Instructor Solution Manual For Business Foundations A Changing World 13e O. C. Ferrell, Geoffrey Hir by StudyGuide

Instructor Solution Manual For Business Foundations A Changing World 13e O. C. Ferrell, Geoffrey Hirt and Linda Ferrell Chapter 1-16

Chapter 1: The Dynamics of Business and Economics SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Inside the Zoom Boom Responding to Business Challenges: Taylor Swift Fights Scalpers Business Disruption: Competition Is Brewing in Kombucha Market Technology and the Economy: Up in the Air: Drones and Air Traffic Control So You Want a Job in the Business World END OF CHAPTER TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: The Forces of Supply and Demand Solve the Dilemma: Mrs. Acres Homemade Pies Build Your Business Plan: The Dynamics of Business and Economics See for Yourself Case: Tesla: More Than a Car Company Team Exercise CONNECT ACTIVITIES GrubHub Excels Amidst the Changing Business Environment Uber and Its Effect on the Sharing Economy iSeeIt! Video Case: Supply and Demand BONUS TEACHING RESOURCES Term Paper or Project Topic Guest Speaker Suggestions 01-1

Teaching Suggestions SUMMARY We begin our study of business in this chapter by examining the fundamentals of business and economics. First, we introduce the nature of business, including its goals, activities, and participants. Next, we describe the basics of economics and apply them to the U.S. economy. Finally, we establish a framework for studying business in this text.

LEARNING OBJECTIVES LO 1-1

Define basic concepts such as business, product, profit, and economics.

LO 1-2

Identify the main participants and activities of business.

LO 1-3

Explain why studying business is important.

LO 1-4

Compare the four types of economic systems.

LO 1-5

Describe the role of supply, demand, and competition in a free enterprise system.

LO 1-6

Specify why and how the health of the economy is measured.

LO 1-7

Outline the evolution of the American economy.

LO 1-8

Explain the role of the entrepreneur in the economy.

LO 1-9

Evaluate a small business owner’s situation and propose a course of action.

KEY TERMS AND DEFINITIONS big data

Large volumes of structured and unstructured data that are transmitted at very fast speeds.

blockchain

A decentralized record-keeping technology that stores linked.

budget deficit

The condition in which a nation spends more than it takes in from taxes.

business

Individuals or organizations who try to earn a profit by providing products that satisfy people’s needs.

capitalism (free enterprise)

An economic system in which individuals own and operate the majority of businesses that provide goods and services.

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communism

First described by Karl Marx as a society in which the people, without regard to class, own all the nation’s resources.

competition

The rivalry among businesses for consumers’ dollars.

demand

The number of goods and services that consumers are willing to buy at different prices at a specific time.

depression

A condition of the economy in which unemployment is very high, consumer spending is low, and business output is sharply reduced.

drones

unmanned aerial devices, can be programed with AI to perform human tasks such as delivering products or collecting environmental data and imagery.

economic contraction

A slowdown of the economy characterized by a decline in spending and during which businesses cut back on production and lay off workers.

economic expansion

The situation that occurs when an economy is growing and people are spending more money; their purchases stimulate the production of goods and services, which in turn stimulates employment.

economic system

A description of how a particular society distributes its resources to produce goods and services.

economics

The study of how resources are distributed for the production of goods and services within a social system.

entrepreneur

An individual who risks their wealth, time, and effort to develop for profit an innovative product or way of doing something.

equilibrium price

The price at which the number of products that businesses are willing to supply equals the amount of products that consumers are willing to buy at a specific point in time.

financial resources (capital)

The funds used to acquire the natural and human resources needed to provide products; also called capital.

free market system

Pure capitalism, in which all economic decisions are made without government intervention.

gross domestic product (GDP)

The sum of all goods and services produced in a country during a year.

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human resources (labor)

The physical and mental abilities that people use to produce goods and services; also called labor.

inflation

A condition characterized by a continuing rise in prices.

mixed economies

Economies made up of elements from more than one economic system.

monopolistic competition

The market structure that exists when there are fewer businesses than in a pure competition environment and the differences among the goods they sell are small.

monopoly

The market structure that exists when there is only one business providing a product in a given market.

natural resources

Land, forests, minerals, water, and other things that are not made by people.

nonprofit organizations

Organizations that may provide goods or services but do not have the fundamental purpose of earning profits.

oligopoly

The market structure that exists when there are very few businesses selling a product.

open economy

An economy in which economic activities occur between the country and the international community.

product

A good or service with tangible and intangible characteristics that provide satisfaction and benefits.

profit

The difference between what it costs to make and sell a product and what a customer pays for it.

pure competition

The market structure that exists when there are many small businesses selling one standardized product.

recession

A decline in production, employment, and income.

socialism

An economic system in which the government owns and operates basic industries, but individuals own most businesses.

stakeholders

Groups that have a stake in the success and outcomes of a business.

standard of living

Refers to the level of wealth and material comfort that people have available to them. 01-4

supply

The number of products—goods and services—that businesses are willing to sell at different prices at a specific time.

technology

includes the methods and processes creating applications to solve problems, perform tasks, and make decisions.

unemployment

The condition in which a percentage of the population wants to work but is unable to find jobs.

CONTENT OUTLINE The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course, and a notation of when to use POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points. There is also a reminder on when CONNECT activities can be used. This feature was created to facilitate in-class or online discussions more effectively. LO 1-1

Define basic concepts such as business, product, profit, and economics.  Introduction  The Nature of Business o The Goal of Business

Key Terms:  Business  Product  Profit  Nonprofit organizations  Stakeholders

PowerPoint Slides: PPT 1.4

Lecture Outline and Notes: I. The Nature of Business A. Business refers to the individuals and organizations seeking a profit by providing products that satisfy people’s needs. B. Products refer to goods or services with tangible and intangible attributes that provide satisfaction and benefits. A product can be a good, service, or idea. 1. Examples of tangible goods include an automobile, smartphone, jeans, and so on. 2. Examples of services include dry cleaning, a checkup with your doctor, a movie, a sports event, and so on. 3. A product can also be an idea. Accountants and attorneys, for example, generate ideas for solving problems.

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PPT 1.5

C. The Goal of Business: to earn a profit, the difference between what it costs to make and sell a product and what a customer pays for it. 1. Businesses have a right to keep their profits as they choose—within legal limits—because profit is the reward they take in providing products. 2. Earning profits contributes to society by providing employment, which in turn provides money that is reinvested in the economy. 3. Nonprofit organizations do not have the fundamental purpose of earning profits, although they may provide goods or services. 4. Both nonprofit organizations and businesses require management skills, marketing expertise, and financial resources; and they must abide by laws and regulations, act in an ethical and socially responsible manner; and adapt to economic, technological, and social changes. 5. Earning a profit requires: a.

Management skills to plan, organize, and control the activities of the business and to find and develop employees so that it can make products consumers will buy.

Marketing expertise to learn what products consumers need and want and to develop, manufacture, price, promote, and distribute those products.

Financial resources and skills to fund, maintain, and expand its operations.

The ability to face challenges such as abiding by laws and government regulations.

Acting in an ethical and socially responsible manner.

Adapting to economic, technological, political, and social changes.

6. To earn a profit, businesses need to produce quality products, operate efficiently, and be socially responsible and ethical in dealing with stakeholders—groups that have a stake in the success and outcomes of a business. O 1-2

Identify the main participants and activities of business.

Key Terms:

o The People and Activities of Business LO 1-3

Explain why studying business is important. o Why Study Business?

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PPT 1.6 PPT 1.7

A. The People and Activities of Business 1. The people involved in business activities are the owners, employees, and customers. (Note that owners, employees, and customers are the main stakeholders, whereas the external environment consists of competition, the economy, information technology, legal and political forces, and social responsibility.) a. Owners have to put up the resources to start a business. They can manage the business themselves or have employees as managers. b. Employees are responsible for the work that goes on within the business. c. The major role of a business is to satisfy the customers who buy its goods and services. 2. The activities of businesses include primarily management, marketing, and finance. a. Management is included in the same part of the circle (Figure 1.1) as employees because managers coordinate employees’ actions to achieve the firm’s goals, organize people to work efficiently, and motivate them to achieve business goals. 1) Production and manufacturing is another element of management. Managers plan, organize, staff, and control the tasks required to carry out the work of the company. 2) Management is also concerned with acquiring, developing, and using resources effectively and efficiently in a business. b. Marketing and consumers are in the same segment (Figure 1.1) because the focus of all marketing activities is satisfying consumers. i.

Marketing involves all activities designed to provide goods and services that satisfy consumers’ needs and wants, including gathering information and conducting research to determine customer wants; planning and developing products; and determining price, distribution, and promotion.

c. Finance: Owners and finance are in the same part of the circle (Figure 1.1) because although management and marketing deal with financial considerations, it is primarily the responsibility of the owners to provide financial resources for the operation of the business. i. Finance refers to all activities concerned with obtaining money and using it effectively.

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B. Why Study Business? 1. It can help you develop skills and acquire knowledge to prepare you for your future career.

PPT 1.8

2. It can help you better understand the many activities necessary to provide goods and services and appreciate the costs associated with these activities. 3. Business activities help create jobs and contribute to the health of local and global economies. LO 1-4

Compare the four types of economic systems. 

Key Terms:

The Economic Foundations of Business

 Economics

o Economic Systems

 Natural resources

o The Free Enterprise System

 Human resources (labor)  Financial resources (capital)  Economic system  Communism  Socialism  Capitalism (free enterprise)  Free market system  Mixed economies

PPT 1.10

II. The Economic Foundations of Business A. Economics is the study of how resources—or factors of production—are distributed for the production of goods and services within a social system. 1. Natural resources are land, forests, minerals, water, and other things not made by people. 2. Human resources are the physical and mental abilities that people use to produce goods and services. 3. Financial resources, or capital, are the funds used to acquire the natural and human resources needed to provide products. 4. Natural resources, human resources, and financial resources are related to the factors of production. 5. Factors of production are: Land, labor, capital, and enterprise used to produce goods and services. 6. The firm can also have intangible resources such as a good reputation for quality products or being socially responsible. 01-8

PPT 1.11

B. An economic system describes how a society distributes its resources to produce goods and services that satisfy the needs of its people. All economic systems must answer three questions: 1. What goods and services and how much of each will satisfy the needs of the consumer? 2. How will the goods and services be produced? Who will produce them and with what resources? 3. How are the goods and services to be distributed?

PPT 1.12–1.13

C. Types of economic systems found in the world: communism, socialism, and capitalism (Table 1.1). 1. Karl Marx described communism as a society in which the people, without regard to class, own all the nation’s resources. Also called command economies (China & Cuba). a. Central government planning determines what products will satisfy citizens’ needs, how they are produced, and how they are distributed. b. In theory, communism appears efficient and equitable, but in practice, communist economies have been marked by low standards of living, critical shortages of consumer goods, high prices, and little personal freedom. c. Many countries have turned away from communism and begun to experiment with economic systems governed by supply and demand rather than by central planning. 2. Socialism is an economic system in which the government owns and operates basic industries, but individuals own most businesses (Norway, Israel, & India). a. Central planning determines what and how basic goods and services are produced and distributed, but individuals and small businesses provide other products based on consumer demand and the availability of resources. b. Most socialist nations are democratic and recognize basic individual freedoms. c. Socialist economies profess egalitarianism—equal distribution of income and social services. d. Taxes and unemployment are generally higher in socialist countries.

01-9

PPT 1.15

3. Capitalism, or free enterprise, is an economic system in which individuals own and operate most of the businesses that provide goods and services (the United States, Canada, & Japan). a. Competition, supply, and demand determine which goods and services are produced, how they are produced, and how they are distributed. b. There are two forms of capitalism: i.

Pure capitalism, or a free market system, exists when all economic decisions are made without government intervention. Adam Smith, the father of capitalism, believed that the invisible hand of competition would best regulate the economy.

4. Modified capitalism differs from pure capitalism in that the government intervenes and regulates business to a certain extent. a. One way of regulating business is through laws. b. Federal Trade Commission Act created the Federal Trade Commission. c. Business laws illustrate the importance of government’s role in economy. 5. Mixed economies have elements from more than one economic system. No country practices a pure form of communism, socialism, or capitalism. a. Many large economies are free enterprise—including the United States, Canada, and Japan. b. Many communist and socialist countries apply free enterprise principles—including China and Russia. c. Free enterprise allows a company to succeed or fail on the basis of market demand.

PPT 1.16

D. The free enterprise system provides an opportunity for a business to succeed or fail on the basis of market demand. A number of basic individual and business rights must exist for free enterprise to work and businesses to succeed. 1. Individuals must have the right to own property. 2. Individuals and businesses must have the right to earn and use profits, within constraints of society’s laws. 3. Individuals and businesses must have the right to make decisions that determine how the business operates, within the limits of the law. 4. Individuals must have the right to decide what career to pursue, where to live, what goods and services to purchase, and more. Businesses can decide where to locate, what goods and services to produce, what resources to use in the production process, and so on. 01-10

LO 1-5

Describe the role of supply, demand, and competition in a free enterprise system. o The Forces of Supply and Demand o The Nature of Competition o Economic Cycles and Productivity

Key Terms:  Demand  Supply  Equilibrium price  Competition  Pure competition  Monopolistic competition  Oligopoly  Monopoly  Economic expansion  Inflation  Economic contraction  Recession  Unemployment  Depression

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PPT 1.17–1.18

A. The Forces of Supply and Demand (Figure 1.2) 1. Demand is the quantity of goods and services that consumers are willing to buy for different prices at a specific time. Consumers will usually buy more of an item as its price falls. 2. Supply is the quantity of goods and services that businesses are willing to sell for different prices at a specific time. Usually, sellers are willing to sell more of a product at higher prices. 3. Supply and demand is the force that drives the distribution of resources (goods and services, labor, and money) in a free enterprise economy. 4. An equilibrium price is the point at which supply and demand curves intersect, indicating that supply and demand are equal at that point. 5. The supply and demand process is constantly changing in response to economic conditions, availability of resources, and degree of competition. 6. Critics of supply and demand say that the system does not distribute resources equally among the wealthy and the poor.

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PPT 1.19–1.20

B. The Nature of Competition 1. Competition is the rivalry among businesses for consumers’ dollars. It is a vital element of free enterprise. 2. Free enterprise systems offer four types of competitive environments: a. Pure competition exists when there are many small businesses selling one standardized product. The trade in agricultural commodities, such as wheat, corn, and cotton, is an example. b. Monopolistic competition exists when there are fewer businesses than in a pure competition system and the differences between the goods they sell are small. Aspirin, soft drinks, and vacuum cleaners are examples. c. An oligopoly exists when very few businesses sell a product, and it is expensive for new firms to enter the marketplace. The airline industry is an example. d. A monopoly exists when there is only one producer of a product in a given market. Utility companies are examples of monopolies.

PPT 1.21

C. Economic Cycles and Productivity 1. Economic expansion occurs when an economy is growing and people are spending more money. a. Rapid economic expansion may result in inflation, a continuing rise in prices. 2. Economic contraction occurs when spending declines. a. It can lead to recessions, which are marked by a decline in production, employment, and income.

PPT 1.22

b. Unemployment is measured as the percentage of the population that wants to work but is unable to find jobs (Figure 1.3). 1) Rising levels of unemployment tend to stifle demand, forcing prices down, a condition known as deflation. c. A depression is a severe recession in which unemployment is very high, consumer spending is low, and business output is sharply reduced. 3. Economies constantly expand and contract in response to changes in consumer, business, and government spending.

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LO 1-6

Specify why and how the health of the economy is measured.

Key Terms:  Gross domestic product (GDP)  Budget deficit

PPT 1.23

PPT 1.24

4. Measuring the Economy: countries measure the state of their economies to determine whether they are expanding or contracting and whether corrective action is necessary to minimize fluctuations. a. Gross domestic product (GDP) is the sum of all goods and services produced in a country during a year (Figure 1.4) i.

GDP measures only those products made within a country not profits earned from companies’ overseas operations. It does include profits earned by foreign companies within the country being measured.

ii.

