costs—including land, construction, labour, local taxes, leasing, and energy costs; (2) transportation costs—which cover the shipping of finished goods; and (3) raw materials costs—which take into account availability of and proximity to raw materials.

4. What is the purpose of capacity planning?

Capacity planning is a long-term strategic decision that establishes the overall level of resources needed to meet customer demand. Because of the potential impact on finances, customers, and employees, capacity planning involves some of the most difficult decisions that managers have to make.

5. Why might a company want to outsource its manufacturing function? What is meant by offshoring?

When a company outsources its manufacturing function it can redirect capital and resources spent on manufacturing to new product development, marketing, and customer service. Companies then save on the overhead and headache of running the

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production. This production is quite often sent to companies in locations around the world; this practice of sending jobs overseas to places like China is called offshoring.

Questions for Analysis 6. What are the steps involved in forecasting demand? How would an unexpected economic recession impact such forecasts?

Using customer feedback, sales orders, market research, past sales figures, industry analyses, and educated guesses about the future behaviour of the economy and competitors, operations managers prepare production forecasts, estimates of future demand for the company’s products. An economic recession will require the company to adjust its estimates of demand in order to accommodate the accompanying reduction of spending that goes with an uncertain future.

7. How do JIT systems go beyond simply controlling inventory?

Although one of the primary functions of a JIT system is inventory control, JIT is actually an entire process control system designed to pull products through production rather than pushing them through the way mass production does. JIT relies on teamwork to keep production flowing smoothly from beginning to end. It also involves the use of flexible manufacturing, small-batch production, strict production control, quick setups, consistent production levels, preventative maintenance, and reliable supplier networks, which enable the manufacturer to do more with less.

8. Why have companies moved beyond quality control to quality assurance?

Quality control—measuring quality against an established standard after the good or service has been produced and weeding out defects—is the traditional means for managing quality. Quality assurance, on the other hand, is more comprehensive than quality control because it includes a commitment to doing the job right the first time.

By striving to build quality into every product, companies are realizing that they can reduce costs, increase customer satisfaction, and decrease the need for quality control, which puts them in better competitive positions.

9. How can supply-chain management 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.

10. ETHICAL CONSIDERATIONS: How does society’s concern for the environment affect a company’s decisions about facility-location and layout?

Our society’s concern for the environment affects facility-location decisions because firms must recognize that the public wants the least amount of environmental impact possible. In particular the public is concerned that firms don’t put manufacturing plants in their “backyards.” This puts pressure on firms to find locations that are acceptable to the public and still cost effective. Layout decisions are also affected by public interest in the environment because firms need to be as efficient as possible with as little waste as possible to meet today’s environmental standards.

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Questions for Application 11. Assume you are the production manager for a small machine shop that manufactures precision parts for industrial equipment. How can you use CAD, CAE, CAM, CIM, FMS, and EDI or XML to manufacture better parts more easily?

CAD and CAE can be used to design and test the products before building a prototype, thereby reducing design time and costs and eliminating design flaws early on. Once a design is complete, CAM can be used to instruct the manufacturing machines exactly how to build the product or its various subunits, thus increasing output, speed, and precision of assembly lines as well as enabling the manufacture of customized products. CIM will link the design, engineering, testing, production, inspection, and materials handling functions to ensure that all employees are operating on the same plan and with the same numbers. If the company frequently alternates between the productions of several different parts, it may be able to use an FMS to reduce setup time and costs. When supplies are needed, EDI can quickly transmit orders to suppliers with a minimum of paperwork, thereby reducing lead times. One of the newer web standards, a language called XML, can accomplish the computer-to-computer communication that EDI has been handling for years.

12. If your final product requires several unique subunits that are all produced with different machinery and in differing lengths of time, what facility layout will you choose, and why?

Because production involves several unique steps requiring different machinery and differing amounts of time, a process layout would be best. However, if the company was able to outsource production of most of the subunits, then a product layout would best facilitate their assembly into the finished good.

13. INTEGRATED: Review the discussion of franchises in Chapter 4. From an operational perspective, why is purchasing a franchise such as Tim Hortons an attractive alternative for starting business?

There are several reasons that purchasing a franchise such as Tim Hortons would be an attractive purchase from an operational standpoint. First, franchises have standard “set-ups” that are dictated by the franchise owners designating the operational layout for the franchisee. Second, because Tim Hortons model is time-tested, layout problems have mostly been resolved over time, leaving a manager with a smooth operation requiring little improvement.

14. INTEGRATED: Review the discussion of corporate cultures in Chapter 6.

What things could you learn about a company’s culture by observing the layout and design of its production facility? Discuss both goods and services operations.

By observing the layout and design of a production facility, an observer could learn about a company’s efficiency and commitment to quality. If the production is slow, or inefficient, a company has not taken the time to “clean up its act.” Further, if the company uses technology such as CAD or CAM, or CIM, the company is clearly committed to meeting the needs of a new generation of customers who want quality and flexibility in design. Similarly, the “production” aspect of a services operation reflects the values of a firm. If the layout is inefficient, outdated, or sloppy, then commitment to quality may be low.

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Practise Your Knowledge Sharpening Your Communication Skills As the newly hired manager of Campus Athletics, a shop featuring athletic wear bearing logos of colleges and universities, you are responsible for selecting the store’s suppliers. Merchandise with team logos and brands can be very trendy.

When a college team is hot, you’ve got to have 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 of 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.

Building Your Team Skills Facility layout is one of the most critical decisions production managers must make.

In this exercise, you and your team are playing the role of production managers for the following companies, some producing a specific good and some producing a specific service: • • • • • • • •

Cott—soft drinks H&R Block—tax consultation Bob Mackie—custom-made clothing Burger King—fast food Bombardier—commercial jets Halifax General Hospital—medical services Brother—fax machines GM—sport-utility vehicles

For each company on the list, discuss and recommend a specific facility layout, referring to Exhibit 8.3 for an overview of the four layouts. Why does your team believe the recommended layout is best suited to the product or service each company produces? How would the recommended layouts affect the movement of resources and inventory for the manufacturers on the list? How would the layouts affect customer interaction for the service providers on the list?

Students’ answers will vary widely; students should be referring to Exhibit 8.3 for their answers.

Expand Your Knowledge Discovering Career Opportunities Whether you prefer to work with products or services, many possible careers await you in production and operations. From input to transformation to output, companies are looking for resourceful, results-oriented employees able to meet the demands of ever-changing schedules and specifications. Start your research by scanning the helpwanted classified and display ads in your local newspaper and in The Globe and Mail; also check help-wanted ads in business magazines such as Industry Week.

Access, Monster.ca and search for production and manufacturing jobs. www.monster.ca . 208

1. As you read through these want ads, note all the production related job titles you find. How many of these jobs include quality or technology (or both) among the duties and responsibilities?

Students’ answers will vary depending upon the issue of the local newspaper selected.

2. Select two job openings that interest you. Reread the ads for those jobs to find out what kind of work experience and educational background are required. What further preparation will you need to qualify for these jobs?

Students’ answers will vary depending upon the issue of the local newspaper selected.

3. Assume you have the qualifications for the two jobs you have selected. What key words should you include on your electronic résumé to show employers that you are a good job candidate?

Students’ answers will vary depending upon the issue of the local newspaper selected.

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, electronic information systems, 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

Answers to Boxed Features Box 1: Smart Car, Interesting Process The Smart Car is sold in 35 countries and was recently introduced into the Canadian market; it is a unique product that has a very interesting manufacturing process. The vehicle is a glowing example of outsourcing in today’s global economy. In some companies, in-house manufacturing operations consist of nothing more than bolting together fabricated chunks that have been manufactured by suppliers. Daimler’s Smart Car is produced in Smartville, a production centre in France. Smart car . 209

assembly is actually relegated to suppliers—from inventorying nuts and bolts on the assembly line to delivering cars to dealers in Europe and Japan. More than half of the 2000 people working in Smartville aren’t even on the manufacturer’s payroll. The biggest suppliers are on-site, building most of the car in the form of large modules— body, doors, rear section with engine, and so on. Conveyors link major suppliers’ plants directly to the assembly building where the cars are bolted together. Suppliers carry much of the cost of work-in-progress inventory; since they aren’t paid until the car comes off the line and is accepted for sale by inspectors—about every 90 seconds, which is quick for the auto industry. Meanwhile, Daimler hopes to incorporate what it has learned about suppliers, modules, pay-on-build, and new technologies into its global operation. “We are getting more and more into learning from others,” says one smart plant manager. “We take good things in other places and install them at our plant.”

Questions for Critical Thinking 1. What are the advantages and disadvantages of creating such powerful ties with suppliers?

The advantages of creating such ties with suppliers are that the company shares risks with suppliers and can reduce development costs as well as inventory costs. The disadvantages are that the company must work cooperatively with external sources and provide them with proprietary information. Trust is the key in such long-term relationships.

2. Do you believe that the initial success of the Smart Car in Canada is a shortterm response or the beginning of a successful run in this market?

The Smart Car may have been an interesting short term phenomenon at its launch, however, with gas prices soaring, it would seem that this unique automobile brand will continue to develop and find its market with consumers looking for a stylish fuel efficient vehicle.

Box 2: Offshoring: Profits? Yes, but at What Cost?

Few business issues in recent years have generated the emotional reaction that outsourcing has stirred up, especially south of the border. Outsourcing has been going on for about as long as businesses have existed, but it has become a hot topic as the outsourcing movement expands from mostly lower-paying assembly positions to higher-paying technical and professional jobs.

When companies outsource any function in the value chain, they often eliminate the jobs associated with that function as well. Increasingly, those jobs aren’t going across the street to another local company, but rather around the world, a variation on outsourcing known as offshoring. High-tech companies such as IBM, Nortel, Dell, and Microsoft are among the many technology firms that have already moved thousands of technical jobs to India, which has a large pool of educated workers willing to work for far less than North American workers are paid.

Proponents say that offshoring is crucial to the survival of many companies and that it saves other domestic jobs. In addition, offshoring helps raise the standard of living . 210

in other countries and thereby expands opportunities for local companies to export their products.

Critics say that companies are selling out the middle class in pursuit of profits and starting a trend that can only harm the domestic economy. When jobs in engineering, medicine, scientific research, architecture, and law can move overseas, they ask, what jobs are going to be left in the nation? Their anger isn’t helped by the fact that terminated employees are often forced to train their own overseas replacements, an apparently common practice.

Uncertainty is only fuelling the controversy, because nobody can be entirely certain just how far the offshoring trend will go or what impact it will have on employees, communities, or companies themselves. Estimates vary widely as to the number of jobs that have moved or could move to other countries. Furthermore, it’s often difficult to identify the specific reasons why one country gained jobs or another lost jobs. The emergence of new technology, the phasing out of old technology, shifts in consumer tastes, changes in business strategies, and other factors can all create and destroy jobs.

Traditional economic theory suggests that outsourcing lower-level jobs to countries with lower wages is good for companies because it frees up money and employees to work on more valuable activities. To some degree, this did in fact happen when many manufacturing jobs moved overseas in previous decades. However, when those more valuable activities themselves started to move overseas, quite a few people began to question the theory. Some economists continue to say that short-term pains will lead to long-term gains—that the jobs lost today will once again be replaced by other jobs.

Here again, though, there’s more uncertainty; no one has yet identified what those jobs are going to be. Paul Craig Roberts, a former assistant treasury secretary in the United States, says the traditional economists are wrong because they’re using 200year-old assumptions about comparative advantage (see Chapter 2) that don’t apply to a highly mobile, information-based economy. With companies trying to reduce costs wherever possible, but workers trying to protect as many jobs as possible, offshoring promises to be a hot topic for years to come—not only for businesses and employees but for governments and society as a whole.

Questions for Critical Thinking 1. Are today’s outsourced job losses a cause for concern, or is this just a natural part of economic evolution in a global economy? Debate both sides of the argument.

Student answers will vary but examining both sides of the debate will force them to look at the issues beyond the standard TV and Newspaper headlines.

2. Will global labour markets eventually balance out with workers in comparable positions all over the world making roughly the same wages?

Explain your answer.

While student responses may vary, the following addresses some possible answers.

Jobs which are outsourced and off-shored tend to go to those countries without the

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infrastructure and systems in place that compare to Canadian systems. Thus, the likelihood of outsourcing balancing out wages would be small.

Box 3: A Bike That Really Travels When bike-industry veteran Hanz Scholz decided to pedal across Europe in 1987, his vision of packing a folding bike in a suitcase when it was time to board a plane or train soon began to fade. Scholz was disappointed by the quality of folding bikes available. So he set out to build his own: one compact enough to fit into a large suitcase but high-quality enough to tackle steep hills and long, rugged stretches.

Five years later, the first commercial orders for Scholz’s Bike Friday were rolling in.

Unlike its fold-up predecessors—often one-size-fits-all models available in retail stores—all Bike Fridays are custom made by manufacturer Green Gear Cycling to meet the rider’s size and component/colour preference. The bike fits into a car trunk, a tight storage space, or an optional suitcase to travel on a plane like regular baggage.

Green Gear’s operations are as distinctive as its product. The relatively small company (US$3 million in sales, 30 employees, and 17 000 square feet of production space) uses advanced manufacturing principles adopted from Toyota Motor and other large manufacturers. Built individually, each Bike Friday begins its life as a bundle of tubes, components, and other structures. These elements are processed through a build-to-order flow-manufacturing configuration organized in a series of cells. The cells are designed so that any one cell can do some of the work of the previous or next cell if production runs behind or ahead.

Once work on a bike has begun it flows through the process without hesitation at any point. “It works like a track relay with a transition area,” says Scholz. “We’ve set up everything with single-process-specific tools so there is no process changeover time.

The flow motto is “touch it once, do it now.” When a quality problem is discovered, the operator switches on a red light and all procedures stop until the production cell is adjusted to eliminate the problem.

Operating in a one-at-a-time flow system rather than in batches maximizes the chances for continuous improvement. “For us, every bike is a batch, so we have 150 to 200 chances per month to make process improvements,” says Scholz. “A small manufacturer operating in a large-batch mode can be put out of business if he ruins just one. If you can make improvements as you find them, you can survive as a small manufacturer.”

Today, Green Gear Cycling builds about 2000 bikes annually. At an average selling price of US$1700, Bike Friday commands a premium price that is primarily paid by North American customers. “We give people what they want, when they want it,” says Scholz. “If you do that, people are willing to pay you for it.”

Questions for Critical Thinking 1. What are the advantages of using a cellular layout to manufacture Bike Friday?

For Bike Friday, arranging workflow by cells can improve the efficiency of a process layout while maintaining its flexibility. The cells are designed so that any one cell can do some of the work of the previous or next cell if production runs behind or . 212

ahead. At the same time, grouping smaller numbers of workers in cells facilitates teamwork and joint problem solving. Employees are also able to work on a product from start to finish, and they can move between machines within their cells, thus increasing the flexibility of the team.

2. Does Green Gear Cycling mass-produce or mass-customize folding bikes?

Explain your answer.

Green Gear Cycling mass-customizes folding bikes. It uses advanced manufacturing principles adopted from Toyota Motors and other large manufacturers. The company uses batch-of-one manufacturing, where every product is made to order from scratch.

The company has set up everything with single-process-specific tools so there is no process changeover time.

See It on the Web URLs for all Internet exercises are provided at the website for this book, www.pearsoned.ca/bovee. When you log on to the text website, select Chapter 8, then select Web Destinations, click on the name of the featured website, and follow the detailed navigational directions to complete these exercises.

Explore these chapter-related websites, review their content, and answer the following questions for each website you visit: 1. What is the purpose of this website?

2. What kinds of information does this website contain? Please be specific.

3. How is this information provided at this website useful for businesspeople? Consumers?

4. How did you expand your knowledge of operations management by reviewing the material at this website? What new things did you learn about this topic?

Make Quality Count In today's competitive business environment, companies have to be concerned about the quality of their goods and services. For information and advice, many turn to the National Quality Institute (NQI), an independent, non-profit organization that focuses on workplace excellence based on quality systems and the elements of a healthy workplace environment. The organization is headed by individuals drawn from both the public and private sectors. Each year the NQI announces the annual Canada Awards for Excellence (CAE). Discover how winning companies are selected, which companies have won the award, and what distinguishes these firms. www.nqi.ca/caeawards/default.aspx

1. What is the purpose of this website?

While student responses may vary, the following will address some possible answers. The National Quality Institute (NQI) has the following mission statement: helping organizations to continuously improve performance and . 213

results by providing innovative national criteria, progressive implementation programs, services and certification. The detailed information available on this site places a focus on quality in the organization.

2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers.

This website contains information on the following: CAE Awards, PEP Certification, job postings, training Information, descriptions of the types of standards; networking opportunities etc.

3. How is this information provided at this website useful for businesspeople? Consumers?

While student responses may vary, the following will address some possible answers.

Businesspeople can use this website to obtain information on how to improve the quality of their operations.

Consumers can use this website for informative purposes.

4. How did you expand your knowledge of operations management by reviewing the material at this website? What new things did you learn about this topic?

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

Follow the Path to Continuous Improvement The business of manufacturing is more complex than ever before. Today's operations managers must address the conflicting needs of customers, suppliers, employees, and shareholders. Discover why many operations managers turn to Industry Week magazine to stay on top of trends, technologies, and strategies to help drive continuous improvement throughout their organization. Log on to this magazine's website and read about the world's best-managed companies. Find out which manufacturing plants have won awards. Check out the surveys and special industry reports. Take a peek at the factories of the future. Don't leave without browsing the current articles or reviewing the glossary of manufacturing terms. www.industryweek.com

1. What is the purpose of this website?

While student responses may vary, the following will address some possible answers.

The purpose of this website for informational purposes; to communicate to readers that Industry Week magazine is designed to assist companies in staying on top of trends, technologies, and strategies to help drive continuous improvement throughout their organization.

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2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers.

This website provides daily news, articles, columns, archives, research, products, business tools, glossary of manufacturing terms.

3. How is this information provided at this website useful for businesspeople? Consumers?

While student responses may vary, the following will address some possible answers.

All of the information listed above (#2) is provided to assist businesspeople in improving business operations and activities.

Consumers can refer to this website to read literature for informative or educational purposes.

4. How did you expand your knowledge of operations management by reviewing the material at this website? What new things did you learn about this topic?

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

Step Inside ISO Online The International Organization for Standardization (ISO) is a worldwide federation of national standards bodies from some 146 countries, one from each country.

Established in 1947, ISO is a non-governmental organization with the following mission: to promote the development of standardization and related activities in the world with a view to facilitating the international exchange of goods and services and to developing cooperation in the spheres of intellectual, scientific, technological, and economic activity. Step inside ISO Online and take a closer look at how ISO standards are developed, why international standardization is needed, and what fields are covered by ISO standards. http://www.iso.org/iso/home.htm 1. What is the purpose of this website?

While student responses may vary, the following will address some possible answers.

The purpose of the website is to communicate the mission of ISO by explaining the developments of ISO standards and the rationale for developing those standards.

2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers.

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The website provides genera information about ISO (structure, members, strategies, figures); products and services (information publications and products, customer services); information on ISO 9000/14000; standards development; communicates and markets (industry forums, ISO and developing countries); communication center (ISO bulletin, news items).

3. How is this information provided at this website useful for businesspeople? Consumers?

While student responses may vary, the following will address some possible answers.

Business people can obtain information they need in order to meet the standards for ISO certification as well as understand the rationale behind those standards.

Consumers can look to the site for informative purposes.

4. How did you expand your knowledge of operations management by reviewing the material at this website? What new things did you learn about this topic?

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

Focusing on E-Business in Action Whatever Happened to B2B Exchanges?

Questions for Critical Thinking 1. Why would a company want to participate in a B2B exchange?

Business-to-business e-commerce exchanges are easier and more cost-effective to implement than traditional electronic data interchange (EDI) systems. Companies can link electronically via the Internet without installing costly private networks.

Moreover, the common platform of the Internet makes it possible for all users to hook up regardless of the company’s computer operating system.

2. Would sellers ever have any incentive to participate? Explain your answer.

As indicated in the case sellers would have an interest in participating when the model does not turn their products into simple commodities and when competitive issues are addressed.

3. Why does a private B2B exchange such as IBM Canada’s work?

This format connects a single buyer with multiple sellers. The private B2B exchange means that the suppliers don’t compete with one another, and there’s only one buyer to coordinate technology with so the system is efficient and provides a win-win scenario.

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Chapter 8 Pop Quiz: 1.

Which of the following is a key task involved in designing a production process? a. preparing production forecasts b. capacity consideration c. finding a facility location that minimizes regional costs, transportation costs, and raw material costs d. developing a master production schedule e. all of the above are key tasks involved in designing a production process

2.

_____________ systems reduce waste and improve quality by producing only enough to fill orders when they are due, thus eliminating supplies inventories. a. JIT b. MRP c. MRPII d. TIJ

3.

Quality _________ focuses on measuring finished products against a preset standard and weeding out any defects. On the other hand, quality _______ is a system of company wide policies, practices, and procedure that build quality into a product and ensure that each product meets quality standards. a. assurance; control b. control; assurance

4. In meatpacking, a steer may be divided into hide, bone, and steaks. This _______ system breaks raw materials into one or more distinct products. a. analytic b. synthetic c. JIT d. MRP 5.

_____________is a long-term strategic decision that establishes the overall level of resources needed to meet customer demand. a. Strategic planning b. Capacity planning c. MRPII d. MRP

6. The need for a new layout design can occur for a number of reasons. Which of the following is not a reason for a new layout design? a. new process or method might become available e. the volume of business might change. f. a new product or service may be offered. g. an existing product or service may be redesigned. e. all of the above are reasons for new layout design

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7. The _____________ is a facility layout in which labour, materials, and equipment are brought to the location where the good is being produced or the customer is being served. a. cellular layout b. product layout c. process layout d. fixed-position layout 8.

The highest level of computerization in operations management is _________________, in which all the elements of production--design, engineering, testing, production, inspection, and materials handling--are integrated into one automated system. a. computer-integrated manufacturing b. computer-aided manufacturing c. computer-aided design d. computer-aided engineering

9.

Many manufacturers and service providers require that suppliers comply with standards set by the ___________________, a nongovernmental entity based in Geneva, Switzerland. a. ISO b. SQC c. SPC d. JIT

10. Outsourcing the manufacturing function has several advantages. Which of the following is not an advantage of outsourcing the manufacturing function? a. it allows companies to redirect the capital and resources spent on manufacturing to new product research and development, marketing, and customer service. b. many contract manufacturers are industry specialists with state-of-the art facilities and production efficiencies that would be costly to duplicate on an individual scale. c. when outsourcing, management maintains total control over the manufacturing function

Answers to Pop Quiz: 1. e 2. a 3. b 4. a 5. b 6. e 7. d 8. a 9. a 10. c

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Chapter 9: Managing Human Resources Learning Objectives 1 2 3 4

List six main functions of human resources departments Cite seven methods recruiters use to find job candidates Identify the six stages in the hiring process Discuss how companies incorporate objectivity into employee performance appraisals Highlight five popular employee benefits Describe four ways an employee’s status may change and discuss why many employers like to fill job vacancies from within

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Summary of Learning Objectives

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1 List six main functions of human resources departments Human resources departments plan for a company’s staffing needs, recruit and hire new employees, train and develop employees, appraise employee performance, administer compensation and employee benefits, and oversee changes in employment status.

2 Cite seven methods recruiters use to find job candidates Recruiters find job candidates by (1) promoting internal candidates, (2) advertising in newspapers and on the Internet, (3) using public and private employment agencies, (4) recruiting at college campuses and career placement offices, (5) attending trade shows, (6) hiring corporate “headhunters,” and (7) soliciting referrals from employees or colleagues in the industry.

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3 Identify the six stages in the hiring process The stages in the hiring process are (1) narrowing down the number of qualified candidates, (2) performing initial screening interviews, (3) administering a series of follow-up interviews, (4) evaluating candidates, (5) conducting reference checks, and (6) selecting the right candidate.

4

Discuss how companies incorporate objectivity into employee performance appraisals Employee performance appraisals are an effective way to inform employees whether they are doing a good job and how they can improve their performance. To ensure objectivity and fairness, most firms use a standard, companywide format, provide a written record of appraisals for future reference, and solicit several perspectives by engaging superiors, peers, and colleagues at different levels in the organization in the review process.

5 Highlight five popular employee benefits The two most popular employee benefits are insurance (health, life, disability, and long-term care) and retirement benefits like pension plans. Employee share-

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ownership plans and stock options, two additional benefits, allow employees to receive or purchase shares in the company and thus obtain a stake in the company.

Family benefits programs are also popular and include maternity and paternity leave, childcare assistance, and eldercare assistance.

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Describe four ways an employee’s status may change and discuss why many employers like to fill job vacancies from within.

An employee’s status may change through promotion or reassignment to a different position, termination, voluntary resignation, or retirement. Employers like to fill vacancies created from such changes by promoting from within for these reasons: The employee has been trained by the company and knows the ropes, it boosts employee morale, and it sends a message to other employees that good performance will be rewarded.

Brief Chapter Outline I. II.

Understanding What Human Resources Managers Do Planning for a Company’s Staffing Needs A. Forecasting Supply and Demand 1. Part-Time and Temporary Employees 2. Outsourcing B. Evaluating Job Requirements III. Recruiting, Hiring, and Training New Employees A. The Hiring Process 1. Background Checks 2. Hiring and the Law 3. Testing C. Training and Development IV. Appraising Employee Performance V. Administering Compensation and Employee Benefits A. Salaries and Wages B. Incentive Programs C. Employee Benefits and Services 1. Insurance 2. Retirement Benefits 3. Stock Options 4. Family Benefits 5. Other Employee Benefits VI. Overseeing Changes in Employment Status A. Promoting and Reassigning Employees B. Terminating Employees C. Retiring Employees

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Lecture Notes and Chapter Outline I.

II.

Understanding What Human Resources Managers Do A. Growing emphasis on hiring the right people to help a company meet its goals 1. Human Resources managers oversee employee activities including: a. Training b. Development c. Motivation d. Evaluation e. Compensation B. Human resources must also consider: 1. How to attract qualified employees from a shrinking pool of entry-level candidates 2. How to train less educated, poorly skilled employees 3. How to keep experienced employees when they have fewer opportunities for advancement 4. How to lay off employees equitably when downsizing is necessary 5. How to train employees to cope with increasing automation and computerization 6. How to manage increasingly complex employee benefits programs 7. How to shape workplace policies to address changing workforce demographics and employee needs Planning for a Company’s Staffing Needs A. Forecasting supply and demand 1. Forecasting demand (represents the number and type of employees that will be needed at various times) 2. Forecasting supply (represents the supply of available employees) a. Often tap existing employees for upcoming jobs b. Sometimes consider possibilities such as outsourcing or hiring temporary employees 3. Temporary employees a. More and more companies use temporary employees to save money and increase flexibility b. Temporary employees include: computer systems analysts, human resources directors, accountants, doctors c. Hiring temporary employees is also a recruiting technique FOR DISCUSSION More and more companies are hiring temporary employees, creating a gap between the company paid employees and a growing workforce of “permatemps?”

Do these choices benefit the company in the long run? How does the use of temps affect company culture? How does the use of temps benefit company employees? If temporary employment agencies create benefits packages for their employees, does this make for a fair arrangement?

4. Outsourcing a. Advantages of outsourcing include: ¾ gives companies access to new resources and world-class capabilities

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¾ shares the risk of getting the work done ¾ frees company resources for other purposes b. Risks ¾ give up direct control over companies that do the work ¾ greater dependency on suppliers ¾ loss of in-house skills ¾ possible work delays ¾ unhappy customers ¾ labour union battles B. Evaluating Job Requirements 1. Job analysis: the process of evaluating job requirements formally and objectively c. To obtain information for a job analysis, the human resources staff asks: ¾ What is the purpose of the job? ¾ What tasks are involved in the job? ¾ What qualifications and skills are needed to do it effectively? ¾ In what kind of setting does the job take place? ¾ Is there much public contact involved? ¾ Does the job entail much time pressure? d. Once a job analysis is completed, job descriptions and specifications are derived from it 2. Job description: a formal statement summarizing the tasks and conditions under which an employee will work 3. Job specification: a statement describing the skills, education, and previous experience a job requires III. Recruiting, Hiring, and Training New Employees A. Recruiting: the process of attracting suitable candidates for an organization’s jobs 1. Methods of recruiting (refer to Exhibit 9.2): a. Internal searches b. Newspaper and Internet advertising c. Public and private employment agencies d. College campuses and career offices e. Trade shows f. Corporate “head-hunters”(people who try to attract people at other companies) g. Referrals from employees or colleagues in the industry B. The Hiring Process 1. Stages of the hiring process a. Stage one ¾ select a small number of qualified applicants from a pool of applicants ¾ may be chosen on basis of standard application or resume b. Stage two ¾ interview selected candidates to clarify qualifications and fill in missing information c. Stage three ¾ call best applicants back for a second interview (or a series of interviews)

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d. Stage four ¾ position’s supervisor evaluates candidates, possibly consulting with higher management, the human resources department, and staff e. Stage five ¾ employer checks references for top few candidates ¾ employer may also check candidate’s education, previous employment, criminal record, motor vehicle record, or credit history f. Stage six ¾ Supervisor selects person most suitable for the job 2. Background Checks a. Verifying all educational credentials and previous jobs b. Accounting for any large time gaps between jobs c. Checking references d. Background checks are especially important for jobs in which employees are in a position to possibly harm others 3. Hiring and the law a. Employers must avoid discrimination in application forms, interviews, and tests b. Employers must avoid asking unrelated questions such as marital status, age, and religion, whether the person belongs to a union, has been arrested, cause of a physical disability, whether a person owns or rents a home, when a person attended school c. The exception is when the information above (b) is related to a bona fide occupational qualification d. Employers must obtain sufficient information about employees to avoid becoming the target of a negligent-hiring lawsuit 4. Testing a. Many companies rely on pre-employment testing to determine whether applicants are suited for a job or not b. Companies use three tests: job skills, psychological, and drug ¾ job skills tests: designed to assess competency or specific abilities needed to perform a job ¾ psychological tests: used to assess overall intellectual ability, attitudes toward work, interests, managerial potential, or personality characteristics----including dependability, commitment, and motivation. ¾ drug testing: ¾ companies with mandatory testing have found real advantages, including lower accident rates, fewer disability claims, and decreased violence and absenteeism ¾ some employers prefer not to incur the extra expense to administer drug tests; others consider such tests an invasion of privacy ¾ drug tests could produce false positives c. Critics say that such tests are ineffective and potentially discriminatory

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C. Training and Development 1. Orientation programs usually include: information about company background; equal opportunity practices; safety regulations; standards of employee conduct; company culture; employee compensation and benefits plan.

2. Training a. Most companies offer training and retraining because employee competence has a direct effect on productivity and profits ¾ Training often takes place at the work site where experienced workers oversee training on the job or in a classroom ¾ Employee training may also involve self-study using training manuals, tests, and interactive modules IV. Appraising Employee Performance A. Performance appraisal systems 1. Attempt to objectively evaluate employees according to set criteria 2. Promotes fairness because standards are usually job-related 3. Goal is to improve performance rather than judge it 4. Periodic performance evaluations give fast feedback so that employees can correct errors quickly 5. Written evaluations provide a record of employee performance and requires the employee to be rated by several people 6. 360 degree review: solicits feedback from colleagues above, below, and around the employee to provide observations of the person’s performance in several skill and behavioural categories.

B. Measuring for Productivity 1. Difficult to accurately evaluate productivity especially when employees work in teams 2. Some firms have teams evaluate themselves rating themselves on a 1-5 scale V. Administering Compensation and Employee Benefits A. Compensation: a combination of payments in the form of wages or salaries, incentive payments, employee benefits, and employer services B. Wages and salaries 1. Wages a. Many blue and white collar workers receive compensation based on calculating the number of hours worked or units produced b. Wages provide a direct incentive to employees c. Employers in Canada must comply with federal and provincial labour laws that determine issues such as minimum hourly wage for employees and overtime pay.

2. Salaries a. Base compensation on time in units weekly, biweekly, monthly, or yearly b. Salaried employees generally receive no pay for extra hours put in but receive leeway in their schedules C. Incentive programs 1. Incentives: cash payments that are linked to specific individual, group, or companywide goals 2. Bonuses: a payment in addition to regular wages or salary 3. Commission: pays employees a percentage of sales made .

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4. Profit sharing: a system in which employees receive a portion of the company’s profits D. Employee benefits and services 1. Employee benefits: financial benefits other than wages, salaries, and incentives a. Employee benefits can be offered as a preset package (designed by the company) or flexible benefits (allow employees to pick their benefits—up to a certain dollar amount---to create a benefits package tailored to their individual needs) 2. Insurance a. Insurance is the most popular employee benefit and is completely optional b. In the past, companies often negotiated group insurance plans for employees c. Now with exploding healthcare costs ¾ companies hire many part time employees who receive little or no benefits ¾ companies require that employees pay part of the premium 3. Retirement benefits a. Canada Pension Plan (QPP in Quebec), Old Age security and The Guaranteed Income Supplement ¾ provide basic financial support to citizens upon reaching retirement age b. Pension plans ¾ pension plans are funded by companies who set aside money on a regular basis to cover future retirement benefits ¾ three of the most popular types of company-sponsored pension plans are as follows: ¾ defined contribution plans: similar to saving plans that provide a future benefit based on annual employer contributions, voluntary employee matching contributions, and accumulated investment earnings ¾ defined benefit plans: formula-based plans in which employers typically promise to pay their employees a benefit upon retirement based on the employee’s retirement age, final average salary, and years of service ¾ Registered Retirement Savings Plans (RRSPs) allow eligible participants to contribute pre-tax dollars to a tax-qualified retirement plan 4. Employee share ownership plan (ESOP) a. Companies place a certain amount of its shares in trust for some or all of its employees, with each employee entitled to a certain share b. Allows employees to purchase the shares at a fixed price 5. Stock options a. Grant the employees the right to purchase a certain amount of stock at fixed price (based on the trading price at the time the option is granted) b. Costs little for employers, provides employees with incentives to stay with a company, and encourages employees to work harder because they have a vested interest in the company doing well .

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c. Stock options can generate a handsome profit for employees if the stock’s market price exceeds the grant price 6. Family benefits a. Maternity leave in Canada extends for one full year; in the U.S. women are only granted 12 weeks leave. b. Day care assistance is offered by 86 percent of companies surveyed.

In Quebec subsidized $7 per day daycare centers have been in existence for years. The federal government introduced the $1200 dollar per child Universal Child Care Benefit to support families. c. Elder care assistance is offered by 50 percent of employers ranging from: referral services, to assistance in finding care providers and dependent care allowances 7. Other employee benefits a. Paid holidays, paid vacations, sick pay, and premium pay for working overtime or unusual hours are important benefits b. Companies sometimes offer sabbaticals, tuition loans and reimbursements, professional development opportunities, personal computers, financial counselling and legal services, assistance with buying a home, paid expenses for spouses who travel with employees, employee assistance programs, nap time, and wellness programs c. Employee Assistance Programs (EAP’s) ¾ offer private and confidential counselling to employees who need help with issues related to drugs, alcohol, finance, stress, family, and other personal problems. d. Benefits such as company cars, free parking, and expanded casual dress days are often referred to as perks FOR DISCUSSION Ask students to think through the various benefits and incentives to work for a company. According to their current needs, which of these benefits or incentives would most attract them to work for a particular company? Which would most motivate them to perform? How do their current needs fit into Maslow’s hierarchy of needs?

VI. Overseeing Changes in Employment Status A. Promoting and reassigning employees 1. Promoting from within a. Allows a company to benefit from the training and experience of its own workforce b. Sometimes find that a person talented at one job lacks the skills for a different job B. Terminating employees 1. Termination: permanently laying the employee off because of cutbacks or firing the employee for poor performance 2. Layoffs a. When employees are laid off (terminated for economic or business reasons unrelated to performance), companies now seek to help ease employees through this transition with resume writing courses, career counselling, office space, and secretarial help

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b. Some companies have adopted a no-layoff or guaranteed employment policies c. Some companies adopt no-layoff, or guaranteed-employment policies---in an economic downturn, employees may be shifted to other types of jobs, perhaps at reduced pay, or given the chance to participate in work-sharing programs ¾ help promote employee loyalty and motivation C. Retiring employees: present two challenges for businesses 1. Give job opportunities to people who are willing and able to work but who happen to be past the traditional retirement age 2. Finding ways of encouraging older employees to retire early

Potential Difficulties and Suggested Solutions 1. Students may have no previous experience with interviews. It is important to communicate the following to the students concerning interviews: ¾ Students should conduct basic research about the company prior to going on an interview (management style, benefits offered, core business) ¾ Students should review sample interview questions and answers to be adequately prepared for possible questions that may be posed during the interview (inform students of the many resources available to them: Internet, books) 2. The chapter discussed illegal interview questions. You may want to ask the students how they would react if they were asked an illegal interview question. Some possible responses are as follows: ¾ Students should realize that they can refuse to answer such questions in a polite manner. A sample response: “I do not believe my marital status has any bearing on this position and I would prefer not answering that question.”

Behind the Scenes Human Resources at WestJet: Smiles and Jokes Take Front Stage Test Yourself Answers to these questions can be found on the website: www.pearsoned.ca/bovee.

1. If you were a member of WestJet’s management team, how would you continue to attract, train, and compensate a diverse workforce?

Student answers will vary, however, some of the following elements should appear.

WestJet puts its own twist on the recruitment process but there are certain standard sources for finding good people: (1) promoting internal candidates, (2) advertising in newspapers and on the Internet, (3) using public and private employment agencies, (4) recruiting at college campuses and career placement offices, (5) attending trade shows, (6) hiring corporate “headhunters,” and (7) soliciting referrals from employees or colleagues in the industry. Since WestJet emphasizes the team experience, training and compensation methods should be designed to account for that fact.

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2. What human resources policies and practices would you implement to motivate employees to give top notch service?

Student answers will vary however some of the following elements can be addressed.

Top notch service, begins with a motivated employee and is bred by good morale in the organization. To encourage employees to be more productive, innovative, and committed to their work, many companies provide managers and employees with incentives, cash payments that are linked to specific individual, group, or companywide goals; overall productivity; and company success. In other words, achievements, not just activities, become the basis for payment. The success of these programs often depends on how closely incentives are linked to actions within the employee’s control. Some of the more common incentives include: bonuses, commissions, and profit sharing and employee benefits. In the case of WestJet, it is obvious that the company emphasizes its profit sharing program as a key measure of motivation.

3. What is meant by performance appraisal and how does it impact a company like WestJet? Performance appraisal systems objectively evaluate employees according to set criteria. Well-designed appraisals promote both fairness and improvement by focusing on job-related performance standards. The ultimate goal of performance appraisals is not to judge employees, but rather to improve their performance.

Periodic evaluations are especially important in today’s project-driven, resultsoriented workplace. Employees need fast feedback so they can correct problems quickly; more importantly, managers must also emphasize future actions. This is especially important in an organization like WestJet because employees have direct contact with customers. They require feedback to correct inappropriate habits and they deserve praise and recognition when they deal with those difficult customers and the model customers as well.

Behind the Scenes (End of Chapter) HR Policies Designed to Avoid Turbulent Labour Issues Critical Thinking Questions 1. Why would WestJet’s human resources managers need to be aware, well in advance, of the company’s plans to purchase more planes and open new offices in the upcoming year?

The human resources department has six major functions: planning for staffing needs, recruiting and hiring, training and development, appraising performance, managing compensation and benefits, overseeing employment status. In order to effectively execute the first element and plan for staffing needs the HR managers would need to have knowledge of a major capacity decision such as this one.

Obviously, more pilots, on-flight staff and support staff would need to be planned for well in advance of the key expansion date.

2. What do you think of WestJet’s group interview process? Would this approach fit a company like IBM? What are the advantages and disadvantages of the group interview approach?

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It is important to point out to the students that the group interview approach would probably not fit with all types of organizations. Some company’s like IBM have much more of a structured corporate culture which does not necessarily breed or even need overly-extroverted employees that this “WestJetter” process seems to seek.

The advantages are that this approach takes employees out of their shells and puts them in a group dynamic that helps to separate individuals. On the negative side it may unnecessarily punish individuals that have a harder time with a group process even though they may be great job candidates.

3. Why does WestJet offer an employee share-purchase plan? What are the disadvantages of this policy?

AnAn employee share-ownership plan (ESOP) aims to increase equity for the firm and for these very important contributing members of the company.44 The company brass hopes that this added incentive or stake in the company will make the typical employee more motivated and help to increase long term commitment and effort. The primary disadvantage of this policy is that when share prices fall the employee portfolio values follow. This can lead to a de-motivating feeling even if the day to day work is otherwise satisfying.

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

Answers to End-of-Chapter Questions Test Your Knowledge Questions for Review 1. What are the steps in human resources planning? What are some of the key issues at each stage?

The planning function consists of two steps: (1) forecasting supply and demand and (2) evaluating job requirements. HR managers consider a number of variables when estimating demand, including (1) predicted sales of the company’s goods and services; (2) the expected turnover rate, the percentage of the workforce that leave every year; (3) the current workforce’s skill level, relative to the company’s future needs; (4) upcoming strategic decisions that might affect the number and type of workers needed; (5) changes in technology or other business factors that could affect the number and type of workers needed; and (6) the company’s current and projected financial status.

The second step of the planning function is to evaluate job requirements. In large organizations where hundreds or thousands of employees are performing a wide variety of jobs, management needs a formal and objective method of evaluating job requirements. That method is called job analysis.

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2. What is the purpose of a job description? How is a job description different from a job specification?

Once a job analysis has been completed, HR develops a job description, which is a formal statement summarizing the tasks involved in the job and the conditions under which the employee will work. In most cases, the staff will also develop a job specification, a statement describing the skills, education, previous experience, and personal attributes that candidates need to possess to do the job effectively.

3. Describe three forms of incentives commonly offered by employers.

Many companies provide managers and employees with incentives or, cash payments that are linked to specific individual, group, or companywide goals; overall productivity; and company success. A bonus is a cash payment, in addition to the regular wage or salary that serves as a reward for achievement. Commissions are a form of compensation that pays employees a percentage of sales made. Finally, with profit sharing employees may be rewarded for staying with a company and they are encouraged to work harder; employees receive a portion of the company’s profits.

Depending on the company, profits may be distributed quarterly, semi-annually, or annually.

4. What is succession planning?

Every company has a number of employees and managers who are considered so critical to the company’s ongoing operations that HR managers work with top executives to identify potential substitutes in the event any of these people need to be replaced. This process is known as succession planning. These plans can cover owners, senior executives, researchers, top sales staff, and other vital members of the organization.

5. What function does an orientation program serve in both the short and long term?

Most companies begin the training process as soon as new employees join the workforce. These orientation programs usually include information about the company’s background and structure, equal opportunity practices, safety regulations, standards of employee conduct, company culture, employee compensation and benefits plans, work times, and other topics that newly hired employees might have questions about. Orientation programs help new employees understand their role in the organization and feel more comfortable.

Questions for Analysis 6. Why is employee retention important to companies? What steps can an organization take to improve its retention rates?

Employee retention is very important to companies because it is costly to recruit and train new employees. Once the company has invested in bringing a new recruit into the fold it is important that they maintain low turnover rates. Smart companies do all they can to ensure that employees feel supported and feel as though they can grow with a company. From orientation programs to support systems like daycare, EAP’s, and mentor systems companies are looking for ways to keep valuable employees.

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7. Overseeing changes in employment status is an important function of a human resources employee. What is the difference between attrition, layoffs, and worker buyouts?

Every company experiences some level of attrition, when employees leave for reasons other than termination, including retirement, new job opportunities, longterm disability, or death.

Layoffs are the termination of employees for economic or business reasons unrelated to employee performance. Another63 method a company may use to encourage retirement is to offer older employees financial incentives to resign, such as enhanced retirement benefits or one-time cash payments, called a worker buyout.

8. What are the advantages and disadvantages of Registered Retirement Savings Plans (RRSPs)?

RRSPs enable employees to put money aside, receive a tax benefit, and watch their money grow tax-free until retirement. Many companies provide a matching feature to their compensation plans which also helps employees. On the negative side RRSPs plans usually put the burden on workers to set aside money for retirement and invest funds wisely. Many people either procrastinate or don’t bother to do their homework.

9. ETHICAL CONSIDERATIONS: Corporate head-hunters 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.

Questions for Application 10. If you were on the human resources staff at a large health-care organization that was looking for a new manager of information systems, what recruiting method(s) would you use and why?

Several recruiting methods would be useful in this case. One is to seek referrals from other employees in the IS department, as they have likely worked with people who are possible candidates. Another method is to post the job opening on your company’s website and/or an online job service. This would be an especially effective method for finding an information systems professional, who probably spends a great deal of time working with computer networks. If these methods don’t produce a qualified candidate, a corporate head-hunter would be another viable option.

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 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 will more than likely 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 . 231

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. INTEGRATED: What are some of the human resources issues managers are likely to encounter when two companies (in the same industry) merge?

Student answers will vary. However, differences in corporate culture should be included in students’ answers. Also, companies would likely shift job descriptions, gain and lose employees, and require employees to learn new skills. Finally, managers might find that employees from different companies have received a different set of benefits and will need to incorporate new benefits into employee packages.

Practice Your Knowledge Sharpening Your Communication Skills

Visit the HRSDC website (Human Resources and Social Development Canada) at www.hrsdc.gc.ca/en/gateways/topics/yze-gxr.shtml to learn about youth employment. Look through the site in detail and then use the information on this website to write a short memo to your instructor summarizing what you’ve learned.

Student Answers will vary but should include some of the following: students summer job placement; career planning; training and learning.

Building Your Team Skills

Team up with a classmate to practise your responses to interview questions.

Use the list of common interview questions provided in Appendix C (Exhibit C.7) 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 these 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.

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 your local Sunday newspaper, the Globe and Mail, the National Post, and online sources such as Monster (www.monster.ca) find ads seeking applicants for positions in the field of human resources.

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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.

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.

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 work force or employee needs caused the company to adapt? What did the company do to respond to these changes? Was the company’s response voluntary or legally mandated?

Answers will vary according to 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 (baby boomer factor).

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 North American companies will become radically different.

3. What other changes in the work force 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. . 233

Answers to Boxed Features Box 1: New-Age Job Interviews: Are you Camera Friendly?

Have you taken a drama course? How are your acting skills? Do you come across well on screen? Are you afraid of the lights of a camera? You may be wondering where we’re going with this line of questioning. Let’s begin with some new-age human resource trends. According to Gordon Orlikow, a senior partner in the Toronto office of the executive recruiting company Korn/Ferry International, “approximately 30 percent of initial job interviews are conducted using a video link between candidates and human resources managers. This figure is up dramatically from about 2 percent just two years earlier.”

A few years ago, Donald Trump packaged his extended interview into a TV program meant to entertain and provide some indication of a bizarre version of the hiring process—The Apprentice. The show faded but the use of the camera lens is not farfetched or unrealistic; real practitioners are seeing the merits of using video equipment to manage their increasing time demands and to decrease costs. This video approach appears to be especially important for high-end executive positions, which tend to extend candidate searches over long distances to other parts of Canada and the world.

Many firms have used unconventional techniques for years, such as asking employees to perform improvisational skits to demonstrate their reactions to a fabricated situation. These approaches force candidates out of their comfort zone and put them under the spotlight. Now human resources managers are truly placing the spotlight on interviewees. So what can a candidate do to prepare for a video interview? A personal face-to-face interview allows the HR manager to focus on what the interviewee is saying, however, in a video interview on-screen appearance and presentation style tend to be more memorable. You can’t approach this type of interview with the same mindset.

Will this method continue to grow in popularity? We’ll find out. In the meantime, remember that you must tailor your interview preparation to the type of company, organizational culture, industry expectations and now the medium of delivery to be truly effective in any given situation.

Questions for Critical Thinking

1. What are the advantages and disadvantages of the video interview? Debate the issue with a classmate.

Student answers will vary but should include some of the following elements.

The video interview can reduce costs when candidates are being recruited from other cities or countries. It allows HR managers to see a candidate perform from a fresh perspective. Many people will say that the interview process is already like a play with actors and expected props (dress attire, specific mannerisms and scripts) so what is the problem? It is important to point out that this is a big step forward from a CV and that high end job interviews usually have a few rounds. This tool can be used as a good initial screening interview. However, it might be possible that a good candidate might be lost just simply because they are camera shy.

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2. How would you prepare for a video interview? What additional steps should you take beyond what you would do to prepare for a regular face-to-face interview?

The same rules apply to the conventional and this unconventional approach. Be presentable, be prepared, and ensure to conduct yourself with proper mannerisms and careful attention to detail. Perhaps a bit of make-up will be required to get across the right image but most importantly come prepared to answer questions and look into the camera as if you are speaking to an individual.

Box #2: Click and Learn: E-Training Today’s Employees According to the Conference Board of Canada, 77 percent of all Canadian employers now offer some form of e-training to their employees. At Rogers Communications, sales representatives can learn how to deal with routine inquiries and difficult customers with their interactive online role-play scenarios.25 Employers from automakers and software firms to hospitals and pharmaceutical companies are turning to computers to train their employees. Electronic training, or e-training (also known as e-learning), uses computers and live or taped webcasts, web-based selfpaced tutorials, and other forms of electronic media such as CD-ROMs to instruct employees on new products, customer service, sales techniques, and more. What makes e-training possible are the technological advances in today’s workplace— more desktop computers, increased Internet access, and more bandwidth.

Dell Computer expects 90 percent of its learning solutions to be totally or partially technology enabled. General Motors University uses interactive satellite broadcasts to teach salespeople the best way to highlight features on new cars. Pharmaceutical companies like Merck use live, interactive Internet classes to instruct sales reps on the latest product information rather than fly them to a conference centre. IBM has moved virtually all content of the first three phases of management training online for its first-line managers, eliminating the need to send them to offsite locations over the course of a training period that stretches over six months.

As these companies have learned, e-training has many benefits: Reduced costs. Much of the cost savings comes from reduced travel expenses and time savings. Intel has saved more than US$1 million annually by using e-training programs. “If we save our 70 000 employees just 20 minutes a year, that alone is $1 million in savings,” says one Intel training manager.

Increased productivity. “Our sales force can’t come in for three-day conferences ■ anymore,” says one Black & Decker vice-president. “But they still need to understand the company’s new products and features.” So the company has instituted online training courses—which means the company’s 700-person sales force can spend a combined 12 000 more days a year with customers.

Individualized pace. E-training allows you to learn at your own pace—skipping ■ over material you already know and spending more time on material that meets your specific needs. Canadian Tire offers a very diverse product line. Through e-training, employees are able to focus on specific areas where they lack knowledge.

Increased consistency. Companies can create one set of instructional materials ■ that is used consistently by everyone in the organization. Thus, all employees are learning the same thing—regardless of their location.

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Improved information sharing. E-training is effectively changing the way companies transfer knowledge and information to employees and customers.

Like many other Internet-related efforts in recent years, e-training saw a rapid rise followed by a period of rethinking when corporate trainers moved past the “geewhiz” factor and took a more objective look at what training technology really could—and couldn’t—offer. They began to appreciate the value of e-training, but also realized it wasn’t the solution to every training challenge and that impressive technology was no substitute for good instructional planning. As a result, many companies now emphasize blended learning, which is a combination of delivery methods. Wendy O’Brien of 3Com, a computer networking firm, says her team examines the content and audience of each training effort, along with parameters such as budgets and deadlines, before they choose a delivery method. By combining the best available methods in each individual case, 3Com keeps the focus on the learner rather than on the technology while still using e-training to its fullest potential.

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Questions for Critical Thinking Why is e-learning an increasingly popular training approach for companies?

The technological advances in today’s workplace—more desktop computers, increased Internet access, more bandwidth allows for e-learning. E-learning has many benefits including: reduced cost; increased productivity; individualized pace; and increased consistency.

1.

2.

How might an economic slowdown impact e-learning?

An economic slowdown may decrease the amount of money available for technological advances and the money available to companies for purchasing of these technologies.

Box 3: Show Me the Money: A Tale of Two Compensation Scales Compensation has become a hot topic in recent years, at both ends of the pay scale.

At the low end, many businesses, employees, and unions are wrestling with the downward pressure on wages, while at the top end; executive compensation has been in the headlines for the opposite reason.

Wal-Mart’s huge influence on the economy is undeniable. The company’s costconscious strategy indirectly affects thousands of people who have never even worked there. In addition to offering lower wages than many traditional grocery and retail stores, Wal-Mart squeezes every possible penny out of operating costs and is quick to import goods from China and other lower-cost countries when domestic suppliers can’t meet its demands. As a result, many companies now feel forced to lower their own costs to compete. For instance, as Loblaw, Sobeys, Zellers, and other stores try to compete with Wal-Mart, these retailers feel they have no choice but to cut costs in any way they can (including lower pay and/or fewer benefits).

Consumers, particularly low-income shoppers, benefit from Wal-Mart’s lower prices, and so do the company’s shareholders. However, lower wages also mean Wal-Mart employees are unable to spend more on consumer goods and services, and consumer spending is a major factor in the strength of the economy. As one researcher put it,

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“You can’t have every company adopt a Wal-Mart strategy. It isn’t sustainable.” Not all of Wal-Mart’s competitors are engaging in the “race to the bottom.” For example, Costco is succeeding with a different approach to compensation. Costco offers higher wages and better benefits—and yet still generates better financial results than WalMart’s Sam’s Club. Costco attributes much of its success to satisfied, motivated employees who are more productive and more eager to help customers.

At the upper end of the pay scale, executive compensation, and the pay of CEOs in particular, has generated its own controversy. CEOs typically receive complex compensation packages that include a base salary plus a wide range of benefits and bonuses, including golden handshakes when they join a company and golden parachutes when they leave. Part of the controversy stems from the widening gap between CEOs and their employees. A second aspect of the controversy can be traced to the lack of relationship between results and compensation. However, the boards of directors who grant these large packages generally defend them as necessary to retain key executives, but critics respond that many other CEOs earn far less and don’t leave in search of greener pastures.

Questions for Critical Thinking

1. How do companies justify decreasing lower-end employee compensation packages while maintaining or even increasing executive compensation packages?

As indicated in the feature, companies often justify huge pay increases or bonuses to top executives as a means of keeping or attracting these employees. When times are prosperous these practices don’t get much attention. However, it is difficult to defend it when low end employees are being asked to simultaneously accept a 1 dollar per hour pay cut. This sort of information leaks out from time to time and the contrast has made a few executives look quite greedy. Some have been asked to lower their compensation packages or return money while others have not been able to keep their posts because of outraged employees.

2. What do you think of the “Wal-Mart effect” on the economy? List the positive and negative contributions this company has made.

The Wal-Mart effect has had both a positive and a negative effect on the economy.

Student answers will vary. They will no doubt appreciate the downward pressures on prices that Wal-Mart has championed but this drive to lower prices means that employees at Wal-Mart and at some of their struggling competitors are paid lower wages. They are unable to spend more on consumer goods and services, and consumer spending is a major factor in the strength of the economy.

You’re e-Fired!

Imagine this scenario: You are sipping your morning coffee and get a message from human resources telling you that you are being let go. It could be followed by a message stating: “Please log off and remove your personal belongings.” To add a little insult to injury, there might be a smiley or sad face attached to the end of the message, with words like “Good luck” or “You have been a valuable contributing member” This chapter describes, in great length, the important role of human

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resources. Company websites are filled with pages that emphasize how much organizations care for the needs of their employees (“People are our number one asset,” “Employees are our partners,” etc.) The practice of getting the e-boot would seem to indicate otherwise.

That is exactly what happened to 400 employees at Radio Shack, and they’re not alone. Some managers who have been overwhelmed with major cuts have taken the short route. In Radio Shack’s defence, the company claimed that they had made announcements at meetings so employees were not caught off guard. The employees themselves used words like “dehumanizing,” “cowardly,” and “disrespectful.” Some things are better said in person, and there is probably nothing more insensitive than receiving bad news via email. Trends catch on quickly in the world of human resources; hopefully this is one that is soon forgotten. Companies must practise what they preach if they are to maintain a good reputation in the long run.

Questions for Critical Thinking 1. How does emailing termination notices affect a company’s long-term reputation? Why do you think employees were so upset with Radio Shack for their message?

Stakeholders can understand when a company needs to layoff a certain amount of employees to deal with an economic downturn. However, people must be treated with respect. The notion of a mass or even individualized email messages to announce a job loss is both insensitive and foolish. For one thing, some of these workers may be recalled at a future date so the human touch is necessary. Even in the case of permanent termination you are still dealing with a person that will rightfully spread the word about their former employer and will at a minimum never frequent the retail outlets again.

2. How should companies handle mass layoffs?

Student answers will vary but the human element is a key to this process. It is not an easy decision and the process should not be automated.

See It on the Web URLs for all Internet exercises are provided at the website for this book, www.pearsoned.ca/bovee. When you log on to the text website, select Chapter 9, then select Web Destinations, click on the name of the featured website, and follow the detailed navigational directions to complete these exercises.

Explore these chapter-related websites, review their content, and answer the following questions for each website you visit: 1. What is the purpose of this website?

2. What kinds of information does this website contain? Please be specific.

3. How is the information provided at this website useful for businesspeople?

Consumers?

4. How did you expand your knowledge of human resources management by reviewing the material at this website? What new things did you learn about this topic?

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Explore the Latest Workforce Management Ideas Visit Workforce Management online to see what management leaders are thinking about month by month (requires registration to read most articles, but it's free). The Community Center hosts a number of forums in which you can read questions, answers, and commentary from working HR managers. The Research Center lists a wide range of topics to explore in the HRM field. www.workforce.com

1. What is the purpose of this website?

This comprehensive online resource provides HR professional with current, vital information related to the HR profession.

2. What kinds of information does this website contain? Please be specific.

This website offers information on the following: trends in recruiting, compensation, benefits, employee satisfaction; top recruiting markets for occupations that interest you; layoff reports; employment markets and trends, labor statistics, recruiting methods, links to job fairs and conventions in a variety of industries; retention efforts 3. How is the information provided at this website useful for businesspeople? Consumers?

The information provided on the website is very useful to businesspeople, as they are always relying on information regarding trends, markets, etc. Also, the recruiting and retention techniques can assist businesspeople in finding the right employees.

Consumers can look to this site for information on job fairs, top recruiting markets, etc.

4. How did you expand your knowledge of human resources management by reviewing the material at this website? What new things did you learn about this topic?

Student responses will vary.

Staying on Top of the World Like all areas of business, the world of human resources changes quickly. To stay informed about trends in recruiting, compensation, benefits, and employee satisfaction, turn to HR.BLR.com. Browse through some of the top recruiting markets for occupations that interest you. This comprehensive online resource provides HR professionals with information about employment markets and trends, labour statistics, recruiting methods, layoffs, and much more.

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http://hr.blr.com/

1. What is the purpose of this website?

While student responses may vary, the following will address some possible answers.

This comprehensive online resource provides HR professional with current, vital information related to the HR profession.

2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers.

This website offers information on the following: trends in recruiting, compensation, benefits, employee satisfaction; top recruiting markets for occupations that interest you; layoff reports; employment markets and trends, labour statistics, recruiting methods, links to job fairs and conventions in a variety of industries; retention efforts 3. How is the information provided at this website useful for businesspeople? Consumers?

While student responses may vary, the following will address some possible answers.

The information provided on the website is very useful to businesspeople as they are always relying on information regarding trends, markets, etc. Also, the recruiting and retention techniques can assist businesspeople in finding the right employees.

Consumers can look to this site for information on job fairs, top recruiting markets, etc.

4. How did you expand your knowledge of human resources management by reviewing the material at this website? What new things did you learn about this topic?

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

Maximizing Your Earning Potential You know you should be making more money. So now what? Log on to www.salaryexpert.com to find out what people in your field are making across Canada. Sharpen your skills and knowledge so you can get the job, salary, and benefits you deserve.

1. What is the purpose of this website?

While student responses may vary, the following will address some possible answers. www.salaryexpert.com provides a wide variety of resources related to salary issues.

2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers.

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This website contains information on the following Personal Salary Reports, Salary calculators, career salary reports as well as cost of living reports.

3. How is the information provided at this website useful for businesspeople? Consumers?

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

4. How did you expand your knowledge of human resources management by reviewing the material at this website? What new things did you learn about this topic?

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

Chapter 9 Pop Quiz: 1. A job ______________ is a formal statement summarizing the tasks involved in the job and the conditions under which the employee will work. A job __________________ is a statement describing the skills, education, and previous experience that the job requires. a. description; specification b. specification; description 2.

Companies have to be very careful when developing application forms and conducting interviews so as not to be discriminatory and to stay within the limits of the law. Which of the following represents a legal interview questions? a. Do you have children? b. Do you own or rent a home? c. Have you ever been arrested? d. Do you have any work-related experience?

3.

____________tests can be used to assess overall intellectual ability, attitudes toward work, interests, managerial potential, or personality characteristics-including dependability, commitment, and motivation. a. Job-skills b. Psychological c. Drug d. Job Analysis

4. A planning tool that identifies the most vital employees in the organization and any available information related to their potential replacement. a. replacement chart b. succession plan c. Gantt chart d. MBO chart

5. The ultimate goal of performance appraisals is not to judge employees but rather to improve their performance.

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a. true b. false 6. The __________________review solicits feedback from colleagues above, below, and around the employee to provide observations of the person’s performance in several skill and behavioural categories. a. orientation b. 360 degree c. on-the-job d. up-and-down 7. Which of the following is not an example of an employee incentive? a. bonuses b. commissions c. profit sharing d. insurance 8. ______________ is a program enabling employees to become partial owners of a company. a. RRSPs b. 401Ks c. HRSDC d. ESOP 9. Wellness programs have been reported to reduce absenteeism, health care costs, sickness, and work-related accidents, thereby serving as a benefit to both the employer and the employee. a. true b. false 10. Which of the following is NOT an advantage of worker buyout? a. This method can be a lot less expensive than firing or laying off employees. b. The morale of the remaining employees is preserved because they feel less threatened about their own security, c. younger employees see increased chances for promotion a. the risk of age-discrimination lawsuits is minimized.

Answers to Pop Quiz: 1. a 2. d 3. b 4. a 5. a 6. b 7. d 8. d 9. a 10. a

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Chapter 10 Motivating Today’s Workforce and Handling Employee-Management Relations Learning Objectives 1 2 3 4 5 6 7 8 9

Identify the importance of maintaining a motivated workforce and the key elements behind the various motivational theories Compare Maslow’s hierarchy of needs and Herzberg’s two-factor theory and explain their application to employee motivation Explain why expectancy theory is considered by some to be the best description of employee behaviour Discuss three staffing challenges employers are facing in today’s workplace Explain the challenges and advantages of a diverse workforce Discuss three popular alternative work arrangements companies are offering their employees Understand the role of unions and the challenges of reaching a collective bargaining agreement in the modern era Cite three options unions can exercise when negotiations with management break down Cite three options management can exercise when negotiations with a union break down

Summary of Learning Objectives 1

Identity the importance of maintaining a motivated workforce and the key elements behind the various motivational theories Organizations must balance the diverse needs of employees with those of management. Maintaining high employee morale is a key element to competing because the employees are on the front line of client interactions and motivated employees are more likely to be positive and productive. In this chapter, various theories were examined to shed light on what it takes to motivate people. These theories focus on three primary elements: needs, actions, and outcomes.

2

Compare Maslow’s hierarchy of needs and Herzberg’s two-factor theory and explain their application to employee motivation Maslow’s hierarchy organizes individual needs into five categories and proposes that the individual must satisfy the most basic needs before being able to address higherlevel needs. Based on the assumption that employees want to “climb to the top” of Maslow’s pyramid, managers should provide opportunities to satisfy those higherlevel needs. Herzberg’s two-factor theory covers the same general set of employee needs but divides them into two distinct groups. His theory suggests that hygiene factors—such as working conditions, company policies, and job security—can influence employee dissatisfaction, but an improvement in these factors will not motivate employees. Only motivational factors such as recognition and responsibility can improve employee performance.

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3

Understand expectancy theory, which is considered by many experts to be the best explanation of employee motivation Expectancy theory suggests that the effort employees put into their work depends on expectations about their own ability to perform, expectations about the rewards that the organization will give in response to that performance, and the attractiveness of those rewards relative to their individual goals. This is considered by many to be a good model of employee behaviour because it considers the linkages between effort and outcome. For instance, if employees think a linkage is “broken,” such as having doubts that their efforts will yield acceptable performance or worries that they will perform well but no one will notice, they’re likely to put less effort into their work.

4 Discuss three staffing challenges employers are facing in today’s workplace A shortage of skilled labour, rightsizing the workforce, and an increasing employee desire to balance work and life responsibilities are making it difficult for employers to find and keep talented people. The factors contributing to these staffing challenges are the increasing use of technology in the workplace, a robust economy, the conversion of a manufacturing-based economy to a service-based economy, a general mismatch between employee job skills and job demands, declining employee loyalty, and increasing employee burnout.

5 Explain the challenges and advantages of a diverse workforce Smart business leaders recognize that diverse workforces bring a broader range of viewpoints and ideas, they help companies understand and identify with diverse markets, and they enable companies to tap into the broadest possible pool of talent.

Supervisors face the challenge of communicating with these diverse employees, motivating them, and fostering cooperation and harmony among them. Teams face the challenge of working together closely, and companies are challenged to coexist peacefully with business partners and with the community as a whole.

6

Discuss three popular alternative work arrangements companies are offering their employees.

To meet today’s staffing and demographic challenges, companies are offering their employees alternative work arrangements. Three of the most popular are flextime (the ability to vary their work hours), telecommuting (the ability to work from home or another location), and job sharing (the ability to share a single full-time job with a co-worker).

7

Understand the role of unions and the challenges of reaching a collective bargaining agreement in the modern era After years of corporate rightsizing and outsourcing, the role of the modern union has changed—even if some union leaders refuse to accept it. Competing in a global economy has forced many firms to abandon former practices and reduce cost structures with dramatic moves. Unions will still flex their muscles in times of prosperity, but economic downturns and intense competition have forced many bargaining units to re-evaluate their goals and negotiate under new terms.

8 Cite three options unions can exercise when negotiations with management break down Unions can conduct strikes, organize boycotts, and use publicity to pressure management into complying with union proposals. A strike is a temporary work stoppage, which the union hopes will cost management enough in lost earnings so

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that they will be forced to accept union demands. A boycott is a union tactic designed to pressure management into making concessions by convincing sympathizers to refuse to buy or handle the product of the target company. A negative publicity campaign against the target company is a pressure tactic designed to smear the reputation of the company in hopes of spurring management into action.

9 Cite three options management can exercise when negotiations with a union break down To pressure a union into accepting its proposals, management may continue running the business with strike-breakers (non-union workers hired to do the jobs of striking workers), institute a lockout by preventing union employees from entering the workplace, or seek an injunction against a strike or other union activity. Strikebreakers are not permitted by law in British Columbia and Quebec.

Brief Chapter Outline I. Understanding Human Relations II. Motivating Employees A. What is Motivation?

B. Theories of Motivation 1. The Hawthorne Effect 2. Maslow’s Hierarchy of Needs 3. Herzberg’s Two-Factor Theory 4. McGregor’s Theory X and Theory Y 5. Ouchi’s Theory Z 6. Equity Theory 7. Expectancy Theory C. Motivational Strategies 1. Setting Goals 2. Reinforcing Behaviour III. Keeping Pace with Today’s Workforce A. Staffing Challenges 1. Shortage of Skilled Labour 2. Rightsizing a. Employee Loyalty b. Employee Burnout 3. Quality of Work Life B. Demographic Challenges 1. Workforce Diversity a. The Globalization of the Workforce b. The Aging of the Workforce c. Gender Equality d. Sexual Harassment 2. Diversity Initiatives C. Alternative Work Arrangements 1. Flextime 2. Telecommuting 3. Job Sharing V. Working with Labour Unions A. The Collective Bargaining Process 1. Meeting and Reaching an Agreement

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2. Exercising Options When Negotiations Break Down a. Labour’s Options b. Management’s Options C. The Labour Movement Today

Lecture Notes and Chapter Outline I.

Understanding Human Relations A. High morale: maintaining a positive attitude toward both your job and organization B. Human relations: interactions among people within the organization. The goal of human relations, in organizations, is to balance the diverse needs of employees with those of management II. Motivating Employees A. Motivation: the inner force that moves individuals to take action B. Every motivational approach needs t consider three key factors: Need, Action and Outcome III. Theories of Motivation A. Scientific Management: developed by Frederick W. Taylor A. Sought to improve employee efficiency through the scientific study of work B. Taylor believed people wee motivated almost exclusively by money C. Setup piecework system: pay system that rewarded employees when they were productive D. Scientific management fails to take into account other motivational factors B. The Hawthorne Effect A. A landmark study in understanding complex employee motivational factors B. Among the key findings: individuals are often driven by internal feelings of importance and respond to attention and feedback C. Maslow’s Hierarchy of Needs A. Theory proposed by Psychologist Abraham Maslow B. Behaviour is determined by a variety of needs C. Five categories of needs arranged in a hierarchy: a. Physiological needs: all of the requirements for basic survival—food, clothing, shelter ¾ located at the very bottom of hierarchy ¾ physiological needs need to be satisfied before the person can consider other higher-level needs b. Safety needs: the need to feel safe and secure c.

Social needs: the need to give and receive love and feel a sense of belonging d. Esteem needs: the need for a sense of self-worth and integrity e. Self-actualization: the need to become everything one can become ¾ located at the very top of the hierarchy ¾ people feel their work is satisfying and worthwhile in itself 4.

Maslow’s hierarchy should not be viewed as a rigid sequence: a person need not completely satisfy each level of needs before being motivated by a higher need; most people are motivated by a combination of needs at any given time

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FOR DISCUSSION Ask students to discuss which of Maslow’s hierarchy of needs affects them most right now. Do they believe that those same sets of needs will hold true ten years from now? Why or why not? Are certain businesses well-suited to fulfilling certain needs? Is there a way to change jobs to allow them to fill several types of needs at once?

D. Two factor theory A. 1960s Herzberg studied human needs and determined that two sets of factors were associated with satisfying and dissatisfying work experience: a. Hygiene factors: associated with dissatisfying experiences ¾ working conditions ¾ company policy ¾ job security ¾ resemble Maslow’s lower level needs b. Motivators ¾ achievements ¾ recognition ¾ responsibility ¾ Resemble Maslow’s higher level needs E. Theory X and Theory Y A. Psychologist Douglas Macgregor identified two different sets of assumptions underlying management actions in the 1960s a. Theory X: managers believe employees dislike work and can be motivated only by extrinsic rewards (money, promotions) and fear of job loss ¾ emphasizes physiological and safety needs and authority b. Theory Y: managers believe that employees like work and can be motivated by working for goals promoting creativity ¾ emphasizes growth and self-direction F. Theory Z A. Developed by William Ouchi, who studied Japanese and U.S. Management practices a. Assumes that employees are more motivated if you involve them in all aspects of a company decision making and treat them like family b. Employees feel more responsible for the outcome of their efforts c. Theory Z is the core of practices such as self-directed work teams, quality circles, other forms of participative management G. Equity Theory a. Suggests employee satisfaction depends greatly on their perceived ratio of inputs to outputs 1. The employee makes a comparison of their perceived inputs/efforts with what they receive back/outputs and judges this against what their coworkers inputs and outputs are 2. It is important to realize this ratio is based on the perception of the employee making the comparison

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b. Results in states of equity or inequity, with employees typically seeking to have equity within their workplace c. A state of inequity results in the employee making a decision which will cause the inequity to go away---quits job, requests a transfer, puts forth less efforts, etc.

H. Expectancy Theory a.

Is perhaps the best theory to offer an explanation of employee motivation b.

The amount of efforts an employee puts forth is directly related to the outcome they receive from those efforts c.

Relates specifically to the process employees follow when seeking satisfaction within their workplace. d.

Links rewards received with an individual employee’s goals, as shown in Exhibit 10.4 of the text.

IV. Motivational Strategies A. Goal Setting Theory- motivational theory which states that setting goals can be an effective way to motivate employees B. Management by Objectives (MBO): a company wide process that empowers employees and involves them in goal setting and decision-making. a. The process involves four steps: (1)Setting goals; (2)Planning actions; (3)Implementing plans; (4) Reviewing performance b. Collaborative goal-setting: the manager and employee work together to define the employee’s goals, the responsibilities for achieving those goals, and the means of evaluating individual and group performance so that the employee’s activities are directly linked to achieving the organization’s long-term goals C. Behaviour modification a. Managers systematically encourage desirable actions and discourage undesirable actions b. Offer rewards such as gifts, medals, dinners, trips c. Provide an atmosphere that maintains high morale (positive attitude toward job) D. Positive reinforcement: offers pleasant consequences (such as a gift, praise) for completing or repeating a desired action E. Negative reinforcement: allows a person to avoid unpleasant consequences (fear of losing a job) by behaving in the desired way.

IV. Keeping Pace with the Changing Work Force A. Staffing Challenges A. Finding, attracting, and keeping talented people B. Right-sizing workforces C. Satisfying employee’s desire for a work-life balance D. Shortage of skilled labour a. Demand for people with engineering, computer, and other technical skills b. Growing occupations require more skills, while shrinking occupations involve activities that require fewer skills c. Nearly all jobs today require computer literacy d. Companies are reacting by: ¾ revamping rigid pay systems to make it easier for employees to move laterally and enhance their skills

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¾ installing new career-development programs to help employees plan their career move ¾ instituting educational programs to attract and keep skilled employees E. Rightsizing a. Factors contributing to downsizing: ¾ company reorganizations ¾ business downturns ¾ elimination of unprofitable product lines ¾ outsourcing ¾ mergers and acquisitions ¾ general mismatch between employee job skills and job demands b. There is a concurrent trend towards upsizing (massive hiring) within the same firm c. Rightsizing: realigning workforces into business growth areas, e.g.: Employees from Department A are let go while new hires are sought to keep up with the growth demands of Department B d. Rightsizing is a contributing factor to declining employee loyalty e. Due to corporate downsizing and restructuring, employees lost job loyalty f. Employees are aware that employers will downsize, close down plants, or manufacture in other countries in order to remain competitive g. Rightsizing is putting pressure on remaining employees to work longer hours h. Employee Burnout: results in emotional exhaustion, depersonalization, and lower levels of achievement i. Sources of employee burnout: ¾ job insecurity: workers anxious about job security feel they have to give 150 percent (or more) or risk being seen as expendable ¾ technological advancements: because new technology allows more people to work from home, being wired to the office 24 hours a day can be stressful. ¾ information overload: managers claim they are unable to handle the vast amounts of information they now receive F. Quality of work life: the environment created by work and job conditions a. To help employees balance demands of work and family, businesses offer child care assistance, family leave, flexible work schedules, telecommuting b. Job enrichment: reduces specialization and makes work more meaningful by expanding each job’s responsibilities c. Job redesign: restructures work to provide a better fit between employees’ skills and their jobs B. Demographic challenges A. Workforce diversity a. Managing the changing mixture of ages, faces, values, and views is increasingly difficult b. Diverse workforces: wide range of skills, traditions, backgrounds, experiences, outlooks, attitudes toward work, language and communication challenges

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c. Influx of Immigrants: ¾ immigrants---legal and illegal---now make up about 13 percent of the nation’s workers ¾ helps to hold down wages in unskilled jobs and provides companies with the numbers of employees they need to expand d. Aging Population ¾ baby boomers participate in today’s labour market------predicted to work into their 70s ¾ late retirement will cause problems: companies have less tolerance for people earning more than their worth; older employees may not be able to keep up pace; benefits cost more e. Diversity Initiatives ¾ to cope with increasing workforce diversity, many companies offer employees sensitivity or awareness training to help them understand the various attitudes and beliefs that minorities and immigrants bring to their jobs ¾ a company stands to benefit most when it incorporates its employees’ diverse perspectives into the organization’s work----enables company to uncover new opportunities by rethinking primary tasks and redefining markets, products, strategies, missions, business practices, and even cultures.