It also does not take into account the sum relative to the country’s population; GDP per capita does.

b. Budget deficits occur when a nation spends more than it takes in from taxes. The national debt exceeds $27 trillion. 5. Other Ways of Measuring the Economy (Table 1.2) PPT 1.25

a. Trade balance: The difference between our exports and our imports. If the balance is negative, as it has been since the mid-1980s, it is called a trade deficit and is generally viewed as unhealthy for our economy. b. Consumer Price Index: Measures changes in prices of goods and services purchased for consumption by typical urban households. c. Per capita income: Indicates the income level of ―average‖ Americans. Useful in determining how much ―average‖ consumers spend and how much money Americans are earning. d. Unemployment rate: Indicates how many working age Americans are not working who otherwise want to work. (Americans who do not work in a traditional sense, such as stay-at-home moms or dads, are not counted as unemployed.) e. Inflation: Monitors price increases in consumer goods and services over specified periods of time. Used to determine whether costs of goods and services are exceeding worker compensation over time. f. Worker productivity: The amount of goods and services produced for each hour worked.

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LO 1-7

Outline the evolution of the American economy. 

LO 1-8

Key Terms:

The American Economy

 Standard of living

o The Importance of the American Economy

 Open economy

o A Brief History of the American Economy

 Entrepreneur

Explain the role of the entrepreneur in the economy. o The Role of the Entrepreneur o The Role of Government in the American Economy o The Role of Ethics and Social Responsibility in Business 

Can You Learn Business in a Classroom?

01-15

PPT 1.26–1.27

III. The American Economy A. The Importance of the American Economy 1. The American economy is an open economy. As an open economy, the United States is a major player in international trade. 2. Standard of living refers to the level of wealth and material comfort that people have available to them. 3. Open economies tend to have a higher standard of living than economies that do not engage in international trade. 4. International trade is positively related to efficiency and productivity. 5. A positive relationship exists between a country’s employment rate and economic growth. 6. Government public policy also drives the economy through job creation. 7. The vast majority of taxes come from individuals. 8. Businesses are also an important form of tax revenue. 9. In 2017, the largest tax reform in the U.S. tax rate in over 30 years changed the corporate tax rate from 35% to 21%. 10. The tax reform was designed to stimulate the economy but will increase the national debt. 11. Businesses are also an important form of tax revenue. 12. The Biden administration proposes to increase both corporate income

taxes and individual income taxes for those in higher income brackets

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PPT 1.28

B. A Brief History of the American Economy 1. The Early Economy a. Colonists established an agricultural economy. b. Most people were self-sufficient and produced almost everything they needed. 2. The Industrial Revolution a. Machines and job specialization increased the speed and efficiency of production. 3. The Manufacturing and Marketing Economies a. Industrialization brought about the manufacturing economy, which was devoted to producing goods and services. b. The marketing economy emerged as businesses became more concerned with the needs and wants of consumers. 4. The Service and New Digital Economy a. As quality of life improved, people had enough income to hire others to provide services for them, which ushered in the service economy. b. Advanced technology contributes to new service products based on technology and digital media that provide: 1) Smartphones 2) Social networking 3) Virtual worlds 4) Online Retailing and E-Commerce (Figure 1.6)

PPT 1.29–1.30

5. Technology includes the methods and processes creating applications to solve problems, perform tasks, and make decisions. a. Artificial intelligence (AI) relates to machine (computer) learning that is able to perform activities and tasks that usually require human intelligence. b. AI is moving rapidly across business functions because it can resolve predictable business activities (Figure 1.5). c. While it has the potential to provide greater productivity and higher quality service, it also creates new challenges. d. Tracking communication, profiles, and other searchable information will accelerate with AI.

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6. Big data to large volumes of structured and unstructured data this is transmitted at very fast speeds. 7. Blockchain is a decentralized record keeping technology that stores linked block of ordered transactions over time. a. Blockchain has the potential to make databases and the digital infrastructures more secure and trustworthy. 8. Drones are unmanned aerial devices can be programed with AI to perform human tasks such as delivering products or human tasks such as delivering products, collecting environmental data and imagery. Drones can be beneficial in a variety of industries such as construction, farming, defense, insurance, outdoor entertainment, and retail. PPT 1.31

C. The Role of the Entrepreneur 1. An entrepreneur risks their wealth, time, and effort to develop for profit an innovative product or way of doing something. 2. The free enterprise system provides the conditions for entrepreneurs to succeed. 3. Early American entrepreneurs were often inventors and captains of industry (Thomas Edison [light bulb and record player], John D. Rockefeller [Standard Oil Company], Andrew Carnegie [railroads and U.S. Steel Corporation], Andrew Mellon [Aluminum Company of America and Gulf Oil], Henry Ford [automobile industry], and J. P. Morgan [financial institutions]). 4. Modern American entrepreneurs are frequently changing business practices with innovative technologies Bill Gates (Microsoft software) and Fred Smith (FedEx).

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The Role of Government in the American Economy 1. The United States is a modified capitalism system.

PPT 1.36

2. Federal, state, and local governments sometimes intervene with regulations aimed at promoting competition and consumer safety. 3. Government agencies such as the U.S. Department of Commerce measure the economy’s health and intervene when economic health is at stake. E. The Role of Ethics and Social Responsibility in Business 1. Recent scandals undermined public confidence in corporate America and sparked a new debate about ethics in business (Enron, Countrywide, BP, Bank of America, Citigroup). 2. Business ethics generally refers to the standards and principles used by society to define appropriate and inappropriate conduct in the workplace. In many cases, these standards have been codified as laws. 3. Society is increasingly demanding that businesspeople behave ethically and socially responsibly toward customers and other stakeholders. 4. Businesses should determine what society wants and attempt to predict the long-term effects of their decisions. IV. Can You Learn Business in a Classroom? (Figure 1.6) The Organization of This Book A. Absolutely! To be successful in business, you need knowledge, skills, experience, and good judgment. B. This book can help students gain some of the knowledge, skills, and experience needed to be successful in business.

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LO 1-9

PPT 1.37–1.38

Evaluate a small business owner’s situation and propose a course of action.

Key Terms:

Solve the Dilemma: Mrs. Acres Homemade Pies A. Produces specialty pies and sells them in local supermarkets and family restaurants B. In each of the first six months, sold 2,000 pies for $4.50 each, netting $1.50 profit per pie C. Had problems keeping up with demand. 1. To meet demand expanded operations, borrowed money, and increased staff 2. Production and sales increased to 8,000 pies per month, and profits soared to $12,000 per month

PPT 1.39

D. Shelly has several options: 1. Maintain current production levels and raises prices 2. Expand the facility and staff while maintaining the current price 3. Contract the production of the pies to a national chain, giving Shelly a percentage of profits with minimal involvement

PPT 1.40

E. Critical Thinking Questions: 1. Explain and demonstrate the relationship between supply and demand for Mrs. Acres Homemade Pies. 2. What challenges does Shelly face as she considers the three options? 3. What would you do in Shelly’s position? (Answers appear under the End of Chapter Teaching Resources section of this Instructor's Manual.)

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Inside the Zoom Boom Founded in 2011, Zoom entered the video conference technology market at a time when consumer and business demand was just starting to ramp up. It wasn’t until the COVID-19 pandemic struck the United States nearly a decade later that Zoom experienced an unprecedented surge in demand and became widely recognized as an industry leader. The software company attracts many users to its free Basic account and attempts to convert these users into paying customers, a pricing model known as freemium pricing. Zoom has experienced record profits and has signed on big-name clients such as ExxonMobil and Activision Blizzard. 1. How did the COVID-19 pandemic contribute to Zoom’s success? Social distancing and isolation in 2020 fueled the demand for video communication and dramatically increase new Zoom user registrations. 2. What value and benefits does Zoom offer? Zoom offers high-quality, easy-to-use video conferencing tool with modern features that would operate on slow internet connections. 3. What are the advantages of a freemium pricing model? Disadvantages? Although the answers will vary, but most students will state that it is an easy method to attract a large number of customers quickly. Disadvantages: Freemium pricing can be expensive for companies because it costs money to acquire new customers and to offer free access, making it especially painful when customers discontinue service after a free trial.

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Responding to Business Challenges: Taylor Swift Fights Scalpers 1. Describe how the supply-demand problem is offering opportunities for scalpers. The demand for concert tickets is high and fans must often hurry to purchase tickets before they are sold out. There are a limited number of seats, demand is high, and the equilibrium price is also high. This situation creates opportunities for ticket scalpers. 2. Scalpers raise the equilibrium price once they control the supply. How do you think this Ticket—master Verified Fan System will affect this ability? The Verified Fan system locates fans less likely to resell their tickets. Fans register and—if they are identified by Ticketmaster’s Verified Fan system—they are sent a link that gives them early access to tickets. 3. As a service provider, do you think performers like Taylor Swift should take an active role in fighting against scalpers? Why or why not? Answers will vary with some students answering that performers should take an active role because they have the power whereas consumers do not. Other students will argue that the concept of supply and demand should apply and performers shouldn’t care if fans resell the tickets because they already have their money. Business Disruption: Competition is Brewing in Kombucha Market 1. Why is the competition in the kombucha industry an example of monopolistic competition? Because kombucha is relatively easy to produce, manufacturers take steps to differentiate their products such as developing drinks in a variety of unique, fruity flavors. 2. How are the forces of supply and demand convincing more established brands like PepsiCo to enter the industry? Consumer interest in the beverage is skyrocketing and the demand is encouraging the entrance of new competitors. Coca-Cola has a stake in a kombucha company and Pepsi doesn’t want to miss a market opportunity. 3. If more and more entrants enter the industry, what do you think will happen to the price of kombucha? Based on the concept of supply and demand, with an increase in the number of sellers, the price should decline.

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Technology and the Economy Up in the Air: Drones and Air Traffic Control 1. How does this situation demonstrate a modified capitalist economic system? Air traffic control is run by the government to regulate and manage air space. While this type of government control works for airplanes, the rise of a new type of product taking to the skies calls for a more autonomous type of control. So free enterprise is encouraged but the government needs to regulate the overall system. 2. What is the difference between the current air traffic control system and the proposed air traffic control system for drones? Unlike the air traffic control system for airplanes, this drone system is private. The FAA will define a drone traffic management framework that commercial operators will follow. 3. Why would it be harder for the government to maintain as much control over drones as it does for airplanes? As many as 7 million drones could be in the sky at once, according to the Federal Aviation Administration (FAA). The sheer number of drones and companies involved would make it impossible for the government to control. Many consumers support conserving biodiversity and promoting sustainability thus preserving the world’s resources. The Rainforest Alliance Certification gives a company credibility in the eyes of those consumers. When consumers see that seal, they know that the company has incorporated sustainability principles into its operations. So You Want a Job in the Business World Why is it important to seriously consider what kind of job you want to have, and how do you help keep it once you have been hired? Because you spend most of your waking hours at work, it is imperative that you explore all avenues when determining what line of work you would like to enter. Most jobs are not with large corporations but are in small companies, nonprofit organizations, government, and even as self-employed individuals. The fast pace of technology today means that students have to be prepared to take advantage of emerging job opportunities and markets. Once you have found a suitable position, you must learn to be flexible and to adapt quickly. You need to consider all of the changes in the workplace and the work that might affect your long-term position within your company, and what will help you be successful.

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Instructor’s Manual—Chapter 2

Ferrell/Hirt/Ferrell: Business Foundations 13e

END OF CHAPTER TEACHING RESOURCES Check Your Progress 1. What is the fundamental goal of business? Do all organizations share this goal? The fundamental goal of business is to earn profits. Nonprofit organizations do not share this fundamental goal, although they often provide goods and services. 2. Name the forms a product may take and give some examples of each. A good (automobile, calculator, beverage, or notebook). A service (dry cleaning, overnight mail delivery, a haircut, a checkup by a doctor). An idea (consultants and attorneys, for example, generate ideas for solving problems). 3. Who are the main participants of business? What are the main activities? What other factors have an impact on the conduct of business in the United States? The main participants in business are owners, employees, and customers. The main business activities include management, marketing, and finance. Other factors having an effect on the conduct of business are legal and regulatory forces, the economy, competition, technology, and ethical and social concerns. 4. What are four types of economic systems? Can you provide an example of a country using each type? Communism (China, North Korea, Vietnam, and Cuba) Socialism (Sweden, India, Denmark, and Israel) Capitalism (United States, Canada, and Australia) Mixed economies (most nations operate as mixed economies) 5. Explain the terms supply, demand, equilibrium price, and competition. How do these forces interact in the American economy? Supply is the quantity of goods or services that businesses are willing to sell at different prices at a specific time, while demand is the quantity of goods and services that consumers are willing to buy at different prices at a specific time. Equilibrium price is the price at which the quantity of products that businesses are willing to supply equals the quantity of products consumers are willing to buy at a specific point in time. Competition is the rivalry among businesses to convince customers to buy their products. These forces interact in the American economy, causing the distribution of resources and products to be determined by supply and demand. Supply and demand change in response to changes in economic conditions, availability of resources, and degree of competition.

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6. List the four types of competitive environments and provide an example of a product of each environment. Pure competition (agricultural commodities such as wheat, corn, and cotton) Monopolistic competition (aspirin, soft drinks, and vacuum cleaners) Oligopolies (aluminum industry, steel industry, automobile manufacturers, and airlines) Monopolies (utility companies) 7. List and define the various measures governments may use to gauge the state of their economies. If unemployment is high, will the growth of GDP be great or small? The gross domestic product (GDP) is the sum of all goods and services produced by a country during a year. It measures only those products made within a country and therefore excludes profits from companies’ overseas operations. It does include profits earned by foreign companies within the country being measured. The existence of a budget deficit indicates that a nation is spending more than it is taking in from taxes. Inflation is characterized by a continuing rise in prices. When unemployment is high, the demand for goods and services is low; thus, the level of production decreases. Accordingly, the growth of the GDP is small. 8. Why are fluctuations in the economy harmful? Fluctuations in the economy are associated with inflation and unemployment. They are a major cause of human distress. Moreover, the potential for fluctuations in the economy makes it more difficult for businesses and consumers to plan for the future. 9. How did the Industrial Revolution influence the growth of the American economy? Why do we apply the term service economy to the United States today? The Industrial Revolution led to an increase in factories as technology provided machines by which workers could make products more efficiently. Work in factories became more specialized. Transportation, especially railroads, allowed farmers to send their surplus crops and goods to markets. Innovations in farm equipment increased farm productivity; fewer workers were required on the farm, and more workers moved to factory jobs in the cities. The U.S. economy is devoted to the production of services that make life easier for consumers. 10. Explain the federal government’s role in the American economy. The U.S. economic system operates as modified capitalism because business is regulated to a certain extent through federal, state, and local governments. Most government regulation seeks to preserve competition and to protect consumers and employees.

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Get Involved 1. Discuss the economic changes occurring in Russia and eastern European countries, which once operated as communist economic systems. Why are these changes occurring? What do you think the result will be? Russia and eastern European countries have turned away from communism and toward economic systems governed by supply and demand rather than by central planning. Before the Soviet Union fell, the economy was stagnant and there was serious political unrest. After the Soviet Union fell, many of the countries that had been taken over by the Soviet Union also began to move away from communism. Despite the potential inequalities that might lie in supply and demand relationships, many feel it is the best way to create an efficient marketplace. In many communistic countries without competition, growth tends to stagnate. In terms of the results, student answers might vary. However, it is not easy to transition from a communist country to a more competitive supply and demand system. Instructors might want to draw students’ attention to Cuba. Facing severe economic constraints, Cuba laid off thousands of government workers and began pushing more for private enterprise. However, many of these workers will not have much experience in the private sector in a country where entrepreneurship was—and to a certain extent still is—highly discouraged by restrictive laws. 2. Why is it important for the government to measure the economy? What kinds of actions might it take to control the economy’s growth? It is important for the government to measure the economy to determine whether corrective action is necessary to minimize fluctuations. One way that the government might try to spur growth is by reducing its interest rates or increasing its own spending for goods and services. In periods of inflation, the government might try to lower growth by raising interest rates to discourage spending by businesses. Students will likely come up with additional answers. 3. Is the American economy currently expanding or contracting? Defend your answer with the latest statistics on GDP, inflation, unemployment, and so on. How is the federal government responding? Many students will probably say the economy is in a period of a mixed results with the economy expanding but with higher unemployment. Unemployment was at historically low levels before the COVID pandemic but shot up during the pandemic. It has declined and there is a current shortage of workers. The inflation rate was 2.1% before the pandemic. The supply chain was significantly disrupted during the pandemic and inflation has increased. These numbers will likely have changed by the time this book comes out. 02-26

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Build Your Skills: The Forces of Supply and Demand Background WagWumps are a new children’s toy with the potential to be a highly successful product. WagWumps are cute and furry, and their eyes glow in the dark. Each family set consists of a mother, a father, and two children. Wee-Toys’ manufacturing costs are about $6 per set, with $3 representing marketing and distribution costs. The wholesale price of a WagWump family for a retailer is $15.75, and the toy carries a suggested retail price of $26.99. Task Assume you are a decision maker at a retailer, such as Target or Walmart, that must determine the price the stores in your district should charge customers for the WagWump family set. From the information provided, you know that the SRP (suggested retail price) is $26.99 per set and that your company can purchase the toy set from your wholesaler for $15.75 each. Based on the following assumptions, plot your company’s supply curve on the graph provided in Figure 1.8 and label it ―supply curve.‖ Quantity 3,000 5,000 7,000

Price $16.99 21.99 26.99

Using the following assumptions, plot your customers’ demand curve on Figure 1.8 and label it ―demand curve.‖ Quantity 10,000 6,000 2,000

Price $16.99 21.99 26.99

For this speciﬁc time, determine the point at which the quantity of toys your company is willing to supply equals the quantity of toys the customers in your sales district are willing to buy and label that point ―equilibrium price.‖

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Prices of WagWumps

Equilibrium Price Supply Curve

Demand Curve

Equilibrium Price = $22.99

Quantity of WagWumps (in thousands)

Solve the Dilemma: Mrs. Acres Homemade Pies 1. Explain and demonstrate the relationship between supply and demand for Mrs. Acres Homemade Pies. When Shelly Acres started selling her pies, she had to find her own customers. None of the local restaurants and supermarkets knew her products, so she had to offer an affordable product to interest restaurants and supermarkets in her products. As demand increased, Shelly started producing more pies to meet this demand. At the moment, she cannot supply all the demand. A way to decrease this demand is to increase prices. She can also increase the production level to meet the demand. 2. What challenges does Shelly face as she considers the three options? The first option implies that Shelly’s company is not going to grow since its current size will be maintained by keeping an artificially high price. The second solution requires Shelly to find the resources to finance the expansion of her activities. The third option leads Shelly to lose her specific know-how by providing it to the national restaurant chain. It also implies that Shelly does not own her business any longer. 3. What would you do in Shelly’s position? Answers will vary, but students should be able to defend the choices they have made.