B. Gender–Related Issues a. Sexism: job discrimination on the basis of gender b. The Glass Ceiling ¾ invisible barrier that keeps women and minorities from reaching the highest level positions ¾ diversity initiatives help to shatter the glass ceiling (long term commitments to hire more women, company-sponsored networking, and career planning) c. Sexual harassment: defined ¾ obvious request for sexual favours with implicit work-related reward or punishment ¾ more subtle creation of sexist environment in which employees are made to feel uncomfortable by off-color jokes, lewd remarks, and posturing ¾ companies must train employees on sexual harassment policy and must have clear procedures for reporting such behavior C. Alternative Work Arrangements A. Flextime: a scheduling system that allows employees to choose their own hours within certain limits a. Flextime reduces turnover, enables the company to adapt to business cycles, allows operations of a round-the-clock business, helps maintain morale and performance after reengineering or downsizing b. Some drawbacks: supervisors feel less in control when employees are coming and going; co-workers who resent flextimers B. Telecommuting: working from home or another location using computers and telecommunications equipment to stay in touch with employer’s offices a. 20-58% of employers now offer telecommunications arrangements for their employees

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b. Saves companies money on overhead and space costs c. Enables companies to hire talented people in distant areas, widening job pool d. Employees like telecommuting because they can set their own hours, reduce job-related expenses, and spend more time with their families e. Challenges: ¾ midlevel manages relinquish direct, visual employee supervision ¾ difficult to manage people you do not see ¾ people working at home may slack off ¾ possible cause of weakening company loyalty ¾ management has to teach an employee how to think like a telecommuter FOR DISCUSSION Telecommuting is a hot issue these days as we enter an era of Internet communications.

More and more workers are choosing to telecommute rather than putting in time at the office daily. But with this innovation comes problems. Telecommuters sometimes feel left out of events or “out of the loop,” whereas non-telecommuters feel overburdened sometimes by the work that gets passed their way because telecommuters are inaccessible. Are there ways to alleviate the stress for both types of employees? What do students think?

C. Job sharing: Allows two employees to share a single full-time job and split the salary and benefits a. Usually offered to employees who need to cut back on their hours b. Company benefits because the position is rarely left uncovered during vacation or illness and two people (instead of one) are bringing their ideas and creativity to the job. c. Employees get more time at home V. Working with labour unions A. Labour Unions: organizations that seek to protect employee interests by negotiating with employers for better wages and benefits, improved working conditions, and increased job security 1.

Historically, labour unions have been largely responsible for the establishment of worker’s compensation, child-labour laws, overtime rules, minimum-wage laws, severance pay, and more.

2. Unions give employees strong bargaining power----this is why employees who feel they are not treated well by management turn to unionization 3. Many feel that unions stifle individual initiative and are not necessary to ensure fair treatment from employers.

4. Companies that have most successfully resisted unionization seem to have adopted a participative management style and an enhanced sense of responsibility toward employees B. The collective bargaining process 1. Collective bargaining: union and management negotiators work together to forge the human resources policies that will apply to the unionized employees—and other employees covered by the contract—for a certain period of time, usually three years.

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2. Meeting and reaching an agreement a. Representatives of the union and management meet and discuss issues point by point b. If negotiations reach an impasse, mediation (bringing in an impartial party to make recommendations for resolution) may be called for c. If an agreement cannot be reached, negotiators may submit to arbitration (a process in which an impartial referee listens to both sides and makes a judgment by accepting one side’s view) 3. Exercising options when negotiations break down a. Labour’s options ¾ strike: a temporary work stoppage aimed at forcing management to accept union demands ¾ boycott: union members and sympathizers refuse to buy or handle the product of a target company ¾ publicity: often called corporate campaigns, labour targets a company by staging rallies during peak business hours, sending letters to charitable groups questioning executive’s motives ¾ slowdown: continue to do jobs but at a snail’s pace ¾ sickout: employees feign illness and stay home b. Management’s Options ¾ Strike-breakers: non-union workers hired to do the jobs of striking workers (illegal in Quebec and British Columbia) ¾ lockouts: management prevents union employees from entering the workplace in order to pressure the union to accept a contract proposal ¾ injunctions: a court order prohibiting union workers from taking certain actions C. The Labour Movement Today a. Many unions are sticking to traditional causes----good wages, safe conditions, and benefits b. Progressive labour leaders are pursuing new workplace issues such as job security, increasing healthcare costs, labour involvement in management decisions, child care, and more job training c. Today’s global economic conditions severely limit the ability of unions to regain the strength they once had

Potential Difficulties and Suggested Solutions 1.

Students (especially those who have no previous work experience) may not completely understand that money is not the only thing that motivates people. As our society becomes more educated, the focus (while people will always be motivated by money) changes to such things as quality of work life and continuing education. To emphasize this, you may want to ask the students to do the following: ¾ Ask students to interview 3-5 individuals who are employed. Using the theories described in the chapter, each group should prepare a list of questions to try to uncover what motivates each of the people interviewed. **The students should conclude that, indeed, individuals are not all motivated in the same manner. There are many differences and it is management’s job to identify what motivates each individual and utilize that information to maximize the performance of that employee.

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Behind the Scenes Employee Relations in Good Times and Bad Times Test Yourself Answers to these questions can be found on the website: www.pearsoned.ca/bovee.

1. Why is it so important for Bombardier to maintain positive relations with its employees?

Employees are important stakeholders and management must maintain positive relations with its employees for long-term success. Employees who maintain high morale or a positive attitude toward both their job and organization perform better.

But cultivating high morale is an ongoing challenge, in good times and bad.

2. What steps can Bombardier take to help maintain morale at its existing North American plants?

Student answers will vary, but it is important to note that the company must provide open communication with its current employees. Obviously, job security is a central issue so long-term contracts are the ultimate solution to these concerns but the groundwork is set in the years preceding a CBA negotiation with an open win-win approach with its unions.

3. Bombardier’s unions have lost a great deal of their power in recent years.

How does this impact their negotiations approach during future collective bargaining rounds?

Union- management negotiations are based on relative power and the ability to exert pressure. With the increased pressure from global sources and the threat of job losses to foreign low-cost labour markets Bombardier’s unions are facing a much more difficult challenge than they faced even a decade ago. With this in mind union approaches may be more conciliatory and work with management to find solutions.

The unions still have very important allies. Both Federal and Provincial governments have subsidized this company and exert influence especially in the area of job security.

Behind the Scenes (End of Chapter) Bombardier: Flying Through Turbulent Skies Critical Thinking Questions 1. In this chapter we have examined employee loyalty and burnout. How do these concepts apply to Bombardier’s recent staffing policies?

Employee loyalty and burnout are affected by working conditions, unionmanagement relations and the most recent history of the firm. Employees at Bombardier had long enjoyed the company’s success but the grim reality attached to this negative string of lay-off announcements has had a tremendous effect on its employees. When employees watch as 20,000 jobs are slashed they realize that their position is not secure. They deal with the loss of friends and colleagues and they

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must cope with the adjusted workload on their plates. In such downsizing periods reduced employee morale is a major factor.

2. Do you believe that it is inevitable that many or most of the assembly jobs will end up being outsourced to China or other locations abroad?

If we objectively look at the trends in other industries it is easy to conclude that these manufacturing jobs are heading to low cost destinations. The recent announcement

by Bombardier, to send its harness assembly positions to Mexico, is just the tip of the iceberg. For many years, the argument was that the assembly of high-tech products like airplanes would be safe but the reality is that there are plenty of highly trained people across the globe that can easily perform the routine standardized functions involved in these positions. It is important to emphasize to the students that the main reason that more jobs have not been outsourced in this industry are the truckloads of government dollars that are provided to support this industry. (This is also a topic that can be used to stimulate an interesting debate in the class.)

3. Bombardier’s decision to build the C-Series is a major issue for its workforce. As key stakeholders, what role can the firm’s employees play in the process?

Stakeholders can exert influence on governments; employees can help to secure such deals by signing a long term collective bargaining agreement to provide stability and by agreeing to certain concessions.

4. Do you think Bombardier should proceed with the C-Series project? List the pros and cons.

How do you think Boeing and Airbus will respond if Bombardier moves forward with the C-Series project?

Student answers will vary.

Pros: more competitive portfolio; growth opportunities; supplies the needs of many current clients; keeping up with Embraer Cons: tremendous up front investment; entering Airbus and Boeing’s competitive field of vision; stretching resources too thin The ultimate launch customer is still being pursued by Bombardier for its C-series.

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

Answers to End-of-Chapter Questions Test Your Knowledge Questions for Review 1. Herzberg’s two-factor theory identifies two entirely different sets of factors that lead to satisfying and dissatisfying work experiences. What are they?

Explain.

Frederick Herzberg’s two-factor theory identifies two entirely different sets of factors associated with satisfying and dissatisfying work experiences: hygiene factors and motivators. What Herzberg called hygiene factors are associated with dissatisfying experiences. The potential sources of dissatisfaction include working conditions, company policies, and job security. Management can lessen worker dissatisfaction by

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improving hygiene factors that concern employees, but such improvements seldom influence satisfaction. On the other hand, managers can help employees feel more motivated and, ultimately, more satisfied by paying attention to motivators, such as achievement, recognition, responsibility, and other personally rewarding factors.

2. How can an organization improve the overall quality of work life (QWL) to improve employee motivation?

Many companies are focusing on improving the quality of work life (QWL), the environment created by work and job conditions. Hewlett-Packard is addressing the fundamental problems of how much time a job really demands and how to build a life beyond work by encouraging employees to set leisure goals and focus on developing their personal lives. As Hewlett-Packard knows, an improved QWL benefits both the individual and the organization. Employees gain the chance to use their specialized abilities, improve their skills, and balance their lives. The organization gains a more motivated and loyal employee.

3. What is meant by telecommuting? What are the advantages and disadvantages of this practice from an employer’s perspective? From an employee’s perspective?

Telecommuting allow an employee to work from home or another location using computers and telecommunications equipment to stay in touch with colleagues, suppliers, and customers—provides another dimension of flexibility. Telecommuting offers many advantages. For one thing, it can save companies money by eliminating offices people don’t need, consolidating others, and reducing related overhead costs.

Telecommuting also enables a company to hire talented people in distant areas without requiring them to relocate. Employees also like telecommuting because they can set their own hours, reduce job-related expenses like commuting costs, and spend more time with their families. Telecommuting can also raise outputs and morale by disconnecting employees from unproductive environments in the office, such as noisy working conditions. Telecommuting does have potential limitations. One of the most commonly expressed concerns is work–life balance, with employees struggling to shut down their work lives so they can participate in their home lives. Some managers struggle with a perceived loss of control over employees they can’t see.

Others are concerned that people working at home will slack off or that telecommuting could cause resentment among office-bound colleagues or weaken company loyalty.

What tactics can management use to put pressure on a union?

As powerful as union tactics are, companies are not helpless when it comes to fighting back. Management can use a number of legal methods such as: strikebreakers (except in BC and Quebec), lockouts, and injunctions.

4.

5. What factors lead to employee burnout?

Employee burnout is a major problem and it is being caused by many workplace factors: r ightsizing is putting pressure on remaining employees to work longer hours; job insecurity- wworkers anxious about job security feel they have to give more or risk being seen as expendable; tttechnological advancements- new technology allows employees to work from home, but being wired to the office 24 hours a day can add extra pressure; and information overload- managers claim they’re unable to handle the vast amounts of information they now receive.

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Questions for Analysis 6. There are various motivational theories, but they all consider three key elements: needs, actions, and outcomes. Explain Maslow’s hierarchy of needs with these three elements in mind.

Every theory or motivational approach needs to consider three key factors: 1. Need- the employee senses a need of some sort, from the basic need to earn enough money to buy food, to a need for recognition or self-respect. 2. Action- to fulfill the need, the employee engages in actions or behaviours that he or she believes will result in the need being satisfied. 3. Outcome- the employee observes the outcome of the action and determines whether the effort was worthwhile. Actions that result in positive outcomes are likely to be repeated; those that result in negative outcomes are less likely to be repeated. Abraham Maslow proposed the theory that behaviour is determined by a variety of needs. He organized these needs into five categories and then arranged the categories in a hierarchy. The most basic needs are at the bottom of this hierarchy and the more advanced needs are toward the top. In Maslow’s hierarchy, all of the requirements for basic survival—food, clothing, shelter, and the like—fall into the category of physiological needs. These basic needs must be satisfied before the person can consider higher-level needs such as safety needs, social needs (the need to give and receive love and to feel a sense of belonging), and esteem needs (the need for a sense of self-worth and integrity). These needs help explain the likely actions that individuals will take in search of a satisfactory or predictable outcome.

7. Compare and contrast equity theory and expectancy theory. Which theory seems to make the most sense from your point of view? Discuss this with a classmate.

Students answers will vary but should address the following elements.

Equity theory suggests that employee satisfaction depends on the perceived ratio of inputs to outputs. If you work side by side with someone, doing the same job and giving the same amount of effort, only to learn that your colleague earns more money than you, would you be satisfied in your work and motivated to continue working hard? You perceive a state of inequity, so you probably won’t be happy with the situation. In response, you might ask for a raise, decide not to work as hard, try to change perceptions of your efforts or their outcomes, or simply quit and find a new job; any one of these steps could bring your perceived input/output ratio back into balance. Expectancy theory 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.

8. What is the difference between mediation and arbitration?

Mediation is a process for resolving a labour contract dispute in which a neutral third party meets with both sides and attempts to steer them toward a solution. With arbitration an impartial third party studies the issues and makes a binding decision.

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9. Why do employees choose to join labour unions? Why do they not join labour unions?

Employees form and join labour unions to protect their interests when those interests conflict with employers’ policies and practices. Employees are particularly likely to join unions if they’re dissatisfied with job and employment conditions, if they believe the union can improve job conditions, and if they can overlook the negative stereotypes of unions. Employees don’t join unions when they believe that doing so will stifle individual initiative and won’t help to ensure fair treatment by employers.

10. ETHICAL CONSIDERATIONS: You’ve got a golf game scheduled for Sunday afternoon, and you’ve worked all weekend to write a proposal to be presented Monday morning. The proposal is more or less finished, but a few more hours of work would make it polished and persuasive. Do you cancel the game?

This question speaks to the need of employees trying to balance their work lives and home lives. The answer to this question depends on the needs of the individual employee. If the employee feels the need to balance work and free time, he or she might want to take the time to play golf. However, if the employee feels the need to “get ahead” at work, he or she might decide to stay home and polish the proposal.

Questions for Application 11. Some of your talented and hardworking employees come to you one day and say they do not feel challenged. They expected to be able to diversify their skills more and take on greater responsibility than they now have. How do you respond?

This can be a difficult situation if the employee works in a narrowly defined job function. However, because she is a dedicated worker who shows promise, it is in the long-term best interest of the company for you to help her grow and remain happy. Sit down with her and discuss what skills she feels she can be using more to contribute to the organization’s goals. Find out what skills she would like to develop more and try to come up with ways for her to sharpen those skills. The company may have a training program, or another employee might be able to use her help on a project. Have her develop some personal goals that mesh with the organization’s goals. If the goals are appropriate, help her efforts to achieve them.

12. Assume you are the plant manager for a company that manufactures tires for cars and light trucks. To compete more economically in the global market, the company is seriously considering closing the plant within the next year and moving manufacturing operations to Southeast Asia. Upon hearing about the possible plant closing, the union votes to launch a strike in one week if its demands for job security aren’t met. Because of a recent surge in orders, the company is not in a position to close the plant yet. What are your options as you continue to negotiate with union representatives?

Which option would you choose and why?

Options include bringing in strike-breakers, using management and other employees to take over the jobs of striking workers, locking the employees out of the plant, or giving in to employee demands. Seeking an injunction would not be an option in this case. Likewise, it is probably too late for an industry pact to have much effect. A good first step is to try to work with union negotiators to identify ways that both the company’s and the employees’ interests can be met. One example is to offer job training and placement services in the event the plant does end up closing. However,

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if the union refuses to budge, strike-breakers, and perhaps even permanent replacement workers, may be necessary.

13. INTEGRATED: How do economic concepts such as profit motive and competitive advantage (see Chapter 1) affect today’s workforce?

Profit motive and competitive advantage (seeking an advantage over other companies in terms of price, service, quality or innovation) seek to keep companies competitive in an increasingly broad market. To do this, companies have downsized, hired temporary workers, and laid-off unskilled employees. Firms have also increased the number of technically skilled employees as we become a more technical world.

While these actions improve the overall quality of employees, they have created anxiety in today’s workforce.

14. INTEGRATED: Why is it difficult for small businesses to allow employees to telecommute, share jobs, and work flexible hours?

Answers may vary according to the students’ knowledge of small business operations and staffing. Small businesses do not have extra employees and usually have employees doing many different jobs, thereby making it necessary for employees to be physically at work for the work hours of the small business.

Practise Your Knowledge Sharpening Your Communication Skills As the director of public relations for a major airline your job is to prepare news releases should the pilots decide to strike. This is a challenging task because many people will be affected by the strike. Being a good communicator, you know that one of the first things you must do before preparing a message is to analyze the audience. Think about an airline strike and answer these questions briefly to practice this important communication technique: 1. What groups of people do you think would be interested in the information about the airline strike?

Student answers will vary. However, anyone who travels has a vested interest in an air strike. Furthermore, people whose business depends on airlines will have a particular interest in the airline strike. Encourage students to consider corollary services that depend upon airports including service industries operating at airports such as: vendors, public transportation, shuttle services, car rental agencies, railway services, buses, taxi services, hotels, and motels. All such industries will be affected.

2. What do you think each of these groups would want to know about most?

Answers will vary depending on groups chosen. Likely, most interested parties will want to know the terms of the strike and how the negotiations are proceeding.

3. How might they react to the information you will provide?

Answers will depend on the groups chosen. However, remind students that for some groups, an airline strike could be considered a boon. Railway services, buses, and car rentals might experience a deluge of business during airline strikes, for example.

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Building Your Team Skills Debate the pros and cons of telecommuting for an accounting, computer programming, or graphics design firm. Break into groups of four students with two students taking the employees’ pro side, and the other two taking management’s con side. As you prepare for this debate, consider the following factors: employee motivation, staffing challenges, quality of work life, costs, control, and feasibility.

During your team’s debate, let one side present its arguments while the other side takes notes on the major points. After both sides have completed their presentations, discuss all the supporting points and try to reach a consensus as to whether or not your firm will support telecommuting. Draft a one-page statement outlining your team’s conclusion and reasoning, and then share it during a class discussion.

Compare your team’s conclusion and reasoning with those of other teams. Do most teams believe telecommuting is a good or bad idea? What issues do most teams agree on? What issues do they disagree on?

Student Answers will vary.

Expand Your Knowledge Discover Career Opportunities Is an alternative work arrangement such as flex-time, job sharing, or telecommuting in your career future? This exercise will help you think about whether these work arrangements fit into your career plans.

1. Look at the list of possible business careers in Appendix C (Exhibit C.1) on the website. Of the careers that interest you, which seem best suited to flex-time? To job sharing? To telecommuting?

When making these decisions, students should consider the duties of the job and whether or not it could be completed with little or no interaction with colleagues.

Jobs that require a lot of time with other colleagues, in meetings, or dealing with production would not be well suited to telecommuting. Jobs that require a lot of interaction with customers or clients are not well suited to flex-time.

2. Select one of the careers that seems suited to telecommuting. What job functions do you think could be performed at home or from another remote location?

Answers will vary depending on students’ responses.

3. Thinking about the same career, do you think it would be possible to split the job’s responsibilities with a co-worker under a job-sharing arrangement? What issues, if any, might you need to resolve first?

Answers will vary depending on students’ responses. Be sure to support students in considering the ways in which a team approach could help them to view the duties of their jobs in a new way.

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Developing Your Research Skills Select one or two articles from recent issues business journals or newspapers (print or online editions) that relate to employee motivation or morale.

1. What is the problem or trend discussed in the article(s) and how is it influencing employee attitudes or motivation?

Answers will vary, as they will depend upon the articles selected by the students.

2. Is this problem unique to this company, or does it have broader implications? Who is affected by it now, and who do you think might be affected by it in the future?

Answers will vary, as they will depend upon the articles selected by the students.

3. What challenges and opportunities does this situation present to the company or industry? The employees? Management?

Answers will vary, as they will depend upon the articles selected by the students.

Box 1: Too Many Workers? Not for Long Focused on today’s labour problems, most companies aren’t looking too far around the bend. But when they do, they’re in for some big surprises. According to demographers and economists, labour shortages—especially of skilled employees— will become a central issue for companies looking to acquire and retain staff.

Companies in Canada and the rest of the industrialized world will face an unprecedented problem. As the baby boomers (people born between 1947 and 1966) retire, the labour pool will have trouble keeping up. In 2001, a report by the Conference Board of Canada indicated that the baby-boom generation made up 47 percent of the labour force. By 2010 the projected retirements will create shortages, especially in areas of technology, health care, and manufacturing.

The problems become clearer when we examine specific scenarios. John Murphy, executive vice-president of human resources at Ontario Power Generation (OPG), faced the following issue: the average age of his workforce was 45 and he projected that the organization would need to replace more than a quarter of its 11 000 staff members within five years. Many of these individuals were top-level engineers and managers who would be taking valuable skill sets with them.

Japan, with one-fifth of the population already over 65, has already begun to feel the effects of this demographic nightmare. The government is stepping up its campaign to maintain the workforce with initiatives to increase the retirement age from 60 to 65 and with programs to encourage more women to join the workforce or to stay home and have more babies. Improved maternity benefits and tax breaks for growing families appear to be just the beginning.

While a labour shortage presents tremendous hurdles for employers, it brings opportunity for employees. A slower-growing workforce could indeed shift the balance of power to workers, forcing employers to hike wages, add daycare centres, increase flexible work hours, provide more training, and develop innovative ways to attract and retrain existing employees. RBC Financial Group accommodates its diverse employees by promoting growth initiatives; each year 12 000 members of the

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70 000 workforce move to new positions they find through internal postings.

Additionally, as the projected shortages become clearer, older workers could suddenly take on value as a skilled pool of labour. At RBC Financial Group, retirees can work part time for up to 30 months without incurring a penalty on their pension.

In Canada, the problem is compounded when you consider that about 40 000 skilled individuals leave the country every year for other opportunities or better pay in the United States or abroad. Bottom line: Employers that refit the work environment to appeal to both young and old, experienced and inexperienced, native and immigrant workers will end up in the best position. But they must begin making such changes now by training and recruiting valuable human resources.23 Questions for Critical Thinking 1. Why do experts predict a skilled labour shortage in the near future?

With the baby boomers aging and the percentage of women choosing to stay at home with children on the rise, experts predict that the growth of the labour force will remain at a crawl for decades to come. Finding enough college-educated workers will become tougher if the demand for skilled labour continues at the pace of the past two decades.

2. What can employers do to prepare for a future skilled-labour shortage?

Employers that refit the work environment to appeal to young and old, experienced and inexperienced, native and immigrant, will end up in the best position. Employers can: add day-care centers, provide flexible work hours, provide more training, and develop innovative ways to attract and retain existing employees.

Box 2: Chuckle While You Work Lighten up. Let loose. Laugh a little. Experts are now advising managers to make company-sponsored fun a fundamental part of work. That’s because after experiencing more than a decade of restructuring, downsizing, and re-engineering, employees could use a laugh or two. In fact, a recent survey of 1300 corporate managers showed that more than 60 percent disagreed with the statement “I have fun at work these days.”

“Because we spend more of our waking hours working than doing anything else, fun should be a very fundamental part of work,” notes one expert on human behaviour. In fact, workplace fun is increasingly important because today’s jobs are more insecure and more competitive than they once were. Furthermore, camaraderie is diminishing as employees spend more and more time relating to machines than to each other; they often eat lunch at their desks, or they work from home.

Although traditional business wisdom says that people having fun on the job are probably slacking off, studies show that a happy workforce is also a productive one.

For one thing, a little wisecracking and laughs can go a long way toward relieving stress. Moreover, fun can raise a company’s bottom line by improving health, reducing absenteeism, boosting morale, building teamwork, releasing creativity, improving productivity, and increasing enthusiasm. So while the pursuit of fun may

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seem frivolous to the serious-minded, more and more companies are beginning to see the value of a good hearty laugh or a little giggle now and then.

Take Sprint, for example. Recent company-sponsored fun days encouraged employees to wear clothes backwards and to go on a photo safari with disposable cameras, taking candid photos of other employees. At Lands’ End—voted as one of the best places to work—employees can participate in the company’s “Cruise Room,” where reps can enjoy calypso music and fruit punch on their breaks. Other companies have organized employee costume parties, hosted goofy birthday celebrations, and sponsored fun-filled weekends at hotels. Still others are lifting the workplace spirit by hanging funny signs and posters in offices, holding a messiest desk contest with prizes, and posting comic strips and snapshots on company bulletin boards. These companies and others recognize that if work is fun, people will want to come to work. “Our people are our most important assets,” says one executive. “We try to make work a fun place where they can stay as long as they want and get excellent benefits.”

Questions for Critical Thinking 1. Under which level of Maslow’s hierarchy of needs would you place having fun at work?

Having fun at work would fit under social needs. Although it has an impact on a variety of other needs such as improved morale and lower stress therefore better health (safety) and happy workers are productive workers possibly resulting into higher salary and recognition (esteem), having fun involves a sense of belonging, enjoying, and having fun with others at work 2. Would a manager who promoted workplace fun be Theory X or Theory Y oriented?

Theory Y: managers believe that employees like work and can be motivated by working for goals promoting creativity, they emphasize growth and self-direction. A manger who promoted workplace fun would be Theory Y oriented.

Box # 3: Wal-Mart and the U-Word Wal-Mart—the world’s largest company—has long resisted unionization. Sam Walton, who founded the firm, believed that unions are divisive and unnecessary, especially in light of Wal-Mart’s benefits and open-door policy. All Wal-Mart employees are encouraged to voice their complaints and recommendations to management. Additionally, Wal-Mart keeps on top of workplace issues by conducting regular surveys to measure employee contentment. To keep employees motivated, store managers are given authority to solve problems, stock clerks are promoted to managerial positions, and all workers are encouraged to participate in the company’s stock ownership plan. Of course, this is the company’s perspective.

On the other side of the debate, many would argue that Wal-Mart simply wants to control its employees and will do anything in its power to destroy union initiatives and keep wages low. Canadian outlets are leading the fight to unionize the company in North America. A store in Jonquière, Quebec, was the first Wal-Mart outlet in North America to unionize. The company began negotiations on the first contract

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with the union, but Wal-Mart warned that the store was unprofitable and that an unfavourable deal would force the company to close it. A few months later, after some initial talks, Wal-Mart announced that it was closing the outlet. To thwart other unionization attempts, the company has gone to the Quebec Court of Appeal to fight a certification in Gatineau, and a store in Saint-Hyacinthe shortly after that.

In Weyburn, Saskatchewan, a drive to unionize an outlet has led to a lengthy fight in court and a promise by the company to take its appeal all the way to the Supreme Court of Canada if necessary. It followed through on the promise, but the Supreme Court sided with previous rulings. This after the Saskatchewan Labour Relations Board decided to force Wal-Mart to hand over certain documents that were used to squash union drives. Among the controversial papers was an internal managerial manual entitled “Toolbox to Remaining Union Free.”

Questions for Critical Thinking 1) Why are Wal-Mart executives so concerned about the potential unionization of stores in Canada?

A strong union can stand up to a large organization and force management to agree to wage increases and improved work conditions that will negatively affect the bottom line. Wal-Mart’s whole retail strategy is based on supply chain efficiency and cost leadership (passing low costs to consumers in the form of low prices). Unions drive up wages. Even more concerning to company management is the potential for other individuals to gain courage from the actions of other stores. The big concern for WalMart is not one or two stores in Canada, but rather a potential wave of unionization that could hit its stores across the continent.

2) What can employers do to help reduce the chances that their employees will unionize?

Employers cannot legally stand in the way of a unionization drive, as long as the employees follow the rules. However, companies often make implicit threats that employees hear loud and clear. Such was the case a few years ago when employees of a McDonald’s, in downtown Montreal, passed the first hurdle to unionization but the owners followed through and shut down the location soon after. Was this location truly unprofitable? Major companies can play hardball with employees and cross the line into the realm of the marginally or blatantly unethical. However, another approach is to maintain a positive relationship with the employees and create an environment in which employees lack the incentive to unionize.

See It on the Web URLs for all Internet exercises are provided at the website for this book, www.pearsoned.ca/bovee. When you log on to the text website, select Chapter 10, then select Web Destinations, click on the name of the featured website, and follow the detailed navigational directions to complete these exercises.

Explore these chapter-related websites, review their content, and answer the following questions for each website you visit: 1. What is the purpose of this website?

2. What kinds of information does this website contain? Please be specific.

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3. How is the information provided at this website useful for businesspeople?

Consumers?

4. How did you expand your knowledge of motivation and employeemanagement relations by reviewing the material at this website? What new things did you learn about these topics?

Working Hard on the Web Frustrated workers and managers now have a place to go to voice their opinions, commiserate with others, and get advice on how to motivate employees. The place is Hard@Work, a website created "to reduce the oversupply of fear and alienation in the workplace by meeting the pent-up demand for constructive communication about what's happening on the job." Visitors can hang around the "Water Cooler" to chat with others about work issues and careers; play "Stump the Mentor," which offers suggestions for handling sticky work situations; or dig into the "Rock Pile," which features realistic case studies. Hard@Work offers something for workers and job seekers alike. www.hardatwork.com 1. What is the purpose of this website?

While student responses may vary, the following will address some possible answers.

Hard@Work is a website created “to reduce the oversupply of fear and alienation in the workplace by meeting the pent-up demand for constructive communication about what’s happening on the job.”

2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers. This website provides information on: how employees can avoid layoffs, lessons learned at work, administrative work, discussions about promotions, rewards, recognition.

3. How is the information provided at this website useful for businesspeople? Consumers?

While student responses may vary, the following will address some possible answers.

This is a very good website for businesspeople to visit in order to obtain valuable advice and/or information on how to handle difficult (sticky) work situations and to chat with others about HR issues.

Consumers can look to this site for informative/educational purposes to obtain information about careers in HR, etc.

4. How did you expand your knowledge of motivation and employeemanagement relations by reviewing the material at this website? What new things did you learn about these topics?

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

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Learn the Language of Equal Opportunity The Human Resources and Social Development Website offers an extensive array of information online for both employees and employers. Explore the categories of employment discrimination and learn how the government defines each type. Learn more about the employment laws that employers are expected to follow, or see the steps employees can take when they feel they have been discriminated against. http://www.hrsdc.gc.ca/en/lp/spila/clli/eslc/01Employment_Standards_Legislatio n_in_Canada.shtml 1. What is the purpose of this website?

The website’s purpose is to provide information and details regarding legislation, laws, and other topics pertaining to equal employment opportunity.

2. What kinds of information does this website contain? Please be specific.

The website provides information regarding discriminatory practices, how to file claims, training and outreach programs, statistics on employment and enforcement, as well as information pertaining to employers.

3. How is the information provided at this website useful for businesspeople? Consumers?

By providing definitions on what acts are discriminatory, identifying these practices, and offering insight into how to file claims, the website is useful for both businesspeople and consumers by making them aware of what constitutes discrimination and how to react if exposed to such a situation. For employers the site is also valuable in that it assists the firm in providing training for employees to ensure all are aware of the extent of discriminatory practices.

4. How did you expand your knowledge of motivation and employeemanagement relations by reviewing the material at this website? What new things did you learn about these topics?

Student responses will vary.

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Telecommuting Your Way to Success Does telecommuting reality match the hype? Follow the links at this website and decide for yourself. Read the guidelines and articles. Learn some telecommuting basics to find out if you possess the skills and qualifications required to succeed in telecommuting. Get some facts and figures so you can use them effectively in a telecommuting proposal to your boss. Then read some success stories. Finally, explore your flexible options by learning about other alternative working arrangements. Which ones are suited to you? http://mobileoffice.about.com/ 1. What is the purpose of this website?

While student responses may vary, the following will address some possible answers.

The purpose of this website is to provide information, including guidelines and articles, about telecommuting.

2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers.

This website provides information on the following: basics of telecommuting; facts and figures so you can use them effectively in a telecommuting proposal to your boss; success stories; information on other alternative working arrangements; cost savings as a result of telecommuting; connections, glossaries.

3. How is the information provided at this website useful for businesspeople? Consumers?

While student responses may vary, the following will address some possible answers.

This information is useful for businesspeople because it provides helpful information about telecommuting, the benefits (including cost savings, etc).

Facts and figures are also presented that support telecommuting in a business environment.

Consumers can gain valuable knowledge about telecommuting for informative or educational purposes.

4. How did you expand your knowledge of motivation and employeemanagement relations by reviewing the material at this website? What new things did you learn about these topics?

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

Spreading the Union Message The CAW and the UFCW are two powerful unions in the nation. These sites are designed to educate members and prospective members about union activities and campaigns. Topics include union membership campaigns, safety and family issues,

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and much more. Browse these sites to get the latest on union initiatives as well as information about trends in the labour movement today. http://www.caw.ca/index.asp http://www.ufcw.ca/ 1. What is the purpose of this website?

While student responses may vary, the following will address some possible answers.

The site is designed to educate members and prospective members about union activities and campaigns.

2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers.

This website provides the following: extensive collection of statistics, information, and commentaries on union issues and programs; union membership campaigns, safety and family issues; latest on union initiatives; information about trends in the labour movement today; worker’s rights; working families agenda; how and why people join unions.

3. How is the information provided at this website useful for businesspeople? Consumers?

While student responses may vary, the following will address some possible answers.

This website is useful for both businesspeople and consumers because it provides information such as what is listed above (#2). This information can help both businesspeople and consumers to understand the importance of employee participation and involvement on the job. Businesspeople can learn to encourage employee involvement and include employees in the decisionmaking process. Consumers and businesspeople can also view the online directories with the e-mail addresses of members of Congress plus sample letters to encourage communication with legislators.

4. How did you expand your knowledge of motivation and employeemanagement relations by reviewing the material at this website? What new things did you learn about these topics?

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

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Focusing on E-Business in Action Job Recruiting Moves Online Questions for Critical Thinking 1. How are job seekers and employers using the Internet in the recruiting process?

Companies have discovered that the Internet is a fast, convenient, and inexpensive way to find prospective job candidates. And job candidates are finding that the Internet is a convenient way to gather company information, search for job vacancies, and post résumés for large-volume distribution using career websites such as Monster.com, HotJobs.com, and CareerBuilder.com.

2. What are the benefits and drawbacks of Internet recruiting?

The benefits of Internet recruiting stem from the following: speed, reach, and cost savings.

Some drawbacks of Internet recruiting include: The Internet produces more job applicants than ever before. The number of résumés one company received went from 6,000 to 24,000 annually after going online. The increased volume of résumés makes it more difficult to cull promising candidates from unqualified ones. Companies get résumés from far away places such as Albania and Timbuktu. Another drawback is that not everyone has Internet access or uses the Internet to search for jobs.

3. What steps would you take to make your résumé stand out among the thousands that are transmitted electronically? {Hint: think of content.} Student answers will vary.

Chapter 10 Pop Quiz: 1. Every theory or motivational approach considers three key elements: need, action and ___________. a. outcome b. negative reinforcement c. feelings d. morale 2.

In Taylor’s view of _______________ people were motivated almost exclusively by money. a. management by objectives b. scientific management c. participative management d. equity theory

3.

In Maslow’s hierarchy, the requirements for basic survival -food, air, waterfall into the category of ___________needs. a. self-actualization b. safety c. physiological d. social

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4.

Theory _____ assumes that employees are more motivated if you involve them in all aspects of company decision making and treat them like family. a. Z b. Y c. X d. A

5.

Consider the following scenario: Employees from Department A are let go while new hires are sought to keep up with the growth demands of Department B. What term best describes this situation? a. Downsizing b. Rightsizing c. MBO d. Theory X

6. Which of the following is not a source of employee burnout? a. job security b. technological advancements c. information overload d. all of the above are sources of employee burnout 7. The _______________is an invisible barrier that keeps women and minorities from reaching the highest-level positions. a. glass ceiling b. hierarchy of needs c. two-factor theory d. wood floor 8.

____________is a scheduling system that allows employees to choose their own hours within certain limits. a. Telecommuting b. Flextime c. job sharing d. split work arrangement

9. Labour unions are organizations that seek to protect employee interests by negotiating with employers for: a. better wages and benefits b. improved working conditions c. increased job security. d. all of the above 10. Both labour and management are able to draw on many powerful options when negotiations or mediation procedures break down. Which of the following is not an option available for labour? a. strikes b. boycott c. publicity d. lockouts

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Answers to Pop Quiz: 1. a 2. b 3. c 4. a 5. b 6. a 7. a 8. b 9. d 10. d

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Chapter 11: Developing Product and Pricing Strategies Learning Objectives 1 2 3

Explain what marketing is and describe the four utilities created by marketing Explain why and how companies learn about their customers Describe how the organizational-customer decision process differs from the consumer process 4 Outline the three steps in the strategic marketing planning process 5 Define market segmentation and cite six factors used to identify segments 6 List the steps involved in developing new products 7 Highlight the four stages in the life cycle of a product and the marketing focus of each stage 8 Understand the important role of branding and the strategies used to build and maintain brand equity 9 Discuss the functions of packaging and labelling 10 Identify four ways of expanding a product line and discuss two risks that product-line extensions pose 11 List seven factors that influence pricing decisions and cite five common pricing methods

Summary of Learning Objectives 1 Explain what marketing is and describe the four utilities created by marketing Marketing is the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational objectives. Marketers enhance the appeal of their products and services by adding utility. Form utility is created when companies turn raw materials into finished goods desired by consumers. Time utility is created by making the product available when the consumer wants to buy it. Place utility is created when a product is made available at a location that is convenient for the consumer. Possession utility is created by facilitating the transfer of ownership from seller to buyer.

2

Explain why and how companies learn about their customers

Companies learn about their customers so they can stay in touch with their current needs and wants, deliver quality products, and provide good customer service. Such attention tends to keep customers satisfied and helps build long-term loyalty.

Moreover, studies show that sales to repeat customers are more profitable. Most companies learn about their customers by studying consumer behaviour, conducting marketing research, and capturing and analyzing customer data.

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3 Describe how the organizational-customer decision process differs from the consumer process.

Purchasing behaviour of organizations (which includes businesses, non-profit organizations, and governments) is easier to understand because it’s driven by monetary issues, not emotions. There tends to be a formal buying process within organizations and there are many people involved in analyzing a major purchase decision. There is also a closer relationship with buyers and sellers that have been built over time.

4

Outline the three steps in the strategic marketing planning process

The three steps in the strategic marketing planning process are (1) examining your current marketing situation, which includes reviewing your past performance, evaluating your competition, examining your internal strengths and weaknesses, and analyzing the external environment; (2) assessing your opportunities and setting your objectives; and (3) developing your marketing strategy, which covers segmenting your market, choosing your target markets, positioning your product, and creating a marketing mix to satisfy the target market.

5

Define market segmentation and cite six factors used to identify segments

Market segmentation is the process of subdividing a market into homogeneous groups to identify potential customers and to devise marketing approaches geared to their needs and interests. The six most common factors used to identify segments are demographics, geographics, psychographics, geodemographics, behaviour, and usage.

6

List the steps involved in developing new products

Product strategies are among the most difficult and important decisions managers need to make, since products can take months or years and millions of dollars to introduce to the marketplace. To maximize the chances of success, companies will usually take a careful seven-step approach: (1) Generate new ideas; (2) Develop and screen product concepts; (3) Develop marketing strategies; (4) Analyze business potential; (5) Design and develop the products; (6) Test the market; (7) Commercialize.

7 Highlight the four stages in the life cycle of a product and the marketing focus of each stage Products start in the introductory stage where marketers focus on stimulating demand for the new product. As the product progresses through the growth stage, marketers focus on increasing the product’s market share. During the maturity stage, marketers try to extend the life of the product by highlighting improvements or by repackaging the product in different sizes. Eventually, all products move to a decline stage, where the marketer must decide whether to keep the product and reduce its costs to compensate for declining sales or discontinue the product altogether.

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8 Understand the important role of branding and the strategies used to build and maintain brand equity Creating a recognized and respected brand name with consumers is a central goal of all firms. Brand names may be owned by manufacturers, retailers, wholesalers, and a variety of business types. Brand equity is a term used to describe the extra value a brand name provides to a product beyond its functional benefits. It can be loosely compared to stock value. It is directly linked to issues like customer satisfaction, value, and long-term integrated marketing communication effects. It is established by the consumers’ experiences and views of the brand name.

9

Discuss the functions of packaging and labelling

Packaging provides protection for the product, makes products easier to display, and attracts attention. In addition, packaging enhances the convenience of the product and communicates its attributes to the buyer. Labels help identify and distinguish the brand and product. They provide information about the product—including ingredients, risks, shelf life, and operating procedures, and they contain UPC codes, which are used for scanning sales information and monitoring inventory and pricing.

10 Identify four ways of expanding a product line and discuss two risks that product-line extensions pose A product line can be expanded by filling gaps in the market, extending the line to include new varieties of existing products, extending the brand to new product categories, and stretching the line to include lower- or higher-priced items. Two of the biggest risks with product line extensions include a loss of brand identity (weakening of the brand’s meaning) and cannibalization of sales of other products in the product line.

11 List seven factors that influence pricing decisions and cite five common pricing methods

Pricing decisions are influenced by manufacturing and selling costs, competition, the needs of wholesalers and retailers who distribute the product to the final customer, a firm’s marketing objectives, government regulations, consumer perceptions, and consumer demand. Five common pricing methods are cost-based pricing, price-based pricing, skimming, penetration pricing, and discounting.

Brief Chapter Outline I.

What is Marketing?

A. Marketing defined 1. Place marketing 2. Cause-related marketing B. The role of marketing in society 1. Needs and wants 2. Exchanges and transactions a. Exchange process b. Transaction . 273

3. The four utilities a. Utility b. Form utility c. Time and place utility d. Possession utility C. The marketing concept 1. Marketing concept 2. Understanding today’s consumers a. Today’s consumers b. The buyers decision process c. Factors that influence the buyer’s decision process d. The organizational-customer decision process e. Marketing research and customer database D. Building relationships with customers 1. Relationship marketing 2. Benefits of maintaining long-term relationships with customers (CRM) 3. One-to-one marketing a. Four key steps to putting effective one-to-one marketing program in place II. Planning Your Marketing Strategies A. Strategic marketing planning 1. Step 1: Examining your current marketing situation a. Reviewing past performance b. Evaluating competition c. Examining internal strengths and weaknesses d. Analyzing the external environment 2. Step 2: Assessing your opportunities and setting your objectives a. New marketing opportunities b. Marketing objectives 3. Step 3: Developing a marketing strategy to reach those objectives a. Marketing strategy b. Dividing markets into segments c. Choosing your target markets d. Positioning your product e. Developing the marketing mix III. Developing Product Strategies A. Types of products 1. Product continuum 2. Service products 3. Consumer products a. Convenience products b. Shopping products c. Specialty products d. Unsought goods 4. Organizational products a. Expense items b. Capital items c. Classification of products B. The product life cycle 1. Introduction 2. Growth .

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3. Maturity 4. Decline C. Product identities 1. Creating brand identity 2. Branding a. Brand names b. Brand mark c. Trademark d. National brands e. Private brands f. Generic brands g. Co-branding h. Brand Equity 3. Packaging 4. Labelling D. Product-line and product mix strategies 1. Product line 2. Product mix 3. Expanding the product line IV. Developing Pricing Strategies A. Factors affecting pricing decisions 1. Manufacturing and selling costs 2. Competition 3. Needs of wholesalers and retailers 4. Firm’s marketing objectives 5. Government regulations a. Price fixing b. Price discrimination c. Deceptive pricing 6. Consumers’ perceptions 7. Consumer demand B. Cost-based and price-based pricing 1. Cost-based pricing 2. Price-based pricing C. Price skimming D. Penetration pricing E. Price discounts

Lecture Notes and Chapter Outline I.

What is marketing?

A. American Marketing Association defines marketing as planning and executing the conception, pricing, promotion and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational goals 1. Place marketing: describes efforts to market geographical areas ranging from neighbourhoods to entire countries 2. Cause-related marketing: promotes a cause or social issue (physical fitness, recycling, or highway safety)

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B. The role of marketing in society 1. Needs and wants a. A need represents the difference between your actual state and ideal state (If you are thirsty you need to drink: water is sufficient) b. Wants are based on needs but are often shaped by advertising and experiences. (You might crave Pepsi to quench your thirst: if you want Pepsi more than other beverages, your craving is a Want) WHAT DO STUDENTS THINK? Ask students to consider the difference between their needs and wants. Have students take 5 minutes to write out a list of needs versus wants to share with the class. What items do students agree on? What items do students disagree on? Would these lists change if students had less income? Would these lists change if students had more income?

2. Exchanges and transactions a. Exchange process: trading something of value for something else of value b. Transaction: the point at which an exchange occurs (e.g.: party A gives part B a dollar in exchange for a Coke) 3. The four utilities a. Utility: something of value to customers (refer to Exhibit 11.2) b. Form utility: when organizations change raw materials into finished goods c. Time and place utility: when firms make products available when and where customers want them d. Possession utility: the satisfaction that buyers get when they actually possess a product, both legally and physically C. The Marketing Concept 1. Marketing concept: an underlying philosophy that guides all marketing decisions and activities that is based on the idea that companies should stress customer needs and wants, while seeking long-term profitability and coordinating their own marketing efforts to achieve the company’s long-term goals.

FOR DISCUSSION Ask students to make the connection between the changing face in production and the changing face of customer relationships. In an era of outsourcing, what can companies do to differentiate themselves and their products? Consumers who are becoming more and more knowledgeable about products and can access information from many different sources via the Internet have different needs—what are those needs?

2. Understanding today’s consumers a. Today’s customers are sophisticated, price-sensitive, demanding, and informed b. The buyer’s decision process: (refer to figure 11.3) ¾ identifying a problem ¾ look for a solution to your problem ¾ if none of the more obvious solutions seem satisfying, gather additional information . 276

¾ consumers are now ready to make a choice ¾ evaluation of choices ¾ cognitive dissonance: buyer’s remorse---after making a major purchase, thinking about all the alternatives you rejected and wondering whether one of them might have been a better choice c. Factors that influence the buyer’s decision process ¾ Culture: the cultures and subcultures that people belong to shape their values, attitudes, and beliefs and influence the way they respond to the world around them ¾ Social class: members of various classes pursue different activities, buy different goods, shop in different places, and react to different media ¾ Reference groups: consists of people who have a good deal in common: family members, friends, co-workers, sports enthusiasts, music lovers, computer buffs. ¾ Self-image: the tendency to believe that “you are what you buy” is especially popular among young people. ¾ Situational factors: events or circumstances in people’s lives that are more circumstantial but that can influence buying patterns; i.e. being in a hurry, celebrating a holiday.

WHAT DO STUDENTS THINK? Ask students to take five minutes to assess themselves as buyers. Ask students to consider the brands and products they buy most frequently. Then ask students to consider why they buy those brands or products. Which of the above factors affects them most? Do they, for example, use the laundry detergent brand that their mothers used? Are they attracted by the image that certain products present? Do they buy whatever is cheapest or on sale? Do they buy products recommended to them by friends or coworkers? What would a marketer have to do to affect their purchases? d. The organizational-customer decision process is different from the individual decision process in various ways: ¾ Organizational decisions emphasize economic payback and rational factors. A consumer can afford to buy on a whim, however, if that same individual is responsible for a business purchase they must be able to point to rational quantifiable reasons. ¾ Formal buying process and participation of multiple individuals: organizations tend to have clear steps and established roles for various members that must be followed in making any significant purchases. ¾ Closer relationships between buyers and sellers: long-term relationships tend to develop as sellers try to deliver good service in order to maintain trust and increase their ability to sell to clients over the long run. e. Marketing research and customer databases ¾ Market research: the process of gathering and analyzing information about customers, markets, and related marketing issues. . 277

¾ Database marketing: process of recording and analyzing customer interactions, preferences, and buying behaviour for the purpose of contacting and transacting with customers.

D. Building relationships with customers 1. Relationship marketing: focuses on establishing a learning relationship with each customer. Thus, the relationship between customer and company does not end with the sales transaction; instead it is viewed as an ongoing process 2. Maintaining long-term relationships with customers has many benefits: a. Acquiring a new customer can cost up to five times as much as keeping an existing one b. Long-term customers buy more, take less of a company’s time, bring in new customers, and are less price-sensitive c. Satisfied customers are the best advertisement for a product d. Firms perceived to offer superior customer service find that they can charge as much as 10 percent more than their competitors e. Research shows that dissatisfied customers may tell as many as 20 other people about their bad experiences.

3. One-to-one marketing: involves individualizing a firm’s marketing efforts for single customer to accommodate the specific customer’s needs a. Four key steps to putting an effective one-to-one marketing program in place are: ¾ identifying your customers ¾ differentiating among them ¾ interacting with them ¾ customizing your product or service to fit each individual customer’s needs II. Planning Your Marketing Strategies A. Strategic marketing planning: a process that involves three steps (refer to Exhibit 11.4) 1. Step 1: Examining your current marketing situation a. Reviewing past performance b. Evaluating competition c. Examining internal strengths and weaknesses d. Analyzing the external environment; some external factors include: ¾ economic conditions: marketers are greatly affected by trends in interest rates, inflation, unemployment, personal income, and savings rates ¾ Natural environment: changes in the natural environment can affect marketers, both positively and negatively. ¾ Social and cultural trends: if social trends are running against a product, the producer might need more advertising to educate consumers about the product’s benefits or alter the product to make it more appealing ¾ Laws and regulations: virtually every task you will encounter in marketing is affected in some way by laws and regulations ¾ Technology: when technology changes, so must your marketing approach

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2. Step 2: Assessing your opportunities and setting your objectives a. New marketing opportunities: ¾ selling more of your existing products in current markets (market penetration) ¾ creating new products for your current markets (new product development) ¾ selling your existing products in new markets (geographic expansion) ¾ creating new products for new markets (diversification) b. Marketing objectives ¾ a common marketing objective is to achieve a certain level of market share: a firm’s portion of the total sales within the market ¾ objectives are specific and measurable

3. Step 3: Developing a marketing strategy to reach those objectives a. Marketing strategy: consists of dividing your market into segments and niches, choosing your target markets and the position you would like to establish in those markets, and then developing a marketing mix to help you get there. b. Dividing markets into segments: ¾ markets contain all customers or businesses who might be interested in a product and can pay for it ¾ market segments: homogeneous groups of customers within a market that are significantly different from each other ¾ market segmentation: grouping customers with similar characteristics, behaviours, and needs ¾ goal of market segmentation is to understand why certain customers buy what they buy so you can sell them your products and services by targeting their needs ¾ six factors marketers frequently use to identify market segments ¾ demographics: the statistical analysis of population; subdividing customers according to characteristics such as: age, gender, income, race, occupation, and ethnic group ¾ geographics: segmenting by geography can help companies decide where to sell products ¾ psychographics: the analysis of people from the inside, focusing on their psychological makeup (activities, attitudes, interests, opinions) ¾ geodemographics: dividing markets into distinct neighbourhoods by combining geographic and demographic data ¾ behaviour: markets can be segmented according customers’ knowledge of, attitude toward, use of, or response to products or product characteristics ¾ usage: it is vital that a company identify its heavy users and provide them with the appropriate support and attention.

(80/20 RULE: eighty percent of a company’s business comes from 20 percent of its consumers: heavy users.)

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¾ niche marketing: takes segmentation one step further by dividing a market segment into micro-segments (example: young adult female tennis players) FOR DISCUSSION The Internet is changing the way we do business in North America. More and more people are using the Internet for all kinds of purchases from furniture to prescription drugs. Each time we access a new site, a “cookie” is used to track our purchases, and gather marketing information. However, in Europe strict laws have been developed to prohibit such techniques. How will this difference in tactics affect international markets? c. Choosing your target markets ¾ choosing markets requires careful judgment ¾ marketers use a variety of criteria to choose target markets ¾ size of segment ¾ competition in the segment ¾ sales and profit potential ¾ compatibility with company resources and strengths ¾ costs ¾ growth potential ¾ risks ¾ three popular strategies for reaching a target market: ¾ undifferentiated marketing (or mass marketing): ignore differences among buyers and offer only one product or product line to satisfy the entire market ¾ differentiated marketing: manufacturing or selling a variety of products or several target customer groups ¾ concentrated marketing: often used when company resources are limited; acknowledging that different market segments exist and you choose to target just one d. Positioning your product ¾ positioning the product: the act of designing your company’s offering and image so that it occupies a meaningful and distinct competitive position ¾ most companies position products by choosing among several differentiating product factors ¾ size, ease of use, style, performance, quality, durability, or design ¾ services that accompany the product ¾ product’s image ¾ category leadership e. Developing the marketing mix ¾ marketing mix: (often called the four Ps) consists of product, price, place, and promotion ¾ product (product plus brand name, design, packaging, services, quality, and warranty) ¾ price (the amount customers must pay for the productincluding discounts)

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¾ place (also called distribution includes the organized network of firms that move goods and services from the producer to the consumer) ¾ promotion (includes all the activities the firm undertakes to communicate and promote its products to the target market—including advertising, personal selling, public relations, and sales promotion) III. Developing Product Strategies A. Types of products 1. Product continuum: indicates the relative amounts of tangible and intangible components in a product (see Exhibit 11.7) 2. Service products: intangible, perishable 3. Consumer products: products that are primarily sold to consumers; can be classified into four subgroups: a. Convenience products: the goods and services that people buy frequently, without much conscious thought: toothpaste b. Shopping products: fairly important goods and services that people buy less frequently: a stereo c. Specialty products: particular brands that the buyer especially wants and will seek out, regardless of location or prices d. Unsought goods: products that people do not normally think of buying, such as life insurance 4. Organizational products: products sold to firms, generally purchased in large quantities and are not for personal use; two categories of organizational products: a. Expense items: relatively inexpensive goods and services that organizations generally use within a year of purchase, i.e. pencils b. Capital items: more expensive organizational products and have longer useful life, i.e. desks c. Organizational buyers and sellers often classify products according to their intended usage: ¾ raw materials: like iron ore, crude petroleum, lumber ¾ components: like spark plugs and printer cartridges are similar to raw materials ¾ supplies: such as pencils, nails, and light bulbs that are used in a firm’s daily operations are considered expense items ¾ installations: such as factories, power plants, production lines, and semiconductor fabrication machinery are major capital projects ¾ equipment: includes less expensive capital items such as desks, telephones, and fax machines ¾ business services: range from simple and fairly risk-frees services such as landscaping to complex services such as management consulting and auditing B. The product life cycle: four distinct stages of product life cycle: introduction, growth, maturity, decline 1. Introduction a. Producers launch a new product b. Develop promotions to build awareness of the product c. Establish distribution systems to get the product into the marketplace

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2. Growth a. Rapid jump in sales b. Increase in the number of competitors c. Marketing is expensive at this stage 3. Maturity a. Sales begin to level off or show a slight decline b. Competition increases c. Market share is maximized 4. Decline a. Sales and profits slip and fade away b. Declines occur for several reasons ¾ changing demographics ¾ shifts in popular taste ¾ product completion ¾ advances in technology c. Companies must decide whether to: ¾ keep selling product as is ¾ discontinue selling product ¾ focus on developing newer products CLASS EXERCISE Have students bring in a combination of old and new magazines. If you can locate them, bring in some very old magazines, yourself. Have students work in groups to classify the products advertised in the magazine as in the introduction, growth, maturity, or decline. Ask students to examine a product that is in decline (or is discontinued) and determine what factors led to its decline. Also, try to find examples of products that have been revived, and ask students why this product is now popular again.

C. Product identities 1. Companies want to create a brand identity by using a unique name or design that sets a product apart 2. Branding a. Brand names: the portion of the brand that can be spoken b. Brand mark: the portion of a brand that cannot be expressed verbally c. Trademark: a brand that has been given legal protection so that its owner has exclusive rights to its use d. National brands: brands offered and promoted by a manufacturer e. Private brands: carry a wholesaler’s or retailer’s unique brand f. Generic brands: packaged in plain containers that bear only a product name g. Co-branding: occurs when two or more companies team up to closely link their names in a single product h. Brand Equity: the extra value a brand name provides to a product beyond its functional benefits 3. Packaging a. Most products need packaging ¾ to protect the product from damage or tampering .

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¾ to make it convenient for customers to purchase ¾ to make products easier to display and facilitate sales of smaller products 4. Labelling a. Identifies brand b. Gives grading information (about product, ingredients) c. Gives operating procedures d. Shelf life WHAT DO STUDENTS THINK? Ask students to write (for five minutes) about the brands they use regularly. Have them write a mental shopping list of the items they buy and consider the effect branding has on their purchases. Do they have brand preference or insistence? Do they have a national or private brand they prefer to buy? Do they have a family branding preference? What about the brand is special or appeals to them? What items would they purchase using a generic brand?

Aspirin, pasta sauce, Band-Aids? Which items would they refuse to purchase under a generic brand? e. Risks ¾ labelling of foods, drugs, cosmetics, health products is regulated ¾ disclosures about potential dangers f. Universal product codes ¾ give companies a way to track the movement of goods ¾ helps retailers and manufacturers measure the effectiveness of promotions such as coupons ¾ helpful for inventory control D. Product-line and product mix strategies 1. Product line: a group of products that are similar in terms of use or characteristics 2. Product mix: a collection of goods and services offered for sale a. Wide product mix: several different product lines b. Long product mix: carries several items in its product lines c. Deep product mix: has a number of version of each product in a product line d. Deciding on the width of a product mix ¾ a company must weigh risks and rewards ¾ some companies limit product offerings to be economical (keeps costs down and limits selling expenses 3. Expanding the product line: refer to Exhibit 11.10 a. Introduce additional items in a given product category under the same brand name---such as new flavours, forms, colors, ingredients, or package sizes b. Add new but similar products bearing the same product name IV. Developing Pricing Strategies A. Factors affecting pricing decisions 1. Manufacturing and selling costs 2. Competition 3. Needs of wholesalers and retailers 4. Firm’s marketing objectives: first step is setting price to match it to objectives you set in the strategic marketing plan

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5. Government regulations: governments play a big role in pricing in many countries. Prices are regulated a. Price fixing: an agreement among two or more companies supplying the same type of product as to the prices they will charge b. Price discrimination: the practice of unfairly offering attractive discounts to some customers but not others c. Deceptive pricing: pricing schemes that are considered misleading 6. Consumers’ perceptions: when people shop, they have a rough price range in mind. Prices that are higher or lower trigger consumers to question the price 7. Consumer demand: if the price for an item is too high, demand falls and the producers reduce their prices to stimulate demand and vice versa a. Price elasticity: how responsive demand will be to a change in price B. Cost-based and price-based pricing 1. Cost-based pricing a. Start with the cost of producing a good or service and add a mark-up 2. Price-based pricing a. Establish an optimal price for a product or service before assessing cost C. Price skimming 1. Skimming: a manufacturer charges a high initial price and drops prices later D. Penetration pricing 1. Penetration: manufacturer charges low initial prices, raising prices later a. Discourages competition b. Helps expand product category c. Helps take customers away from pioneer (company who started the category) E. Price discounts 1. Discount pricing: companies offer various types of temporary price reductions a. Trade discounts to wholesalers or retailers b. Cash discounts to reward customers who pay cash or pay promptly c. Sometimes can create price wars (competition based on price only) which can damage an industry d. Value pricing: charging a fairly affordable price for a high-quality offering

Potential Difficulties and Suggested Solutions 1.

The instructor may want to pose a question to the students to ensure their understanding of marketing products in international markets. An example follows: ¾ If you were thinking of marketing a breakfast cereal in Vietnam, what sorts of issues would you want to consider when you perform your market research? **Answer: Students should focus on whether breakfast cereal is a popular food in Vietnam, and if not, whether the potential market is big enough to be worth having to overcome social and cultural factors to get accepted. Given a possible market, research would be needed to determine the most acceptable product characteristics

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such as flavours, name, packaging (including colour and size of boxes), and availability of complementary products like milk and sugar.

Instructor’s notes: Students should be aware that engaging in the international marketplace requires a significant amount of research in order to ensure success.

Businesses stand to suffer large financial losses if cultural factors such as colour, taste, and seasoning are not considered before offering products suitable for these international markets.

Behind the Scenes Shoppers Drug Mart Gets a Facelift: Updating a Marketing Strategy Test Yourself Answers to these questions can be found on the website: www.pearsoned.ca/bovee.

1. What is the difference between a private-label brand and a national brand?

A national brand is owned by a manufacturer and sold nationally. For example Chips Ahoy cookies are made by Nabisco and sold nationally. A private label brand is often manufactured by a company, like Nabisco, but it bears the private label of a particular retailer. Sticking to the cookie example President’s Choice is a private label brand owned and controlled by Loblaws. In the case of Shopper’s Drug Mart the products that bear the Life brand or Quo Cosmetics brand fall under the private label category.

2. Why are private-label brands so important for retailers?

As indicated in this opening case, private label brands have become a very important strategic weapon for retailers. They provide consumers with discounted prices versus the national brands that often result in 25 percent savings and in addition they provide superior profits to the retailer of about 15 percent. -Win-win for both the customer and the retailer. - In addition, if the private label develops a strong name for itself (i.e. President’s Choice, Kenmore etc.) it can lead to more customer loyalty since those private brands are only available in those particular retail stores.

3. What are the benefits of the Optimum card for consumers? For Shoppers Drug Mart?

Consumers earn reward points and discounts. Shoppers Drug Mart gains access to valuable consumer information. They can track purchase histories that are linked to accounts with specific demographic information. This information can be used for analysis and strategic planning; it can also be used to send targeted email messages to clients. Have you received an email from Shoppers Drug Mart offering you a discount for your favourite shampoo? Was that just a coincidence?

4. What do you think of the changes at Shoppers Drug Mart? Can they fend off direct and indirect competitors with their updated approach?

Answers will vary. Students should be aware of the ever changing nature of the business landscape and the constant threat to even the most successful organizations.

Companies must continuously monitor the external environment and honestly assess .

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their internal strengths and weaknesses. One thing is clear. Shoppers Drug Mart is taking a multi-pronged approach to deal with these competitive pressures. Only time will tell if these new measures will succeed but it seems as though they are on the right track.

Behind the Scenes (End of Chapter Questions) Shoppers Cosmetics: Makeup Beautifies the Bottom Line Critical Thinking Questions 1. Do you believe that customers are ready to pay premium prices for cosmetics bought in a drugstore? Explain.

Answers will vary. Some students will be surprised at this question but it forces them to think of purchase decision factors like: self image and situational factors. From a consumer’s perspective most students will likely point to the convenience and access factors and answer yes to this question. This is precisely why major department stores are worried. Cosmetics sections are a major reason to visit a department store.

Shoppers Drug Mart is counting on it to increase traffic flow and improve the bottom line at the expense of those department stores.

2. What key demographic groups are Shoppers tapping into with the addition of high-end cosmetics brands? How can the Optimum card help Shoppers Drug Mart target this key customer segment?

A wide variety of customers shop at drugstores, however, when it comes to cosmetics they have only been able to service the needs of customers looking for more inexpensive products and brands. Women and, more specifically, women with a higher income or women willing to spend more for top cosmetics brands are groups being tapped by this strategic move. Clients willing to pay top dollar for cosmetics are an attractive segment because high end cosmetics carry margins of 40 percent or more. By providing these brands, Shoppers can increase their share of the customer wallet and also increase customer visits that will lead to additional purchases of other products in their retail outlets.

The Optimum card allows Shoppers to track purchases and see who is buying these particular brands which also enables the company to send specific promotions to these clients. The Optimum accounts also allow the company to segment the market based on important demographic variables like income for the effective execution of such campaigns.

3. In this chapter you learned about the concept of brand equity. Explain the relationship between this term and Estée Lauder’s hesitation to sign the deal with Shoppers Drug Mart. What made Estée Lauder change its mind?

Brand equity is defined as the extra value that a brand name provides beyond its functional benefits. Brand names are protected and the image is carefully guarded so that companies like Mercedes can charge premium prices. Part of the extra cost is attributed to top of the line materials and features but part of it is also based on reputation. This relationship holds true in this example as well.

Some students may be surprised that a company would not welcome every opportunity to sell their product in as many retail outlets as possible. Students must . 286

clearly link Estee Lauder hesitation to the concept of brand equity. Estee Lauder hesitated because they saw drugstore cosmetics sales as the domain of the cheap brands where customer service was at a minimum level. Since customer service and image were lacking they refused the initial request in order to protect the image (and huge margins) of the brand. Once Shoppers stepped up to the plate and spent money to provide a worthy higher end experience (store atmosphere and customer service) for their customers, Estee Lauder made the choice to slowly make their higher end brands available at Shoppers.

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

Answers to End-of-Chapter Questions Test Your Knowledge Questions for Review 1. Explain what is meant by the marketing concept.

The marketing concept is the underlying philosophy that guides all marketing decisions and activities. The idea is based on the concept that companies should seek to continuously meet and exceed customer wants and needs while seeking long-term profitability. Achieving a careful balance between bottom line constraints and customer wishes is what distinguishes truly successful firms in the long-run.

2. Describe the product development process.

One of the great challenges to enduring success is for a firm to be able to develop new products to meet their consumer’s changing needs. To maximize the chances of success, companies tend to employ the following steps: 1) generate ideas, 2) develop and screen product concepts, 3) develop marketing strategies, 4) analyze business potential, 5) design and develop the products, 6) test market, 7) commercialize.

3. How can legal and regulatory factors affect a company’s short–term marketing objectives?

Despite the best laid plans and intentions a sudden legal or regulatory change can have an unexpected impact on a company’s ability to reach its marketing objectives in both a positive and negative manner. A new tax on a particular category of products can have a damaging effect on sales. As indicated in the text, the ecoAuto Rebate program was a positive factor for sales of cars like the Toyota Prius since it meant new rebates of 2000 dollars for the purchase of this fuel efficient car. At the same time gas guzzlers were being slapped with additional taxes.

In the short-term it can force a company to adjust their expectations and objectives up or down. In the long-run companies must take such changes into account in order to develop strategies to take advantage of the rules of the game.

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4. Describe the four stages of the product life cycle.

In the In In the introductory stage, marketers focus on creating awareness and stimulating demand for the new product. As the product progresses through the growth stage, marketers focus on increasing the product’s market share. During the maturity stage, marketers try to extend the life of the product by highlighting improvements or by repackaging the product in different sizes. Eventually, all products move to a decline stage, where the marketer must decide whether to keep the product and reduce its costs to compensate for declining sales or discontinue the product altogether.

5. Explain what is meant by niche marketing and provide an example of a company that is using this approach effectively.

A company that uses a niche strategy will concentrate all of its resources and efforts to attract a particular market segment. For example, the Manoucher Food Company sells high end bread to a high end clientele willing to pay a premium for gourmet bread. It does not compete directly with the typical baker or the large multinationals; instead the company sells bread to high end gourmet and specialty food shops that enable them to sell bread at 3 to4 or even 10 times the average price of a typical loaf of bread.

Questions for Analysis 6. How have new techniques in database marketing revolutionized the way companies communicate with their core customers? What tools have enabled them to improve their data collection processes?

Database marketing is the process of recording and analyzing customer interactions, preferences, and buying behaviour for the purpose of contacting and transacting with customers. Companies can learn customer preferences and priorities through these methods to make the customer’s experience more personal and compelling.

7. How do consumer purchases differ from organizational purchases? Describe the difference between the processes of a consumer buying an automobile for personal use versus an organization purchasing a fleet of delivery cars.

When individuals are making purchase decisions they often rely on emotional factors. Purchasing behaviour of organizations (which includes businesses, non-profit organizations, and governments) is easier to understand because it’s driven by monetary issues, not emotions. There tends to be a formal buying process within organizations and there are many people involved in analyzing a major purchase decision. There is also a closer relationship with buyers and sellers that have been built over time.

8.

What is meant by brand equity? What can companies do to maintain or improve brand equity?

Brand equity is the term used to describe the extra value a brand name provides to a product beyond its functional benefits. Companies with strong brand equity and a high end image carefully manage and protect their brand because it enables them to maintain and grow a loyal customer base and charge a premium to earn above average returns.

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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, improve profits, project a particular image, or combat competition? Students’ answers should focus on one objective.

10. Ethical Considerations. Why might an employee with high personal ethical standards act less ethically when developing packaging, labelling, or pricing strategies?

When developing packaging, labelling, pricing or promotional strategies, employees with high ethical standards in their personal lives might act less ethically because the nature of packaging, labelling, pricing, and promoting is to highlight the positive and downplay the negative sides of products. For this reason, employees might feel pressured to “stretch the truth” in order to promote products.

Questions for Application 11. How does a hotel chain like Holiday Inn deal with the specific challenges of the service industry (intangibility and perishability)? What impact do these factors play in pricing?

Services marketers often compensate for intangibility by using tangible symbols or by adding tangible components to their products. To deal with perishability, hotels try to shift customer demand by offering discounts or promotions during slow periods. Hotels realize that an empty room on a given night represents permanently lost revenue. Selling rooms at discounted prices, at the last minute, allows them to generate some revenue instead of guarding a vacant room.

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 purchase?

Student answers will vary depending on the product of choice.

13. A technology firm has just developed a new Internet browsing device that is designed for practical home use and can free up the problem parents have with children fighting over the computer—not to mention the parents’ lack of access. The product can be produced at a very low manufacturing cost.

What pricing approach should they use—skimming or price penetration?

Explain.

This is a very important pricing decision and like many business decisions it is important to get the students to understand that the answer depends on the situation.

The class discussion can be organized as a debate with both sides providing valid arguments. If this product had been launched a few years ago it may have been a better candidate for a skimming approach. In this day and age with all the new internet browsing sources (phones, PDAs etc.) there is plenty of indirect competition.

If the product can truly deliver a superior platform and the competition is limited it . 289

can more effectively use the skimming approach. However, the company may decide to use a price penetration approach in order to capture a large market share from the start and discourage new competitors from entering the market after they have spent the time and energy developing it.

14. Integrated. Why is it important to analyze a firm’s marketing plan before designing the production process for a service or a good? (Production processes were discussed in Chapter 8.) What kinds of information are generally included in a marketing plan that might affect the design of the production process?

In order to create strong production designs, 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 and deciding whether to change products, remain the same, increase volume, or reduce volume of output.

These decisions must be made carefully; otherwise, lots of cash could be lost.

15. Integrated. Discuss how the following economic indicators discussed in Chapter 1 might affect a company’s marketing decisions: consumer price index, inflation, unemployment.

Marketers are greatly 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.

Practise Your Knowledge Sharpening Your Communication Skills Collect some examples of mail communications you have received from companies who are trying to sell you something. How do these communications try to get your attention? Highlight all the instances in which these communications use the word “you” or even your personal name. How is using the word “you” an effective way to communicate with customers? Does the communication appeal to your emotion or logic? How does the company highlight the benefits of its products or services? How does the company talk about price? Finally, how does the company motivate you to act? Bring your samples to class and be prepared to present your analysis of these factors to your classmates.

Student responses will depend upon the sampling of information gathered. However, such advertising often tries to appeal to the emotion of the consumer. Generally, customers do not like feeling that their relationship with a business is impersonal.

Rather, they trust companies who foster a sense of relationship with their customers.

Also, in such communications, companies tend to highlight the benefits of the products before they mention price (this is especially true when the price is hefty).

Finally, companies attempt to motivate customers to purchase often by offering products with special features at lower prices for a limited time.

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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 Canadian Tire 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 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 Canadian Tire 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?

The point of this exercise is to get students to consider the less-obvious (and sometimes unlikely) connections between all sorts of purchases. Any product geared for outdoor activities ranging from camping gear to picnic hampers will be affected by shifts in the weather. Imagine, for example, how an extremely rainy summer would affect the sales of sunscreen—or umbrellas, rain slickers, charcoal, bathing suits, sunglasses—etc. A very heavy winter leads to an increased demand for snow blowers. Encourage students to see the connection between the weather and these obvious items, as well as the less-obvious items such as: books, videos, or chlorineremoval shampoo!

Expand Your Knowledge Discovering Career Opportunities Jobs in the four Ps of 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 your local job bank as well as online job-search websites such Monster.ca 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?

Student’s answers will. However, encourage students to conduct a self-evaluation 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 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.” Often internships are available to eager students wanting to experience new fields. . 291

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.

Developing Your Research Skills From recent issues 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, behavioural, 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 understand its customers?

Answers will vary depending on the article selected

Answers to Boxed Features Box 1: Your Right to Privacy versus the Marketing Are all the details of your personal life really private? Consider this: Your bank knows your account balance, your credit history, and your Social Insurance Number.

Government agencies know how much money you made last year, the kind of car you own, and how many parking tickets you’ve had. Credit agencies know to whom you owe money and how much you owe. The list goes on and on, from video stores to insurance companies. Every time you register online, or even click on a website, all sorts of data are being collected about you. By depositing “cookies” on your hard drive, web marketers can follow your path and track the sites you visit.

Of course, there’s nothing unethical about collecting data or maintaining a database.

The ethical problems arise when marketers buy, borrow, rent, or exchange information, usually without your knowledge or permission. Who should have the right to see your records? The answer depends on where you live. In Europe, strict privacy regulations prevent companies from using data about individuals without asking permission and explaining how the data will be used. But in Canada and most other countries, marketers can easily buy information about who you are, where you live, how much you earn, and what you buy—for as little as a nickel.