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Build Your Business Plan: The Dynamics of Business and Economics I think the best way to get the students excited about developing their business plans is to facilitate lively class discussions. Ask the students for the pros and cons of using an established product/business for their business plans. Students are going to think it will be easier to deal with an established product when indeed they have no idea that many companies are privately held and information may not be readily available. More importantly, students do not realize how difficult it may be to improve upon an established product or business. Unless the students come up with a unique promotional idea or distribution channel for the established product/service, students will end up doing a research project on a product that is already successful. That is not what the business plan project is about. Encourage students to share their experiences of businesses they attempted, were successful in starting, or have desires to start. It may be a painting service, an eBay service provider, or a lawn care service. Push the students to identify what kinds of businesses/services they believe their communities need. Students need to realize how important it is for them to think about how many others in the community share their desire for a particular good or service. Often students will suggest another video store, pizza parlor, or workout gym for their new business or service. You need to force the students to think about how substantial the demand is for this good/service. Suggestions for Group Formation If this is a first-year course, it probably makes sense to assign students to groups since they do not know each other. An ideal group size is four or five students. From Appendix A, you can see that the first assignment is to develop their business proposals. If you are on a 15week semester, this should be due around the fourth week of the semester. At that point, you will not have covered the marketing chapters, but the idea of the business proposal is just to get the groups to start thinking about what lies ahead for the group. In order to avoid a disaster, require the groups to submit their idea of a good or service to you within the first 10 days/2 weeks of the course. This allows you to steer them in the right direction if they are in over their heads, or if their idea is not feasible. History has shown that rotating the leadership of the group helps everyone to be more accountable for their actions (or lack of action). You might suggest that each week one student serve as the leader and coordinate/lead meetings, while the other serves as a recorder of meeting notes and tasks assigned to each group member. Over the course of the semester, students should be able to have each role at least once. Inform the students that they will be completing an evaluation of each group member’s contribution to the group after the project is completed. 02-29

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Consider having a business plan competition at the end of the semester and invite local professionals in to judge. You could require that all teams participate in the competition or it could be voluntary. Maybe the first time you do it you might ask for teams to volunteer. Offer financial prizes (maybe $100 each) to the best plan, the most likely to succeed, and the most creative business plan. The forum for this should be after their oral presentation to the class, which would give them some experience before presenting it for the judges. Consider involving all the other sections of the Introduction to Business course in this competition. Knowing they will be competing for a financial prize could serve as a great motivator for students. See for Yourself Case: Tesla: More Than a Car Company Case Overview Tesla, an all-electric vehicle and energy generation products company, is widely admired for its industry-altering innovation built around its core vision of moving the world toward sustainable energy. Tesla did not invent the EV, but it was the first to create a viable EV for consumers and has set the standard of what an electric car should be. In 2003, Martin Eberhard and Marc Tarpenning set out to create a high-end performance EV, targeting wealthy car enthusiasts. Elon Musk joined the company in 2004 after investing $30 million and becoming the chair of the board of directors. The company launched three successful vehicles and began to focus on the energy side of its business, unveiling Solar Roof solar tiles as well as Powerwall and Powerpack industry batteries to store converted solar energy. The company changed its name from Tesla Motors to Tesla, Inc., in 2017, signifying the company’s shift from a car manufacturer to a sustainable energy solution company. In addition to addressing more of the consumer market, Tesla is investing in heavy-duty trucks and high-passenger-density urban transport. The company has made significant gains and has firmly established itself as a leader in EVs 1. What benefits do Tesla’s products provide? Tesla created a battery that could sufficiently power a vehicle and a motor that was effective and affordable. Their vehicles feature autopilot for partial autonomous driving enabling the cars to self-drive with active driver supervision, have the longest driving range of any EV, and are more affordable and safer. 2. As competition grows, do you think demand for Tesla’s vehicles will decline? Why or why not? Answers will vary but students should support their answers.

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3. How has Tesla pushed the car industry forward? Answers will vary—Tesla pushed the car industry forward by for its focus on industryaltering innovation built around its core vision of moving the world toward sustainable energy. Their efforts have resulted in more car companies focusing on renewable and sustainable energy. Team Exercise Major economic systems, including capitalism, socialism, and communism, as well as mixed economies were discussed in this chapter. Assuming that you want an economic system that is best for the majority, not just a few members of society, defend one of the economic systems as the best system. Form groups and try to reach agreement on one economic system. Defend why you support the system that you advance. CONNECT ACTIVITIES GrubHub Excels Amidst the Changing Business Environment Learning Objective: 1-2: Identify the main participants and activities of business. Activity Summary: GrubHub has been on a mission to change the way we eat since its founding in 2004. This scenario illustrates the story of GrubHub’s founding, its evolution, and value proposition as it looks to grow in the years ahead by hearing the perspectives of leaders in the organization. How to Use Activity: This activity allows students to get inside the minds of GrubHub leaders—understanding what they do and why they do it. Beyond answering the video case questions, students can apply the same concepts and vocabulary terms GrubHub leaders reference (competitive advantage, global business environment, legal environment) and relate them to another familiar brand of their choosing. Class Discussion: GrubHub is a business that has succeeded by not being stagnant. How has GrubHub evolved as time progressed? Why is this important? The four components of the business environment impact the success of GrubHub’s operation. What are some examples of aspects in the economic and legal environment, technological environment, competitive environment, and social environment that could affect GrubHub? Share reasoning behind your response.

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Uber and Its Effect on the Sharing Economy Learning Objective: 1-5: Describe the role of supply, demand, and competition in a free enterprise system. Activity Summary: The rapid rise of sharing economy has shaped consumer behavior and spurred the development of new businesses in less than one decade. With evolving consumer preferences and businesses entering markets at new angles, the result creates natural economic implications. How to Use Activity: Divide students into five groups (one for each question) and assign each a question from the case. Give each group 5 min to read the case, and 5 min together to collaborate on the response to their question. After they’ve aligned on an answer, invite a student from each group to share their response and justification. Allow the class to agree or disagree with the group’s answer, self-grading each group. Provide expertise and arbitrate when necessary. Class Discussion: How would you explain the concept of the sharing economy? Other than Uber, can you think of other companies whose businesses are founded on this principle of collaborative consumption? (Note to Professor: Common examples may include Lyft, Airbnb, WeWork, Kickstarter, GoFundMe.) iSeeIt! Video Case: Supply and Demand Learning Objective: 1-5: Describe the role of supply, demand, and competition in a free enterprise system. Activity Summary: Explore how one of the most fundamental economic concepts, supply and demand, is brought to life through a pair of jeans. How to Use Activity: The Broadway blockbuster, Hamilton, continues to gross over $3 million each week in New York City. Its average ticket price is $300, more than double the second highest grossing show on Broadway (Disney’s The Lion King). Ask students to research on the internet the Hamilton ticketing scarcity and connect its pricing to the concepts of supply and demand. (Note to Professor: Hamilton uses a new technique in musical theater ticketing, dynamic pricing, where ticket prices are automatically adjusted based on supply and demand. Prices depend on a number of factors: time of day, seasonality, number of seats available, desirability of specific seat, and so on. In addition, scalpers often acquire almost every primarily sold tickets and increase the price even higher than what’s reported on the primary market. Yet, rooted in the basics of economics, this philosophy validates the basic economic concept: supply is low, and demand is high.) 02-32

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Class Discussion: How can the ticketing of the musical Hamilton relate to supply and demand? Some products have a steady price that don’t change too significantly over time (e.g., groceries); other products have pricing that adjusts wildly similarly to Hamilton. What examples can you think for each of these two classes of products—ones when price doesn’t seem to fluctuate often due to demand and conversely examples of when it does? BONUS TEACHING RESOURCES Term Paper or Project Topic These topics may be assigned as individual or collaborative projects: 1. 2. 3. 4. 5.

The Life and Influence of Karl Marx The Life and Influence of Adam Smith How Railroad Transportation in the 1800s Affected the American Economy Eli Whitney: An Innovator of Standardization in Manufacturing Advantages and Disadvantages of Small Business Entrepreneurship

Guest Speaker Suggestions 1. A representative from the Small Business Administration or Small Business Development Center or a small business owner/entrepreneur to speak about the opportunities in small business or in entrepreneurship. 2. Students usually enjoy hearing about the experiences of international students and many instructors already have an international student in their classes. The instructor could set up a panel of students to discuss the economies and what life was like in their home country. If the instructor does not any international students, most colleges have a campus international association who could provide access to speakers to discuss the differences in American business practices and those of other cultures.

Teaching Suggestions 1. Instructors may use the materials provided in this Instructor’s Manual in a variety of ways. Many prefer to give a lecture interspersed with PowerPoint slides and/or transparencies. These have been designed to add to student understanding of the chapter content. 2. The lecture is generally followed by class discussion of Key Terms and Definitions, Check Your Progress, and Get Involved. 02-33

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3. Supplemental lecture material follows the Lecture Outline and Notes. One supplemental lecture is provided for each chapter. After discussing the course, the syllabus, and the next session’s assignment, some instructors may wish to use the supplemental lecture material as a beginning lecture on the first day. In addition to the supplemental lecture(s), a Controversial Issue, Term Paper or Project Topics, and Guest Speaker Suggestions are provided for each chapter. 4. Additional material is provided in the textbook and in the boxed texts. Also, discussion questions are provided in the Instructor’s Manual for ―Going Green‖ and ―Business Challenges‖ boxed material. 5. A quiz is provided for each chapter. This quiz may be used as a practice quiz or as an inclass quiz. As an alternative to giving the quiz at the conclusion of the lecture, some instructors prefer to give the quiz at the beginning of class (prior to a lecture) to determine how well students have read the chapter assignment or to use the quiz as a means for discussing the chapter. 6. Instructors also have a variety of options in giving in-class and out-of-class assignments. The following are some possibilities: a. Instructors may assign a brief ―writing to learn‖ exercise in which students summarize their thoughts or write answers. This may be a short in-class exercise in which students write answers to one or all of the Additional Discussion Questions and Exercises. The instructor may call on a random number of students to read their written exercises or to discuss answers in class. b. A list of suggestions for guest speakers is provided for the chapter. The instructor may arrange for a speaker, although some instructors give class members or teams the responsibility of arranging for speakers. The number of speakers planned for the entire course and the amount of time allowed for each speaker must be considered by the instructor in planning the sequence of the course. c. Some students are not test wise. One suggestion that may help students prepare for tests is to have each student develop one test question (multiple choice, true/false, completion, etc.) based on the key terms and concepts. These questions and answers may be shared in pairs or in teams of individuals. For a unit test, some instructors use one or two questions submitted by students. d. Term paper or project topics may be assigned to be completed over a long period of time. An option to a written term paper is to have a short oral presentation on the term paper or project topics. Many instructors give students a choice of topics from different chapters, allowing them the flexibility of choosing from the topics. 02-34

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Chapter 2: Business Ethics and Social Responsibility SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Omaze-ing: Reinventing the Charity Model Business Disruption: Tyson Looks for Sustainable Meat Consider Ethics and Social Responsibility: Building a Better Everyday Life With Ikea Responding to Business Challenges: Sherwin-Williams Paints Itself in a Corner So You Want a Job in Business Ethics and Social Responsibility END OF CHAPTER TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Making Decisions about Ethical Issues Solve the Dilemma: Customer Privacy Build Your Business Plan: Business Ethics and Social Responsibility See for Yourself Case: Hershey Finds a Sweet Spot in Sustainability Team Exercise CONNECT ACTIVITIES Cocoa Exchange Values Social Responsibility The Dilemma of Cross-Selling Insurance Policies Bombas’ Business Model—Buy One Give One BONUS TEACHING RESOURCES Recycling: A Dilemma for Business Firms Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions

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SUMMARY In this chapter, we take a look at the role of ethics and social responsibility in business decision making. First, we define business ethics and examine why it is important to understand the role of ethics in business. Next, we explore a number of business ethics issues to help you learn to recognize such issues when they arise. Finally, we consider steps businesses can take to improve ethical behavior in their organizations. The second half of the chapter focuses on social responsibility and unemployment. We survey some important issues and detail how companies have responded to them.

LEARNING OBJECTIVES LO 2-1

Describe the importance of business ethics and social responsibility.

LO 2-2

Detect some of the ethical issues that may arise in business.

LO 2-3

Specify how businesses can promote ethical behavior.

LO 2-4

Explain the four dimensions of social responsibility.

LO 2-5

Evaluate an organization’s social responsibilities to owners, employees, consumers, the environment, and the community.

LO 2-6

Evaluate the ethics of a business’s decision.

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KEY TERMS AND DEFINITIONS bribes

Payments, gifts, or special favors intended to influence the outcome of a decision.

business ethics

Principles and standards that determine acceptable conduct in business.

codes of ethics

Formalized rules and standards that describe what a company expects of its employees.

consumerism

The activities that independent individuals, groups, and organizations undertake to protect their rights as consumers.

corporate citizenship

The extent to which businesses meet the legal, ethical, economic, and voluntary responsibilities placed on them by their stakeholders.

ethical issue

An identifiable problem, situation, or opportunity that requires a person to choose from among several actions that may be evaluated as right or wrong, ethical or unethical.

plagiarism

The act of taking someone else’s work and presenting it as your own without mentioning the source.

social responsibility

A business’s obligation to maximize its positive impact and minimize its negative impact on society.

sustainability

Conducting activities in a way that allows for the long-term wellbeing of the natural environment, including all biological entities; involves the assessment and improvement of business strategies, economic sectors, work practices, technologies, and lifestyles so that they maintain the health of the natural environment.

whistleblowing

The act of an employee exposing an employer’s wrongdoing to outsiders, such as the media or government regulatory agencies.

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Describe the importance of business ethics and social responsibility.  Introduction  Business Ethics and Social Responsibility

Key Terms:  Business ethics  Social responsibility

 The Role of Ethics in Business

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PowerPoint Slides: PPT 2.4

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Lecture Outline and Notes: V. Business Ethics and Social Responsibility D. Business ethics are principles and standards that determine acceptable conduct in business. E. Acceptable behavior is determined by: 1. The organization 2. Stakeholders and interest groups 3. Competitors 4. Government regulators 5. The public 6. The individual’s personal principles

PPT 2.5

F. Global Trust in Different Industries (Figure 2.1) 1. In business, trust is the glue that holds the customer relationship together. 2. The recent global financial crisis took a toll on consumer trust of financial services companies. G. ―Tone at the top‖ 1. Managers must show a strong commitment to ethics and compliance. 2. ―Tone at the top‖ requires top managers to acknowledge their own role in supporting ethics and compliance.

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3. Top managers must:

PPT 2.6

Create strong relationships with ethics and compliance department.

ii.