Many web marketers post privacy policies showing how they use personal data.

Since January 1, 2001, the Personal Information Protection and Electronic .

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Documents Act (PIPEDA) has applied to all federal businesses. “It gives the individual control over personal information by requiring organizations to obtain consent to collect, use, or disclose information.” The law indicates the obligations of organizations, the rules of conduct, as well as the rights of individuals. If a person feels as though their rights have been violated and they are unable to resolve them directly, they can submit a formal complaint to the Office of the Privacy Commissioner of Canada (1-800-282-1376).

As you can imagine, the consumer’s right to privacy is an ongoing debate. Privacy advocates argue that people should have the right to be left alone, whereas marketers argue that they should have the right to freedom of speech—the right to inform customers about their offers, that is. Thus, the ultimate dilemma is whether a marketer’s needs and freedom of speech outweigh the consumer’s right to privacy.

What’s your opinion?

Questions for Critical Thinking 1. Should a marketer selling long-distance telephone service be allowed to see your telephone records without your knowledge or permission?

Consumers’ right to privacy is an ongoing debate. Marketers feel that using customer information ultimately benefits the customer, bringing him more services that more closely fit his needs due to the extensive research. Marketers also believe that it is their right to freedom of speech that allows them to obtain and use such information. Privacy advocates argue that people should have the right to be left alone. Students should consider both of these perspectives when answering this question.

2. Should web marketers be required to conspicuously post their privacy policies and ask consent before collecting and using visitors' personal data?

The issue of information exchanged over the web is a concern for customers and marketers alike. This concern is especially valid when considering children who may well give out inappropriate information unknowingly. Currently, more and more web marketers are posting privacy policies showing how they use personal data.

Box 2: Questionable Marketing Tactics on Campus Alarmed by how quickly university and college students can bury themselves in debt and fed up with aggressive sales tactics, a growing number of universities are banning or restricting credit card marketing on campus.

Administrators complain that students are bombarded with credit card offers from the moment they step on campus. Marketers have shown up on campuses unannounced and without permission to hawk cards; they stuff applications into bags at campus bookstores and entice students to apply for cards and take on debt with free T-shirts, music CDs, and promises of an easy way to pay for spring break vacations. Some yell at students to get their attention and follow them through hallways to make a sale; they even get student organizations to work for them so that friends pressure friends.

Students are, of course, a prized target for the credit card industry because consumers tend to be loyal to their first credit card. Even though students often have little or no income, they are not considered high-risk borrowers because parents generally bail them out if they get into trouble. As a result, roughly 63 percent of full-time students . 293

now have a credit card in their own name. But only about half of those students pay their bills in full each month, and the number of students who usually make just the minimum payment is rising.

While some schools have banned credit card marketers from campus to protect students from their own potentially destructive credit practices, many students say it’s unfair for schools to do so. After all, marketers don’t give up. They just move across the street or to other locations frequented by students.

Questions for Critical Thinking 1. Should credit card companies be prohibited from soliciting on campuses?

Why or why not?

Arguments could be offered both for and against such prohibition. It is an issue of educating the students and potential consumers in the responsible use of such financial freedom. It is convenient access to credit cards that is offered on campus, and if they are prohibited, these marketers will go to other locations frequented by students. Also, it could be a disservice to students who are and can be responsible in their use of such credit cards. Should the availability of such cards be prohibited because some students abuse their use or should appropriate educational opportunities be offered to train individuals in their appropriate use?

2. Why do credit card companies target students even though they have little or no income?

Students are a prized target for the credit card industry because consumers tend to be loyal to their first credit card. Even though they often have little or no income, they are not considered high-risk borrowers because parents generally bail them out if they get into trouble

See It on the Web URLs for all Internet exercises are provided at the website for this book, www.pearsoned.ca/bovee. When you log on to the text website, select Chapter 11, then select “Student Resources,” click on the name of the featured website, and follow the detailed navigational directions to complete these exercises.

Explore these chapter-related websites, review their content, and answer the following questions for each website you visit: 1. What is the purpose of this website?

2. What kinds of information does this website contain? Please be specific.

3. How is the information provided at this website useful for businesspeople?

Consumers?

4. How did you expand your knowledge of marketing, customers, products, or pricing by reviewing the material at this website? What new things did you learn about these topics?

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Protect Your Trademark Got a winning idea for a new product? Don’t forget to protect your idea trademark by registering it. Visit the Canadian Intellectual Property Office and learn the basic facts about registering a trademark, such as who is allowed to use the TM symbol and how a trademark differs from a service mark. Find out how the process works and how much it costs. In fact, why not search its database now to see whether anyone has already registered your trademark? http://cipo.gc.ca/ 1. What is the purpose of this website?

While student responses may vary, the following will address some possible answers.

The purpose of this website is to provide information on the basic facts about patents and trademarks.

2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers.

This website provides information on the following: general information about the roles and functions of CIPO; specific information about patents, trademarks, copyrights, domain names, trade secrets, international IP; legal and regulatory information about patents, trademarks, and copyrights.

3. How is the information provided at this website useful for businesspeople?

Consumers?

While student responses may vary, the following will address some possible answers.

This website is useful for businesspeople because it provides information about the specifics of registering a trademark and patenting. For example, a business could use this website to learn if anyone has already registered its trademark.

Also, the legal and regulatory information is also helpful in keeping businesspeople informed.

Consumers can use this information for informational/educational purposes.

4. How did you expand your knowledge of marketing, customers, products, or pricing by reviewing the material at this website? What new things did you learn about these topics?

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

Sign Up For Electronic Commerce 101 Think you may be interested in moving your business onto the Net but you don’t know where to start? Study the basics at Electronic Commerce 101 before you plan your marketing strategies. Find out how to succeed in electronic commerce. Read the beginners guide and the step-by-step process of becoming e-commerce enabled.

Learn how to process payments, credit cards, and e-cash. Find out the top ten ways websites lose customers. Still have a question? This site has free advice from over 7,000 experts. http://onlinebusiness.about.com/od/onlinebusiness101/Online_Business_101.htm

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1. What is the purpose of this website?

While student responses may vary, the following will address some possible answers.

The purpose of this website is to provide information concerning the basics of electronic commerce.

2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers.

This website provides information on: how to succeed in electronic commerce; a beginner’s guide; a step-by-step process of becoming e-commerce enabled; how to process payments credit cards, and e-cash; and the top ten ways websites lose customers. If this information is not enough, you can get free advice from over 7,000 experts.

3. How is the information provided at this website useful for businesspeople?

Consumers?

While student responses may vary, the following will address some possible answers.

This website is useful for businesspeople because it provides information on all of the topics listed above (refer to answer for #2). Obviously, this information can assist any business wishing to engage and e-commerce and serve as a guide through the process.

Consumers can refer to this site for information/educational purposes to find out news and information concerning e-commerce activities.

4. How did you expand your knowledge of marketing, customers, products, or pricing by reviewing the material at this website? What new things did you learn about these topics?

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

Chapter 11 Pop Quiz: 1. The difference between an individual’s actual state and his or her ideal state is referred to as a: a. Wish b. Transaction c. Want d. Need 2. When organizations change raw materials into finished goods, they are creating ________ utility desired by consumers. a. place b. time c. possession d. form

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3. The final stage in the consumer decision making process is called: a. post-purchase evaluation b. evaluation of alternatives c. purchase d. problem recognition 4. Which of the following is NOT an example of a situational factor that might influence a buyer’s purchase decision? a. attitudes and beliefs b. having a coupon c. being in a hurry d. celebrating a holiday 5. Popular marketing research tools include all but which of the following: a. personal observations b. buyer’s remorse c. questionnaires d. experiments 6. Strategic marketing planning is a process that involves three steps. Which of the following lists these steps in chronological order? a. examining your current marketing situation, assessing your opportunities and setting your objectives, developing a marketing strategy to reach those objectives b. assessing your opportunities and setting your objectives , examining your current marketing situation, developing a marketing strategy to reach those objectives c. assessing your opportunities and setting your objectives, developing a marketing strategy to reach those objectives, examining your current marketing situation d. examining your current marketing situation, developing a marketing strategy to reach those objectives, assessing your opportunities and setting your objectives 7. Organizational purchase decisions are characterized by all of the following except: a. emphasis on payback and other rational factors b. an informal buying process c. a closer relationship between buyers and sellers d. the participation and influence of multiple people 8. Homogeneous groups of customers within a market that are significantly different from each other are referred to as __________________. a. relationship marketing b. target markets c. market segments d. situational variables

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9. Segmenting the market into different units such as regions, cities, counties, or neighbourhoods allows companies to customize and sell products that meet the needs of specific markets. This type of segmentation is referred to as a. demographic segmentations b. psychographic segmentation c. geographic segmentation d. behavioural segmentation

10. The four elements of the marketing mix are as follows: a. product, price, promotion, and place b. product, place, time, and possession c. time, place, form, and product d. none of the above

Answers to Pop Quiz: 1. d 2. d 3. a 4. a 5. b 6. a 7. b 8. c 9. c 10. a

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Chapter 12: Developing Distribution and Promotional Strategies Learning Objectives 1 2 3 4 5 6 7 8

Explain what marketing intermediaries do and list their seven primary functions Explain how wholesalers and retailers function as intermediaries Discuss the key factors that influence channel design and selection Differentiate between intensive, selective, and exclusive distribution strategies Discuss the Internet’s effect on the distribution function Identify the five basic categories of promotion Distinguish between the two main types of sales promotions and give examples of each Discuss the use of integrated marketing communications

Summary of learning Objectives 1

Explain what marketing intermediaries do and list their seven primary functions Marketing intermediaries, or middlemen, bring producers’ products to market and help ensure that the goods and services are available in the right time, place, and amount. More specifically, intermediaries match buyers and sellers; provide market information; provide promotional and sales support; sort, standardize, and divide merchandise; transport and store the product; assume risks; and provide financing.

2 Explain how wholesalers and retailers function as intermediaries Wholesalers buy from producers and sell to retailers, to other wholesalers, and to organizational customers such as businesses, government agencies, and institutions.

Retailers buy from producers or wholesalers and sell the products to the final consumers.

3 Discuss the key factors that influence channel design and selection Channel design and selection are influenced by the type of product and industry practices. They are also influenced by a firm’s desired market coverage (intensive, selective, or exclusive), financial ability, desire for control, and potential for channel conflict.

4

Differentiate between intensive, selective, and exclusive distribution strategies With an intensive distribution strategy, a company attempts to saturate the market with its products by offering them in every available outlet. Companies that use a more selective approach to distribution choose a limited number of retailers that can adequately support the product. Firms that use exclusive distribution grant a single wholesaler or retailer the exclusive right to sell the product within a given geographic area.

5 Discuss the Internet’s effect on the distribution function Companies are using the Internet to enhance their existing channel structures, expand their market reach, and add efficiencies to their channel structures. Some are eliminating layers of intermediaries from a marketing channel and transferring the . 299

eliminated intermediary functions to the Internet. In many cases, these changes— especially the bypassing of a channel—are causing channel conflict.

6 Identify the five basic categories of promotion The five basic categories of promotion are: (1) personal selling, which involves contacting customers by phone, interactive media, or in person to make a sale; (2) advertising, which is a paid sponsored message transmitted by mass media; (3) direct marketing, which is the distribution of promotional material to consumers via direct mail, email, telemarketing, or the Internet to generate an order or other consumer response; (4) sales promotion, which includes a number of consumer and promotional tools designed to stimulate consumer interest in a product and encourage a purchase; and (5) public relations, which includes non-sales communications between businesses and their stakeholders to foster positive relationships.

7

Distinguish between the two main types of sales promotion and give examples of each The two main types of sales promotion are consumer promotion and trade promotion.

Consumer promotions are intended to motivate the final consumer to try new products or to experiment with the company’s brands. Examples include coupons, cross-promotion, specialty advertising, premiums, point-of-purchase displays, and special events sponsorship. Trade promotions are designed to induce wholesalers and retailers to stimulate sales of a producer’s products. Examples include trade allowances, display premiums, dealer contests, and travel bonus programs.

8 Discuss the use of integrated marketing communications The likelihood of sending conflicting marketing messages to consumers increases when companies use a greater variety of marketing communications. Integrated marketing communications (IMC) is a process of coordinating all of a company’s communications and promotional efforts so that they present only one consistent message to the marketplace. Properly implemented, IMC increases marketing and promotional effectiveness.

Brief Chapter Outline I.

Developing Distribution Strategies A. Understanding the Role of Marketing Intermediaries B. Selecting Your Marketing Channels 1. Length of Distribution Channels 2. Factors That Influence Channel Selection a. Market Coverage b. Cost c. Control d. Channel Conflict C. Managing Physical Distribution 1. Order Processing 2. Inventory Control 3. Warehousing 4. Materials Handling 5. Outbound Transportation D. Incorporating the Internet into Your Distribution Strategies II. Promotional Strategies A. Setting Your Promotional Goals . 300

B. Analyzing Product Variables C. Deciding on Your Market Approach D. Selecting Your Promotional Mix 1. Personal Selling 2. Advertising and Direct Marketing 3. Direct-Marketing Vehicles 4. Advertising Categories 5. Sales Promotion a. Consumer Promotion b. Trade Promotion 6. Public Relations E. Integrating Your Marketing Communications

Lecture Notes and Chapter Outline I.

Developing Distribution Strategies Marketing channels: an organized network of firms that work together to get goods and services from producer to consumer Distribution strategy: overall plan for moving products to buyers Marketing intermediaries: middleman who bring producer’s products to market Understanding the role of marketing intermediaries 1. Wholesalers: sell primarily to retailers, to other wholesales, 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 2. Retailers: sell products to the final consumer for personal use (major types of retailers are described in Exhibit 12.1) 3. Wholesalers and retailers are instrumental in creating place, time, and possession utility (discussed in chapter 11) 4. Wholesalers and retailers perform a number of specific distribution functions: a. Match buyers and sellers: make sellers’ products available to multiple buyers b. Provide market information: collect valuable data about customer purchases: who buys, how often, and how much. c. Provide promotional and sales support: many intermediaries create advertising, produce eye-catching displays, and use other promotional devices for some or all of the products they sell d. Gather an assortment of goods: some intermediaries receive bulk shipments from producers and break them into more convenient units by sorting, standardizing, and dividing bulk quantities into smaller packages e. Transport and store the product: some retail stores maintain an inventory of merchandise that they acquire from producers so they can quickly fill customers’ orders. f. Assume risks: when intermediaries accept goods from manufacturers, they take on the risks associated with damage, theft, product perishability, and obsolescence. g. Provide financing: large intermediaries sometimes provide loans to smaller producers.

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B. Selecting your marketing channels 1. Distribution mix: the number and types of intermediaries used; depends on the kind of product being sold and the marketing practices of the industry 2. Length of distribution channels a. Most businesses purchase goods they use in their operations directly from producers, so the distribution channel is short b. Channels for consumer goods are usually longer and more complex.

There are four primary channels for consumer goods: ¾ producer to consumer: producers who sell directly to consumers through catalogs, telemarketing, infomercials, and the Internet are using the shortest, simplest distribution channel. ¾ producer to retailer to consumer: some producers create longer channels by selling their products to retailers, who then resell them to consumers ¾ producer to wholesaler to retailer to consumer: most manufactures of supermarket and drugstore items rely on longer channels ¾ producer to agent/broker to wholesaler to retailer to consumer: these additional channel levels are common in certain industries where specialist are required to negotiate transactions or to perform interim functions such as sorting, grading, or subdividing goods (agriculture) 3. Factors that influence channel selection a. Managers face critical decisions when designing and selecting marketing channels for any product: ¾ Should you sell directly to end-users or rely on intermediaries? ¾ Which intermediaries should you choose? ¾ Should you try to sell your product in every available outlet or limit its distribution to a few exclusive outlets? ¾ Should you use more than one channel? b. Companies must consider four key factors when establishing marketing channels: ¾ market coverage: the number of wholesalers or retailer that will carry a product ¾ intensive distribution: inexpensive convenience goods or organizational suppliers (computer paper) sell best if they are available in as many outlets as possible ¾ selective distribution: shopping goods (refrigerators) should be sold through a limited number of outlets that can give the product adequate sales and service support ¾ exclusive distribution: offering products in only one outlet in each market area (high-end vehicle manufacturers) ¾ cost: small or new companies who cannot afford to hire a sales force large enough to sell directly to end users need the help of intermediaries who can spread the cost of such activities across a number of non-competing products ¾ control: longer distribution channels means less control for producers ¾ channel conflict: channel members often disagree on the roles each member should play . 302

¾ channel conflict may arise when suppliers provide inadequate product support ¾ channel conflict may arise when markets are over saturated with intermediaries ¾ channel conflict may arise when companies sell products via multiple channels, each of which is competing for the same customers C. Managing physical distribution Physical distribution: encompasses all the activities required to move the finished product from the producer to the consumer, including order processing, inventory control, warehousing, material handling, and outbound transportation a. Logistics: the planning and movement of goods and information throughout the supply chain 2. Order processing: involves preparing orders for shipment and receiving orders when shipments arrive. a. Checking customer’s credit b. Recording the sale c. Making the appropriate accounting entries d. Arranging for the item to be shipped e. Adjusting inventory records f. Billing the customer 3. Inventory control: inventory managers decide how much product to keep on hand and when to replenish the supply of goods in inventory 4. Warehousing: a. Warehouses may be owned by the manufacturer, by an intermediary, or by a private company that leases space to others b. Distribution centers: warehouses serving as command posts for moving products to customers ¾ some of today’s most advanced physical distribution centers employ satellite navigation and communication, voice-input computers, machine vision, robots, onboard computer logbooks, and planning software that relied on artificial intelligence 5. Materials handling: the movement of goods within and between physical distribution facilities a. Storage method b. Keeping track of inventory 6. Outbound transportation: goal is to maximize the efficiency of the entire distribution process while minimizing the cost. Types of outbound transportation include: a. Rail b. Truck c. Water (ships) d. Air (planes) e. Pipeline G. Incorporating the Internet into your distribution strategies 1. The Internet’s efficient and effective global reach is revolutionizing the way goods and services are sold and distributed.

2. Growing numbers of businesses sell a huge selection of goods and services Online 3. The Internet is a powerful force that is changing the role of traditional .

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intermediaries—the Internet increasingly allows sellers and buyers to find each other and do business directly and differently than ever before II. Developing Promotional Strategies A. Promotion: persuasive communication that motivates people to buy what a firm sells-goods/services B. Promotional strategy: defines the direction and scope of promotional activities implemented to meet marketing strategies C. Promotional goals: promotion is used to achieve three basic goals: 1. Informing: the first promotional priority because people cannot buy a product until they are aware of it 2. Persuading: most people need to be encouraged to purchase something new or to switch brands (persuasive advertising) 3. Reminding: reminds customers of product’s availability and stimulates more purchases (reminder advertising) D. Promotional strategy should accomplish specific objectives: 1. Attract new customers 2. Increase usage among existing customers 3. Aid distributors 4. Stabilize sales 5. Boost brand-name recognition 6. Create sales leads 7. Differentiate the product 8. Influence decision makers E. Analyzing product variables 1. The firm must consider a number of product and market factors before selecting the promotion mix a. Nature and appeal of a product b. Position in the life cycle c. Size and interest of the target market d. Competitive situation e. Cultural differences (if any) f. Desired market position g. Need for personal contact in promotion h. Price of products (e.g. mass advertising for cheap products, personal sales calls for expensive products) F. Deciding on your market approach 1. Push and Pull strategies a. Push strategy: persuade wholesalers and retailers to carry products b. Pull strategy: appeal directly to ultimate customer using advertising, direct mail, contests, discount coupons, etc.

2. Most companies use a combination of methods, often relying on advertising and public relations to build awareness and interest, following up with personal selling to complete the sale G. Selecting your promotional mix 1. Five elements of the promotional mix: personal selling; advertising; direct marketing; sales promotion; public relations

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Handout: Five Elements of the Promotional Mix Activity

Reach

Timing

Flexibility

Cost/Exposure

Personal Selling

Direct personal interaction with limited reach

Regular, recurrent contact

Message tailored to customer and adjusted to reflect feedback

Relatively high

Advertising

Indirect interaction with large reach

Regular, recurrent contact

Standard unvarying message

Low to moderate

Direct Marketing

Direct personal interaction with large reach

Intermittent, based on short- term sales objectives

Customized, varying message

Relatively high

Sales Promotion

Indirect interaction with large reach

Intermittent, based on short- term sales objectives

Standard, unvarying message

Varies

Public Relations

Indirect interaction with large reach

Intermittent, as newsworthy events occur

Standard, unvarying message

No direct costs

2. Personal selling: direct person-to-person selling a. Allows for immediate interaction between buyer and seller b. Enables seller to adjust message to needs of customers c. Personal Selling Process (consists of 7 steps) ¾ prospecting: finding and qualifying potential buyers of the product or service ¾ preparing: considering various options for approaching the prospect and preparing for the sales call ¾ approaching: contacting the prospect, getting his or her attention, and building interest in the product or service ¾ presenting: communicating a message that persuades a prospect to buy ¾ handling objections: countering the buyer’s objections to purchasing a product or service with convincing claims ¾ closing: asking the prospect to buy the product ¾ following up: checking customer satisfaction following the sale and building goodwill d. Technological advances are facilitating these steps and the entire selling process ¾ some companies are using custom software to provide online proposal-generation and order-management systems 3. Advertising and direct marketing a. Advertising: consists of messages paid for by and identified sponsor and transmitted through a mass communication medium b. Direct marketing is defined by the Direct Marketing Association as distributing promotion materials directly to a consumer or business recipient for the purpose of generating (1) a response in the form of an order, (2) a request for further information, or (3) a visit to a store . 305

or other place of business for purchase of a specific product or service c. All forms of advertising and direct marketing have three objectives: ¾ create product awareness ¾ create and maintain the image of a product ¾ stimulate consumer demand d. The Canadian Radio-Television and Telecommunications Commission (CRTC) creates broadcast rules e. Advertising Standards Canada (ASC), administers codes of practice that are voluntarily established. f. Direct marketing vehicles: ¾ direct mail: include catalogues, brochures, videotapes, disks, and other promotional materials delivered through Canada Post and private carriers ¾ target e-mail: companies are sending e-mails to highly targeted lists of prospects ¾ telemarketing: selling over the telephone ¾ Internet: marketers can use the Internet’s interactive options to tailor a unique pitch to the individual g. Advertising categories ¾ product advertising: designed to sell specific goods or services; generally describes the product’s features and may mention its price ¾ institutional advertising: designed to create goodwill and build desired image for a company rather than to sell specific products ¾ national advertising: sponsored by companies that sell products on a nationwide basis ¾ local advertising: sponsored by a local merchant, i.e. grocery store ads in the local newspaper ¾ cooperative advertising: financial arrangement whereby companies with products sold nationally share the costs of local advertising with local merchants and wholesalers; cooperative advertising is a cross between local and national advertising h. Media: channels of communication (six major categories are listed in Exhibit 12.8) ¾ Your goal as a marketer is to select a media mix—the combination of print, broadcast, and other media that maximizes the return of your advertising dollar.

4. Sales promotion: includes a wide range of events and activities designed to stimulate immediate interest in and encourage the purchase of your product or service a. Consumer promotion: aimed directly at final users of the product ¾ coupons: certificates that spur sales by giving buyers a discount when they purchase specified products ¾ rebates: buyers generally get reimbursement checks from the manufacturer by submitting proof of purchase along with a prepared manufacturer’s rebate form ¾ point-of-purchase display (POP): a device for showing a product in a way that stimulates immediate sales ¾ special-event sponsorship: sponsoring special events has become a very poplar sales-promotion tactic . 306

¾ cross-promotion: involves using one brand to advertise another non-competing brand ¾ samples: effective in introducing new products, encouraging nonusers to try an existing product, encouraging current buyers to use the product in a new way, or expanding distribution into new areas ¾ in-store demonstrations ¾ loyalty and frequency programs such as frequent flyer miles ¾ premiums: free bargain-priced items offered to encourage the consumer to buy a product ¾ contests, sweepstakes, or games ¾ Specialty advertising: advertising on pens, calendars, etc. b. Trade promotion: aimed at inducing distributors or retailer to sell a company’s products by offering them a discount on the products price, or a trade allowance ¾ discounts ¾ display premiums ¾ dealer contests or sweepstakes ¾ travel bonus programs FOR DISCUSSION Ask students to consider which of these techniques have appealed to them as consumers.

Once students have discussed a few examples, ask them to consider whether the techniques that lured them to purchase one product would have the same effect when purchasing another product. In other words, would a point of purchase display be as effective for marketing computers as it is for marketing corn chips? What needs of customers does each of these techniques fulfill? List the different devices on the board, and ask students to agree on an optimal list of products to sell using each technique.

5.

Public relations: encompasses all non-sales communications that businesses have with their many stakeholders (communities, investors, industry analysts, government agencies and officials, and the news media) a. Companies rely on public relations to build a favourable corporate image and foster positive relations with these groups b. Two standard public relations tools: ¾ news release: a short memo sent to the media covering topics of interest (often used to gain favourable coverage about themselves and their products) ¾ news conference: companies will arrange a news conference when it has significant news to announce c.

Both public relations tools are used under the following circumstances: ¾ the company’s news is of widespread interest ¾ when products need to be demonstrated ¾ when company officials want to be available to answer questions from the media

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H. Integrating our Marketing Communications (IMC): 1. Important to decide what mix of promotional methods to use on a product 2. Integrated marketing communications: integrating all communications and promotion efforts to provide customers with clarity, consistency, and maximum communications impact 3. The basics of IMC are simple: communicating with one voice and one message to the marketplace (refer to Exhibit 12.9) 4. IMC increases marketing and promotion effectiveness 5. Organizational resistance is the primary cause of IMC failure a. Many marketing departments see IMC as a threat to their resources and decision-making power b. Moving to an IMC approach requires new ways of organizing, planning, and managing all marketing functions, and some marketing departments are not up to the task

Potential Problems and Suggested Solutions 1. Students may need to think beyond what is written in the text to understand how promotion works in the “real-world.” For example, students need to realize that the product life cycle affects the promotion mix, i.e. the promotion mix changes as a product such as the BlackBerry matures. ¾ Answer: Early on, when the seller is trying to inform the customer about the product and build the distribution network, promotional efforts are in high gear. Selective advertising, sales promotion, and public relations are used to build public awareness and to encourage early adopters to try the product; personal selling is used to gain the cooperation of intermediaries. As the market expands during the growth phase, the seller broadens the advertising and sales-promotion activities to reach a wider audience and continues to use personal selling to expand the distribution network. When the product reaches maturity and competition is at its peak, the seller’s primary goal is to differentiate the product from rival brands. Advertising generally dominates the promotional mix during this phase, but sales promotion is an important supplemental tool, particularly for low-priced consumer products. As the product begins to decline, the level of promotion generally tapers off.

Advertising and selling efforts are carefully targeted toward loyal, steady customers. ¾ Students should also consider other factors when deciding on the right promotional mix for the product: consider the nature and appeal of the product; the size and interests of its target segments; its competitive situation, any country and cultural differences, and its desired market position.

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Behind the Scenes MEC: Climbing Toward the Three Million Member Mark Test Yourself Answers to these questions can be found on the website: www.pearsoned.ca/bovee.

1.

What were some of the concerns MEC had when they originally launched their website?

The primary concern, like most retailers at the time, was the fear that this new retail arm would cannibalize sales from their bricks and mortar figures. There was also a fear of the unknown as this model was still evolving which made MEC and many others proceed with caution.

2.

Why is it important for a company to maintain a consistent message between its traditional outlets and its Internet retail arm?

In chapter 12, we discuss the importance of integrated marketing communications which is associated with promotion but in essence describes a philosophy in which the marketer portrays a consistent image for all communications with the customer.

Clients will alter their opinion of a retail outlet based on their experiences with that organization at any contact point. Whether it is shopping in the store, browsing online or speaking to someone by phone- important impressions are being made. Providing a consistent message enables the consumer to shop more efficiently and enables the retailer to reinforce a message.

3.

How can a company effectively cross-promote the website and its retail outlets?

Student answers will vary.

Behind the Scenes (End of Chapter) MEC: Effectively Blending Retail and E-Tail Channels Critical Thinking Questions 1. How does MEC blend its online and offline channels?

MEC worked hard to develop a winning multi-channel approach—one that successfully blended its online store with its offline business. Management learned that by using this approach the company could provide better customer service. If all channels work together to educate, to service and to promote then the company/client exchange process is successful and the customer is satisfied.

2. How has MEC’s success as a traditional retailer benefited its online business?

MEC already had extensive experience dealing with the needs of its client base through the traditional retail outlet as well as through the catalogue. There reputation had been built over a span of three decades. In short, MEC had experience, a powerful name (brand equity), and a loyal customer base.

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

Answers to End-of-Chapter Questions Test Your Knowledge Questions for Review 1. What is meant by channel conflict and how can companies reduce the likelihood of conflict within the chain?

TThe success of individual channel members depends on the overall channel success; however, channel members often disagree on the roles each member should play.

Channel conflict may arise when suppliers provide inadequate product support, when markets are oversaturated with intermediaries, or when companies sell products via multiple channels, each of which is competing for the same customers. Similarly, when producers choose to sell direct to consumers via the Internet, they run the risk of damaging their existing relationships with other channel members. Channel conflict can also occur as members of the chain deal with various competitors simultaneously.

2. What factors have an influence on channel selection?

The appropriate market coverage varies by type of product. Inexpensive convenience goods sell best if they are available in as many outlets as possible. Such intensive distribution requires wholesalers and retailers of many types. In contrast, shopping goods require different market coverage, because customers shop for such products by comparing features and prices. For these items, the best strategy is usually selective distribution, selling through a limited number of outlets that can give the product adequate sales and service support. If producers of expensive specialty or technical products do not sell directly to customers; they may choose exclusive distribution, offering products in only one outlet in each market area. Costs play a major role in determining a firm’s channel selection. Small or new companies often cannot afford to hire a sales force large enough to sell directly to end-users or to call on a host of retail outlets. These firms need the help of intermediaries who can spread the cost of such activities across a number of non-competing products. Control is another is another issue to consider when selecting distribution channels. Longer distribution channels mean less control for producers, who become increasingly distant from sellers and buyers as the number of intermediaries multiplies.

3. What is the difference between product advertising and institutional advertising?

Product advertising is the most common type, designed to sell specific goods or services. Product advertising generally describes the product’s features and may mention its price. Institutional advertising is designed to create goodwill and build a desired image for a company rather than to sell specific products.

4. What are the seven steps in the personal selling process?

1) Prospecting: finding and qualifying potential buyers of the product or service. 2) Preparing: considering various options for approaching the prospect and preparing for the sales call. 3) Approaching: contacting the prospect, getting his or her

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attention, and building interest in the product or service. 4) Presenting: communicating a message that persuades a prospect to buy. 5) Handling objections: countering the buyer’s objections with convincing claims. 6) 6) Closing: asking the prospect to buy the product. 7) Following up: checking customer satisfaction following the sale and building goodwill.

5. What is meant by the term integrated marketing communications?

Integrated marketing communications (IMC) is a strategy of coordinating and integrating all one’s communications and promotional efforts to provide customers with clarity, consistency, and maximum communications impact.

Questions for Analysis 6. What is the difference between a category killer and a department store?

A category killer is a specialty store that focuses on specific products on a giant scale and dominates retail sales in product categories whereas a department store offers a wide variety of merchandise in many departmental sections.

7. What trade-offs must you consider when adopting a physical distribution system?

The overriding objective should be to achieve a competitive level of customer service standards at the lowest total cost. In general, as the level of service improves the cost of distribution increases. A producer must analyze whether it is worthwhile to deliver the product in, say, three days as opposed to five, if doing so increases the price of the item. This type of trade-off can be difficult because the steps in the distribution process are all interrelated. The trick is to optimize the total cost of achieving the desired level of service.

8. If a manufacturer starts to sell its goods on its company website, why might this arouse channel conflict?

Companies are using the Internet to enhance their existing channel structures; expand their market reach; and add efficiencies to their channel structures. Some are eliminating layers of intermediaries from a marketing channel and transferring the eliminated intermediary functions to the Internet. In many cases these changes— especially the bypassing of a channel—are causing channel conflict.

9. Describe the relationship between a push and a pull strategy and the corresponding level of use of consumer or trade promotions.

If the focus is on intermediaries, the producer uses a push strategy to persuade wholesalers and retailers to carry the item. Producers may offer wholesalers or retailers special discounts or incentives for purchasing larger quantities. You would expect to see personal selling and sales promotions to dominate the promotional mix aimed at intermediaries. If the marketing focus is on end-users, the producer uses a pull strategy to appeal directly to the ultimate customer, using advertising, direct mail, contests, discount coupons, and so on. With this approach, consumers learn of the product through promotion and request it from retailers, who respond by asking their wholesalers for it or by going directly to the producer.

10. ETHICAL CONSIDERATIONS: Direct-mail marketers often publish different prices in different catalogues targeted at different market segments. When you call to order, the sales representative first asks for your customer or

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catalogue number or postal code so that the rep knows which price to charge you. Is this practice ethical?

This practice is ethical; there are business prices, educational prices, and prices for customers that have purchased a lot of merchandise from the firm, etc.

Questions for Application 11. Scan your local papers and highlight or clip ads that could possibly mislead the public. What do you find misleading about the ad? How would you improve the ad?

Answers will vary according to the ad the students select.

12. Find three newspaper or magazine ads that you think are particularly effective and three more that you think are ineffective. What do you like about the effective ads? How might you improve the ineffective ads?

Answers will vary according to the ads that the students select.

13. INTEGRATED: In Chapter 8 we 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 distributors 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. The benefit of involving distributors in such activities is that their role in distribution becomes stronger and is transforming along with the times 14. INTEGRATED: Which of the four basic functions of management discussed in Chapter 6 would be involved in decisions that establish or change a company’s channels of distribution? Explain your answer.

In part the decision requires a manager to use the planning function or forecast the need for new channels of distribution. Also, a manager would execute his or her organization function, which involves the process of arranging resources to carry out the organization’s goals. Because proper distribution is an essential part of the way an organization functions, a manager changing channels of distribution is working to meet the company’s overall strategic goals.

Practise Your Knowledge Sharpening Your Communication Skills Select a product you’re familiar with, and examine the strategies used to advertise and promote that product. Identify the media (website, print, television, radio, billboards, and so on) used to advertise the product. Consider the following: • Where do the ads appear?

• Who is the target audience? Does the company attempt to appeal to a wide variety of people with differing ads?

• What creative theme or appeal is being used?

• Is the company taking advantage of any Internet technologies for promotion?

Prepare a brief summary of your findings as directed by your instructor.

Compare your findings with those of other students, and note any differences or similarities in the promotion of your selected products.

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Students’ answers will vary according to the product they selected and the media observed. The student comparisons with other students should clearly show the many difference and similarities that will exist in this assignment.

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.

Expand Your Knowledge Discovering Career Opportunities Retailing is a dynamic, fast-paced field with many career opportunities in both store and non-store 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, and browsing the websites of online retailers.

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 their choices. An example might include Chapters, which is considered to be a category killer.

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?

Chapters’ hiring procedures center greatly on an employees understanding of customer service for bookseller positions. Management positions are usually filled from within the company, and a good way to get “on board” is to prove yourself as a dedicated seasonal employee by working during the Christmas rush.

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?

Answer will depend on the time the research is conducted.

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 direct to consumers? Is a physical retailer offering goods via a company website? Is a company eliminating the middleman? Has a nonstore retailer decided to open a physical store? Is a category killer opening smaller stores? Has a major retail tenant closed its stores in a mall? . 313

1. What changes in the company’s distribution structure or strategy have taken place? What additional changes, if any, are planned?

Answers will vary depending on the article selected.

2. What were the reasons for the changes? What role, if any, did electronic commerce play in the changes?

Answers will vary depending on the article selected.

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?

Answers will vary depending on the article selected.

Answers to Boxed Features Box 1: Where Did the Audience Go? Looking around at today’s media-saturated world, it’s hard to imagine a time when “mass media” consisted of a couple of nationwide television networks, radio, local newspapers, and a handful of popular magazines. If you wanted to launch a new product nationwide, you simply bought commercial time on CTV or CBC in Canada (CBS, ABC, or NBC in the United States) and you would have had a pretty good chance of reaching your target market. Advertisers didn’t have to look very far to find consumers, because consumers didn’t have anywhere else to turn (and they didn’t even have remote controls to mute commercials or change the channel).

Fast-forward to the twenty-first century when advertisers wonder where everybody went. Consumers are still around, of course, but now they’re scattered in smaller, isolated pockets all over the media landscape, from blogs to Internet radio to online e-zines to digital cable systems with hundreds of channels. With personal video recorders (PVRs) they can zoom right past commercials they once had to sit through.

Many people, particularly younger consumers, are spending less time watching regular TV and more time playing video games or enjoying DVDs. According to one study, a national US advertiser in 1995 could reach 80 percent of American women aged 18 to 49 by running a commercial just three times. To reach that same group a decade later required 97 ads, and these figures are climbing as the media fragments further.

How can advertisers reach audiences that won’t sit still and won’t pay attention when they are sitting still? Nobody has the answer for every situation, but advertisers are trying plenty of possibilities. Product placement, in which advertisers put their products right into a TV show or movie, is more common than ever. Have you noticed those Coke-logo beverage cups the judges drink from on American Idol?