Clearly communicate expectations for ethical behavior to all employees.

iii.

Educate managers/supervisors about the company’s ethics policies.

iv.

Train managers and employees on what to do if an ethics crisis occurs.

H. Social responsibility is a business’s obligation to maximize its positive impact and minimize its negative impact on society. 1. Social responsibility and ethics are not the same. i.

Ethics refers to individual’s or work group’s decisions.

ii.

Social responsibility is the impact of the entire organization’s activities on society.

I. Laws and regulations PPT 2.7 PPT 2.8

1. Timeline of Ethical and Socially Responsible Activities (Table 2.1) 2. Dodd-Frank Act

PPT 2.9

Passed to reform the financial industry and offer consumers protection against complex and/or deceptive financial products.

ii.

Enacted after the most recent recession.

VI. The Role of Ethics in Business A. Growing concerns about legal and ethical issues in business strengthen the public’s perceptions that ethical standards and the level of trust in business need to be raised. 1. Recent legal and ethical issues: a. Subprime loans and foreclosures b. Accounting fraud c. Cybercrimes d. Deceptive advertising e. Unfair competitive practices 2. Learning to recognize and resolve ethical issues is a key step in evaluating ethical decisions. 02-40

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LO 2-2

Detect some of the ethical issues that may arise in business. 

Key Terms:  Ethical issue

Recognizing Ethical Issues in Business

 Bribes

o Fairness and Honesty

 Plagiarism

o Making Decisions about Ethical Issues PPT 2.11

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B. Recognizing ethical issues in business 1. Ethical issue is an identifiable problem, situation, or opportunity that requires a person to choose from among several actions that may be evaluated as right or wrong, ethical or unethical. 2. Recognizing ethical issues is the most important step in understanding business ethics. 3. Best way to judge the ethics of a decision is to look at a situation from a customer’s or competitor’s viewpoint. C. Bribes are payments, gifts, or special favors intended to influence the outcome of a decision. 1. Many business issues seem straightforward and easy to resolve on the surface but are in reality very complex. 2. Experience with the culture in which a business operates is critical to understanding what is ethical or unethical. 3. One of the principal causes of unethical behavior in organizations is overly aggressive financial or business objectives.

PPT 2.12

D. Organizational Misconduct in the United States 2020 (Table 2.2)

PPT 2.14

E. Misuse of Company Time 1. Theft of time is a common area of misconduct observed in the workplace. 2. Many employees spend an average of 1 hr/day using social media sites or watching YouTube. 3. Time theft costs are estimated to cost companies hundreds of billions of dollars annually.

PPT 2.15

F. Abusive or intimidating behavior is the most common ethical problem for employees. 1. Bullying is associated with a hostile workplace when a person or group is targeted and is threatened, harassed, belittled, verbally abused, or overly criticized. a. Within the concept of abusive behavior, intent should be a consideration. b. Abusive behavior is difficult to assess and manage because of diversity in culture and lifestyle. 02-41

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PPT 2.16

Actions Associated With Bullies (Table 2.3)

PPT 2.17

H. Misuse of company resources has been identified as a leading issue in observed misconduct in organizations. 1. Issues might include: a. Spending an excessive amount of time on personal emails b. Submitting personal expenses on company expense reports c. Using the company copier for personal use 2. Many companies have implemented official policies delineating acceptable use of company resources.

PPT 2.18

I. Conflict of Interest 1. Exists when a person must choose whether to advance their own personal interests or those of others. 2. To avoid, employees must be able to separate their personal financial interests from their business dealings. 3. Inside trading is the buying or selling of stocks by insiders who possess material that is still not public.

PPT 2.19 PPT 2.20

J. Least Corrupt Countries (Table 2.4) K. Fairness and Honesty 1. Employees must: a. Abide by the laws. b. Cause no harm through dishonesty. c. Use company resources fairly and honestly. d. Be aware of company policies. e. Recognize ethical behavior. f. Use fair competition practices. g. Give full disclosure of potential harm by a product. 2. Communications a. Be truthful in advertising b. Product safety c. Product labeling

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3. Business Relationships a. Keep company secrets. b. Meet obligations. c. Avoid undue pressure forcing others to act unethically. d. Plagiarism is taking someone else’s work and presenting it as your own without mentioning the source.

PPT 2.21

L. Making Decisions About Ethical Issues 1. It can be difficult to recognize specific ethical issues. 2. People often need years of experience to accurately recognize and react to ethical situations. 3. Questions to Consider in Determining Whether an Action is Ethical (Table 2.5)

LO 2-3

Specify how businesses can promote ethical behavior. 

Improving Ethical Behavior in Business

Key Terms:  Codes of ethics  Whistleblowing

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PPT 2.22

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Improving Ethical Behavior in Business 1. Three factors that influence business ethics (Figure 2.2): a. Individual Standards and Values b. PLUS Managers’ and Co-Workers’ Influence c. PLUS Opportunity: Codes and Compliance Requirements d. EQUAL Ethical/Unethical Choices in Business 2. Many employees use different ethical standards at work than they do at home. 3. The activities and examples set by managers and coworkers are critical in gaining consistent ethical compliance. 4. If a company fails to provide good examples and direction, confusion and conflict will develop. a. This can lead to unethical choices in business.

PPT 2.23

Why a Code of Ethics Is Important (Table 2.6)

O. Codes of ethics are formalized rules and standards that describe what a company expects of its employees. 1. Employees must have established ethics policies if employees are expected to determine acceptable conduct. 2. Codes and policies on ethics encourage the creation of an ethical culture in the company. 3. The enforcement of ethical codes and policies through rewards and punishments increases the acceptance of ethical standards by employees. P. Whistleblowing is the act of an employee exposing an employer’s wrongdoing to outsiders such as the media or government regulatory agencies. 1. One of the most important components of an ethics program is a means through which employees can report observed misconduct anonymously. 2. More companies are establishing programs to encourage employees to report illegal or unethical practices internally. 3. In 2010, Congress passed the Dodd-Frank Act, which includes a ―whistleblower bounty program.‖

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LO 2-4

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Q. Ethical Trends in Business Explain the four dimensions of social responsibility. Key Terms: 1. The current trend is to move away from legally based ethical  The programs Nature of to Social Responsibility  Corporate cultural or integrity-based programs that make ethics citizenship a core organizational value. 2. Effective business ethics programs are good for business performance. 3. Firms that develop higher levels of trust function more efficiently and effectively and avoid damaged company reputations and product images.

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PPT 2.25

VII.

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The Nature of Social Responsibility

A. Four Dimensions of Social Responsibility (Table 2.7) 1. Financial and Economic Viability: Being profitable 2. Legal responsibilities: Obeying the law (society’s codification of right and wrong); playing by the rules of the game 3. Ethical responsibilities: Being ethical; doing what is right, just, and fair; avoiding harm 4. Philanthropic Activities: Being a ―good corporate citizen‖; contributing to the community and quality of life PPT 2.26

B. Corporate citizenship is the extent to which businesses meet the legal, ethical, economic, and voluntary responsibilities placed on them by their stakeholders. 1. Commitment to corporate citizenship indicates a strategic focus on fulfilling the social responsibilities expected of it by its stakeholders. 2. Involves action and measurement of the extent to which a firm embraces corporate citizenship philosophy and following through by implementing appropriate initiatives. 3. A Selection of the World’s Most Ethical Companies (Table 2.8) C. The Arguments For and Against Social Responsibility (Table 2.9)

LO 2-5

Evaluate an organization’s social responsibilities to owners, employees, consumers, the environment, and the community.  Social Responsibility Issues

Key Terms:  Consumerism  Sustainability

 Unemployment

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VIII. Social Responsibility Issues (Table 2-11) The Divisions of the Federal Trade Commission’s Bureau of Consumer Protection A. Managers consider social responsibility on a daily basis. 1. Among the many social issues that managers must consider are their firms’ relations with: a. Owners and stockholders b. Employees c. Consumers d. Environmental advocates PPT 2.27

e. Communities B. Relations with Owners and Stockholders 1. Maintain proper accounting procedures. 2. Provide investors with all relevant information.

PPT 2.28

3. Protect owner’s rights and investments. C. Employee Relations 1. Provide a safe workplace and pay them adequately. 2. Provide equal opportunities for all employees. 3. Keep them informed of what is happening in the company. 4. Listen to their grievances and treat them fairly.

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PPT 2.29

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D. Consumer Relations involves the activities that independent individuals, groups, and organizations undertake to protect their rights as consumers. 1. Write letters. 2. Lobby government agencies. 3. Make public service announcements. 4. Boycott irresponsible companies. E. Consumer Bill of Rights (John F. Kennedy, 1962) 1. The right to safety 2. The right to be informed 3. The right to choose 4. The right to be heard F. (Table 2.11) The Divisions of the Federal Trade Commission’s Bureau of Consumer Protection G. Sustainability Issues

PPT 2.30–2.33

1. The scope of sustainability is broad: a. Conducting activities in a way that allows for the longterm well-being of the natural environment, including biological entities. 2. Involves the assessment and improvement of business strategies, economic sectors, work practices, technologies, and lifestyles so that they maintain the health of the natural environment. 3. Environmental Protection emerged as a major issue in the 20th century. G. Pollution 1. Water: Society is demanding clean water 2. Air: Acid rain and global warming 3. Land: Garbage, strip mining, and poor forest conservation H. Alternative energy 1.

Reducing carbon emissions forces alternative energy

sources. I. Companies Responses to Environmental Issues 1. Making processes more eco-friendly is called ―green‖ business. 2. Recycling aluminum, paper, and glass. 02-48

3. UsingNo green power sources when available. © McGraw Hill LLC. All rights reserved. reproduction or distribution without the prior written ofcompanies McGraw Hill LLC. 4.consent Larger may have a vice president of environmental affairs. 5. Greenwashing is creating a positive green association for

Instructor’s Manual—Chapter 2

PPT 2.34

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J. Community Relations 1. Donations to local and national charities 2. Volunteer support of local causes

PPT 2.35

IX. Unemployment A. Unemployment, while an economic issue, also carries ethical implications. B. Some companies refuse to hire unemployed workers due to their lack of skills; however, critics have accused these companies of not wanting to take the time to train employees. C. Factory closures are seen as unethical because they contribute to unemployment. D. Protesters say unemployment leads to the growing gap between rich and poor.

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LO 2-6 PPT 2.36

Evaluate the ethics of a business’s decision.

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Key Terms:

X. Solve the Dilemma: Customer Privacy F. Checkers Pizza was one of the first to offer home delivery service, with overwhelming success. G. Major pizza chains soon followed suit, taking away Checkers’s competitive edge. H. Checkers’s founder, Jon Barnard, needed a new gimmick to beat the competition. 3. Developed a computerized information database that would make Checkers the most efficient competitor and provide insight into consumer buying behavior. 4. Telephone customers were asked their phone number, if they had ordered before, and their address and previous order information came up on the computer screen.

PPT 2.37

I. The new system was successful: 1. After 3 months, Barnard decided to give an award to the family that ate the most Checkers pizza. 2. As Barnard began to plan for the event, however, he began to think that maybe the family might not want all the attention and publicity.

PPT 2.38

J. Critical Thinking Questions: 1. What are some of the ethical issues in giving customers an award for consumption behavior without notifying them first? 2. Do you see this as a potential violation of privacy? Explain. 3. How would you handle the situation if you were Barnard? [Answers appear under the End of Chapter Teaching Resources section of this Instructor's Manual.]

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Omaze-ing: Reinventing the Charity Model

Omaze is an online global sweepstakes platform that puts together coveted experiences and prizes to raise money for charities. Since Omaze’s launch in 2012, the for-profit company, which takes a percentage of the overall sweepstakes donations, gives back to local communities having raised more than 130 million for more than 350 charities. In Omaze’s business model, the charity receives 80% of the net proceeds from the experience and the company earns 20%. There are two fundamental strategies the company deploys; celebrity campaigns and prize campaigns. The company is now intent on creating packages that marry a high-demand item with a cause that resonates among entrants. Omaze’s 34-person marketing team produces content to showcase the charity and connects with influencers who will promote the campaigns. 1. How does Omaze make its money? Omaze puts together coveted experiences and prizes to raise money for charities and takes a percentage of the overall sweepstakes donations. The charities receive 80% of the net proceeds from the experience and the company earns 20%. They deduct the cost of the winners’ flights, hotels, and background checks from the overall take, but the company absorbs all of the risk and pays all of the marketing and content costs. 2. What strengths do you think Omaze brings to its partnerships? Answers will vary but most students will focus on Omaze’s Marketing team and its ability to connect with influencers and donors. 3.

Do you think Omaze is profit-driven, purpose-driven, or both?

Student answers will vary but students will have to justify their answers. Business Disruption: Tyson Looks for Sustainable Meat

1. What were some of the sustainability mishaps Tyson has faced in the past? Tyson’s greenhouse gas emissions are thought to be equivalent to those emitted by the country of Ireland. Additionally, Tyson was forced to pay a fine of $2 million for contaminating a river with chicken waste from a processing plant. It has also been accused of inhumane treatment of animals.

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2. What are some ways Tyson hopes to improve its sustainability and the ethical treatment of animals? The CEO has added the position of a chief sustainability officer and promised to better the treatment of animals. The company has also pledged to cut emissions by 30% by 2030. 3. Do you think Tyson is investing more in alternative meats because it is beneficial to the environment or because the market is increasing in demand? Explain your reasoning. Answers will vary with some students answering that Tyson is just meeting a consumer preference while other students will argue that Tyson is trying to be more sustainable and ethical. Consider Ethics and Social Responsibility: Building a Better Everyday Life With Ikea

1. Describe the strides IKEA is attempting to take in sustainability. IKEA is reducing carbon emissions and has a long-term goal to become ―carbon positive,‖ which means removing more carbon dioxide emissions than it creates. The company is switching to electric delivery trucks and is committed to completely switching over to electric trucks in every location. IKEA has invested around $2 billion in renewable energy and expects to be climate positive— producing more energy than it uses—by 2030. 2. How does IKEA display corporate social responsibility? How does this differ from ethical conduct? Employees are encouraged to mentor young students, assist senior citizens, and more. In 1982, IKEA opened the IKEA foundation. Besides fighting for children’s rights and education, the IKEA Foundation awarded a grant of $2.3 million to the World Resources Institute to help bring clean electricity to a million people in India and East Africa. 3. Why do you think a culture of volunteerism might be helpful in recruiting new employees? Answers will vary, but most students will answer that volunteerism and the skills learned in as an IKEA volunteer create marketable skills that employees and employers’ value. Additionally, many of today’s employees value jobs that align with the IKEA vision ―to create a better everyday life for the many people.‖

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Responding to Business Challenges: Sherwin-Williams Paints Itself in A Corner

1. Describe the ethical issue in this case. Why do you think it has been so difficult to come to a solid verdict? This case centers on a California lawsuit that sought damages for the firm’s marketing of lead paint in homes. The difficulty centers around the issue of whether companies should be held liable if their products are found to be hazardous further down the road—even if they are currently legal. 2. If Sherwin-Williams knew about the dangers of lead paint more than a century ago (it denies this claim), how would this violate the concepts of fairness and honesty? Do you think this should affect the verdict? If Sherwin-Williams knew about the dangers then it violates the concept of fairness and honesty as it relates to disclosure of potential harm caused by product use. Fairness and honesty are at the heart of business ethics and relate to the general values of decision makers. Answers will vary with some students answering that it should affect the verdict and others disagreeing. 3. Recall that lead paint in homes was not made illegal until 1978. Yet knowledge that it was toxic inside the home was accepted since the 1950s. Do you think other stakeholders should be held liable for the cleanup? Again, answers will vary with some students answering that government agencies should be held accountable since they did not enforce a lead paint ban. Other students will argue that only the companies responsible for making the paint should be held liable. So You Want a Job in Business Ethics and Social Responsibility

What has helped drive the increasing awareness of the importance of business ethics and social responsibility? Under pressure from employees and consumers, businesses understand the importance of ethical and social responsibility issues. They recognize that being socially responsible and ethical is good for the business’s bottom line, as well as for its reputation. As the trend continues to grow, more and more businesses are likely to employ individuals who are experts in these areas.

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END OF CHAPTER TEACHING RESOURCES Check Your Progress

1. Define business ethics. Who determines whether a business activity is ethical? Is unethical conduct always illegal? Business ethics refers to principles and standards that determine acceptable conduct in business. Ethical behavior is determined by the public, government regulators, interest groups, and competitors. Unethical conduct is not always illegal, but it does not conform to the principles of society. Ethics goes beyond legal issues. It attempts to build trust among the participants of business. 2. Distinguish between ethics and social responsibility. Ethics relates to an individual’s values and standards and the decisions they make. Social responsibility concerns the impact of a business’s activities on society. 3. Why has ethics become so important in business? The negative publicity received by many unethical business practices has made consumers very much aware of ethical issues. Consumers are putting pressure on businesses to behave more ethically with all parties involved directly or indirectly in business affairs. 4. What is an ethical issue? What are some of the ethical issues discussed in your text? Why are they ethical issues? An ethical issue is an identifiable problem, situation, or opportunity that requires a person to choose from among several actions that may be evaluated as right or wrong, ethical or unethical. The text categorizes a number of issues, including misuse of company time, bribery, abusive behavior, misuse of company resources, conflicts of interest, communications, and business relationships. These are ethical issues because they involve actions that may be considered unacceptable by society, they could be perceived as unfair, and they could cause potential harm to other stakeholders. 5. What is a code of ethics? How can one reduce unethical behavior in business? A code of ethics is a set of formalized rules and standards that describes what a company expects of its employees. One can reduce unethical behavior in business by developing and promoting a code of ethics, and by using different methods such as training, group discussions, or corporate communications.

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6. List and discuss the arguments for and against social responsibility by business (Table 2.9). Can you think of additional arguments (for or against)? Arguments for social responsibility include (1) business helped create problems and should help to solve them; (2) business has the financial and technical resources to help solve problems; (3) as a member of society, business should do its fair share to help others; (4) social responsibility can help prevent increased government regulation; and (5) social responsibility helps to ensure economic survival. Arguments against social responsibility include (1) social responsibility detracts from the profit-making objectives of business; (2) participation in social responsibility programs gives business power at the expense of other segments of society; (3) business may not have the expertise to solve social problems; and (4) social problems are the responsibility of government agencies. Students may be able to offer additional arguments for or against being socially responsible. 7. What responsibilities does a business have toward its employees? A business should provide employees with a safe workplace, pay them adequately, listen to their grievances, and treat them fairly. 8. What responsibilities does business have with regard to the environment? What steps have been taken by some responsible businesses to minimize the negative impact of their activities on the environment? Businesses have the responsibility of maintaining a healthy environment. Businesses must take responsibility for their actions as part of society. Some companies focus on prevention as part of environmental responsibility. Others view the protection of the environment as a way of reducing costs and increasing profits. More companies are adopting social responsibility audits to determine how effective the programs have been and to help develop future programs. 9. What are a business’s responsibilities toward the community in which it operates? Businesses have responsibilities to the general welfare of the communities and societies in which they operate. Many businesses simply want to make their communities better places for everyone to live and work.

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Get Involved

1. Discuss some recent examples of businesses engaging in unethical practices. Classify these practices as issues of conflict of interest, fairness and honesty, communications, or business relationships. Why do you think the businesses chose to behave unethically? What actions might the businesses have taken? Student answers will vary, but they should support their answers with information from the text. Sample student answer: The Environmental Protection Agency discovered that Volkswagen had been installing defeat devices in its diesel vehicles to fool regulators during emissions testing. The defeat device was able to detect when the vehicle was being tested for emissions and caused the vehicle to operate at less than maximum capacity so it would pass the test. In reality, on the road the vehicles gave off many times the allowable limit of emissions. This caused a massive recall for VW, a major loss in reputation, and likely fines from governments that had been deceived by VW. Potential ethical issues include fairness and honesty. Employees at VW purposefully installed the defeat devices to fool regulators, a dishonest activity used to increase sales of its vehicles. It also was dishonest with dealers and consumers. VW released advertising promoting the environmental benefits of its vehicles, when in reality its emissions far surpassed accepted standards. There was likely insufficient communication inside the company since the misconduct went on for so long unchecked. VW also neglected its legal and environmental responsibilities. Its use of defeat devices to fool regulators violated laws. Additionally, it neglected its responsibilities to the environment by developing vehicles that heavily polluted the environment with its high emissions. In this example, students might assume that certain employees at VW were more concerned with short-term gains than long-term viability. Some proposed actions would have been to spend longer periods of time developing diesel vehicles that did meet emissions standards. Also, those who found out about the misconduct could have become whistleblowers and alerted authorities to the deception before the situation worsened. 2. Discuss with your class some possible methods of improving ethical standards in business. Do you think that business should regulate its own activities or that the federal government should establish and enforce ethical standards? How do you think businesspeople feel? Student answers will vary. Students who might favor businesses regulating their own activities might argue that businesses understand their industries better and would therefore have a better understanding of which ethical standards to adopt. Businesses could also come up with unique and creative ways to meet the needs of their stakeholders than if they were constrained by regulation. Those who favor government regulation 02-56

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might point toward the many business scandals that have occurred in recent years and the necessity for government regulation to close loopholes and keep businesses from advancing their own interests at the expense of society. Most businesspeople prefer less regulation as it tends to limit their activities, although some opinions of businesspeople might vary depending on the person. 3. Find some examples of socially responsible businesses in newspapers or business journals. Explain why you believe their actions are socially responsible. Why do you think the companies chose to act as they did? Student answers will vary depending on their choices. Some good places to investigate would be Ethisphere magazine’s ―World’s Most Ethical Companies‖ or Fortune magazine’s ―Best Companies to Work for.‖

Build Your Skills: Making Decisions About Ethical Issues

The following information is extracted from Gray Matters: The Ethics Game Manual: Objectives 1. Make students aware of various ethical challenges that can arise in their day-to-day job responsibilities. 2. Stimulate students’ imaginations regarding the ethical consequences of their business decisions and actions. 3. Strengthen students’ skills in applying textbook knowledge to hypothetical situations. 4. Involve students in discussion rather than have them listen passively to a lecture or read an abstract set of ethical principles. This game is designed to teach the solving of ethical dilemmas that occur almost every day in every kind of business. It is also designed to create controversy. It is structured to bring out more than just one company’s policies—to allow the participants to argue multiple approaches to ethical dilemmas. For example, is there only one answer—regardless of the circumstances? Or are there modifying influences? Right is right, but what is right? The intentional controversy doesn’t stop with the answers. It carries on into the values of the answers. In a game, there must be scorekeeping. You may disagree with the values of some of the answers, but do you always agree with the penalties in football? Or that fine line that distinguishes a hit from an error in baseball?

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Ethics is dynamic. No one solution is always correct nor is another solution always wrong. Some solutions appeal to some while other solutions appeal to others. In Gray Matters, every mini-case poses four solutions. In some cases, only one solution is correct; in others, more than one is correct. But which is most correct? In a few mini-cases, none of the posed answers are correct. But one will be the best selection from the options listed. In theory, each possible answer should entice somebody, thereby generating discussion. It is the discussion that is valuable, for out of the discussion will come the rationale for an answer. None of the posed answers can be changed. The players must pick the one they can best justify—based on company policies, their experiences, their education, their ethical training, and their beliefs. Materials 

Four mini-case cards (in-textbook exercise)



Four each A-B-C-D answer flags (instructor can use 3 × 5 index cards where the answer letters (A-B-C-D) are written one per card)

How to Play Competition adds spice to the game, just as it does in real life. It can be played by individuals, or by a larger playgroup divided into teams. When the class is too large to play as individuals, organize the players into competitive groups. The number of groups optimally should be three to five (but can be as many as 10). Preferably, no more than four to six players should be in each group. A group spokesperson will be appointed. For each mini-case, the group should be allowed 5 min for discussion among themselves. At the end of 5 min, the leader will ask each group spokesperson to hold up an answer flag pertaining to the group’s selected answer. The answers will be recorded by the instructor. Each group will then be asked to explain their answer in 1 min. Based on the answer flag presented, each group will be awarded points according to the answers given below. (You may want the groups to keep track of their own scores or you may wish to photocopy and use the score sheet at the end of this section.) What is the most essential ingredient to the success of the game? Complete discussion of the ethical dilemma in each question and answer by all the participants.

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Answers, Point Values, and Rationale CASE NO.

ANSWER

POINTS

RATIONALE

-5

May solve the workload problem if you can physically and mentally carry this double workload over a long period. Does not solve the ethical issue, so no credit. It brings to the attention of the supervisor the poor work ethic of your colleague. It also may give you an opportunity to properly expand your own activity. If it works, this is the easy way to solve the problem. Be aware, however, if it doesn’t work, you may have to take the next step. Pushes the problem-solving onto someone else. The problem is between you, your supervisor, and your colleague. Solve it there.

CASE NO.

ANSWER POINTS

RATIONALE

A B C D

May do some good. May do some good. Too confrontational. Gets the right people involved in solving the problem.

5 5 0 10

ANSWE POINTS R A −10 B

C D

−10 10

RATIONALE How many other company policies do you also ignore? May solve the problem but then it may not. In fact, it may get very confrontational and most likely will not. In that case you deserve −10 points. This is the easiest way for you to handle the problem and the one with the most chance of success.

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CASE NO.

ANSWER POINTS A B C D

−10 0 10 5

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RATIONALE That makes you also guilty of theft. He probably knows that. Ethics will have it investigated. This may also get the problem investigated; but then again, it may not.

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Score Sheet Photocopy the chart, fill in the group leader’s name at the top of each column, and record the points for the choices selected. CASE NO. 4

ANSWER A B C D A B C D A B C D A B C D

POINTS 0 5 10 −5 5 5 0 10 −10 5 −10 10 −10 0 10 5

TOTAL POINTS Source: Gray Matters: The Ethics Game by George Sammet Jr., Lockheed Martin Corporation.

Solve the Dilemma: Customer Privacy

1. What are some of the ethical issues in giving customers an award for consumption behavior without notifying them first? In such a situation, the consumption behavior of the rewarded customer is communicated to the public. It violates the right of the consumer to be informed. The company should know what the effect of this award might have on the winner: negative consequences may be as likely as positive ones. 2. Do you see this as a potential violation of privacy? Explain. The publicity given to the customer violates privacy: it reveals to the public some of their behaviors (here, pizza eating habits). However, the family might not mind the publicity or 02-61

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feel like it violates their privacy. Students might have different opinions regarding the seriousness of this issue. 3. How would you handle the situation if you were Barnard? Barnard should contact the family concerned and inform them that an award rewarding Checkers’ best customer may be given to them if the family accepts the award. The program of the award (especially the news story associated with it) should be described in detail. If the family refuses the award, the next best customer could be contacted.

Build Your Business Plan: Business Ethics and Social Responsibility

Find an example within your community of an ethical and/or societal violation, which can be an issue still being resolved. Lead a discussion on the facts of this violation and what the implications are of this violation with the community. Have the students identify the stakeholders affected by this action. Ask the students for volunteers to discuss the industry they are considering for their business plan. Probe them to identify any environmental violations, product defects, recalls, and so on that they need to be aware of as they proceed to gather information on this industry.

See for Yourself Case: An Affordable World Vision

Case Overview With more than $8.1 billion in annual sales, the Hershey Company is one of the world’s largest producers of chocolate and candy products. Hershey’s products are sold in more than 70 countries and include Hershey’s Kisses and Hershey’s Milk Chocolate Bars, as well as brands such as Reese’s, Whoppers, Almond Joy, and Twizzlers. Although Hershey strives to be a model company and has several philanthropic, social, and environmental programs, the company has struggled with ethical problems related to labor issues. The company incorporates its values into its programs and initiatives. Hershey uses its value chain to categorize its social responsibility activities into four groups: Shared Futures, Shared Planet, Shared Business, and Shared Communities. 1. Hershey’s Shared Futures pillar focuses on helping children succeed through education and nutrition. 2. Maintaining the environment is important to Hershey, and it is taking many steps to reduce its impact on the environment under its Shared Planet pillar. 3. Maintaining the environment is important to Hershey, and it is taking many steps to reduce its impact on the environment under its Shared Planet pillar. 4. Hershey’s idea of Shared Communities begins with employee engagement and volunteerism and extends to investing in the communities in which Hershey operates. 02-62

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Although The Hershey Company strives to engage in ethical and responsible behavior, the realities of the cocoa industry present several ethical challenges related to the fair and safe treatment of workers, especially children. The global cocoa market is currently supplied mostly by lesser developed countries, with 70% supplied by Africa (Ivory Coast, Ghana, Nigeria, and Cameroon). This has brought about the booming business of child labor, slavery, and human trafficking across African borders. 1. How does the Hershey Company support communities in Africa? Hershey provides ViVi, a fortified nutritional supplement, to students in Ghana to improve nutrition as well as increase school attendance. A study by the University of Ghana showed that anemia rates decreased and attendance rates improved in the 57,700 children that received ViVi daily. Hershey introduced a human rights policy in 2019 as a sign of its commitment to human rights issues in the supply chain such as child labor, women’s rights and empowerment, living wage and income, and forced labor. 2. What ethical challenges does the cocoa industry present? Ethical challenges include sustainable cocoa farming, child labor, slavery, and human trafficking. 3. What stakeholders does the Hershey company prioritize? Hershey stakeholders are the ―people and the planet‖. Its program focuses on four groups: Shared Futures, Shared Planet, Shared Business, and Shared Communities. These programs focus on employees, children, the environment, and the communities in which Hershey operates. Team Exercise

Sam Walton, founder of Walmart, had an early strategy for growing his business related to pricing. The ―Opening Price Point‖ strategy used by Walton involved offering the introductory product in a product line at the lowest point in the market. For example, a minimally equipped microwave oven would sell for less than anyone else in town could sell the same unit. The strategy was that if consumers saw a product, such as the microwave, and saw it as a good value, they would assume that all the microwaves were good values. Walton also noted that most people don’t buy the entry-level product; they want more features and capabilities and often trade up. Students will form teams and assign the role of defending this strategy or casting this strategy as an unethical act. They can present their thoughts on either side of the issue. Sample Answers: 02-63

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Strategy as ethical: As long as there are plenty of these minimally equipped products on hand and Walmart is transparent about their prices and functionality, then there is nothing wrong with the strategy. In fact, it is an excellent business strategy because it attracts consumers and provides them with the choice to purchase the minimally equipped product or choose to upgrade to a higher priced product with more features. Strategy as unethical: Walmart is using a penetration pricing strategy to drive competitors out of business. Its entire strategy is to draw consumers away from the competition into its stores and then upsell them to higher priced products. Although this might not be illegal as long as the lower priced products are available, this practice is unfair to local businesses that cannot compete and is an underhanded way of persuading consumers to come to its stores.

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CONNECT ACTIVITIES Cocoa Exchange Values Social Responsibility

Learning Objective: 2-1: Describe the importance of business ethics and social responsibility. Activity Summary: The Cocoa Exchange is a direct-to-consumer subsidiary of Mars Inc., the global manufacturer of confectionery and other food products. Specifically, the Cocoa Exchange is a marketplace for its salespeople to connect with chocolate-loving consumers, offering tasty chocolate and sugar-based products. As a nature-related business, operating in an ethically and in a socially responsible manner is important for leadership of the company. How to Use Activity: After watching the video, divide the class into four groups. Have each group spend 15 min responding to a specific prompt: 1. 2. 3. 4.

What behaviors contribute to an ethical business? What behaviors detract from an ethical business? What behaviors contribute to a business being socially responsible? What behaviors detract from a business being socially responsible?

Then, invite each group to share their responses with the class. Class Discussion: What are the benefits of working in an organization which is ethical and socially responsible? How would you define ethical behavior? What are the positive benefits of being socially responsible? Are there any drawbacks? The Dilemma of Cross-Selling Insurance Policies

Learning Objective: 2-5: Evaluate an organization’s social responsibilities to owners, employees, consumers, the environment, and the community. Activity Summary: Cross-selling is a common sales technique that can benefit a salesperson’s book of business when done correctly. Conversely, it can also damage their (and their company’s) creditability when done with malicious intent. In this case, students read about a common scenario in which they understand and apply an ethical dilemma in crossselling. How to Use Activity: Today’s students often come to the classroom with a variety of work experiences. After assigning this activity as a homework assignment, facilitate a discussion around the term ethical dilemma. Invite students to share their own experiences; it is likely that they will have observed or at least been made aware of similar examples supporting the term. 03-65

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Class Discussion: Have you ever observed, or been a part of an ethical dilemma? What did you do? What news headlines have you seen recently relating to social responsibility or workplace ethics? (Note to Professor: Examples include Enron, Facebook, and Online Privacy.)