Coca-Cola paid $20 million to put them there. That program also features the CocaCola interview room, with red and white bottles appearing in the background on digital displays as Ryan Seacrest asks the contestants questions. Another common move is taking the ads to wherever the customers are, from posters in rest rooms to TV screens positioned near checkout lines, gas pumps, and other places people are forced to wait. Highway billboards have gone high tech, too, with flashy electronic displays that can be altered by remote control to catch the eye of drivers stuck in . 314

traffic. One company pays college students to wear company logos on their foreheads. Tremor, a promotions company started by consumer giant Procter & Gamble, has recruited several hundred thousand teenagers to help promote its products—without pay. These boys and girls are treated to sneak previews and inside information about various products, and they’re only too happy to share the news with their friends.

Television commercials aren’t going away, of course, but advertisers are working harder to make them more entertaining and more memorable, if sometimes more risqué or even disgusting in some viewers’ opinions. If you don’t like these new ads, don’t think you can get away by switching off the TV to play a video game instead; many games now have ads built right into them (and if you play networked games over the Internet, somebody’s probably measuring your response to these ads, too).

Of course, every new solution seems to create another round of problems. With ads everywhere, consumers are now complaining that there’s nowhere to hide. Until somebody dreams up a better way to reach consumers, though, chances are that wherever you go you’ll find an ad waiting for you—and it might be delivered by your best friend.

Questions for Critical Thinking 1. Do fragmented media make it easier or harder for marketers to engage in segmented or concentrated marketing? Explain your answer.

Students will choose a negative or positive response as they discuss whether marketing by segments is possible given the fragmented media. Students suggesting it is easier will point to segmentation categories including demographics, geography, psychology, etc.

2. Is it ethical to engage consumers to help promote your products without explicitly telling them you’re doing so? Explain your answer.

Student answers will vary based on their view of the ethical dilemmas involved in this area.

Box 2: Zoom Media: A Good Place for an Ad Consumers are faced with an endless string of ads on television, in magazines, on the radio, and in other traditional media outlets. It is difficult for sponsors to get a message through to the current ad-weary generation. Once upon a time, a firm could advertise on a local station and feel confident that it would reach a significant portion of the targeted community. Today, satellite and digital cable are providing countless stations and fragmenting the market. Personal video recorders are reducing the ad impressions as consumers are able to skip ads like never before. Furthermore, traditional media are competing for our leisure time with alternatives like the Internet. What can a savvy marketer do? Zoom Media offers a solution by enabling sponsors to place strategically integrated messages into consumers’ everyday work and play environments.

You may or may not be familiar with Zoom Media, but you have undoubtedly seen its ads. They are located in washrooms across the country, from your local school . 315

campus to the bar you frequent to sports and medical complexes in your community.

What began in 1991 as a university project to raise awareness and reduce the spread of sexually transmitted diseases eventually grew into Zoom Media. This company now boasts 30 000 billboard locations in more than 4000 venues. Carl Grenier and his team pioneered this advertising approach; they began by acquiring the rights to display ads in restaurants and bars. The Zoom resto-bar division now serves close to 2000 different outlets. If a sponsor is targeting a specific youth segment it can reach them directly in their favourite bar or restaurant. Zoom also serves 70 educational institutions, 320 sports clubs, 375 medical facilities, and 230 golf courses across Canada and the United States. According to research, consumers are at peace with the invasion of their washrooms: “80% of students appreciate the ads and 54% of students recall the advertisements.”

Zoom Media continues to expand its reach. With its recent acquisition of Parkad Media Ltd. it has branched out to serve parking lots. In addition to its extensive network of restaurants, Zoom Media has forged an alliance with McDonald’s and serves 558 franchise locations. One thing is clear: washrooms across the nation have become a new permanent outlet to access your mind and influence your perception of products.

Questions for Critical Thinking 1.

One of the benefits of Zoom Media’s approach is the opportunity for sponsors to target specific groups. Name a product/brand that would be a good candidate to promote in Zoom’s golf network. Explain.

One of the great advantages of Zoom’s model is that advertisers can target specific groups. From night clubs to golf courses, segments are divided based on the typical clientele. In the case of a Golf course an obvious choice would be golf apparel companies. Their demographic profiles tend to be older than typical patrons at a night club. Golf clubs can be further distinguished based on reputation and demographic factors like average income of the typical guest or member. As far as McDonald’s is concerned you would expect to find products that are geared to a younger audience and or major mass marketed brands that range from Gatorade to iPods.

2. How do Zoom’s washroom ads fulfill the three principle objectives of advertising?

The three principle objectives of advertising are to: inform, persuade and remind. The Zoom model can be used to gain awareness and inform the target group when a new product is out on the market. It is yet another approach to break through the clutter and reach individuals. It can also be used to persuade and or remind customers and achieve the current objectives of the advertiser’s campaign.

See It on the Web URLs for all Internet exercises are provided at the website for this book, www.pearsoned.ca/bovee. When you log on to the text website, select Chapter 12, then select Web Destinations, click on the name of the featured website, and follow the detailed navigational directions to complete these exercises.

Explore these chapter-related websites, review their content, and answer the following questions for each website you visit:

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1. What is the purpose of this website?

2. What kinds of information does this website contain? Please be specific.

3. How is the information provided at this website useful for businesspeople?

Consumers?

4. How did you expand your knowledge of distribution and promotion by reviewing the material at this website? What new things did you learn about these topics?

Explore the World of Wholesaling Thinking about a career as a wholesale sales representative? The Occupational Outlook Handbook is a terrific source for learning about careers in business. Read the online material discussing the functions wholesale sales reps perform, the skills and experience manufacturers look for in candidates, and how to acquire any necessary training. Find out what a typical day on the job involves. How will you be compensated? Will travel be required? Will you be required to work long hours?

What types of reports will you be expected to submit? Log on and learn now. A career in wholesale sales may be just the thing for you. http://stats.bls.gov/oco/ocos119.htm 1. What is the purpose of this website?

While student responses may vary, the following will address some possible answers.

The purpose of this website is to provide access to the Occupational Outlook Handbook that details careers in business (this website specifically details a career in sales, wholesale, and manufacturing.

2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers.

This website provides information on the nature of the work, working conditions, employment, training, other qualifications, advancement, job outlook, earnings, related occupations, sources of additional information specially related to a career in sales, wholesaling, and manufacturing.

3. How is the information provided at this website useful for businesspeople?

Consumers?

While student responses may vary, the following will address some possible answers.

This website is useful for businesspeople because it details Economic/job outlooks and how this will affect customers' needs and the impact of technology on consumer needs. It also lists the median annual earnings of sales representatives, wholesale and manufacturing. Businesses can use this for comparison purposes.

This website is useful to consumers for informational/educational purposes. It is a very good source to gain knowledge about all of the information listed above (refer to answer for #2) to help an individual decide if a specific job is right for him or her or not.

4. How did you expand your knowledge of distribution and promotion by reviewing the material at this website? What new things did you learn about these topics?

Students’ responses will depend, in large part, on the material currently posted on the website. . 317

Learn the Consumer Marketing Laws Thinking about advertising or marketing your product? There are some laws you'll need to obey. Visit the Canadian Radio-television and Telecommunications Commission (CRTC) website to learn how this agency protects consumers against unfair and deceptive marketing practices. How many minutes of commercial time can a broadcaster allocate in an hour? How does the CRTC regulate advertisements of alcoholic beverages? How does the commission regulate advertising aimed at children? www.crtc.gc.ca 1. What is the purpose of this website?

While student responses may vary, the following will address some possible answers. The purpose of this website is to provide basic information concerning broadcast regulations.

2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers. This website contains information on the following: broadcast rules, advertising regulations, policies, public consultations, case examples.

3. How is the information provided at this website useful for businesspeople?

Consumers?

While student responses may vary, the following will address some possible answers. This website is useful for businesspeople because it provides the listing of rules/guidelines that businesspeople should. This website provides consumers with information and cases.

4. How did you expand your knowledge of distribution and promotion by reviewing the material at this website? What new things did you learn about these topics?

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

See How the Pros Put Marketing to Work Marketing Sherpa offers a compelling mix of articles, advice, and on-the-job interviews with marketing experts. The site's valuable content archives require nominal fees, but you can view the material for no charge for 10 days after it is first published, so visit frequently to get free insights into real-world marketing challenges. Plus, sign up for free e-newsletters in B2B and B2C marketing, e-mail marketing, marketing careers, and media relations. Check out Career Climber to see what's on the mind of top marketing people and to find job listings, salary benching, and career advice. www.marketingsherpa.com

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1. What is the purpose of this website?

While student responses may vary, the following will address some possible answers.

The purpose of this website is to provide sales and marketing how-to and reference information 2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers.

The website provides the following: over 100 how-to and reference articles; a wealth of sales and marketing trends, statistics, and legal issues; information on marketing strategies, promotions, trade shows, event marketing, direct marketing; information on how to incorporate the Internet into your promotional strategies; information on the most effective sampling strategies; information on how to attract and keep longterm customers using frequency marketing; tips for building customer profiles.

3. How is the information provided at this website useful for businesspeople?

Consumers?

While student responses may vary, the following will address some possible answers This website is useful for businesspeople because it provides information on all of the above (refer to answer for #2). This information can assist businesspeople in developing the most effective sales/marketing strategies.

Consumers can use this website for informational/educational purposes.

4. How did you expand your knowledge of distribution and promotion by reviewing the material at this website? What new things did you learn about these topics?

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

Focusing on E-Business in Action Bricks and Clicks: Bridging the Physical and Virtual Worlds Questions for Critical Thinking 1. Why did retailers initially separate their physical and web stores?

The thinking was that the creation of separate e-businesses would allow the web entity to: speed up decision making; be more flexible; be more entrepreneurial; act independently; and thus compete more effectively with pure-play e-businesses 2. Why did the strategy to separate online and offline stores fail?

The strategy forced the physical stores to compete with their online sibling and prevented them from sharing management teams, combining marketing programs, or achieving economies of scale.

3. What are the benefits of a clicks-and-bricks strategy?

Mixing clicks with bricks (also known as clicks-and-bricks or clicks-and-mortar) makes a store’s physical and web operations transparent to the customer. Multichannel customers who shop both online and in stores tend to be more loyal and spend more money. Clicks-and-bricks retailers can use their websites to advertise, test merchandise, suggest gifts, increase product awareness, cross-promote online and

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offline products, and drive traffic to their physical stores or vice versa. Some are even using their websites to provide specialty items not available in stores

Chapter 12 Pop Quiz 1. Most companies do not sell their goods directly to the final users. Producers in many industries work with _________________ to bring their products to market. a. marketing intermediaries b. distribution strategists c. inventory control analysts d. none of the above 2. ___________________is the interpersonal aspect of the promotional mix. It involves person-to-person presentation—face-to-face, by phone, or by interactive media such as Web TV’s video conferencing or customized websites—for the purpose of making sales and building customer relationships. a. Advertising b. Personal selling c. Public Relations d. none of the above 3. The final step in the personal selling process is: a. closing b. trial close c. presenting d. following up 4. All forms of advertising and direct marketing have three objectives. Which of the following is not one of these objectives? a. to create product awareness b. to persuade consumers c. to remind consumers and keep the brand on the top of the client’s mind d. all of the above 5. If the focus is on intermediaries, the producer uses a _________strategy to persuade wholesalers and retailers to carry the item. If the marketing focus is on end users, the producer uses a ________strategy to appeal directly to the ultimate customer. a. push; pull b. pull; push c. front; back d. back; front 6. Which of the following is a disadvantage for direct marketing: a. relatively high cost per exposure b. customized messages c. regular recurrent contact d. indirect interaction with large reach

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7. _____________________is designed to create goodwill and build a desired image for a company rather than to sell specific products. a. National advertising b. Product Advertising c. Institutional Advertising d. Local advertising 8. Which of the following is a disadvantage of rebates (to the seller)? a. many buyers neglect to redeem the rebates b. the costs of running such programs is relatively high c. rebates allow the manufacturer to promote the reduced price even though customers pay the full price at checkout d. none of the above 9.

By transferring products from producer to the consumer, intermediaries ensure that goods and services are available where consumers wish to purchase them.

This creates _________ utility. a. time b. place c. possession d. form

10. Companies rely on _________________to build a favourable corporate image and foster positive relations with these groups. a. Personal Selling b. Direct Advertising c. Direct Mail d. Public Relations

Answers to Pop Quiz: 1.

2.

3.

4.

5.

6.

7.

8.

9.

a b d d a a c b b

10. d

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Chapter 13: Analyzing and Using Financial Information Learning Objectives 1 2 3

Discuss how managers and outsiders use financial information Describe what accountants do Summarize the impact of the Sarbanes-Oxley Act in the United States and Bill C-198 in Canada 4 State the basic accounting equation and explain the purpose of double-entry bookkeeping and the matching principle 5 Differentiate between accrual-basis and cash-basis accounting 6 Explain the purpose of the balance sheet and identify its three main sections 7 Explain the purpose of the income statement 8 Explain the purpose of the statement of cash flows 9 Explain the purpose of ratio analysis and list the four main categories of financial ratios 10 Identify the responsibilities of a financial manager

Summary of Learning Objectives 1 Discuss how managers and outsiders use financial information Managers use financial information to control a company’s operations and to make informed business decisions. Outsiders use financial information to evaluate whether a business is creditworthy or a good investment. Specifically, banks want to know if a business is able to pay back a loan, investors want to know if the company is earning a profit, and governments want to be assured that the company is paying the proper amount of taxes.

2 Describe what accountants do Accountants design and install accounting systems, prepare financial statements, analyze and interpret financial information, prepare financial forecasts and budgets, prepare tax returns, interpret tax law, calculate and analyze production costs, evaluate a company’s performance, and analyze the financial implications of business decisions. In addition to these functions, accountants help managers improve business procedures, plan for the future, evaluate product performance, and analyze the firm’s profitability. Auditors are licensed certified public accountants who review accounting records and processes to assess whether they conform to generally accepted accounting principles (GAAP) and whether the company’s financial statements fairly present the company’s financial position and operating results.

3

Summarize the impact of the Sarbanes-Oxley Act in the United States and Bill C-198 in Canada The Sarbanes-Oxley Act introduced a number of rules covering the way publicly traded companies manage and report their finances, including restricting loans to directors and executives, creating a new board to oversee public auditors, requiring corporate lawyers to report financial wrongdoing, requiring CEO’s and CFO’s to sign-off on financial statements under oath, and requiring companies to document . 322

their financial systems. These rules had a direct impact on many firms based in Canada as well. Bill C-198 has taken the basic sentiment of Sarbanes-Oxley and brought tough compliance rules north of the border.

4

State the basic accounting equation and explain the purpose of double-entry bookkeeping and the matching principle Assets = Liabilities + Owners’ Equity is the basic accounting equation. Double-entry bookkeeping is a system of recording financial transactions to keep the accounting equation in balance. The matching principle makes sure that expenses incurred in producing revenues are deducted from the revenue they generated during the same accounting period.

5 Differentiate between accrual-basis and cash-basis accounting Accrual-basis accounting recognizes revenue at the time of sale, even if payment is not made. Similarly, expenses are recorded when you receive the benefit of a service or when you use an asset to produce revenue. Cash-basis accounting recognizes revenues at the time payment is received and expenses when cash is paid. Public companies are required to keep their books on an accrual basis.

6 Explain the purpose of the balance sheet and identify its three main sections The balance sheet provides a snapshot of the business at a particular point in time. It shows the size of the company, the major assets owned, how the assets are financed, and the amount of owners’ investment in the business. Its three main sections are assets, liabilities, and owners’ equity.

7 Explain the purpose of the income statement The income statement reflects the results of operations over a period of time. It gives a general sense of a company’s size and performance.

8 Explain the purpose of the statement of cash flows The statement of cash flows shows how a company’s cash was received and spent in three areas: operations, investments, and financing. It gives a general sense of the amount of cash created or consumed by daily operations, fixed assets, investments, and debt over a period of time.

9

Explain the purpose of ratio analysis and list the four main categories of financial ratios Financial ratios provide information for analyzing the health and future prospects of a business. Ratios facilitate financial comparisons among different-sized companies and between a company and industry averages. Most of the important ratios fall into one of four categories: profitability ratios, which show how well the company generates profits; liquidity ratios, which measure the company’s ability to pay its short-term obligations; activity ratios, which analyze how well a company is managing its assets; and debt ratios, which measure a company’s ability to pay its long-term debt.

10 Identify the responsibilities of a financial manager The responsibilities of a financial manager include developing and implementing a firm’s financial plan, monitoring a firm’s cash flow and deciding how to create or use excess funds, budgeting for current and future expenditures, recommending specific . 323

investments, raising capital to finance the enterprise for future growth, and interacting with banks and capital markets.

Brief Chapter Outline I.

What is Accounting A. Accounting B. What Accountants do 1. Accountants do the following 2. Areas of accounting 3. What Accountants do in addition to traditional accounting work 4. Private Accountants 5. Chartered Accountants (CAs) 6. Certified Management Accountants (CMAs) 7. Certified General Accountants (CGAs) 8. Public Accountants C. The roles of accounting 1. Published financial statements must be prepared according to GAAP 2. The Canadian Institute of Chartered Accountants establishes GAAP in Canada 3. International Accounting Standards hopes to standardize accounting rules worldwide 4. How strict is GAAP 5. New Rules: Sarbanes Oxley and Bill C-198 II. What Are the Fundamental Accounting Concepts?

A. The accounting equation 1. Assets 2. Liabilities 3. Owners equity 4. Accounting equation B. Double-entry bookkeeping and matching principle 1. Double-entry bookkeeping 2. The matching principle III. How are Financial Statements Used?

A. Understanding Financial Statement 1. What type of information do financial statements provide 2. What should you use financial statements for 3. Balance sheet 4. Income statement 5. Statement of cash flows B. Analyzing financial statements 1. Trend analysis 2. Ratio analysis a. Benefits of using ratios b. Two rules of thumb 3. Types of financial ratios a. Profitability ratios b. Liquidity ratios c. Activity ratios d. Leverage or debt ratios .

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IV. What Does Financial Management Involve?

A. Developing and implementing a financial plan 1. Financial plan 2. Two objectives of a financial plan 3. Financial planning requires an answer to these questions: a. Is the company introducing a new product in the near future or expanding its market? b. Is the industry growing? c. Is the national economy declining? d. Is inflation heating up? e. Would an investment in new technology improve productivity?

B. Monitoring cash flow C. Developing a budget 1. Budget 2. Mastering operating budget 3. Financial control 4. Capital investment 5. Capital budgeting

Lecture Notes and Chapter Outline I.

What is Accounting?

Accounting is a system used in businesses to identify, measure, and communicate financial information to others inside and outside the organization Helps outsiders (suppliers, banks, etc) evaluate a business Helps managers plan and control a firm’s operations Financial Accounting: concerned with preparing financial statements and other information for outsiders such as stockholder and creditors Management accounting: concerned with preparing cost analyses, profitability reports, budgets, for insiders such as managers A. What Accountants do 1. Accountants do the following: a. Design accounting systems b. Prepare financial statements c. Analyze and interpret financial information d. Prepare financial forecasts and budgets e. Prepare tax returns f. Interpret tax law 2. Areas of accounting: a. Cost accounting: computing and analyzing production costs b. Tax accounting: preparing tax returns and interpreting tax law c. Financial analysis: evaluating a company’s performance and the financial implications of strategic decisions such as product pricing, employee benefits, and business acquisitions.

3. What accountants do in addition to traditional accounting: a. Help clients improve business processes b. Plan for the future c. Evaluate product performance d. Analyze profitability by customer and product groups e. Design and install new computer systems f. Assist companies with decision-making .

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4. Private Accountants: work for a business, government agency, school, non-profit corporations a. Generally work as a team under the supervision of the organization’s controller, who reports to the vice president of finance (In smaller organizations, the controller may be in charge of the company’s entire finance operation and report directly to the president) 5. Chartered Accountants (CA’s): professionally licensed accountants who meet certain requirements for education and experience and pass a comprehensive examination.

6. Certified Management Accountants (CMAs): earn a university degree,

complete prerequisite course work, pass an entrance exam prior to admission, complete a two-year professional component called Strategic Leadership, and complete 24 months of relevant work experience 7. Certified General Accountants (CGA): requires a university degree, work experience, and the successful completion of an examination.

8. Public accountants: Independent of businesses, organizations, and individuals they serve a. Only public accountants who have passed the CA exam and obtained certifications may conduct an audit. ¾ a formal evaluation of a company’s accounting records and processes to ensure integrity and reliability of a company’s financial statements b. External auditors: employees who review a client’s financial records to determine whether the statements that summarize these records have been prepared in accordance with generally accepted accounting principles (GAAP) basic accounting standards and procedures that have been agreed on by regulators, auditors, and companies over decades c. Internal auditors: employees who investigate and evaluate a company’s internal operations and data to determine whether they are accurate and comply with GAAP, federal laws, and industry relations ¾ part of a self-checking process WHAT DO STUDENTS THINK? Ask students to write for three to five minutes discussing why it might be important to have both internal and external audits. What is the purpose of each kind of audit, and why couldn’t the audits be performed by the same people? What are the benefits of each kind of audit?

C. The Rules of Accounting 1. Published financial statements must be prepared according to GAAP 2. The Canadian Institute of Chartered Accountants (CICA) is responsible for developing and monitoring GAAP in Canada 3. IAS (International Accounting Standards) hopes to standardize accounting rules worldwide a. Critics contend that IAS standards are inferior to GAAP

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FOR DISCUSSION Considering the cultural and financial differences between countries and cultures, it will be difficult to come up with standards that are universal for all countries. Ask students to consider the barriers that will have to be crossed in order to standardize accounting principles. Students should consider different economies, different attitudes towards money and time, shifts in currency, etc.

4. How strict is GAAP? a. GAAP: sets forth the principles and guidelines that companies and accountants must follow when preparing financial reports or recording accounting transactions b. GAAP gives executives the freedom to use their judgment in areas that can dramatically affect the company’s bottom line without breaking any rules c. Some companies take advantage of this flexibility (WorldCom) d. Accounting irregularities may be a result of pressure from employeeshareholders whose life savings are invested in company stock, executives whose bonuses are tied to a company’s bottom line, and financial managers who must meet Wall Street and Bay Street estimates to pump up a company’s stock price 5. New Rules: Sarbanes-Oxley and Bill C-198 a. High-profile scandals involving Enron, Nortel, WorldCom, and other big corporations prove that it is still possible to get around the rules and deceive investors. b. The US Congress passed the Public Company Accounting Reform and Investor Protection Act, usually referred to as the Sarbanes-Oxley Act. This Act had a direct impact on some Canadian companies when it was first introduced. Here are some of the key measures: outlaws most loans by corporations to their own directors and executives, requires corporate lawyers to report evidence of financial wrongdoing, prohibits external auditors from providing some non-audit services, prohibits investment bankers from influencing stock analysts, requires CEOs and CFOs to sign statements attesting to the accuracy of their financial statements c. The new Canadian-made Bill C-198 now makes compliance everyone’s business.

II. What Are the Fundamental Accounting Concepts?

A. The Accounting Equation 1. Assets: valuable items firms own or lease (land, buildings, equipment, cash) 2. Liabilities: what firms owe their creditors (banks, suppliers) 3. Owners equity: what remains after liabilities have been deducted from assets 4. Accounting equation: Assets – Liabilities = Owners’ equity Assets = Liabilities + Owners’ Equity B. Double-Entry Bookkeeping and Matching Principle 1. Double-entry bookkeeping: a. Records every transaction affecting assets, liabilities, or owners’ equity . 327

b. Although accountants use software, they must program the software and check transactions before they can close the books on transactions 2. The Matching Principle a. Requires that expense incurred in producing revenues be dedicated from the revenue they generated during the same accounting period b. Accountants match revenue to expenses by adopting the accrual basis of accounting which states that revenue is recognized when you make a sale or provide a service, not when you get paid c. If a company runs on a cash basis, the company records revenue only when money from the sale is actually received d. Amortization: the allocation of the cost of a tangible long-term asset over its estimated useful life. ¾ when you buy a piece of equipment or machinery, instead of deducting the entire cost of the item at the time of purchase, you amortize it over its useful life.

III. How are Financial Statements Used?

A. Understanding Financial Statements 1. Statements provide information about an organization’s financial strength and ability to meet current obligations, the effectiveness of its sales and collection efforts, and how well the company manages its assets 2. Use financial statements to spot opportunities and problems, make business decisions, evaluate a company’s past performance, present condition, and future prospects 3. Balance Sheet (statement of financial position): a snapshot of a company’s financial position on a particular date: freezes all business actions and provides a baseline from which a company can measure change a. The accountant sets up the balance sheet so that managers and other interested parties can evaluate the business’s financial position as if it were static b. Balance sheets are prepared once a year, usually at end of calendar year (1/1 –12/31) or at the end of a fiscal year (any 12 consecutive months) c. Assets: something owned by a company that will be used to generate income ¾ current assets: include cash and other items that will or can become cash ¾ fixed assets: long term investments in buildings, equipment, furniture, fixtures, transportation equipment, land ¾ assets are listed in descending order by liquidity (the ease with which they can be converted into cash) d. Liabilities: represent claims against the company’s assets ¾ current liabilities: obligations that will have to be met within one year of the date of the balance sheet ¾ accounts payable: money that companies owe its suppliers ¾ short-term financing: consists of trade credit and commercial paper ¾ accrued expenses: expenses that have been incurred but for which bills have not yet been received . 328

¾ long-term liability: obligations that are due one year or more after the date of the balance sheet ¾ long-term loans: borrowing company makes principal and interest payments to the bank over the term of the loan ¾ lease: the owner of an item allows another party to use it in exchange for regular payments ¾ bonds: certificates that obligate the company to repay a certain sum, plus interest, to the bondholder on a specific date e. Owners’ Equity ¾ the owners’ investment in a business is listed under owners’ equity or shareholder’s equity for a corporation ¾ sole proprietorships list owner’s equity under owner’s name; small partnerships list each partners share of firm separately, ¾ shareholders equity for a corporation is presented in terms of the amount of common stock that is outstanding ¾ shareholders also includes a corporation’s retained earnings – the portion of shareholders’ equity that is not distributed to its owners in the form of dividends 4. Income Statement: shows how profitable the organization has been over a specified period of time (typically one year) a. Summarizes revenues, expenses ¾ revenues: amounts that have been or are to be received from customers for goods and services delivered to them ¾ expenses: costs that have arisen in generating revenues b. Expenses and income taxes are subtracted from revenues to show the actual profit or loss of a company called net income, profit, or bottom line c. Expenses include both direct costs associated with creating or purchasing products for sale and indirect costs associated with business operations ¾ cost of goods sold = Beginning Inventory + Net purchases – ending Inventory ¾ gross profit: cost of goods sold deducted from sales ¾ operating expenses: includes both selling expenses and general expenses ¾ selling expenses: operating expenses incurred through marketing and distribution of a product ¾ general expenses: operating expenses incurred in the overall administration of a business d. A firm’s net operating income is adjusted by the amount of any nonoperating income or expense items (such as the gain or loss on the sale of a building)—result is firm’s net income or loss before taxes 5. Statement of Cash Flows: shows how much cash a firm generated over time and where the cash went a. Tracks the cash coming into and flowing out of a company’s bank accounts b. Reveals increase and decrease in cash but also the accounts causing the change c. Should give an account of: ¾ amount of cash created or consumed by daily operations .

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¾ amount of cash invested in fixed or other assets ¾ amount of debt borrowed or repaid ¾ proceeds from sale of stock or payment of dividends ¾ company’s ability to pay its short-term obligations when due B. Analyzing Financial Statements 1. Trend analysis: the process of comparing financial data from year to year in order to see how they have changed 2. Ratio Analysis: compares two elements for the same year’s financial figures (called ratios because they are computed by dividing one element of a financial statement by another) a. Benefits of using ratios ¾ highlight important relationships and measure performance ¾ set standards and benchmarks by comparing with industry averages b. Two rules of thumb: ¾ avoid drawing too strong of a conclusion from any one ratio ¾ once ratios have presented a general indication, refer back to specific data involved to see whether the numbers confirm what the ratio suggests 3. Types of Financial ratios a. Profitability ratios: show the state of the company’s financial performance or how well it is generating profits ¾ return on Sales: profit margin—the net income a business makes per unit of sales ¾ return on Investment: return on equity—the income earned on the owner’s investment ¾ earnings per share: the profit earned for each share of stock understanding b. Liquidity ratios: Measures the ability of the firm to pay its shortterm obligations ¾ working capital: current assets minus current liabilities: an indication of liquidity because it represents current assets remaining after the payment of all current liabilities ¾ current ratio: current assets divided by current liabilities ¾ quick ratio (acid test ratio): computed by subtracting inventory from current assets and dividing results by current liabilities ¾ often a better indicator of a firm’s ability to pay debt because current ratio ignores inventories c. Activity ratios: May be used to analyze how well a firm is managing its assets ¾ inventory turnover ratio: measures how fast a company’s inventory is turned into sales (usually the faster the better) ¾ accounts receivable turnover ratio: measures how well a company’s credit and collection policies are working by indicating how frequently accounts receivable are converted into cash d. Leverage or debt ratios ¾ lenders look at ratios to determine whether the potential borrower has put enough money into the business to serve as a protective cushion for the loan ¾ debt-to-equity ratio: total liabilities divided by total equity .

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(indicates the extent to which a business is financed by a debt as opposed to invested capital ¾ debt-to-total assets ratio: serves as simple measure of a company’s ability to carry long-term debt (amount of debt should not exceed fifty percent of value of total assets) FOR DISCUSSION Use the batting average example in the text as a jumping off point for a discussion about ratios. In what other ways can ratios be misleading? Why must there be a representative number of subjects in science experiments? Ask students to give examples of skewed ratios.

IV. What Does Financial Management Involve?

A. Developing and Implementing a Financial Plan 1. Financial plan: a document that shows the funds a firm will need for a period of time , as well as the sources and uses of those funds 2. Two objectives of a financial plan: a. Achieving a positive cash flow b. Efficiently investing cash flow to make your company grow 3. Financial planning requires an answer to these questions: a. Is the company introducing a new product in the near future or expanding its market? b. Is the industry growing? c. Is the national economy declining? d. Is inflation heating up? e. Would an investment in new technology improve productivity?

B. Monitoring Cash Flow How companies use excess cash flow helps determine the direction of company Some companies use cash for growth Some companies improve cash flow by monitoring working capital accounts (controlling inventory levels, timely bill dispatching, shrinking accounts receivable collection periods) Invest in short-term investments called marketable securities (interestbearing or dividend-paying investments) Developing a Budget 1. Budget: financial blueprint for a given period (often one year) 2. Master operating budget: helps financial managers estimate the flow of money into and out of the business by structuring financial plans in a framework of a firm’s total estimated revenues, expenses, and cash flows a. Sets a standard for expenditures b. Provides guidelines for controlling costs c. Offers an integrated and detailed plan for the future 3. Financial control: once the budget is created, the finance managers compare actual results with projections to discover variances and make recommendations on corrective action 4. Capital Investments: major expenditures in buildings or equipment that will help a firm grow 5. Capital budgeting: deciding whether to invest in major assets, which ones, and how to finance those undertaken . 331

Potential Difficulties and Suggested Solutions 1. With the recent scandals, many issues are now being raised concerning the legitimacy of auditors and the accuracy of the information they report.

Students will be interested in this and the instructor may want to initiate discussion based on these recent issues involving Nortel, Enron, WorldCom, etc. A possible in-class debate could address the following: ¾ Accounting firms should be liable to pay stockholders if they give a company a clean audit and it goes bankrupt within a year?

Students may argue that many people such as creditors, shareholders, investors, and government agencies, rely on the integrity of a company’s financial statements and place great trust and confidence in the independence of auditors whose detached position allows them to be objective and, when necessary, critical. Some students may feel they are liable, other may argue that, realistically, this is not possible. This said, however, some possible consequences (punishment of some sort) of action should be in place for these particular auditors. This is a good starting point before discussing Sarbanes Oxley and Bill C-198.

Behind the Scenes Corporate Reputation: Once a Tremendous Asset, Now a Clear Liability for Nortel Test Yourself Answers to these questions can be found on the website: www.pearsoned.ca/bovee.

1. What will it take for Nortel to regain the respect it once had from investors and customers?

In order for financial markets to function effectively, accurate timely information is required. In the case of Nortel, there is plenty of information in the form of numbers, statistics and ratios. The only problem is that nobody seems to be sure that the figures are accurate. The reputation has been destroyed by a long series of errors and/or illegal actions. Only after this is cleaned up and after years of accurate records will this reputation begin to approach its former lofty heights.

2. Do you think that customers and suppliers should avoid doing business with Nortel until they get their house in order?

Student answers will vary on this question based on perceived strength of the company, in the long term, and based on ethical issues. However, customers will continue to deal with Nortel if the company can provide great products at competitive prices. Suppliers will also deal with Nortel; however, if fears resurface they may try to add restrictive financial terms so that they won’t get caught with a major unpaid bill if the company gets into serious trouble.

3. What can governments do to protect investors and other stakeholders from unethical or illegal practices?

Governments are already making efforts to try to address this problem. The government, through various agencies and departments, oversees the financial markets to ensure fair and accurate information. As this chapter explain, both the Canadian and US Governments have come up with stricter laws under Bill C-198 and . 332

Sarbanes Oxley.

4. How does the Nortel case relate to the tighter new laws and regulations that fall under the Sarbanes-Oxley Act in the United States and Bill C-198 in Canada?

The Sarbanes-Oxley Act and Bill C-198 can be directly attributed to scandals and inaccurate financial information from major companies like Nortel, Enron, WorldCom and many others. The outrage by investors, based on the loss of billions of dollars in stock value and pensions, created the political will to make the rules stricter.

Behind the Scenes (End of Chapter) How Long Will It Take? Nortel’s Troubles Resurface Critical Thinking Questions 1. What impact do the current charges against former CEO Frank Dunn have on Nortel’s future?

The charges against Frank Dunne were just another black mark on the reputation of Nortel. It cast an even greater shadow on the inner working of the organization. At the same time it also brought a sense of potential justice for investors that suffered losses. If a decision is rendered in the courts, at some future date, it will open up old wounds which may or may not lead to additional lawsuits but also bring some sense of closure for others.

2. In this chapter we have discussed the importance of financial figures and the ability of analysts and investors to crunch numbers. How do accounting irregularities affect this process? In particular, discuss the impact on the process of ratio analysis.

Crunching numbers is a vital tool in analyzing investment options and correctly selecting stocks for investment. Ratio analysis is defined as: the use of quantitative measures to evaluate a firm’s performance. This analysis is rendered useless if the figures are cooked and don’t represent an accurate picture of the company. Decisions are made based on shadows of the truth and therefore analysts and investors are being misled.

3. After taking major cost-cutting initiatives and laying-off approximately 65 000 people to save the company, what does Nortel need to do to recapture some of its status?

Student answers will vary. However, there are two key points that need to be made.

First, the long-term success will be fuelled by basic business fundamentals such as: strong R&D, good products, strong marketing, strong customer service etc. However, without a sense of order and trust in the accounting books any potential growth will be stifled by fears and mistrust.

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

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Answers to End-Of-Chapter Questions Test Your Knowledge Questions for Review 1. What is the difference between a private and a public accountant?

Most accountants are private accountants who work for a business, a government agency, or a non-profit corporation. Private accountants generally work together as a team under the supervision of the organization’s controller, who reports to the vicepresident of finance. In smaller organizations, the controller may be in charge of the company’s entire finance operation and report directly to the president.

Public accountants, by contrast, are independent of the businesses, organizations, and individuals they serve. Most public accountants are employed by public accounting firms that provide a variety of accounting and consulting services for their clients.

Members of the firm are generally CA’s and must obtain the CA designation before they are eligible to conduct an audit—a formal evaluation of a company’s accounting records and processes to ensure the integrity and reliability of a company’s financial statements.

2. What is the purpose of the Sarbanes-Oxley Act and Bill C-198?

To repair investor confidence, the US Congress passed the Sarbanes-Oxley Act. This Act had a direct impact on some Canadian companies when it was first introduced.

However, the new Canadian-made Bill C-198 now makes compliance everyone’s business. The Sarbanes-Oxley Act aims to stop abuses and errors in several important areas. The Act: outlaws most loans by corporations to their own directors and executives, creates the Public Company Accounting Oversight Board (PCAOB) to oversee external auditors, requires corporate lawyers to report evidence of financial wrongdoing, prohibits external auditors from providing some non-audit services, requires that audit committees on the board of directors have at least one financial expert and that the majority of board members be independent (not employed by the company in an executive position), prohibits investment bankers from influencing stock analysts, requires CEOs and CFOs to sign statements attesting to the accuracy of their financial statements, requires companies to document and test their internal financial controls and processes 3. What are the primary elements of an income statement?

The income statement shows an organization’s profit performance over a specific period of time, typically one year. It summarizes all revenues, the amounts that have been or are to be received from customers for goods or services delivered to them, and all expenses, the costs that have arisen from generating revenues. Expenses and income taxes are then subtracted from revenues to show the actual profit or loss of a company, a figure known as net income—profit, or the bottom line.

4. What is meant by the term “closing the books?”

During the accounting process, sales, purchases, and other transactions are recorded and classified into individual accounts. Once these individual transactions are recorded and then summarized, accountants must review the resulting transaction summaries and adjust or correct all errors or discrepancies before they can close the books, or transfer net revenue and expense items to retained earnings. . 334

5. What is the primary goal of capital budgeting?

Capital investments generally cover a period of several years and help the company grow. Before investments can be made, however, a firm must decide on which of the many possible capital investments to make, how to finance those that are undertaken, and even whether to make any capital investments at all.