Bombas’ Business Model—Buy One—Give One

Learning Objective: 2-4: Explain the four dimensions of social responsibility. Activity Summary: Many social issues managers have to consider revolve around relations with stakeholders, including owners, stockholders, employees, consumers, regulators, communities, and environmental issues. While there are many arguments for and against social responsibility, many studies show that social responsibility is associated with improved business performance. Students will read the Bombas case and demonstrate their understanding of social responsibility and the role it plays in how consumers’ decisions. Class Discussion: Focus the discussion on how Bombas’ business model and its slogan of ―Buy One Give One‖ is an integral part of its philosophy and has impacted its success.

BONUS TEACHING RESOURCES Recycling: A Dilemma for Business Firms

In the United States, the amount of consumer and industrial waste has been increasing regularly. It was estimated that by the year 2010, total municipal solid waste reached 250 million tons. Ecological authorities frequently tout recycling as a means of slowing down waste and the need for landfill space. Biodegradable products, those which decompose, are also recommended. As more companies strive to be ecologically responsible as well as appeal to consumers by offering ―green‖ products, many have come to believe the evidence that such programs may actually be economically profitable. Many companies now offer ―green‖ versions of their traditional products as the proof mounts that many consumers favor these products. Organizations such as Walmart are reducing pollution and waste in anticipation of future federal regulatory mandates. 3M offers toilet-bowl brushes made from the leftover plastic fibers from is Scotch-Brite cleaning cloths. Similarly, Recycline offers toothbrushes and other household and personal grooming products made from recycled Stonyfield Farm yogurt containers. 03-66

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Many large retailers offer recycling centers for paper, plastics, and aluminum. Best Buy even offers electronics recycling at many of its stores. Large grocery chains frequently give consumers discounts on their purchases if they bring their own bags with them. While recycling has become increasingly widespread, recycling centers can be problematic for two reasons: (1) the lack of a market for recycled products in some areas and (2) the cost of maintaining the recycling centers. For example, one manager of a major retailing firm pointed out that people used the recycling bins to dispose of all kinds of unwanted trash and garbage, disregarding the specific types of materials to be placed in the bins. Every morning, employees had to clean the parking lot of debris from the recycling bins. People would toss in glass, metal, cloth, and garbage in plastic sacks—materials not to be deposited in the recycling bins. Many cities in the United States, concerned about the declining amount of landfill space, have introduced recycling for trash and garbage pickup. Those municipalities, as in the case of individual business firms, need an outlet for materials saved for recycling. Sorting is a requirement for municipal recycling—whether done by each household or by specialized sorting equipment. Two trends may lead to increased recycling by consumers and business firms. One trend is charging for nonrecyclable garbage. For example, some municipalities refuse to pick up nonrecycled trash and garbage, forcing households to hire private firms to pick up nonrecycled items. Another trend is through regulation that requires recycling, such as the German Green Point Law, which requires manufacturers to assume responsibility for the disposal of their packaging. When consumers and business firms find it is in their economic interests to recycle, then perhaps producers will find ways to use recycled products. For example, Pitney Bowes of Canada Ltd. is one of many companies that now sells copiers that take reusable toner cartridges. Thermo Tech Technologies Inc., another Canadian company, uses a patented technology to turn organic wastes into animal feed supplements or fertilizers. Technology also has many innovative uses proposed for recycled plastics—some as reformulated plastics, others as insulation or building materials. Biodegradability is the main problem with plastics. Biodegradable plastics, however, can be composted and are therefore healthier for the environment. Household and personal care product firm Seventh Generation offers biodegradable diapers, cleaners, and detergents. While these products must be composted properly in order to fully biodegrade, they do represent a step in the right direction toward fully biodegradable plastics. Recycling, no doubt, is here to stay. Social responsibility on the part of consumers and businesses will encourage greater use of recycling. Governmental regulation also will spur greater use of recycling in the future. 03-67

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Sources: Kristina Dell, ―The Promise and Pitfalls of Bioplastic,‖ Time, May 3, 2010, http://content.time.com/time/magazine/article/0,9171,1983894,00.html; ―The Home Depot and the Environment,‖ Home Depot, Inc. corporate website, http://corporate.homedepot.com/sites/default/files/image_gallery/The%20Home%20Depot%2 0and%20the%20Environment%202018.pdf; Jacquelyn Ottman, ―A Little Creativity Could Lead to a Big Advantage,‖ Marketing News, March 27, 1995, p. 11; Kevin Kelly, ―It Really Can Pay to Clean Up Your Act,‖ Business Week, November 7, 1994, p. 141; Johanna Powell, ―Companies Get Their Due for Public Service,‖ The Financial Post, November 12, 1994, p. s15; Seventh Generation website, https://www.seventhgeneration.com. 1. Why has recycling become more popular and widespread? As more consumers become concerned about the environment and climate change, recycling has become more common. Many cities offer recycling services now, and some organizations also have recycling bins for commonly recycled items. Furthermore, companies like Best Buy offer recycling services for difficult-to-recycle items like electronics. As resources become scarcer and more consumers reject companies perceived as wasteful, organizations have sought to improve their recycling practices in order to cut down on waste and to increase goodwill. 2. What are some of the issues hindering businesses and organizations from offering further recycling services? Recycling can be expensive because people must be hired to sort the recycled goods. There must also be a market for recyclables. In recessionary periods, oftentimes it becomes too expensive to continue to offer recycling programs because companies seek to cut back on extra expenses. Additionally, some cities and towns have found that recycling programs can be expensive to maintain. 3. What are some of the solutions companies are developing to help cut down on waste and to recycle more? Some companies are turning to energy saving measures like using renewable energy. They are also looking toward cutting-edge materials to help reduce waste that ends up in landfills. Biodegradable plastics in packaging are relatively new and, while they are not in widespread use, are growing in acceptance and popularity.

Term Paper or Project Topic

These topics may be assigned as individual or collaborative projects: 03-68

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    

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Advantages and Disadvantages of Social Responsibility Programs for Business A Study of Unethical Business Practices A Survey of Social Responsibility Programs in Corporations (can do a questionnaire survey of local firms) Ralph Nader: Consumer Advocate Environmental Issues and Their Solutions

Guest Speaker Suggestions

1. A professor or teacher to talk about ethics in business. 2. A representative from a business firm to speak about business ethics, problems with business ethics in a competitive environment, and the importance of business ethics in dealing with consumers. 3. A business communication or English professor or teacher to speak to the class on what constitutes plagiarism, how to paraphrase, and how to use correct documentation. 4. An individual (concerned environmentalist, teacher, professor, etc.) to speak on local environmental issues. 5. A consumer relations manager to describe consumer relations programs of a local firm.

Teaching Suggestions

7. As indicated in ―Teaching Suggestions‖ for Chapter 1, instructors may wish to vary the daily organization of the lesson. Varying the sequence of activities adds variety to class presentation. At the beginning of the chapter in the textbook and in this Instructor’s Manual, objectives are provided. Many instructors write the objectives on the chalkboard or on an overhead at the beginning of the class session and then at the end of the session check off each objective to determine if all the objectives have been achieved. Educational research indicates students learn more effectively when there is a summarization or review of the textbook content at the end of class sessions. 8. As a ―writing to learn‖ exercise, allow approximately 5 min for students to write their thoughts or summary on this topic: What is the importance of ethics and social responsibility in business today? 03-69

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The writing exercise can be done with or without the use of the textbook. The purpose of the exercise is for students to consider the topic and apply the knowledge learned in the reading assignment. Research indicates that the act or process of writing helps students to retain information. Feedback may be done by calling on a few students at random to read their writing. Remember, not all feedback need be for a letter grade; instead, the feedback may be treated as an activity to enhance learning. For large classes, an alternative to calling on individual students is to break into small groups and have them share their writing within the small group. 9. ―Check Your Progress‖ is important for this chapter. A suggestion for large lecture halls is to assign different question numbers to different rows. Then call upon one person in a row to give their answer. 10. The instructor can lecture using the ―Lecture Outline and Notes,‖ covering all of the chapter content. An alternative is not to cover the entire chapter but simply to use the PowerPoints to cover main points of the chapter; then the instructor may have time to use the ―Supplemental Lecture‖ and/or ―Controversial Issue‖ material provided in this Instructor’s Manual. If students are to have read the chapter prior to class, then the instructor may spend less time lecturing and more time with additional material, discussion questions, and boxed material or cases. 11. Use the quiz provided. Have students write answers quickly. Then have students call out the correct answers in unison. Ask if there are any questions about any of the answers. 12. Occasionally, an instructor may wish to give oral instructions or information to reinforce listening skills. One business professor gives part of her test instructions orally; she believes that teachers reward inattention by repeating information time and time again. She warns students that she will give the instructions only once and will not repeat instructions. Her students learn to listen!

Chapter 3: Business in a Borderless World SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Spotify: Streaming Everywhere Responding to Business Challenges: Harley-Davidson Gets Up to Speed 03-70

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In International Markets Business Disruption: Chinese Airlines Soaring to Great Heights Technology and the Economy: Data Privacy Concerns Take the World by Storm So You Want a Job in Global Business END OF CHAPTER TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Global Awareness Solve the Dilemma: Global Expansion or Business as Usual? Build Your Business Plan: Business in a Borderless World See for Yourself Case: Why McDonald’s Fast Food had Slow Growth in Vietnam Team Exercise CONNECT ACTIVITIES India’s Comparative Advantage End of Chapter Video Case: Electra Bikes ConveyerPape: Supplying Conveyer Belts Internationally BONUS TEACHING RESOURCES Effects of Trade Legislation Controversial Issue: High Dollar, Low Dollar—Which Is Better? Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions

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SUMMARY In this chapter, we explore business in this exciting global marketplace. First, we look at the nature of international business, including barriers and promoters of trade across international boundaries. Next, we consider the levels of organizational involvement in international business. Finally, we briefly discuss strategies for trading across national borders.

LEARNING OBJECTIVES LO 3-1

Explore some of the factors within the international trade environment that influence business.

LO 3-2

Investigate some of the economic, ethical, legal, political, social, cultural, and technological barriers to international business.

LO 3-3

Specify some of the agreements, alliances, and organizations that may encourage trade across international boundaries.

LO 3-4

Summarize the different levels of organizational involvement in international trade.

LO 3-5

Contrast two basic strategies used in international business.

LO 3-6

Assess the opportunities and problems facing a small business that is considering expanding into international markets.

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KEY TERMS AND DEFINITIONS absolute advantage

A monopoly that exists when a country is the only source of an item, the only producer of an item, or the most efficient producer of an item.

Asia-Pacific Economic Cooperation (APEC)

An international trade alliance that promotes open trade and economic and technical cooperation among member nations.

Association of Southeast Asian Nations (ASEAN)

A trade alliance that promotes trade and economic integration among member nations in Southeast Asia.

balance of payments

The difference between the flow of money into and out of a country.

balance of trade

The difference in value between a nation’s exports and its imports.

Cartel

A group of firms or nations that agrees to act as a monopoly and not compete with each other, in order to generate a competitive advantage in world markets.

comparative advantage

The basis of most international trade, when a country specializes in products that it can supply more efficiently or at a lower cost than it can produce other items.

contract manufacturing

The hiring of a foreign company to produce a specified volume of the initiating company’s product to specification; the final product carries the domestic firm’s name.

countertrade agreements

Foreign trade agreements that involve bartering products for other products instead of for currency.

direct investment

The ownership of overseas facilities.

Dumping

The act of a country or business selling products at less than what it costs to produce them.

Embargo

A prohibition on trade in a specific product.

European Union (EU)

A union of European nations established in 1958 to promote trade among its members; one of the largest single markets today.

exchange controls

Regulations that restrict the amount of currency that can be bought or sold.

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exchange rate

The ratio at which one nation’s currency can be exchanged for another nation’s currency.

Exporting

The sale of goods and services to foreign markets.

Franchising

A form of licensing in which a company—the franchiser—agrees to provide a franchisee a name, logo, methods of operation, advertising, products, and other elements associated with a franchiser’s business in return for a financial commitment and the agreement to conduct business in accordance with the franchiser’s standard of operations.

A trade agreement, originally signed by 23 nations in 1947, that General Agreement on Tariffs and Trade (GATT) provided a forum for tariff negotiations and a place where international trade problems could be discussed and resolved. global strategy (globalization)

A strategy that involves standardizing products (and as much as possible, their promotion and distribution) for the whole world, as if it were a single entity.

import tariff

A tax levied by a nation on goods imported into the country.

Importing

The purchase of goods and services from foreign sources.

Infrastructure

The physical facilities that support a country’s economic activities, such as railroads, highways, ports, airfields, utilities and power plants, schools, hospitals, communication systems, and commercial distribution systems.

international business

The buying, selling, and trading of goods and services across national boundaries.

International Monetary Fund (IMF)

Organization established in 1947 to promote trade among member nations by eliminating trade barriers and fostering financial cooperation.

joint venture

A partnership established for a specific project or for a limited time.

Licensing

A trade arrangement in which one company—the licensor—allows another company—the licensee—to use its company name, products, patents, brands, trademarks, raw materials, and/or production processes in exchange for a fee or royalty.

multinational corporation

A corporation that operates on a worldwide scale, without 03-74

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(MNC)

significant ties to any one nation or region.

multinational strategy

A plan, used by international companies, that involves customizing products, promotion, and distribution according to cultural, technological, regional, and national differences.

Offshoring

The relocation of business processes by a company or subsidiary to another country. Offshoring is different than outsourcing because the company retains control of the offshored processes.

Outsourcing

The transferring of manufacturing or other tasks—such as data processing—to countries where labor and supplies are less expensive.

Quota

A restriction on the number of units of a particular product that can be imported into a country.

strategic alliance

A partnership formed to create competitive advantage on a worldwide basis.

trade deficit

A nation’s negative balance of trade, which exists when that country imports more products than it exports.

trading company

A firm that buys goods in one country and sells them to buyers in another country.

The United States– Mexico–Canada Agreement

Agreement that eliminates most tariffs and trade restrictions on agricultural and manufactured products to encourage trade among Canada, the United States, and Mexico.

World Bank

An organization established by the industrialized nations in 1946 to loan money to underdeveloped and developing countries; formally known as the International Bank for Reconstruction and Development.

World Trade Organization International organization dealing with the rules of trade between nations. (WTO)

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CONTENT OUTLINE The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course and a notation of when to use POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points. There is also a reminder on when CONNECT activities can be used. This feature was created to facilitate in-class or online discussions more effectively. LO 3-1

Explore some of the factors within the international trade environment that influence business.  Introduction  The Role of International Business o Why Nations Trade o Trade between Countries o Balance of Trade

Key Terms:  International business  Absolute advantage  Comparative advantage  Outsourcing  Exporting  Importing  Balance of trade  Trade deficit  Balance of payments

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Lecture Outline and Notes: I. The Role of International Business A. International business refers to the buying, selling, and trading of goods and services across national boundaries. 1. Falling political barriers and new technology are making it possible for more companies to sell their products in new markets. a. For example, American brands such as McDonald’s are becoming increasingly popular in places like China. 2. Most of the world’s population and two-thirds of its total purchasing power are outside the United States. 3. Global marketing requires balancing global brands with the need of local consumers. B. Why Nations Trade 1. Nations and businesses engage in trade: a. To obtain raw materials and goods that might otherwise be unavailable to them or that are available elsewhere at a lower price. b. To sell surplus materials or goods to acquire funds to buy the goods, services, and ideas its people need.

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2. An absolute advantage exists when a country is the only source of an item, the only producer of an item, or the most efficient producer of an item. 3. A comparative advantage occurs when a country specializes in products that it can supply more efficiently or at a lower cost than it can produce other items.

PPT 3.4

PPT 3.5–3.6

4. As a result of some countries gaining a comparative advantage over the United States in the provision of some services, many U.S. companies are outsourcing, or transferring manufacturing and other tasks to countries where human resources, labor, and supplies are less expensive. a. Outsourcing has become a controversial practice in the United States because many jobs have moved overseas, where those tasks can be accomplished for lower costs. C. Trade between Countries 1. Exporting is the sale of goods and services to foreign markets. 2. Importing is the purchase of goods and services from foreign sources. D. Balance of Trade

PPT 3.7

PPT 3.8

1. A nation’s balance of trade is the difference in value between its exports and imports. a. A trade deficit—a negative balance of trade—is potentially harmful because it can mean the failure of businesses, the loss of jobs, and a lowered standard of living (Table 3.1). 1) The United States has had a trade deficit for quite some time. 2) The United States has a trade deficit with China; although its exports to China have been increasing, it has not been sufficient enough to keep up with the increase in imports from China (Figure 3.1). b. When a nation exports more goods than it imports, it has a favorable balance of trade or trade surplus. 1) Until about 1970, the United States had a trade surplus due to an abundance of natural resources and the relative efficiency of its manufacturing systems. 04-78

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2. The balance of payments is the difference between the flow of money into and out of a country (Table 3.2). a. A country’s balance of trade, foreign investments, foreign aid, loans, military expenditures, and money spent by tourists comprise its balance of payments. b. A country with a trade surplus generally has a favorable balance of payments because it is receiving more money from trade with foreign countries than it is paying out.

LO 3-2

Investigate some of the economic, ethical, legal– political, social, cultural, and technological barriers to international business.  International Trade Barriers o Economic Barriers

Key Terms:  Infrastructure  Exchange rate  Import tariff

o Ethical, Legal, and Political Barriers

 Exchange controls

o Social and Cultural Barriers

 Quota

o Technological Barriers

 Embargo  Dumping  Cartel

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PPT 3.9

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II. International Trade Barriers A. Completely free international trade seldom exists, and there are numerous challenges to conducting business across international borders. B. Economic Barriers 1. Economic Development a. When considering doing business abroad, businesspeople need to recognize that they cannot take for granted that other countries offer the same things as found in the United States. 1) Industrialized nations are economically advanced countries such as the United States, Japan, Great Britain, and Canada. 2) Less developed countries (LDCs) are less economically advanced than industrialized nations and are characterized by low per capita income. 3) LDCs are a huge and growing market for many products, and many companies are realizing the huge profit potential there. b. A country’s level of development is determined by its infrastructure, the physical facilities that support its economic activities.

PPT 3.10

2. Exchange Rates a. The ratio at which one nation’s currency can be exchanged for another nation’s currency is the exchange rate. 1) Influences the cost of imports and exports. b. Devaluation occurs when a government decreases the value of its currency in relation to other currencies. 1) Encourages other nations to buy more of a country’s goods and services. c. Reevaluation increases the value of a currency relative to other currencies. It occurs rarely.

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PPT 3.11

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C. Ethical, Legal, and Political Barriers 1. A company that enters the international marketplace must contend with potentially complex relationships among the different laws of its own nation, international laws, and the laws of the nation with which it will be trading; various trade restrictions imposed on international trade; changing political climates; and different ethical values. 2. Laws and Regulations a. The United States has many laws governing activities of U.S. firms engaged in international trade. b. Laws in other countries differ from U.S. laws and businesspeople need to be aware of the differences before conducting business there.

PPT 3.12

1) Some countries have laws limiting the amount of local currency that can be taken out of the country and the amount of currency that can be brought in. 2) Although countries such as China and Vietnam have and enforce their copyright laws, controlling the amount of counterfeit products sold in their countries is very challenging. 3. Tariffs and Trade Regulations a. Tariffs and other trade restrictions are part of a country’s legal structure. b. An import tariff is a tax levied by a nation on imported goods. 1) A fixed tariff is a specific amount of money levied on each unit of product brought into the country. 2) An ad valorem tariff is based on the value of the item. 3) Countries sometimes levy tariffs for political reasons. 4) Import tariffs are more commonly employed to protect domestic products by raising the price of imported ones. 5) Critics of tariffs argue that their use inhibits free trade and competition; others believe they are necessary to keep domestic wages high and unemployment low.

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c. Exchange controls restrict the amount of currency that can be bought or sold. d. A quota limits the number of units of a particular product that can be imported into a country. PPT 3.13

e. An embargo prohibits trade in a specific good. It may be established for political, economic, health, or religious reasons. f. A common reason for setting quotas or tariffs is to prohibit dumping, the selling of products for less than it costs to produce them. 1) A company may dump its products because it permits quick entry into a market; the domestic market for the firm’s product is too small to support an efficient level of production; or because technologically obsolete products are no longer salable in the country of origin.

PPT 3.15–3.16

2) Dumping is difficult to prove, but even the suspicion of dumping may lead to the imposition of tariffs or other trade controls, sometimes prompting trade wars. 4. Political Barriers a. Businesses must consider the political instability of the countries where they want to set up operations: Political unrest may create a hostile or even dangerous environment for business. b. Political considerations may lead to the formation of a cartel, a group of firms or nations that agree to act as a monopoly and not compete with each other, to create a competitive advantage in world markets. 1) OPEC is an example of a cartel.

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D. Social and Cultural Barriers 1. Most businesspeople engaged in international trade

PPT 3.18–3.19

underestimate the importance of social and cultural differences. (Table 3.3) 2. Differences in spoken and written language may create

problems for businesses; even when words are correctly translated, cultural differences may affect the meaning of translated words. 3. Differences in body language and personal space may

generate uncomfortable feelings and misunderstanding when businesspeople of different countries negotiate with each other. a. Body language is nonverbal, usually unconscious communication through gestures, posture, and facial expression. b. Personal space is the distance at which one person feels comfortable talking to another. c. Acceptable gestures also vary from culture to culture. 4. Differences in family roles also influence business

activities, especially with regard to marketing and advertising to children. 5. The people of other nations often have a different

perception of the importance of time. 6. Companies engaged in foreign trade must observe the

national and religious holidays and local customs of the host country. 7. Unlike the United States, most countries use the metric

system for measurement. PPT 3.20

8. Problems linked to cultural and social differences may

be minimized through research. E. Technological Barriers 1. Lack of technological infrastructures can be viewed as a barrier or as an opportunity. a. For example, lack of infrastructure for landlines in places like Africa are creating opportunities for cell phone companies. 2. Changes in technology also bring new challenges and competition. 04-83

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LO 3-3

Specify some of the agreements, alliances, and organizations that may encourage trade across international boundaries.  Trade Agreements, Alliances, and Organizations o General Agreement on Tariffs and Trade o The North American Free Trade Agreement o The European Union o Asia-Pacific Economic Cooperation o Association of Southeast Asian Nations o World Bank o International Monetary Fund

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Key Terms:  General Agreement on Tariffs and trade (GATT)  World Trade Organization (WTO)  The United States–Mexico– Canada Agreement  European Union (EU)  Asia-Pacific Economic Cooperation (APEC)  Association of Southeast Asian Nations (ASEAN)  World Bank  International Monetary Fund (IMF)

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PPT 3.22

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III. Trade Agreements, Alliances, and Organizations A. General Agreement on Tariffs and Trade (GATT) 1. The General Trade Agreement on Tariffs and Trade (GATT), originally signed by 23 nations, provided a forum for tariff negotiations and discussions of international trade problems. More than 100 nations abide by its rules. 2. The World Trade Organization, an international organization dealing with the rules of trade between nations, was created in 1995 by the Uruguay Round of GATT negotiations. 3. The WTO provides legal ground rules for international commerce and helps producers of goods and services and exporters and importers conduct business. 4. The WTO serves as a forum for trade negotiations, monitors national trade policies, provides technical assistance and training for developing countries, cooperates with other international trade organizations, and perhaps most importantly, negotiates trade disputes among member nations.

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B. The United States–Mexico–Canada Agreement (USMCA) The North American Free Trade Agreement (NAFTA) went into effect in 1994 and merged Canada, the United States, and Mexico into one market. 1. NAFTA eliminated most tariffs and trade restrictions on agricultural and manufactured products among the three countries. 2. NAFTA made it easier for the U.S. businesses to invest in Mexico and Canada. 3. Canada and Mexico are crucial trading partners to the United States. 4. Many U.S. companies have taken advantage of Mexico’s low labor costs and proximity to the United States to set up production facilities, sometimes called maquiladoras. 5. NAFTA has been controversial. 6. NAFTA was replaced by the United States–Mexico– Canada Agreement (USMCA) which includes major changes in auto manufacturing and new policies on labor and environmental standards, intellectual property protections, and some digital trade provisions.

C. The European Union (EU) 1. Was established in 1958 to promote trade among its members. PPT 3.25 2. To facilitate free trade among its members, the EU is working toward standardization of business regulations, import duties, and value-added taxes; elimination of customs checks; and has a standardized currency (the euro) for use by all members. 3. The long-term goals are to eliminate all trade barriers within the EU, improve the economic efficiency of the EU nations, and stimulate economic growth. 4. The EU has enacted some of the world’s strictest laws concerning antitrust issues. 5. The prosperity of the EU has suffered in recent years. a. Greece, Ireland, and Portugal required steep bailouts from the IMF. Spain and Cyprus also requested bailouts. b. Greece was forced to default, which negatively impacts other EU nations because it makes them appear riskier as well.04-86 © McGraw Hill LLC. All rights reserved. reproduction or distribution without the written consent c. NoStandard & Poor’s downgraded theprior sovereign debt ofof several EU nations. McGraw Hill LLC. d. Germany, however, has largely avoided the economic woes. plaguing other countries. It was not downgraded but maintained its high ratings.

Instructor’s Manual—Chapter 4

PPT 3.26

PPT 3.27

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D. Asia-Pacific Economic Cooperation (APEC) 1. Promotes open trade and economic and technical cooperation among its 21 member nations. 2. Differs from other international trade alliances in its commitment to facilitating business and its practice of allowing the business/private sector to participate in a wide range of APEC activities. 3. Despite some economic turmoil, companies of the APEC have become increasingly competitive and sophisticated in global business. a. China has become a manufacturing powerhouse. b. Less visible Pacific Rim nations, such as Thailand, Singapore, Vietnam, and Hong Kong, have also become major manufacturing and financial centers. E. Association of Southeast Asian Nations (ASEAN) 1. A trade alliance that promotes trade and economic integration among member nations in Southeast Asia. 2. ASEAN’s goals include the promotion of free trade, peace, and collaboration between its members. 3. In 1993, ASEAN began to reduce or phase out tariffs among countries and eliminate nontariff trade barriers. 4. However, ASEAN is facing challenges as a unified trade bloc. Unlike members of the European Union, the economic systems of ASEAN members are quite different. Major conflicts have also occurred between membernations.

PPT 3.28

5. Despite these challenges, ASEAN plans to increase economic integration by 2015, but unlike the European Union, it will not have a common currency or fully free labor flows between member-nations. F. World Bank 1. Also known as the International Bank for Reconstruction and Development. 2. Was established by industrialized nations in 1946 to loan money to underdeveloped and developing countries.

04-87 G. International Monetary Fund (IMF) 1. Was established in 1947 to promote trade among member nations by eliminating trade barriers and fostering financial cooperation. 2. The IMF tries to avoid financial crises and panics by alerting the international community about countries that

Instructor’s Manual—Chapter 4

LO 3-4

Summarize the different levels of organizational involvement in international trade.  Getting Involved in International in International Business

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Key Terms:  Countertrade agreements  Trading company  Licensing  Franchising

o Exporting and Importing

 Contract manufacturing

o Trading Companies

 Joint venture

 Offshoring

o Licensing and Franchising

 Strategic alliance

o Contract Manufacturing

 Multinational corporation (MNC)

 Direct investment

o Outsourcing o Offshoring o Joint Ventures and Alliances o Direct Investment

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IV. Getting Involved in International Business A. Businesses get involved in international trade at many levels, and the degree of resources and effort required increases according to the level at which a firm involves itself in international trade. B. Exporting and Importing 1. Many companies first get involved in international trade when they import goods from other countries for their own businesses. A business may first get involved in exporting when it is called upon to supply a foreign company with a particular product. a. Some of the world’s largest exporting countries are shown. (Figure 3.2) 2. Exporting sometimes takes place through countertrade agreements, which involve bartering products for other products instead of currency. 3. Many firms choose to export through an export agent, an intermediary that handles international transactions for other firms. a. An advantage of using an agent is that the company does not have to deal with foreign currencies or the red tape of international business. b. A major disadvantage of export agents is that, because the agent must make a profit, either the price of the product must be increased or the domestic company must provide a larger discount than it would in a domestic transaction.

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C. Trading Companies 1. Buy goods in one country and sell them to buyers in another country.

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2. They perform all activities that are required to move products from one country to another. D. Licensing and Franchising 1. Licensing is a trade arrangement in which one company, the licensor, allows another company, the licensee, to use its company name, products, patents, brands, trademarks, raw materials, and/or production processes in exchange for a fee, or royalty. a. Licensing is an attractive alternative to direct investment when the political stability of a foreign country is in doubt or when resources are unavailable for direct investment.

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b. Licensing is especially advantageous for small manufacturers wanting to launch a well-known brand internationally. 2. Franchising is a form of licensing in which a company, the franchiser, agrees to provide a franchisee a name, logo, methods of operation, advertising, products, and other elements associated with the franchiser’s business in return for a financial commitment and the agreement to conduct business in accordance with the franchiser’s standard of operations. a. Subway and McDonald’s are the top two global franchises. McDonald’s has to adapt its menu somewhat to appeal to local tastes. (Table 3.4)

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3. Licensing and franchising enable a company to enter the international marketplace without spending large sums of money abroad or transferring personnel to handle overseas operations. 04-90

maintain high standards of quality, the product’s image may be hurt. E. Contract Manufacturing

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G. Offshoring 1. Offshoring is the relocation of business processes by a company or subsidiary to another country. 2. Different than outsourcing because the company retains control of the process—not subcontracting to a different company. 3. Reasons to offshore involve lower wages, skilled labor, and taking advantage of different time zones. H. Joint Ventures and Alliances 1. Many countries do not permit direct investment by foreign companies or individuals. A company may also lack sufficient resources or expertise to operate in another country. 2. A joint venture is a partnership between a foreign company and a domestic business or government.

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3. A strategic alliance is a partnership formed to create a competitive advantage on a worldwide basis. It is especially useful in industries where the costs of competing alone are too high for a single company. I. Direct Investment 1. Direct investment is the ownership of overseas production and marketing facilities. a. General Motor’s Cadillac brand was so successful in exporting to China, it opened a $1.2 billion plant in Shanghai to build the CT6 Sedan and XT5 SUV. Cadillac doubled its dealerships and avoided a 25% import tariff because the vehicles are locally built. 2. Multinational corporations (MNC) operate on a worldwide scale, without significant ties to any one nation or region and represent the highest level of international business involvement. (Table 3.5) a. Many MNCs are targeted by antiglobalization activists who contend they increase the gap between rich and poor, misuse scarce resources, exploit labor in less-developed countries, and harm the environment. b. Many multinationals originated in the U.S.

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Contrast two basic strategies used in international business.  International Business Strategies o Developing Strategies o Managing the Challenges of Global Business

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Key Terms:  Multinational strategy  Global strategy (globalization)

V. International Business Strategies A. Developing Strategies

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1. Companies doing business internationally have traditionally used a multinational strategy, customizing their products, promotion, and distribution according to cultural, technological, regional, and national differences. 2. More and more companies are moving from this customization strategy to a global strategy (globalization), which involves standardizing products (and, as much as possible, promotion and distribution) for the whole world, as if it were a single entity. 3. Before moving outside their own borders, companies must conduct environmental analyses to evaluate the potential of and problems associated with various markets and to determine which strategy is best for doing business in those markets. 4. Astute businesspeople today ―think globally, act locally.‖ B. Managing the Challenges of Global Business 1. Many barriers to global trade have fallen. 2. Managers who meet the challenges of creating and implementing effective and sensitive business strategies can be successful. 3. Benchmarking of international best practices can help firms. 4. Being globally aware is essential for today’s managers.

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Assess the opportunities and problems facing a small business that is considering expanding into international markets.

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Key Terms:

VI. Solve the Dilemma: Global Expansion or Business as Usual? K. Audiotech Electronics currently operates a 35,000 sq ft factory with 75 employees. 1. Produces control consoles for TV and radio stations and recording studios. 2. Products are used by all the major broadcast and cable networks. 3. Newest products allow TV correspondents to simultaneously hear and communicate with their counterparts in different geographic locations.

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4. Very successful meeting its customers’ needs efficiently. L. Global Expansion? 1. Audiotech sales have historically been strong in the United States.

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2. Even though Audiotech is a small family-owned firm, it believes it should evaluate and consider global expansion. M. Critical Thinking Questions: 1. What are the key issues that need to be considered in determining global expansion? 2. What are some of the unique problems that a small firm might face in global expansion that larger firms would not? 3. Should Audiotech consider a joint venture? Should it hire a sales force of people native to the countries it enters? [Answers appear under the End of Chapter Teaching Resources section of this Instructor's Manual.]