Questions for Analysis 6. GAAP is monitored and developed by the Canadian Institute of Chartered Accountants (CICA). Why is GAAP important to company stakeholders?

Generally Accepted Accounting Principles (GAAP) are basic accounting standards and procedures that have been agreed upon by regulators, auditors, and companies over decades. GAAP is important for investors because it helps ensure that the results are a fair and true picture of a company’s financial position. In other words, the results of one company can be fairly judged against another because they are using the same rules.

7. Why do some companies resort to accounting tricks and what steps are being taken to clamp down on such wrongdoings?

The GAAP rules give executives the freedom to use their judgment in areas that can dramatically affect the company’s bottom line without breaking any rules.

Unfortunately, some companies take advantage of this flexibility by resorting to a number of accounting tricks that overstate expenses, puff up income, and hide problems from the public. New laws with tougher penalties are being created to try to address this problem.

8. What is the main purpose of calculating the various liquidity ratios?

Liquidity ratios measure the ability of the firm to pay its short-term obligations.

Liquidity can be judged on the basis of working capital, the current ratio, or the quick ratio.

9. What information can a stakeholder learn by reading a company’s balance sheet?

The balance sheet, also known as the statement of financial position, is a snapshot of a company’s financial position on a particular date. This statement is called a balance sheet because it includes all elements in the accounting equation and shows the balance between assets on one side of the equation and liabilities and owners’ equity on the other side.

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 of this billing error, and her response is, “Let it go, it happens often.” 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 negative effects on other accounting activities), as well as the ethics that have been called into question here.

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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. Log on to the Toronto Stock Exchange website at www.tsx.com and click on “Listed Company Directory.” Search for Royal Bank and Canadian Tire.

Using these financials, calculate 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 according to the year of the data; students should give evidence that they understand the term “more liquid.”

13. INTEGRATED: Review Chapter 3 Then review this chapter’s discussion of Bombardier. Do you think the concept of program accounting is ethical even though it may be legal? Is it ethical for the Bombardier family to control so many voting shares but own very little common stock?

Student answers will vary.

14. INTEGRATED: Your appliance manufacturing company recently implemented a just-in-time inventory system 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; ideally, current inventories would be lower than previously. The quick ratio, on the other hand, would be unaffected by the JIT system since is does not include inventory in its calculation; instead, it is calculated by adding cash, marketable securities, and receivables, then dividing that sum by current liabilities.

Practise Your Knowledge Sharpening Your Communication Skills Obtain a copy of the annual report of a business, and examine what the report shows about finances and current operations. In addition to other chapter material, use the information in “How to Read an Annual Report” as a guideline for understanding the annual report’s content.

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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? . 336

• • •

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.

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 pointers given in “How to Read an Annual Report”: • •

• • •

Check the CA’s report to see if the annual report conforms to generally accepted accounting principles 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

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Building Your Team Skills Divide into small groups and compute the following financial ratios for Pacific Manufacturing using the company’s Balance Sheet and Income Statement. Compare your answers to those of your classmates: • • • •

Profitability ratios: return on sales; return on equity; earning per share Liquidity ratios: current ratio; quick ratio Activity ratios: inventory turnover; accounts receivable turnover Leverage ratios: debt to equity; debt to total assets Pacific Manufacturing Balance Sheet December 31, 2008

Assets Cash Accounts Receivable (beginning balance $1500) Inventory (beginning balance $1500) Current Assets Fixed Assets Total Assets

$ 2000 3500 2700 $ 8200 33,000 $41,200

Liabilities and Shareholders’ Equity Current Liabilities (beginning balance $4000) $ 5000 Long-Term Debts 28,200 Shareholders’ Equity (500 common shares outstanding valued at $16 each) 8,000 Total Liabilities and Shareholders’ Equity $41,200 Pacific Manufacturing Income Statement Year ended December 31, 2008 Sales Less: Cost of Goods Sold Gross Profit Less: Total Operating Expenses Net Operating Income Before Income Taxes Less: Income Taxes Net Income After Income Taxes

$ 25,000 11,600 $13,400 6,450 6 950 1 350 $ 5 600

Instructor’s Notes. Students’ should consider 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 (if, for instance, the company carries a high bank debt); • The results of ratio analyses which may be performed, including: 9 profitability ratios (e.g., the company’s return on investment); 9 liquidity ratios (e.g., the company’s working capital, current ratio, and quick ratio); .

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9 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.

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. Select one of the occupations mentioned in this chapter. Using library sources, Internet websites, from one of the major accounting firms, or the websites for CICA (CAs), CMAs, or CGAs, dig deeper to learn more about your chosen occupation.

1. What are the day-to-day duties of this occupation? How would these duties contribute to the financial success of a company?

Students’ answers will vary according to the particular occupation they have chosen. In addition to the occupations listed in the text, students can find plenty of information from the Internet. The CICA’s website for instance, provides an extensive list of specific position descriptions (in the areas of public accounting, corporate accounting, and financial management), as well as various career paths.

2. What skills and qualifications would you need to enter this occupation?

How do these qualifications fit with your current plans, skills, and interests?

Students’ answers will vary according to the particular occupation they have chosen.

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?

Students’ answers will vary according to the particular occupation they have chosen.

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.

1. Did the company report a profit or a loss for this accounting period? What other performance indicators were reported?

Did the company’s performance improve or decline over previous accounting periods? What reasons were given for this change?

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.

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2. Did the company’s performance match industry analysts’ expectation, or was it a surprise? How did analysts or other experts respond to the firm’s actual quarterly or year-end results?

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?

Answers will vary according to the particular company being evaluated.

Answers to Boxed Features Box 1: Putting Accountability Back into Public Accounting For a profession that is supposed to be all about trust and financial responsibility, public accounting seems to be sliding from one scandal to another: billions of dollars in accounting fraud slipped past auditors, multimillion-dollar fines for selling shady tax shelters, accountants arrested for destroying documents, accusations of over billing, an endless parade of lawsuits from investors and clients—and the biggest black eye of them all, the collapse of the once-mighty accounting firm Arthur Andersen. How did all this happen over the past decade, and how can the profession restore public confidence?

No situation this complex has a simple explanation, but observers point out several issues that have contributed to many of the recent problems: ■ Deliberate deception by corporate clients. Auditors maintain that in many cases it’s impossible to detect deliberately misleading bookkeeping, and it’s unfair to hold them accountable when they don’t see it. An auditor “cannot provide 100 percent guarantee against fraud,” says Chuck Landes, director of auditing for the American Institute of Certified Public Accountants (AICPA).

■ Changes in accounting practices. Some claim that auditors aren’t looking in the right places. In the past, auditors used a labour-intensive process of sifting through thousands of transactions to determine if bookkeeping entries were correct. Now they focus on analyzing the computerized bookkeeping programs and internal controls.

While this approach prevents low-level employees from swiping petty cash, it can’t always catch executives who shift millions or billions around using creative accounting schemes.

■ Conflict of interest. Others blame the conflict of interest that exists when an accounting firm earns millions performing consulting work for an audit client. “If you are auditing your own creations, it is very difficult to criticize them,” says one accounting expert. Critics say these cozy relationships discourage some auditors from examining corporate books closely enough or challenging CEOs when potential irregularities surface.

With billions of dollars and the financial health of millions of people on the line, this new attention is a good thing. The past few years have given everyone a clear and important reminder: Auditing is a vital function upon which free enterprise and the health of the global economy depend.

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Questions for Critical Thinking 1. Examine the reasons given in this feature to explain why auditors sometimes don’t detect accounting irregularities and discuss why these problems exist and what else can be done to eliminate or curb these problems.

Student answers will vary. Students; however, should at least recognize that it would be very difficult to “criticize their own creations.”

2. Why is the auditing function of such vital importance to the global economy?

As businesses become more complex through global expansion and technological change, they must deal with an increasing number of ethical and social issues. This includes the use of questionable accounting practices to compute financial results. The Enron scandal has battered accounting’s public image and has prompted calls for reform of American accounting practices. Consumers are to questioning their investments and fail to participate in financial activities such as investing in the stock market. With this high level of uncertainty evident in the U.S. and Canadian economies, global activities may decrease, i.e. imports may decrease because companies may not be able to sell goods as rapidly and successfully as they did when the economy was good and consumer confidence was high.

Box 2: Software Simplifies Accounting Tasks Most small business owners love the idea of building their dream into a real business.

Unfortunately, many of them forget that for the business to be viable in the long run they must keep their financial books in order. Many small business owners dread the nuts and bolts of accounting and focus on building sales. But to ensure a solid financial footing, to keep the government off their backs, and to attain proper financing from banking institutions and investors, entrepreneurs need to pay attention to accounting matters. Thankfully, the process of maintaining the books has become a lot easier in recent years with the continued development and improvement of software accounting packages like Simply Accounting and QuickBooks. These software programs can range from $50 to a few thousand dollars. More advanced software packages like ACCPAC can range from the low thousands to over $100 000.

Simply Accounting, for example, has various product lines to meet the different needs of small businesses. The Entrepreneur version provides basic services like preparing invoices and tracking GST/PST. The Basic version enables users to manage inventory, track projects, and handle payroll in-house. The Pro version enables departmental accounting and is multiple-user ready. The Premium version can produce enhanced financial reports and enables the user to prepare forecasts. For more information on the differences between the packages you can visit www.simplyaccounting.com.

The bottom line: these programs are improving efficiency and enabling individuals with a limited accounting background, but a willingness to learn, to perform basic accounting functions effectively.

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Questions for Critical Thinking 1. List some of the practical ways that accounting software can help a small business owner develop his or her business.

Accounting software is designed to simplify basic accounting task such as: payroll and producing financial reports and forecasts.

2. Selecting a specific software package that is right for a firm’s particular needs can be difficult. What criteria should a small business owner consider before making a selection?

Student answers will vary. However, the relative needs of the company are the first consideration. Is this a lifestyle business or a growth venture? How many employees does the company have? How steady are the business revenues? What level of forecasting is required by the company? These are just a few questions to consider.

Box 3: How to Read an Annual Report Whether you’re thinking of investing in companies, becoming a supplier for them, or applying for a job with them, you’ll need to know how to read annual reports in your career. Thus, it’s worth your while to consider the advice of Newsweek columnist Jane Bryant Quinn, who provided the following pointers.

READ THE LETTERS First, turn to the auditor’s report. This third-party statement will tell you right off the bat if the report conforms to generally accepted accounting principles. Now turn to the letter from the chairman. This letter should tell you how the company fared this year, but more important, the letter should tell you why. Keep an eye out for sentences that start with “Except for...” and “Despite the....” They’re clues to problems. The chairman’s letter should also give you insights into the company’s future. For example, look for what’s new in each line of business. Is management getting the company in good shape to weather the tough and competitive years ahead?

DIG INTO THE NUMBERS Check out the trend in the company’s working capital (the difference between current assets and current liabilities). If working capital is shrinking, it could mean trouble.

One possibility: The company may not be able to keep dividends growing rapidly.

Another important number to analyze is earnings per share. Management can boost earnings by selling off a plant or by cutting the budget for research and advertising.

Read the accompanying notes to the financial statements; they often tell the whole story.

If earnings are down only because of a change in accounting, maybe that’s good. The company owes less tax and has more money in its pocket. If earnings are up, maybe that’s bad. They may be up because of a special windfall that won’t happen again next year. One good indicator is the trend in net sales. If sales increases are starting to slow, the company may be in trouble.

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GET OUT YOUR CALCULATOR AND COMPARE High and rising debt, relative to equity, may be no problem for a growing business.

But it shows weakness in a company that’s levelling out. So get out your calculator and divide long-term liabilities by shareholders’ equity (the debt-to-equity ratio). A high ratio means the company borrows a lot of money to fund its growth. That’s okay—if sales grow too, and if there’s enough cash on hand to meet the payments.

But if sales fall, watch out. The whole enterprise may slowly sink..

Remember, one ratio, one annual report, one chairman’s letter won’t tell you much.

You have to compare. Is the company’s debt-to-equity ratio better or worse than it used to be? Better or worse than the industry norms? In company watching, comparisons are everything. They tell you whether management is staying on top of things.

Questions for Critical Thinking 1. Why might a job seeker want to read a company’s annual report before applying for a job with that company?

To understand what the company is about, what types of products or services it offers, where it does business, who its primary customers are, what its basic values are and what the company’s philosophy is, if the company values its employees, if it is profitable, if it is growing or shrinking its operations, etc. With answers to these questions, an individual seeking employment with a company can make an informed decision.

2. What types of valuable non-financial information might an annual report disclose to a potential supplier?

It can provide information about the values and principles of the company; its philosophy; its attitude towards employees, suppliers, and distributors; growth in its operations; and geographical expansions or contractions, etc.

See It on the Web URLs for all Internet exercises are provided at the website for this book, www.pearsoned.ca/bovee. When you log on to the text website, select Chapter 13, then select Web Destinations, click on the name of the featured website, and follow the detailed navigational directions to complete these exercises.

Explore these chapter-related websites, review their content, and answer the following questions for each website you visit: 1. What is the purpose of this website?

2. What kinds of information does this website contain? Please be specific.

3. How is the information provided at this website useful for businesspeople?

Consumers?

4. How did you expand your knowledge of accounting by reviewing the material at this website? What new things did you learn about accounting?

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Link Your Way to the World of Accounting Do you want to learn more about potential careers in accounting? Link to the following websites and get a feel for the various designations: CA, CMA and CGA. Find out about the differences and make an informed choice for your future. www.cica.ca http://www.cma-canada.org/ http://www.cga-canada.org/en-ca/Pages/default.aspx 1. What is the purpose of these websites?

While student responses may vary, the following will address some possible answers.

The purpose of these websites is to provide career information, news, analysis and information for the tax and accounting community.

2. What type of information do the websites contain? Please be specific.

While student responses may vary, the following will address some possible answers.

These websites contain information on the following: financial planning, practice management, technology consulting, latest accounting hot jobs and opportunities; information on the tip tax and accounting firms, etc.

3. How is the information provided on these websites useful for businesspeople? Consumers?

While student responses may vary, the following will address some possible answers.

The websites are useful for businesspeople, specifically those occupying accounting positions, because they provide independent news, analysis and information related to accounting issues. The websites are useful to consumers for informational/educational purposes.

They also provide information concerning careers in the accounting profession which may be of interest to consumers wishing to pursue a career in this field.

4. How did you expand your knowledge of accounting by reviewing the material on the sites? What new things did you learn about accounting?

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

Sharpen Your Pencil Sharpen your pencil and start thinking like an accountant. Take a virtual field trip to the Edgar and Sedar websites, where you can click to view the annual reports of Molson Coors, Allstate, Bombardier, and many other firms from around the world.

Select an annual report for any company and examine the financial statements, chairman's letter, and auditor's report. Was it a good or bad year for the company?

Who are the company's auditors? Did they issue a clean audit report?

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www.sedar.com http://www.sec.gov/edgar.shtml

1. What is the purpose of these websites?

While student responses may vary, the following will address some possible answers.

The purpose of these websites is to publish annual reports of many U.S. Canadian and international firms.

2. What information do these websites contain? Please be specific.

While student responses may vary, the following will address some possible answers.

The websites provide information on the following: annual report for companies that include the financial statements, chairman’s letter, and auditor’s report; information related to the company’s auditors; information on the accuracy of the audit reports; information to determine if the company had a good or bad year.

3. How is the information provided on the websites useful for businesspeople?

Consumers?

While student responses may vary, the following will address some possible answers.

The information provided is useful for businesspeople because you can access abstracts and order copies of brokerage research reports from over 245 U.S. and Canadian brokerage firms. The databases offer research reports from more than 3,200 brokerage analysts covering 8,000+ companies which all have such common sections as: Letter from the chairman (or CEO) to the shareholders; Financial Highlights; Balance Sheets; Profit and Loss Statements; New Business; Year in Review; Projections; Outstanding Shares of Stock and Complete list of Board Members. Business people can use this information for comparison purposes and benchmarking efforts.

Consumers can use these websites for informational/educational purposes 4. How did you expand your knowledge of accounting by reviewing the material on these websites? What new things did you learn about accounting?

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

Think Like an Accountant Find out how the world of accounting is changing by exploring the valuable links at the CICA website. Learn about the many facets of accounting such as taxes, finance, auditing, and more. Follow the link to your provincial CICA society, and discover what it takes to become a CA or how to prepare for the CA exam. Learn how to read a financial report, and discover what financial statements say about your business.

Check out the financial calculators. Increase your knowledge of accounting terms and accounting basics before participating in one of the site's discussion forums. . 345

www.cica.ca

1. What is the purpose of this website?

While student responses may vary, the following will address some possible answers The purpose of this website is to be the online community and website resource for accounting professionals.

2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers.

The website contains information on the following: financial planning, practice management, technology consulting, latest accounting hot jobs and opportunities; information on the tip tax and accounting firms, etc.

3. How is the information provided at this website useful for businesspeople?

Consumers?

While student responses may vary, the following will address some possible answers.

The website is useful for businesspeople because it provides news, analysis and information related to accounting issues. The website is useful to consumers for informational/educational purposes. It also provides information concerning careers in the accounting profession which may be of interest to consumers wishing to pursue this.

4. How did you expand your knowledge of accounting by reviewing the material at this website? What new things did you learn about accounting?

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

Chapter 13 Pop Quiz: 1. ________________ accountants work for a business, a government agency or a non-profit corporation, while ____________________ accountants are independent of the businesses, organizations, and individuals they serve. a. Private; public b. Public; private c. Cost; Management d. Management; Cost 2. ____________ are basic accounting standards and procedures that have been agreed on by regulators, auditors, and companies over decades. a. SEC b. GAAP c. FASB d. none of the above 3. When a company borrows money to purchase a building, the lender or creditor has a claim against the company’s assets.

This is referred to as a . 346

______________. a. asset b. cost c. liability d. none of the above 4. The ________________freezes all business actions and provides a baseline from which a company can measure change. a. income statement b. balance sheet c. statement of cash flows d. none of the above 5. _________________ is the portion of shareholders’ equity that is not distributed to its owners in the form of dividends. a. Retained earnings b. Statement of cash flows c. Cash dividends d. Revenues 6. Which of the following is NOT true in regards to trend analysis? a. it allows a company to compare financial data from year to year in order to see how they have changed b. can use it to uncover shifts in the nature of the business over time c. Most large companies fail to provide data for trend analysis in their annual reports d. All of the above are true in regards to trend analysis 7. Which of the following is NOT an advantage of ratio analysis? a. it makes it possible to compare different-size companies and changing dollar amounts b. converts the raw numbers from the current and prior years’ financial statements into ratios that highlight important relationships or measures of performance c. financial ratios help companies understand their current operations d. All of the above are advantages of ratio analysis 8. ________basis accounting recognizes revenue at the time payment is received, whereas ___________basis accounting recognizes revenue at the time of sale, even if payment is not made. a. Cash; accrual b. Accrual; Cash c. Cost; Accrual d. Cash; Cost 9. Which of the following is NOT a main section of the balance sheet? a. assets b. liabilities c. Owner’s equity d. All of the above are sections of the balance sheet .

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10. Which of the following is NOT a responsibility of a financial manager? a. developing and implementing a firm’s financial plan b. monitoring a firm’s cash flow and deciding how to create or use excess funds c. budgeting for current and future expenditures d. designing and installing computer systems on a regular basis

Answers to Pop Quiz 1. a 2. b 3. c 4. b 5. a 6. c 7. d 8. a 9. d 10. d

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Chapter 14 Understanding Banking and Securities Learning Objectives 1 2 3 4 5 6 7

Highlight the functions, characteristics, and common forms of money Discuss the responsibilities and insurance methods of the Canadian Deposit Insurance Corporation (CDIC) Discuss the Canadian banking industry Differentiate among a share’s par value, its market value, and its book value Highlight the distinguishing features of common shares, preferred shares, bonds, and mutual funds Differentiate among an auction exchange, dealer exchange, and electronic communication network (ECN) Explain how government regulation of securities trading tries to protect investors

Summary of Learning Objectives 1. Highlight the functions, characteristics, and common forms of money

Money functions as a medium of exchange, a measure of value, and a store of value.

It must be divisible, portable, durable, stable, and difficult to counterfeit. Common forms of money include currency, such as coins, bills, traveller’s cheques, cashier cheques, and money orders; demand deposits, like chequing accounts; and time deposits, such as savings accounts, certificates of deposit, and money-market deposit accounts.

2. Discuss the responsibilities and insurance methods of the Canadian Deposit Insurance Corporation (CDIC) The CDIC is a federal insurance program that protects deposits in banks up to $100 000 if a member bank fails.

3. Discuss the Canadian banking industry The Canadian banking industry consists of large chartered banks operating small branches throughout the country with little influence from foreign competitors and trust companies. The Big Six banks are Royal Bank of Canada, Scotiabank, Canadian Imperial Bank of Commerce, Toronto Dominion Bank, Bank of Montreal, and National Bank. They control the majority of the nation’s assets and are currently seeking a mandate from the government to merge with one another so they can compete more effectively on the world stage.

4. Differentiate among a share’s par value, its market value, and its book value Par value is the dollar value assigned to a share for bookkeeping and for dividend calculations. Market value is the price at which a share is currently selling. Book value is the portion of a corporation’s net assets represented by a single common share.

5. Highlight the distinguishing features of common shares, preferred shares, bonds, and mutual funds Common shares give shareholders an ownership interest in the company, the right to elect directors and vote on important issues, and the chance to earn . 349

dividends and share in the fortunes of the company—while limiting the shareholder’s liability to the price paid for the shares. Preferred shares usually provide shareholders a higher dividend than common shares and a preferred claim over common shareholders if the corporation fails. Certain types of preferred shares have special privileges. Bonds are long-term loans investors make to the issuing entity in return for a stated interest amount. The loan or principal is paid back to the bondholder over the life of the bond. Bonds may be secured, unsecured, or convertible. They may be issued by corporations or federal, provincial, and municipal agencies. Mutual funds are pools of money drawn from many investors to buy a variety of shares, bonds, and other marketable securities. The primary benefit of this investment is diversification.

6. Differentiate among an auction exchange, dealer exchange, and electronic communication network (ECN) Auction exchanges such as the Toronto Stock Exchange and the New York Stock Exchange funnel all buy and sell orders into one centralized location. Dealer exchanges like NASDAQ are decentralized marketplaces in which dealers, known as market makers, are connected electronically to handle buy and sell orders without a single, centralized trading floor. Electronic computerized networks (ECNs) match buy and sell orders directly (cutting out the market makers and specialists); ECNs operate globally, and they operate economically.

7. Explain how government regulation of securities trading tries to protect investors The government tries to prevent fraud in the securities markets by requiring companies to file registration papers, fulfill certain requirements, and file periodic information reports so that investors receive accurate information.

Government regulations also control the listing of companies on stock exchanges and prohibit such fraudulent acts as improper release of information, insider trading, stock scams, and other acts designed to deceive investors.

Brief Chapter Outline I.

Money and Financial Institutions A. Characteristics and Types of Money 1. Checking and Savings Accounts 2. Credit, Debit, and Smart Cards B. Financial Institutions and Services 1. Deposit and Non-deposit Financial Institutions 2. Loans 3. Electronic Banking C. Bank Safety D. The Evolving Canadian Banking Environment II. Types of Securities Investments A. Shares 1. Common Shares 2. Preferred Shares B. Bonds 1. Corporate Bonds 2. Canadian Government Securities . 350

3. Mutual Funds 4. Income Trusts III. Securities Markets A. Securities Exchanges B. How to Buy and Sell Securities 1. Securities Brokers 2. Orders to Buy and Sell Securities C. How to Analyze Financial News 1. Watching Market Indexes and Averages 2. Interpreting the Financial News D. Industry Challenges E. Regulation of Securities Markets 1. Filing Requirements 2. Regulation Fair Disclosure 3. Securities Fraud

Lecture Notes and Chapter Outline I.

Money and Financial Institutions A. Characteristics and Types of Money 1. Money: anything generally accepted as a means of paying for goods and services 2. Bartering: trading services and possessions as a means of getting what you need 3. Characteristics of Money: a. Divisible b. Portable c. Durable d. Difficult to counterfeit e. Stable value 4. Functions of Money a. Must serve as a medium of exchange—a tool for simplifying transactions between buyers and sellers b. Must serve as a measure of value so that you do not have to negotiate the relative worth of dissimilar items every time you buy something c. Must serve as a temporary store of value—a way of accumulating your wealth until you need it 5. Forms of money: a. Currency: coins, bills, traveler’s cheques, cashier cheques, and money orders b. Demand deposit: Money available immediately on demand, such as from checking accounts c. Time deposit: Accounts that pay interest and restrict the owner’s right to withdraw funds on short notice, such as savings accounts, certificates of deposit, and money-market deposit accounts 6. Chequing and Savings Accounts a. Cheques: written orders that direct your bank to pay the stated amount of money to you or to someone else. b. Savings Accounts: money can be withdrawn at any time from regular savings accounts. Two variations are listed below: . 351

¾ Money-market deposit account: money in this account earns more interest, but you are allowed only a limited number of monthly withdrawals ¾ Guaranteed Investment Certificate (GIC): earns an even higher interest rate, but you cannot withdraw funds for a stated period, such as six months are more 7. Credit, Debit, and Smart Cards a. Credit cards: plastic cards that entitle customer to make purchases now and repay the amount later ¾ popular substitute for currency and cheques ¾ companies may charge users an annual fee ¾ credit card companies charge businesses a processing fee ¾ all charge interest on any unpaid credit card balance b. Debit cards: plastic cards that function like cheques in that the amount of a purchase is electronically deducted from the user’s chequing account and transferred to the retailer’s account at the time of sale c. Smart cards: plastic cards that contain tiny computer chips that can store amounts of money (from the user’s bank account) and selected data (such as shipping address, credit card information, frequentflyer account numbers, health and insurance details, or other personal information ¾ when a purchase is made, the store’s equipment electronically deducts the amount from the value stored on the smart card and reads and verifies requisite customer information B. Financial Institutions and Services 1. Deposit and Non-deposit Financial Institutions a. Deposit institutions: accept deposits from customers or members and offer chequing and savings accounts, loans, and other banking services. ¾ Chartered banks: profit-oriented financial institutions that operate under the Bank Act. ¾ Trust Companies: incorporated by either federal or provincial governments. Provide many similar services to chartered banks. ¾ Credit unions and Caisse Populaires: non-profit member-owned organizations that take deposits only from members, such as one company’s employees or one union’s members or another designated group. b. Non-deposit institutions offer specific financial services but do not accept deposits. ¾ insurance companies, which provide insurance coverage for life, property, and other potential losses; they invest the payments they receive in real estate, in construction projects, and in other ways. ¾ pension funds, which are set up by companies to provide retirement benefits for employees; money contributed by the company and its employees is put into securities and other investments. ¾ finance companies, which lend money to consumers and businesses for home improvements, expansion, purchases, and other purposes. . 352

¾ brokerage firms, which allow investors to buy and sell stocks, bonds, and other investments; many also offer checking accounts, high-paying savings accounts, and loans to buy securities.

2. Loans: most important services financial institutions provide a. Personal loans ¾ auto loans ¾ home-improvement loans ¾ student loans b. Business loans ¾ expansion ¾ purchases of new equipment ¾ construction or renovation plants and facilities ¾ other large scale projects c. Line of credit: an agreed-on maximum amount of money a bank is willing to lend to a business during a specific period of time, usually one year 3. Electronic Banking a. Automated teller machines: an electronic banking service that allows for the withdrawal of money from a demand-deposit account at any hour b. Electronic funds transfer system (EFTS): computerized systems that allow users to conduct financial transactions efficiently from remote locations ¾ direct deposit c. Internet and online banking: allows individuals and businesses to transfer money between accounts, check account balances, pay bills, apply for loans, and handle other transactions at any hour DISCUSSION: Do you think Cyberbanks will grow substantially in the next five years? Support your position with facts and reasons.

C. Bank Safety and Regulation 1. The Canadian Deposit Insurance Corporation (CDIC) is a Crown corporation that was founded in 1967 to bring deposit insurance to the Canadian banking system.

2. The insurance covers deposits at banks, trust companies, and loan companies up to $100 000, and reimburses clients when a member institution fails.

D. The Evolving Canadian Banking Environment 1. In 1935 the Bank Act was passed, officially bringing the Bank of Canada into existence. It immediately became the lone issuer of currency and manager of credit in the country.

2. Today the Bank of Canada is in charge of setting interest rates; controlling the supply of money; administering the public debt, and providing a host central banking services, including setting regulations and acting as a bank for other Canadian financial institutions by accepting their deposits.

3. For most of the twentieth century, Canada’s finance industry was dominated by six unique participants: chartered banks, credit . 353

unions/caisses populaires, trust companies, insurance agencies, brokers, and other lending agencies.

4. This began to change in the 1980s and 1990s when several amendments were made to the Bank Act to increase the amount of competition in the financial services industry.

5. The Big Six banks are also pushing for bank mergers among themselves but the Canadian government has blocked potential merger activity.

II. Types of Securities Investments A. Securities: stocks, bonds, and other investment traded in organized markets B. Shares: represents ownership in a corporation and is evidenced by a share certificate 1. Authorized shares: the maximum number of shares into which the business can be divided a. Issued share: part of authorized share that is sold and held by shareholders b. Unissued share: part of authorized shares that is not sold 2. Stock split: increases the number of shares that each share certificate represents while proportionately lowering the value of each share 3. Par value: dollar value of a share when first issued 4. Market value: price at which a share currently sells 5. Book value: amount of net assets of a corporation represented by one common share 6. Common shareholders: a. Vote to elect the company’s board of directors b. Vote on other important corporate issues c. Receive dividends—payments from the company’s profits d. Have no say in day-to-day business operations e. Have the advantage of limited liability if the corporation gets into trouble f. Stand to make a profit if the stock price goes up and they sell their shares for more than the purchase price; also stand to lose if reverse is true 7. Preferred shareholders a. Higher dividends b. Better claim on assets if the corporation fails (after creditors) c. Amount of the dividend on preferred share is printed on the certificate and set when the share is first issued d. Convertible preferred share: can be exchanged, if the shareholder chooses, for a certain number of common shares issued by the company e. Cumulative preferred share has an additional advantage: If the issuing company stops paying dividends for any reason, the dividends on these shares will be held (accumulate) until preferred shareholders have been paid in full—before common shareholders are paid.

C. Bonds: method of raising money in which the issuing organization borrows from an investor and issues a written pledge to make regular interest payments and they repay the borrowed amount later 1. Bond certificate shows: a. Issuer’s name b. Amount borrowed (principal) . 354

c. Date this principal amount will be repaid d. Annual interest rate investors receive 2. Bonds are not guaranteed investments: The variations in interest rates across corporations that issue bonds are significant a. Variations in interest rates reflect the degree of risk associated with the bond, which is closely tied to the financial stability of the issuing company b. Corporate bonds: ¾ secured bonds: backed by company-owned property (such as airplanes or plant equipment) that will pass to the bondholders if the issuer does not repay the amount borrowed. ¾ mortgage bonds, one type of secured bond, are backed by real property owned by the issuing corporation. ¾ debentures are unsecured bonds, backed only by the corporation’s promise to pay. ¾ riskier than other types of bonds, investors who buy these bonds receive higher interest rates. ¾ convertible bonds can be exchanged at the investor’s option for a certain number of common shares ¾ pay lower interest rates 3. Canadian Government Securities a. Treasury bills (also referred to as T-bills): short-term government bonds that are repaid in less than one year. ¾ treasury bills are sold at a discount and redeemed at face value b. Canadian Savings bonds: are debt securities issued by the Bank of Canada; they are usually held in excess of one year. ¾ pay a fixed amount of interest c. Benefits of investing in government securities compared to corporate bonds: ¾ considered safer ¾ very little risk that the government will fail to repay bondholders as promised D. Mutual Funds: are financial organizations that pool money from many investors to buy a diversified mix of stocks, bonds, or other securities 1. No-load funds: charge no fee to buy or sell shares 2. Load funds: charge investors a commission to buy or sell shares. a. Front end (assessed when you purchase the fund) b. Back end (assessed when you sell the fund) 3. Types of mutual funds: a. Open-end mutual fund: issues additional shares as new investors ask to buy them b. Closed-end funds: raise all their money at once by distributing a fixed number of shares that trade much like stocks on major security exchanges c. Money-market funds: invest in short-term securities and other liquid investments Investment Mix Growth funds invest in stocks of rapidly growing companies Income funds invest in securities that pay high dividends and interest Balanced funds invest in a carefully chosen mix of stocks and bonds.

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Sector funds (also known as specialty or industry funds) invest in companies within a particular industry Global funds invest in foreign and domestic securities International funds invest strictly in foreign securities Index funds buy stocks in companies included in specific market averages, such as the Standard & Poor’s 500 d) Income Trusts: legal entities that hold cash-generating assets in trust and distribute the majority of income to unit-holders in the form of dividends.

III. Securities Markets A. Primary market: Newly issued shares or initial public offerings (IPOs) are sold in this market B. Secondary market: subsequent investors can buy and sell these shares in this organized market known as stock exchanges (or securities exchanges) C. Toronto Stock Exchange (TSX) is the largest securities exchange in Canada D. The New York Stock Exchange (NYSE) (also known as the “Big Board) : the world’s largest securities exchange E. The over-the-counter (OTC) market consists of a network of registered stock and bond representatives who are spread out across North America nad the World 1. National Association of Securities Dealers Automated Quotations (NASDAQ) nationwide computer network owned by the National Association of Securities Dealers (NASD) F. How to Buy and Sell Securities 1. Auction exchange: depicted in Exhibit 14.2 a. Example: New York Stock exchange b. All buy and sell orders (and all information concerning companies traded on that exchange) are funnelled onto an auction floor c. Stock specialist: a broker who occupies a post on the trading floor and conducts all the trades in specific stocks via a central clearinghouse ¾ if buying or selling imbalances occur in that stock, a specialist can halt trading to prevent the price from plunging without adequate cause ¾ can also sell stock to customers out of their own inventory 2. Dealer exchange a. Example: NASDAQ b. All buy and sell orders are executed through computers by market makers, registered stock and bond representatives who sell securities out of their own inventories 3. Electronic communication networks (ECN’s)—frequently referred to as a virtual stock market or cyber market a. Use the Internet to link buyers and sellers b. Computer networks with software programs that match buy and sell orders directly, cutting out the once dominant market makers and specialists 4. Many brokerage firms use a combination of auction exchanges, dealer exchanges, and ECN’s to execute their trades 5. Securities Brokers a. Must execute all trades of securities by using a securities broker

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b. Broker: an expert who has passed a series of formal examinations and is legally registered to buy and sell securities on behalf of individual and institutional investors ¾ investors pay transaction costs for every buy or sell order, to cover the broker’s commission ¾ full-service broker: provides financial management services such as investment counselling and planning; ¾ discount broker: provides fewer or limited services and generally charges lower commissions than a full-service broker ¾

WHAT DO STUDENTS THINK? What do you think will happen if the requirement to work through a broker is eliminated? Do you think it is a good idea?

6. Orders to Buy and Sell Securities a. Market order: tells the broker to buy or sell at the best price that can be negotiated at the moment b. Limit order: specifies the highest price you are willing to pay when buying or the lowest price at which you are willing to sell c. Stop order: tells the broker to sell if the price of your security drops to or below the price you set, protecting you from losing more money if prices are dropping d. Open order: instructs the broker to leave the order open until you cancel it e. Day order: is valid only on the day you place it f. Discretionary order: gives the broker the right to buy or sell your securities at the broker’s discretion g. Margin trading: when Investors borrow some of the money from their stockbroker, paying interest on the borrowed money and leaving the stock with the broker as collateral ¾ margin trading increases risk because if the price of a stock you bought on margin goes down, you will have to give your broker more money or the broker will sell your stock. h. Short selling: you sell stock you borrow from a broker in the hope of buying it back later at a lower price. After you return the borrowed stock to the broker, you keep the price difference ¾ Selling short is risky—the price may go up instead of going down G. How to Analyze Financial News 1. Daily newspaper reports on securities markets 2. Newspapers aimed specifically at investors a. Investor’s Business Daily b. Barron’s 3. General-interest business publications that follow the corporate world and give hints about investing a. Wall Street Journal b. Globe and Mail . 357

c. Forbes d. Fortune e. Business Week 4. Published newsletters and special reports on securities a. Standard & Poor’s b. Moody’s Investor Service c. Value Line 5. Online sources a. Your brokerage firm’s website b. Excellent financial websites 6. Bull market: the situation when stock prices have been rising over a long period 7. Bear market: a situation characterized by a long-term trend of falling prices 8. Watching Market Indexes and Averages a. Market indexes and averages: use the performance of a representative sampling of stocks, bonds, or commodities as a gauge of broader market activity b. Dow Jones Industrial Average (DJIA): tracks the prices of 30 blue chip or well-established stocks, each representing a particular sector of the U.S. economy ¾ Critics say the Dow is too narrow and too susceptible to shortterm swings, lacks the right stocks, and gives too much weight to higher-priced shares ¾ advocates say the Dow’s 30 stocks serve as a general barometer of market conditions c. Standard & Poor’s 500 Stock Average (S&P 500): tracks the performances of 500 corporate stocks ¾ weighted by market value, not by stock price, so large companies carry far more weight than small companies d. The Wilshire 5000 Index: actually covers some 7,000 stocks ¾ broadest index measuring U.S. market performance 9. Interpreting the Financial News (refer to Exhibit 14.3) a. Price-earnings ratio, or p/e ratio (also known as the price-earnings multiple): which is computed by dividing a stock’s market price by its prior year’s earnings per share b. Bond quotation tables in major newspapers (see Exhibit 14.4) are used to follow specific bonds c. Newspapers and business publications: include tables of price quotations for investments such as mutual funds, commodities, options, and government securities (see Exhibit 14.5) H. Industry Challenges 1. One of the largest complaints in Canada is the lack of a national securities regulator like the SEC in the United States. In Canada, the regulation of securities falls under the jurisdiction of the provinces, and laws can differ from province to province.

2. The International Monetary Fund (IMF) has called on Canada to scrap the provincial system in favor of a national body 3. Discount brokers, ECNs, large securities institutions such as Merrill Lynch and Goldman Sachs (which are investing in ECNs), and

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consumers are pushing traditional securities exchanges to offer electronic trading options within their exchanges 4. Some of Wall Street’s largest brokers are lobbying the SEC to adopt a sweeping new market system that includes a central display of all stock quotes 5. The push toward round-the-clock trading is another challenge securities markets are facing a. After-hours trading or extended-hours trading: refers to the purchase and sale of publicly traded stocks after the major stock markets, such as the NYSE and NASDAQ, close b. Biggest advantage to extended-hours trading: it accommodates traders who live in regions outside the Eastern time zone c. Biggest disadvantage: lack of volume 6. Online trading a. Advantages: convenience, control, and lower commissions b. Disadvantages: you trade alone, with no one to check for mistakes or offer advice and website problems c. The top five consumer complaints filed with the SEC against online brokers include: ¾ failure to process order or delays in executing orders ¾ difficulty in accessing one’s account or contacting a broker ¾ errors in processing orders ¾ execution of orders at higher prices than posted on the website ¾ errors and omissions in account records and documents H. Regulation of Securities Markets 1. Trading in shares and bonds is monitored by 13 provincial and territorial exchange commissions 2. Filing Requirements a. Companies must meet certain requirements (which include filing a blizzard of registration papers and reports) to be listed on any stock exchange b. Brokers must operate according to the rules of the exchanges, rules that are largely designed to protect investors 3. Regulation Fair Disclosure (FD): creates a level playing field for all investors a. Mandates that any news with the potential to affect the price of a stock must be released to everyone simultaneously b. Critics say that regulation could cut down on the amount of information received by everyone 4. Securities Fraud a. Internet stock scams ¾ Example: penny-stock promoters can dupe tens of thousands (if not millions) of investors by making false claims about a company, watching investors eager to make a fast profit pump up the company’s stock price, then selling or dumping their penny shares at inflated prices and pocket a handsome profit b. Department of Justice, the FTC, the U.S. Attorney’s offices, and even the FBI have stepped up efforts to police such fraud c. Best defence against fraud: carefully research securities before you buy and to steer clear of any investment that seems too good to be true . 359

d. Two particular forms of securities fraud making the headlines today: ¾ insider trading: occurs when people buy or sell a stock based on information that is not available to the general public, such as a company merger or new discovery ¾ accounting fraud

Potential Difficulties and Suggested Solutions 1. Students may have a difficult time understanding how the stock market works, specifically how volatile the stock market is. An in-class project could aid in the student’s understanding of the volatility of the market and the important usages of financial information. Steps to the project are as follows: ¾ Assign students or have them choose which stock they will purchase (only one, for a simplistic example) ¾ Assign a specific date on which the students will purchase their stock. On this particular day, students will obtain current stock price using the Globe and Mail or some other financial resource. In addition to this, students’ should obtain information such as the P/E Ratio, 52 week high and 52 week low, ticker symbol, etc. ¾ Assume a commission percentage as well as a fixed amount of money the students have to purchase the stock. (For example, students should purchase as much stock as they can given they have $10,000 and a commission rate of 6%) ¾ Assign a date on which the student’s will sell the stock ¾ Students should then compute the return on investment (ROI) given the information they obtained

Behind the Scenes Retooling Canada’s Banks: Despite Merger Restrictions, Some Positive Results Test Yourself Answers to these questions can be found on the website: www.pearsoned.ca/bovee.

1.

How does the government’s position on mergers relate to their historical actions in creating the CDIC, enacting the Bank Act, and establishing the Bank of Canada?

The government’s position in blocking Canadian Bank mergers relates to its role in protecting the financial stability of the economy and ensuring that there is a fair and competitive environment for businesses and individuals to function effectively. In particular there was a fear that bank mergers would lead to reduced competition which would have a negative impact on consumers looking for loans or completing basic banking tasks.

One of the primary tasks and goals of the government is to create a stable environment. In 1935 the Bank Act was passed and the Bank of Canada (BOC) was created. Today the BOC has many roles: setting interest rates and controlling the money supply. The CDIC insures deposits help in banks, trust companies and loan companies up to 100,000. This protection provides stability and peace of mind for Canadian investors and consumers.

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2.

Why has the Canadian government avoided the temptation to allow the Canadian banks to merge?

As mentioned in question one, the great fear was that the competition would be reduced making it more difficult for Canadian consumers. There was a particular fear that many rural communities being serviced by two banks might merge operations into one branch and reduce or in some cases eliminate the options for local merchants.

3.

Why were consumers so opposed to bank mergers when the issue became public knowledge? Do you think the fears are legitimate?

In addition to the factors mentioned in the previous questions consumers were concerned that mergers would lead to higher service charges as competition was diminished. Bank officials argued that the opposite was true. The mergers would allow banks to streamline operating costs which would benefit consumers.

Behind the Scenes (End of Chapter) Separating Facts from Fiction: Canadian Bank Mergers Critical Thinking Questions 1.

Public speeches by high-ranking government officials tend to be very diplomatic and carefully constructed. In his former position as Bank of Canada governor, David Dodge was very aware of the importance of word selection. Why do you think he was so direct in this particular speech?

It was quite clear from the tone of his words that David Dodge felt very strongly about this issue. After years of delays and after observing changes that he found alarming he made his point in a clear manner to sound the alarm bell and try to get some action in this area.

2.

The government seemed to be considering the rights of Canadian citizens as consumers when stopping the mergers. Do you think it gave equal thought to Canadian citizens as bank stakeholders? Why or why not?

The government’s role is to ensure that all stakeholders are treated equally and their interests are protected. Stopping the bank mergers was an action that was geared towards retail bank consumers and seemed to have a negative effect on investors of bank stocks in the short term. Nevertheless, investors have reaped rewards related to these actions; these major institutions were forced to look within and streamline operations with these restrictions in place. This has had a positive effect on stock valuations.

Every decision has its advocates and its detractors. The government will always make at least one group unhappy but it must weigh the options and act in the best interests of the economy as a whole.

Do you think the government was right to prevent the bank mergers 3. back in 1998? Why or why not? Based on what you have read, should the government allow bank mergers?

Student answers will vary.

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

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Answers to End-Of-Chapter Questions Test Your Knowledge Questions for Review 1. What are the various forms of money? Describe each form in some detail.

Currency: Coins, bills, traveller’s cheques, cashier’s cheques, and money orders.

Demand deposit: money available immediately on demand, such as from chequing accounts. Time deposits: accounts that pay interest and restrict the owner’s right to withdraw funds on short notice, such as savings accounts, certificates of deposit, and money-market deposit accounts 2. What purpose does a line of credit serve for a business?

A line of credit is an agreed upon maximum amount of money a bank is willing to lend to a business during a specific period of time, usually one year. Once a line of credit has been established, the business may obtain unsecured loans for any amount up to that limit, provided the bank has funds. The line of credit can be cancelled at any time, so companies that want to be sure to obtain credit when needed should arrange a revolving line of credit, which guarantees that the bank will honour the line of credit up to the stated amount.

3. Explain the purpose of the bond ratings system. What is the difference between a AAA-rated bond and a B-rated bond?

Bonds are not guaranteed investments. The variations in interest rates reflect the degree of risk associated with the bond, which is closely tied to the financial stability of the issuing company. Agencies such as Standard & Poor’s (S&P) and Moody’s rate bonds on the basis of the issuers’ financial strength. Low-rated bonds pay higher interest rates to compensate investors for the higher risk.

4. What is meant by an over-the-counter (OTC) market?

The over-the-counter (OTC) market consists of a network of registered stock and bond representatives who are spread out across North America—and in some cases around the world. Most use a nationwide computer network owned by the National Association of Securities Dealers (NASD). This network is called NASDAQ (National Association of Securities Dealers Automated Quotations) and it is the second-largest stock market in the United States. In Canada, the OTC market is referred to as the Canadian Unlisted Board (CUB).

5. What is the difference between a bear market and a bull market?

If prices have been rising over a long period, the industry and the media will often describe this situation as a bull market. The reverse is a bear market, one characterized by a long-term trend of falling prices.

Questions for Analysis 6. How are deposit institutions different form non-deposit financial institutions? Provide examples.

Deposit institutions accept deposits from customers or members and offer chequing and savings accounts, loans, and other banking services: chartered banks, trust companies, credit unions, and Caisses populaires. Non-deposit institutions offer specific financial services but do not accept deposits: insurance companies, pension funds, finance companies, brokerage firms.

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7. Why did income trusts gain such popularity in the Canadian marketplace in recent years? How has the atmosphere changed since the new rules were put in place?

Income trusts are legal entities that hold cash-generating assets in trust and distribute the majority of income to unit-holders in the form of dividends. An income trust An Income trust allows the majority of income to flow to the owners of the trust company through dividends. As a result, the income trust traditionally avoided paying tax and income was only taxed in the hands of the unit-holders. This made Income trusts quite popular in recent years. Before the Tax Fairness Plan, it was not uncommon to see trust companies pay dividend yields in excess of 7 percent, whereas most common shares pay dividends under 3 percent. The recent rule changes have ended the move to convert and made this investment vehicle less attractive.

8. 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.

9. How does the CDIC help bring stability and calm to the Canadian retail banking market?

Canadian Deposit Insurance Corporation (CDIC) is a Crown corporation that covers deposits at banks, trust companies, and loan companies up to $100 000, and reimburses clients when a member institution fails.

10. ETHICAL CONSIDERATIONS: You work in the research and development department of a large corporation and have been involved in a discovery that could lead to a new, profitable product. News of the discovery has not been made public. Is it legal for you to buy stock in the company? Now assume the same scenario but you talk to your friend about your discovery while dining at a restaurant. The person at the next table overhears the conversation. Is it legal for the eavesdropper to buy the company’s stock before the public announcement of the news?

It is illegal to participate in insider trading that occurs when people buy or sell a stock based on information that is not available to the general public. Both scenarios are considered illegal.

Questions for Application 11. What are the advantages and disadvantages of using cash, cheques, credit cards, and debit cards to pay for goods and services?

Some advantages of using cash, cheques, credit cards, and debit cards are: Cash and cheques allow you to pay for the item immediately and take away the threat of interest that could be charged if paying by credit card. Credit cards have become immensely popular with consumers because they are convenient and allow people to postpone payment on purchases they make. They also help people manage their finances either by choosing to repay the full amount when they are billed or making small payments month by month until the debt has been repaid. Debit cards are ideal for customers who must control their spending or stick to a budget. Some disadvantages of using cash, cheques, credit cards, and debit 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 card issuers also charge an annual fee.

12. If you were thinking about buying shares of Bombardier, under what circumstances would you place a market order, a limit order, an open order, and a discretionary order? . 363

You would use a market order when you want to buy the security today regardless of selling price. You’ve done your research and you feel the security has a lot of growth potential, so paying a few dollars more won’t matter. You would use a limit order when you are only willing to pay a certain price. For example, rumour has it that Bombardier may be acquired at X dollars, so if you buy now you can make a few dollars per share on the price run up. You would use an open order if you want to buy the security only at a certain price and you are willing to wait until that happens. If it doesn’t you are willing to risk not buying it at. You would use a discretionary order when you have complete confidence in your broker and you are following his or her advice in managing this investment.

13. INTEGRATED: Besides watching market indexes, which economic statistics discussed in Chapter 1 might investors want to monitor? Why? While student answers may vary, below are several possible answers: Economists monitor the performance of the economy by watching a variety of indicators.

Unemployment statistics, for example, signal future changes in consumer spending.

When unemployment rises, people have less money to spend, and the economy suffers. Housing starts, another leading indicator, show where several industries are headed. Housing is very sensitive to interest rate changes. If mortgage rates are high, fewer people can afford to build new homes. When housing starts drop, builders stop hiring, and may even lay off workers. Meanwhile, orders fall for plumbing fixtures, carpets, and appliances, so manufacturers decrease production and workers’ hours.

These cutbacks ripple through the economy and lead to slower income and job growth, and weaker consumer spending. Another leading indicator is durable-goods orders, or orders for goods that typically last more than three years (which can mean everything from desk chairs to airplanes). A rise in durable-goods orders is a positive indicator that business spending is turning around. Besides unemployment data, housing starts, and durable-goods orders, economists closely monitor a nation’s price changes and output. Investors may want to monitor inflation and deflation. In a deflationary period, investors postpone major purchases in anticipation of lower prices in the future.

14. INTEGRATED: Look back at Chapter 6 and review the discussion of mission statements. 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 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 and an increase in the share price) or dividends (whether you might make money on the dividends they pay).

Practice Your Knowledge Sharpening Your Communication Skills Interviewing a 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: 1. Questions you might ask a stockbroker to help you decide whether you would use that his or her services.

Questions students might ask include: ¾ How long have you been in this field? ¾ What motivated you to become a stockbroker? What is your educational background? . 364

¾ How long have you worked for this particular firm? Why did you leave your last firm? ¾ Are you a full-service or a discount broker? ¾ How would you describe your track record? Could you give examples of the quality of your expertise? ¾ 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: ¾ How would you rate the company’s financial stability? ¾ What has the company’s track record been? ¾ How do S&P and Moody’s rate this company? ¾ Would you recommend this particular security? Why? ¾ Why would you recommend buying this security at this particular time? ¾ What risks would you say are involved in this purchase? ¾ 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 team-mates 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.

Once 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.

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. And the requirements for entry are high—most employees have a university degree plus additional training. Log on to the Investment Dealers Association of Canada at www.ida.ca and read up on educational and employment opportunities available in the field. Then answer the following questions: . 365

1. What are the licensing and continuing education requirements for securities brokers?

Students’ answers will vary depending upon their province of residence; supplemental information can be found at: http://www.ida.ca/IDAWebsite/English/Investors/SecuritiesRegulation/ .

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 file.

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 file Developing Your Research Skills Since the turn of the century, the stocks of several high-profile companies, such as Tyco, Enron, and WorldCom, tumbled following their disclosures of negative company information. Use computer resources or business journals to find a company whose disclosure of negative information dramatically impacted its securities. Then perform some research on that company so you can answer the following questions: 1. On what exchanges do the company’s shares trade and under what ticker symbol?

Student answers will depend on company chosen.

2. What negative information did the company disclose? When? Did the company commit a fraudulent act? How did the information impact the company as a whole?

Student answers will depend on company chosen.

3. How did the negative information impact the company’s securities? What was the company’s stock price prior to the release of the negative information? Following the release of the information? What was the stock’s 52-week high and low during the year the disclosure was made?

Student answers will depend on company chosen.

Answers to Boxed Features Box 1: Surprise! You’ve Been Swiped Skimming is the fastest-growing area of credit and debit card fraud. A skimmer is someone who steals customer account information by swiping a credit card through a handheld magnetic card reader—about the size of a pager. The reader copies the cardholder’s name, account number, and even the card validation code—stored on the magnetic strip—giving the counterfeiter all the data needed to create a perfect clone of the credit card. Debit card skimming is almost identical, but because of the need for the user’s personal identification number (PIN) to gain access to funds, thieves have set up hidden cameras to record the PINs of unsuspecting users.

Recently in Halifax, Nova Scotia, thieves took debit card skimming a step further by placing a clear plastic sleeve over the keypad on debit machines. The sleeve was linked to a computer and every time someone typed in his or her PIN the information was transferred directly to a PC. Card readers can be purchased for as little as US$100 over the Internet and are intended for legitimate use by banks, restaurants, retailers, and hotels. Unfortunately, some end up in the wrong hands.

Thieves and, increasingly, organized crime groups pay waiters and store clerks to steal information from credit cards using the concealed devices. By skimming 14 to 20 accounts, crooks can generate $50 000 to $60 000 worth of fraud that will . 366

probably go undiscovered until the victims get their bills—30 to 60 days after the crime. Moreover, skimmed data from, say, a customer in Winnipeg, Quebec City or Ottawa can be emailed to Taiwan, Japan, or Europe and used for mail-order, telephone-order, or e-commerce overseas transactions within 24 to 48 hours of the theft. Professionals can even encode the stolen codes into a strip and use equipment to produce an electronically indistinguishable counterfeit card.

While credit and debit card issuers decline to say how much they are losing to skimmers—in part because they don’t want to scare consumers out of using their plastic—industry analysts estimate skimmers reap more than US$125 million annually. To curb this fraud, major card issuers are cooperating with the RCMP to pool information about fraudulent transactions. For example, issuers can generate computer analyses that flag locations where numerous cards may have been skimmed. Or if someone in Hong Kong tries to buy something with a credit card that was used two hours earlier in Toronto, the computer will reject the transaction.

What can you do to prevent your cards from getting skimmed? Not much, say experts, besides covering up the keypad when entering your PIN, using PINs that are unrelated to personal characteristics and events, reading your bills closely, checking your accounts on the web or by phone during the month to make sure there are no surprises, and reporting improper charges promptly. Although you’re not liable for fraudulent credit card charges made to your accounts by skimmers or other scam artists, you do have to face the hassle of getting the unauthorized transactions removed from your bills. To date, banks have been willing to cover debit card losses, though some are now doing so only if the PIN is not easily detectable by knowing some of the user’s personal information such as important birthdays or telephone numbers. Of course, you can always pay with old-fashioned cash. But if you carry a lot of that around, you may have to worry about the old-fashioned robber.

Questions for Critical Thinking 1. To curb the abuse, why don’t credit card issuers require customers to present additional personal validation data at the time of sale?

For one, it would be an inconvenience for the customers. Also, they may not like giving far more personal validation data to strangers, and thieves would figure out ways to obtain that as well. It may create a situation where the users may limit or minimize the use of the card so that they do not have to put up with such an aggravation.

2. Why won’t skimming increase the demand for smart cards?

The fear of fraudulent practices deters people from expanding their use of smart cards.

Box 2: Income Trusts: Playing the Blame Game In mid-2006 it seemed as though every company in Canada had either converted, announced intentions, or was thinking of converting to an income trust. Okay, that might be an exaggeration but you get the point. A snowball effect was in place and the government was stuck at the bottom of the hill trying to find a way to make sure that it did not get snowed under by the movement. The tipping point probably came when major players like Telus and BCE joined the ranks and announced their conversion plans. There are legitimate long-term business concerns of company’s converting, and in addition the government feared major tax revenue losses if the trend was not stopped. However, the government would be changing the rules of the tax game in a major way, and the move would have a punishing effect on investors already committed to this investment vehicle. The Conservative government’s official policy is to avoid government intervention if at all possible. However, in

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October of 2006, the Tax Fairness Plan came into effect and the income trust bubble burst. Investors lost as the value of income trust investments diminished.

Although there were signs along the way, angry investors felt cheated. Some even went as far as to make irrational threats toward Finance Minister Jim Flaherty. A Louisiana stockbroker was charged with uttering death threats for two emails that he sent. The stockbroker claims that the Tax Fairness Plan ruined his business and his client’s portfolios. He faces up to five years in prison and a $250 000 fine. While this example is extreme, it does illustrate the difficult nature of the decision. As the poster boy for the move, Flaherty has taken praise from some and a lot of grief from others.

Many experts believe that this move should have been made a couple of years earlier, and yet others are totally against government intervention and were not pleased by the decision.

Key lesson: Whether you are investing in shares, bonds, income trusts or any other vehicle, get all the facts, get professional advice, and stay informed. Despite some claims, this decision did not come out of nowhere. Perhaps it was more devastating than expected, but a possible move had been hinted at for quite some time. Nobody should have been shocked by the decision, because the same old rules apply: Keep a diversified portfolio and look for signs. Investors sometimes have a hard time seeing beyond today’s successes and don’t believe that the good times will end. When the other shoe drops, emotions are hard to keep in check, especially when financial nest eggs are at stake.

Questions for Critical Thinking 1. Do you think that the government made the right choice? Did they level the playing field or did they unnecessarily interfere?

Student answers will vary.

The Government was faced with a difficult decision that would have negative repercussions no matter what it did. One thing is certain the movement had a snowball effect and the government felt the need to act or risk losing tremendous tax revenues.

2. Every government decision affects multiple stakeholders and has a positive effect on some and a negative effect on others. Create two columns and list the winners and losers in this situation.

Losers included: Income Trust unit holders, investment advisers that had pushed this vehicle, firms that were about to convert Winners; the government, (many would argue, in the long term) firms that were about to convert into trusts

Box 3: Put Your Money Where Your Mouse Is! The Internet has been hailed as the great equalizer between individual investors and the experts on Bay and Wall Streets. Today’s investors have access to a large amount of valuable information and investment tools—many of which are used by professionals. But having access to information is one thing; using it wisely is another. So before you put a dollar (or a euro) into any investment, learn as much as possible about the market, the security, its issuer, and its potential. Here are some tips to point you in the right direction.

For “how-to” advice, try Globe Investor (www.globeinvesetor.ca), Globe Fund (www.globefund.com), Business News Network (www.bnn.ca), the Motley Fool (www.fool.com), or CNN/Money’s website (http://money.cnn.com). For the latest online news and commentary about shares, check out The Street (www.thestreet.com) and MarketWatch (www.marketwatch.com). Then research . 368

individual securities using Yahoo! (www.yahoo.com) or another Internet search tool.

Plug in the company name and click to see the latest news. Go to Hoovers Online (www.hoovers.com) to read a little about the company’s history and recent results.

Be sure to stop by the company’s website to read its press releases and financial statements. You can dig even further into potential investments using the following websites: ■ Corporate financial data filed for Canadian companies (www.sedar.com) ■ Corporate financial data filed with the SEC (www.freeedgar.com) ■ Toronto Stock Exchange (www.tsx.ca) Construct a hypothetical portfolio on Quicken, Yahoo!, or another financial website and watch how your investments fare. Track your favourite market index on MSN Money (http://money.msn.com) and compare it to your personal investment portfolio.

Are your proposed investments meeting, missing, or beating the market index?

Now you’re in a better position to buy securities, but your research shouldn’t end here. Even after you start trading, you need to stay on top of the latest news and industry developments that can affect the securities in which you have invested. If a potential investment seems too good to be true, point your web browser to the North American Securities Administrators Association (www.nasaa.org) and get some tips on investment fraud. When it comes to investments, your web surfing can really pay off.

Questions for Critical Thinking 1. Why is it important to learn about a company’s financial results and background before buying its stock or bonds?

Buying stocks or bonds of a company means investing your money in that company.

Done wisely, it can help you meet your financial goals. To choose wisely, you have to know what options you have and what risks they entail. Having as much knowledge as possible about a company’s financial results and background allows an investor to determine the risk and reward levels for their investments.

2. What are the disadvantages of searching for investment information on the Internet?

The disadvantages of searching for investment information online include possible fraud, pump and dump strategies on part of the so-called brokers, and heresy hype as opposed to advice based on fundamentals. Individuals are left open to scams from con artists and can lose everything they have worked very hard for.

Box 4: Put the Experts to the Test: Stocks That Can Stand Up to the Storm As you can understand from reading this section, stocks can rise and fall quickly, but predicting when they will rise, by how much, and when they will fall is no easy task.

We have referred to bear markets and bull markets, preferred shares and common shares, and looked at other investments like bonds, debentures, trusts, and a variety of different types of mutual funds. When markets begin to move, investors look to experts for some guidance. During one particularly volatile period in mid-2007, the markets fell into retreat mode and charged back in quick spurts. When market waters are rough many investors look for comfort. Investors will often turn to dividend yield stocks with low payouts to ride out the storm. However, in an article in the Globe and Mail, Yin Luo, executive director of quantitative strategy at CIBC World Markets, proposed the following portfolio based on a more scientific approach that created defensive scores for stocks. . 369

Questions for Critical Thinking 1. Look up all of the stock symbols on the list and see how stable these predictions have been since July 31, 2007. Which stock performed the best?

Which performed the worst? Were these stocks in fact a good choice? Beware of stock splits.

Answers will vary based on the collection date.

2. Select two of these stocks and visit their websites. Learn as much as you can about the companies. Why do you think that these companies were on the “stand up to the storm” list? Discuss their core businesses and industries in your analysis.

Answers will vary.

See It on the Web URLs for all Internet exercises are provided at the website for this book, www.pearsoned.ca/bovee. When you log on to the text website, select Chapter 14, then select Web Destinations, click on the name of the featured website, and follow the detailed navigational directions to complete these exercises.

Explore these chapter-related websites, review their content, and answer the following questions for each website you visit: 1. What is the purpose of this website?

2. What kinds of information does this website contain? Please be specific.

3. How is the information provided at this website useful for businesspeople?

Consumers?

4. How did you expand your knowledge of banking and securities markets by reviewing the material at this website? What new things did you learn about these topics?

Visit the Bank of Canada and US Treasury Visit the Bank of Canada's website and explore the sections on securities, monetary and financial policy. Then take a take a virtual tour of the U.S Treasury and click on Education to visit the Learning Vault. Once inside the vault, read about the duties and functions of the U.S Treasury, explore the fact sheets, and discover how money gets into circulation. Then explore this department from the inside out by clicking on the Site Index and following the links. Do you know how many notes a day the Bureau of Engraving and Printing (BEP) produces? Do you know how long $10 billion would last if you spent one dollar every second of every day? To find out, follow the link to the BEP governmental agency and brush up on your money facts. Don't leave this website without taking a peak at some new currency. Compare some of the differences in the sites, the content, and most importantly the policy statements. www.bankofcanada.ca www.ustreas.gov

1. What is the purpose of these sites?

While student responses may vary, the following will address some possible answers. . 370

The purpose of these sites is to provide information regarding the role and involvement of the Bank of Canada and U.S. Treasury Department.

2. What kind of information does the websites contain? Please be specific.

While student responses may vary, the following will address some possible answers.

The websites contains information on the following: Treasury accounting programs and policies; Federal budget documents; latest Currency & Coins press releases; the production and distribution of paper currency and coins, anticounterfeiting programs and resources, and currency and coin related gifts you can purchase online; public debt; seized property auctions, employment with the government, savings bonds, etc.

3. How is the information provided on these sites useful for businesspeople?

Consumers?

While student responses may vary, the following will address some possible answers.

The sites are useful for businesspeople because they can access information on procurement, take advantage of the resources for vendors and contractors, and contact information for small business specialists. Consumers can use this website for informational/education purposes.

How did you expand your knowledge of banking and securities markets by reviewing the material at this website? What new things did you learn about these topics?

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

Stock Up at the TSX and NYSE Visit the Toronto Stock Exchange website, review some of the educational tools, read up on new regulations, and check out how some of Canada's companies are doing.

Then take a tour the New York Stock Exchange. Visit the trading floor and learn about the hectic pace of trading. Find out why having a seat doesn't necessarily mean you'll have a chance to sit down. Listen in on a stock transaction and discover how a stock is bought and sold. Learn how investors are protected and how unusual stock transactions are spotted. Get the latest market information as well as a historical perspective of the exchange. Don't leave without checking out your favourite stock price. Maybe it's time to sell. Compare the differences between the exchanges. What similarities do you see? www.tsx.com www.nyse.com

1. What is the purpose of these websites?

While student responses may vary, the following will address some possible answers.

The purpose of the sites is to provide general information about the NYSE and TSX as well as to provide specific listing of companies listed on the exchanges.

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2. What kinds of information do the websites contain? Please be specific.

While student responses may vary, the following will address some possible answers.

The websites provide information about the following: the trading floor, the technology behind the NYSE, TSX, current stock quotes, real-time market indices, and listed companies historical data, rules and enforcement tools, goals of the international marketplace.

3. How is the information provided at this website useful for businesspeople?

Consumers?

While student responses may vary, the following will address some possible answers.

The websites are useful for businesspeople because they provide the guidelines that companies must meet before listing.

The websites are useful for consumers for informational/educational purposes.

Consumers can learn about specific stocks, check current stock prices, etc.

How did you expand your knowledge of banking and securities markets by reviewing the material at the sites? What new things did you learn about these topics?

Students’ responses will depend, in large part, on the material currently posted on the websites Invest Wisely, Don't Be a Fool Visit Motley Fool's fun investment site and don't be afraid to ask a foolish investment question or two. Roll up your sleeves and do a little work on your own. Discover the strategies, ideas, and information needed to make investment decisions at Fool's School. Learn the steps to investing foolishly. Read the investing basics and learn how to value stocks, analyze stocks, or pick a stockbroker. Expand your knowledge of stocks, bonds, and mutual funds. Finally, discover the keys to successful investing. www.fool.com 1. What is the purpose of this website?

While student responses may vary, the following will address some possible answers.

The purpose of this website is to educate, amuse, and enrich the people who visit this site to learn more about investing.

2. What kinds of information does this website contain? Please be specific.

While student responses may vary, the following will address some possible answers.

This website provides information on the following: strategies, ideas, and information needed to make investment decisions; the steps to investing foolishly; how to value stocks, analyze stocks or pick a stockbroker; stocks, bonds, and mutual funds; keys to successful investing, retirement and personal finance.

3. How is the information provided at this website useful for businesspeople?

Consumers?

While student responses may vary, the following will address some possible answers.

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This website is useful for businesspeople and consumers for educational/information purposes. Specifically, this website can provide an otherwise uninformed investor with some basic knowledge concerning the investment process, retirement, and personal finances. Ii also provides information on how to choose the best broker.

How did you expand your knowledge of banking and securities markets by reviewing the material at this website? What new things did you learn about these topics?

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

Focusing On E-Business in Action Questions for Critical Thinking 1. What challenges did cyberbanks face in the competitive banking environment and what steps did they take to overcome these challenges?

Cyberbanks faced the following challenges in the competitive banking environment: lack of name recognition, no friendly banker, and limited services. To overcome these challenges, some cyberbanks got physical by opening service centers, setting up kiosks, and establishing ATM networks. Others offered rebates on ATM surcharges their customers paid to other banks. Still, others, formed alliances with stores like Mail Boxes Etc. and Canadian Tire so customers could deposit checks nationwide.

2. Why did most pure Internet banks close up or fold into their parent organizations?

Cyberbanking did not reach the mass appeal needed to justify the huge investment and operating costs involved. So most traditional banks eventually folded their online ventures into the parent organization.

3. What banking services, if any, do you perform online? What do you like and dislike about banking online?

Students’ answers will vary.

Chapter 14 Pop Quiz: 1. Which of the following is NOT a characteristic of money? a. it is divisible b. portable c. not difficult to counterfeit d. durable 2. Which of the following is an example of a deposit institution? a. commercial banks b. insurance companies c. finance companies d. brokerage firms 3. When employers use direct deposit to transfer wages directly into employees’ bank accounts, they are taking advantage of a. automated teller machines b. Electronic funds transfer systems (EFTS) c. lines of credit d. pension funds . 373

4. These legal entities hold cash generating assets and distribute the majority of earnings to unit-holders in the form of dividends: a. Debentures b. Income Trusts c. Preferred Trusts d. Mutual Funds 5. Governments and municipalities issue ________ to raise money for building or public expenses such as national defence and road improvements. a. bonds b. common stock c. preferred stock d. none of the above 6. A ____________________increases the number of shares that each stock certificate represents while proportionately lowering the value of each share.

Companies generally use this to make the share price more affordable. a. stock price b. stock split c. par value d. dividend 7. ___________ stockholders enjoy higher dividends than _________stockholders and a better claim (after creditors) on assets if the corporation fails. a. Preferred, Common b. Common, Debenture c. Common, Preferred d. Mutual Fund, Common 8. Which of the following investments is the lowest risk? a. investment in common stock b. investment in corporate bonds c. investments in Canadian Savings Bonds d. investment in preferred stock 9. According to Standard and Poor’s rating service which rating represents a company with a very Strong Capacity to pay? a. AA b. BB c. Aaa d. C 10. Initial public offerings (IPO’s) are sold in the secondary market and are considered to be a low-risk investment. e. true f. false

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Answers to Pop Quiz 1. c 2. a 3. b 4. b 5. a 6. b 7. a 8. c 9. a 10. b

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Appendix A: The Canadian Legal System Brief Appendix Outline I.

The Canadian Legal System A. Sources of Law 1. Statutory Law 2. Administrative Law 3. Common Law B. Business Law 1. Torts a. Intentional Torts b. Negligence and Product Liability 2. Contracts a. Elements of a Contract b. Contract Performance c. Warranties ¾ Agency ¾ Property Transactions ¾ Patents, Trademarks, and Copyrights 3. Negotiable Instruments 4. Bankruptcy

Lecture Notes and Appendix Outline I.

The Canadian Legal System A. International Law: Body of precepts, customs and rules that govern relationships between sovereign states and international organizations and persons B. Sources of Law 1. law: a rule developed by a society to govern the conduct of, and relationships among, its members a. The Canadian Constitution and the Charter of Rights and Freedoms are the foundation for Canadian laws 2. Statutory Law: law written by legislative bodies a. Provinces also have legislative bodies that write statutory laws 3. Administrative Law: Laws passed by federal and provincial legislatures are generally enforced by an administrative agency a. Clarify a regulation’s intent b. Write more specific regulations c. Government agencies cannot create laws but regulate and enforce them d. Have the power to investigate corporations suspected of breaking administrative law e. Corporations may agree to sign a consent order (which allows companies to promise to stop doing something without admitting guilt) f. Administrative agencies might also start legal proceedings 4. Common Law: The type of law that come out courtrooms and judge’s decisions

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a. The approach applies in all provinces in Canada except in Quebec which practices a hybrid system (Common law for criminal matters, civil code for non-criminal matters) b. Also called “unwritten law” to distinguish it from legislative acts and administrative agency regulations c. Established through custom and precedents set by courtroom proceedings d. Doctrine of stare decisis (Latin for “to stand by decisions”)—judges establish a precedent for deciding future cases of a similar nature e. Common law is applied and interpreted in system of courts C. Business Law: the branch of the law that directly affects business activities (refer to chart at end of lecture outline) 1. Business licensing 2. Employee safety 3. Corporate income taxes 4. Tort: non-criminal act that results in injury to a person or property a. Compensatory damage award: the victim of a tort is legally entitled to some form of financial compensation b. Punitive damage award: punishment for the wrongdoer if the misdeed was very bad c. Intentional Torts ¾ A wilful act that results in an injury d. Negligence and Product Liability ¾ Negligence: involve a failure to use a reasonable amount of care necessary to protect others from unreasonable risk of injury ¾ product liability: a product's capacity to cause damages or injury for which the producer or seller is held responsible Contract: an exchange of promises between two or more parties that is enforceable by law ¾ strict product liability: makes it possible to assign liability without assigning fault. It must only be established that (1) the company is in the business of selling the product; (2) the product reached the customer or user without substantial change in its condition; (3) the product was defective; (4) the defective condition rendered the product unreasonably dangerous; and (5) the defective product caused the injury e. Contract: an exchange of promises between two or more parties that is enforceable by law. ¾ Express contract: derived from the words either oral or written of the parties ¾ Implied contract: stems from actions or conduct of parties ¾ Elements of a Contract ¾ An offer must be made ¾ An offer must be accepted ¾ Both parties must be given consideration ¾ Both parties must be given genuine assent ¾ Both parties must be competent ¾ The contract must not involve an illegal act ¾ The contract must be in proper form

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f.

¾ Contract Performance ¾ Breach of contract: one party fails to live up to the terms of the contract ¾ Discharge: when one party violates the term of agreement, generally the other party is under no obligation to continue with his or her part ¾ Damages: a party has the right to sue in court for damages that were foreseeable at the time the contract was entered into ¾ Specific performance: a party can be compelled to live up to the terms of the contract if money would not be adequate Warranty: a statement specifying what the producer will do to compensate the buyer if the product is defective or malfunctions ¾ Express warranties: specific, written, statements ¾ Implied warranties: unwritten but involve certain protections ¾ Agency: when one party known as the principal authorizes another party, the agent, to act on his or her behalf ¾ Power of attorney: states that one person may legally act for another ¾ Property Transactions ¾ Property: the relationship between the person having the rights to any tangible or intangible object and all other persons ¾ Real property: land and everything permanently attached to it ¾ Personal property: all property that is not real property: tangible or intangible ¾ Deed: a legal document by which an owner transfers the title or right of ownership ¾ Patents, Trademarks, and Copyrights ¾ Patents: Protects the invention or discovery of a new and useful process, an article of manufacture, a machine, a chemical substance, an improvement on any of these ¾ Trademarks: Any word, name, symbol, or device, used to distinguish the product of one manufacturer from those made by others ¾ Copyrights: protects the creators of literary, dramatic, musical, artistic, scientific, and other intellectual works 5. Negotiable Instruments: a transferable document that represents a promise to pay a specified amount a. It must be in writing and signed by the person who created it b. It must have an unconditional promise to pay a specified sum of money c. It must either be payable on demand or at a specified date in the future d. It must be payable either to some specified person or organization or to the person holding it (the bearer).

6. Bankruptcy: a legal means of relief for debtors (individuals or businesses) who are no longer able to meet financial obligations a) Voluntary bankruptcy: initiated by debtor b) Involuntary bankruptcy: initiated by creditors

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