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Streaming Everywhere

Case Overview Spotify, the world’s most popular audio streaming service, sees its mission as supporting human creativity by giving recording artists an opportunity to make money while giving fans access to music. Spotify is eyeing international growth as a way to maintain its lead in streaming. Spotify believes by working with local distributors and establishing regional partnerships, it can act more local than other global competitors and act more global than local competitors, offering the best of both worlds. In markets where Spotify’s presence is long-established, Spotify plans to increase subscription prices to pull in higher revenues. 1. How is Spotify attempting to increase earnings? Spotify is eyeing international growth as a way to maintain its lead in streaming and increase revenue. It also plans to increase subscription prices to pull in higher revenues. 2. Do you think users will continue to see the value Spotify provides? Answers will vary depending on students’ view Spotify. 3. What are Spotify’s strengths as it expands globally? It has 354 million users under its belt in 93 markets and provides a growing library of original and exclusive content in 16 markets. The company believes it is offering more value in mature markets than it did in the past. Responding to Business Challenges: Harley-Davidson Gets Up to Speed in International Markets

1. What barriers does Harley-Davidson face in marketing its motorcycles to countries outside of the United States? Harley-Davidson faces competition from already-established brands like Royal Enfield, the leading bike brand in Asia. Tariffs are another challenge. 2. What are some ways Harley-Davidson is overcoming these challenges? Harley-Davidson’s plan is to reduce the complexity of its products and sharpen the strategic focus of its business, investing in markets that will drive profitability and growth. Harley is overcoming the challenge of tariffs by building international plants.

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3. What opportunities does Harley-Davidson have in other countries that they do not necessarily have in the United States? Harley-Davidson markets a small electric bike, Livewire, designed to compete with electric bike brands like Honda. Europe could be a lucrative market for HarleyDavidson’s Livewire because the top 10 most ―environmentally conscious‖ countries are European. Additionally, about 80% of households in Indonesia, Thailand, and Vietnam own a motorcycle or scooter. Business Disruption: Chinese Airlines Soaring to Great Heights

1. What advantages do U.S. airlines have over Chinese airlines? What advantages do Chinese airlines have over U.S. airlines? Currently, Chinese airlines do not have the infrastructure to handle all the flights, leading to significant layovers, delays, and cancellations. China also needs more airports. Local Chinese governments are paying so airlines will come to their cities. These subsidies are allowing China’s airlines to grab market share, negatively affecting nearby countries. 2. What barriers are Chinese airlines facing as they rapidly grow as a global player? Air China currently makes one-sixth the profit of American Airlines. Chinese airlines were hard hit by the COVID-19 (coronavirus). Recovery will be impacted by uncertain changes to business and international travel. 3. How do you think China’s subsidies of its airlines will impact its relations with airlines in other countries? Explain your answer. Answers will vary but most students will mention that European countries are proposing sanctions against the Chinese airlines. Technology and the Economy: Data Privacy Concerns Take the World by Storm

1. What type of international barriers are companies like Facebook and Google facing in the realm of user privacy? General Data Protection Regulation (GDPR), allows people to request data that have been collected about them and restricts businesses on how they can use that data. It also forces companies to notify users of how data collected about them will be used. If companies don’t comply with this new regulation, they could face up to $1 billion in fines.

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2. Describe the global implications of the GDPR law. The EU is encouraging other countries to develop tougher online privacy regulations by making data protection a part of trade deals. Even companies not based in the EU are subject to the regulation if it involves processing personal data of EU citizens. 3. How might tougher regulations make it harder for users in Europe to utilize online services? Data collection used for behavioral advertising is worth billions of dollars annually. Companies may choose to charge European residents for online services since the services will not be generating income or the companies may choose to not do business in Europe. So You Want a Job in Global Business

What are some of the skills required to be a successful businessperson in the borderless world of the 21st century? To be successful you must have an idea not only of the differing regulations from country to country, but of different languages, ethics and communication styles, and the varying needs and wants of international markets. From a regulatory side, you may need to be aware of laws related to intellectual property, copyrights, antitrust, advertising, and pricing in every country. Translating is never only about translating the language. Perhaps even more important is ensuring that your message gets through. Whether on a product label or in advertising or promotional materials, the use of images and words varies widely across the globe.

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END OF CHAPTER TEACHING RESOURCES Check Your Progress

1. Distinguish between an absolute advantage and a comparative advantage. Cite an example of a country that has an absolute advantage and one with a comparative advantage. A nation with an absolute advantage is the only or most efficient producer of an item. A nation with a comparative advantage specializes in products that it can supply more efficiently; however, it is not the sole producer of those products. Examples provided by students to the second part of the question will vary, but potential examples include the fact that South Africa has an absolute advantage in gem quality diamond production, while the United States has a comparative advantage in agricultural products. The United States specializes in agricultural products such as wheat and cotton, but it is not the only producer of those products. 2. What effect does devaluation have on a nation’s currency? Can you think of a country that has devaluated or revaluated its currency? What have been the results? Devaluations decrease the value of a currency in relation to other currencies. They make that country’s goods less expensive for foreign buyers. Revaluations increase the value of a currency in relation to other currencies. They make that country’s goods more expensive for foreign buyers, but foreign goods would cost the country’s consumers less. Examples provided by students to the second part of the question will vary, but many will cite Mexico as a country that has devalued its currency. This devaluation has increased the number of Mexican products sold in the United States and has favored tourism from the United States. 3. What effect does a country’s economic development have on international business? Less developed countries are likely to have much less infrastructure than developed countries. Thus, it may be difficult to develop operations in these countries. The wages offered for routine jobs in less developed countries are lower than the minimum wages existing in industrialized countries. Consequently, many businesses from industrialized countries open assembly plants in less developed countries to reduce labor costs. 4. How do political issues affect international business? Political and governmental decisions can affect business through such barriers as tariffs, embargoes, terrorism, business favoritism, and so on. 04-97

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5. What is an import tariff? A quota? Dumping? How might a country use import tariffs and quotas to control its balance of trade and payments? Why can dumping result in the imposition of tariffs and quotas? An import tariff is a duty levied by a nation on imported goods. A quota is the maximum number of units of a particular product that can be imported into a country. Dumping occurs when a country or business sells products at less than what it costs to produce them. A country, such as the United States, could set higher import tariffs on another country’s products sold in the United States, thus forcing United States consumers buying imported goods to pay a higher price. A quota may be set on the number of units that can be sold in the United States. For example, import tariffs on Japanese TVs could mean that Japanese TVs might cost more. If quotas were established for Japanese TVs, only a certain number could be imported into the United States. Either situation tends to protect domestic manufacturers. By selling more domestic products, the balance of trade and payments would be more favorable for the United States. A country or firm that practices dumping harms local businesses by offering a product at a much cheaper price. In order to limit the access to its market by the dumping firm or country, the local government might decide to constrain the imports of the product considered. Thus, the government is likely to impose tariffs and quotas. 6. How do social and cultural differences create barriers to international trade? Can you think of any additional social or cultural barriers (other than those mentioned in this chapter) that might inhibit international business? Social and cultural differences create barriers to international trade through: a. Differences in language, body language, perception of personal space, and perception of time. b. Differences in local customs, national holidays, and religious holidays. Another cultural or social difference not mentioned in the textbook includes communication variations. For example, the format and physical features of letters, memos, and fax messages vary from one country to another. And just as social customs involving greetings and body motions vary, so do the communication approaches used in letters. Communications in the United States and Canada are much more direct and shorter than messages sent by other countries. Students may be able to suggest additional barriers based on their own knowledge and experiences.

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7. Explain how a countertrade agreement can be considered a trade promoter. How does the World Trade Organization encourage trade? A countertrade agreement is really a bartering agreement, which makes it possible for a nation with limited currency to use raw materials or other products in place of currency in purchasing goods. The World Trade Organization encourages trade by administering the WTO agreements (legal ground rules for international commerce), presenting a forum for trade negotiations, handling trade disputes, monitoring national trade policies, providing technical assistance and training for developing countries, and cooperating with other international organizations. 8. At what levels might a firm get involved in international business? What level requires the least commitment of resources? What level requires the most? A firm can get involved in a variety of ways. Probably the smallest commitment is through exporting. Many companies first get involved in global business by exporting. A small company may market its products overseas directly, or it may deal with a middleman, commonly called an export agent. The highest level of international business involvement is the multinational corporation. In between are trading companies, licensing and contract manufacturing arrangements, direct investment, and joint ventures. 9. Compare and contrast licensing, franchising, contract manufacturing, and outsourcing. Licensing is a trade arrangement in which a licensor allows a licensee to use its company name, products, patents, brands, trademarks, raw materials, and/or production processes in exchange for a fee or royalty. Franchising is a form of licensing in which the franchiser has a tighter control over the activities of the franchisee. The franchisee is provided with more support from the franchiser than the licensee. This support includes a name, logo, methods of operation, advertising, products, and so on. In exchange for this support, the franchiser not only receives a financial commitment but also can control the way in which the business is conducted. Licensing and franchising lower the costs of business development by involving third parties in the opening and management of new facilities.

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Contract manufacturing is an arrangement in which a foreign company produces a specified volume of a firm’s product to specifications and uses the domestic firm’s name on the final products. Contract manufacturing enables a company to benefit from the lower production costs offered in a foreign country without investing in that country. Outsourcing involves transferring a specific set of tasks such as production or data entry to countries where labor or supplies are less expensive. 10. Compare multinational and global strategies. Which is better? Under what circumstances might each be used? A multinational strategy involves customizing products and promotion to local conditions; a global strategy uses the same products and promotional techniques throughout the world. A multinational strategy acknowledges social and cultural differences between countries, while a global strategy deems that these differences can be ignored. The best strategy to be used depends on the country considered and on the product to be exported. A global strategy can be used when the cultural and social differences between countries do not directly affect the mode of consumption of the product. However, when consumption patterns vary greatly from one nation to another, then a multinational strategy may be advisable.

Get Involved

1. If the United States were to impose additional tariffs on cars imported from Japan, what would happen to the price of Japanese cars sold in the United States? What would happen to the price of American cars? What action might Japan take to continue to compete in the U.S. automobile market? If the United States were to impose additional tariffs on cars imported from Japan, the price of Japanese cars sold in the United States would go up. The prices on American cars would stay the same for a while, but if demand rises significantly then the prices of American cars may rise. Japan might choose to locate factories in America so that it would not have to import its cars. Thus, it could avoid the heavier tariffs. 2. Although United States–Mexico–Canada Agreement has been a positive factor for U.S. firms desiring to engage in international business. What industries and specific companies have had the greatest potential for expanding into Canada and Mexico? What opportunities exist for small businesses that cannot afford direct investment in Mexico and Canada? 04-100

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Student answers will vary. Production facilities called maquiladoras have been popular in Mexico. Mexico has also been attracting major technology industries. Small businesses that cannot afford to locate in Mexico or Canada can still license their products in those countries as licensing rules have been relaxed. 3. Identify a local company that is active in international trade. What is its level of international business involvement and why? Analyze the threats and opportunities it faces in foreign markets, as well as its strengths and weaknesses in meeting those challenges. Based on your analysis, make some recommendations for the business’s future involvement in international trade. (Your instructor may ask you to share your report with the class.) Student answers will vary based on which business they choose. Build Your Skills: Global Awareness

Answers to this exercise are as follows. 1. C

6. J

2. B

7. F

3. E

8. H

4. D

9. I

5. A

10. G

Solve the Dilemma: Global Expansion or Business as Usual?

1. What are the key issues that need to be considered in determining global expansion? Audiotech needs to assess whether there is a demand for its products in different countries. It also has to inquire about the existence of entry barriers. The infrastructure of the countries considered must be examined to determine whether it allows for the use of Audiotech’s products. For example, many countries do not have cable networks and thus could not accommodate a product based on this technology. The level of economic development of the countries could also be an important barrier. For example, TV remains essentially a luxury item in some countries. Legal and political barriers may also exist in countries where TV and radio activities are highly regulated. Tariffs and trade restrictions may exist in countries where a business offers the same product as Audiotech. 04-101

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If the barriers to entry on foreign markets are not too high, then Audiotech has to consider the best way of entering these markets. Knowledge of foreign countries and costs should be factors considered in making this decision. 2. What are some of the unique problems that a small business might face in global expansion that larger firms would not? Smaller firms are more likely to find the costs of launching international operations prohibitive. They may find it difficult to finance the research needed to make the first investigations about international market conditions. Business trips abroad may also be too costly. Small businesses may encounter more difficulties in hiring sufficiently skilled personnel to make negotiations abroad. Personnel with foreign language proficiency and past experiences abroad are desirable. It may also be more difficult for small businesses to find local partners. Local companies are less likely to be interested in allying with a small venture than with an established corporation. 3. Should Audiotech consider a joint venture? Should it hire a sales force of people native to the countries it enters? A joint venture would enable Audiotech to lower the cost of developing its operations abroad. However, it would have to share with its partner the specificities of its technology. Audiotech may be reluctant to have such a partnership for fear of having its knowledge stolen. Audiotech could hire a sales force of people native to the countries it enters to become more knowledgeable about the local conditions and to overcome the language barrier. However, this solution may be very expensive, and it may be difficult to find the appropriate employees. A better solution may be to rely on export agents who would handle Audiotech’s international transactions. Build Your Business Plan: Business in a Borderless World

This chapter allows students to have fun as they learn about living in a global environment. Ask the students where they have traveled outside the United States. What cultural differences did they notice? Did they have any problems communicating with the locals? For those who have not traveled outside the United States, you need to involve them in a different way. Have the students check the label of their jacket or the shirt collar of the student sitting next to them. This process will help students realize how few products, even companies based in the United States, are actually produced in the United States. Encourage the students to explain why this is the case.

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Challenge the students to consider whether their good/service (or the idea) could ever be exported. What problems would they encounter? What countries would be the easiest to enter?

See for Yourself Case: Why McDonald’s Fast Food had Slow Growth in Vietnam

Case Overview This case describes Electra McDonald’s and the challenges it faced in Vietnam. In 2014, McDonald’s capitalized on the opportunity that was presented when Vietnam opened trade to outsiders. At first, it appeared that McDonald’s move into the country was a huge success, with more than 400,000 customers visiting the restaurant within its first month of operation. Originally, McDonald’s planned to open more than 100 stores in a 10-year period. However, nearly 6 years later, McDonald’s only had 22 stores in the entire country. McDonald’s failed for the same reason that it is successful everywhere else. Known for being fast and cheap, the famous chain learned the hard way that Vietnamese culture and native food options weren’t easy to compete against. 1. In the United States, McDonald’s competes on speed of service. Why was this not a competitive advantage in Vietnam? The concept of fast food has existed for a long time among traditional Vietnamese food outlets, and Vietnamese restaurants are often faster than McDonald’s. 2. Why did McDonald’s pricing strategy not work in Vietnam? In Vietnam it is viewed as a luxury because monthly income is lower in Vietnam compared to the United States. The vast majority of customers aren’t able to visit McDonald’s frequently and would much rather opt for a complete meal from a local vendor. 3. Describe family-style dining and explain why McDonald’s menu is at odds with this concept. Locals are known to enjoy meals in a ―family-style‖ atmosphere, which is common in Asian countries. This is the concept of having dishes and sides all at the disposal of those who have gathered to eat rather than each person having their own respective meal which is the exact opposite of McDonald’s trademark menu items.

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Team Exercise

Visit Transparency International’s Country Corruption Index website: https://www.transparency.org/research/cpi/overview. Form groups and select two countries. Research some of the economic, ethical, legal, regulatory, and political barriers that would have an impact on international trade. Be sure to pair a country with a high level of perceived corruption (lower scores) with a country that has a low level of perceived corruption (higher scores). Report your findings.

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CONNECT ACTIVITIES India’s Comparative Advantage

Learning Objective: 3-1 Explore some of the factors within the international trade environment that influence business. Activity Summary: Nations and businesses engage in international trade to obtain raw materials and goods that are otherwise unavailable to them or available elsewhere at a lower price than that at which they themselves can produce. The international business environment includes various factors—social, political, regulatory, cultural, legal, and technological—that encompass a business’ overall international strategy. Students explore concepts from the chapter using an example focused on India. How to Use Activity: After students complete this activity, the class can discuss the various advantages and disadvantages each country has within the international business landscape. Have students select a country of their own choosing and consider how the various concepts and vocabulary of international business apply to their selected country. For example, students could respond with their perception on a country’s comparative advantage, legal barriers, cultural norms, and so on. Class Discussion: How do the forces within the international business environment affect trade? To what degree does a country’s economy have an effect on international business?

Video Case: Electra Bikes

Learning Objective: 3-4 Summarize the different levels of organizational involvement in international trade. Activity Summary: Students explore how Electra Bikes is expanding its previously U.S.-only presence to selling bicycles all across the world. As the brand expands, the company learns the best ways to produce its product globally, while also balancing the duality of benefitting from and remaining compliant with the legal and regulatory environment. How to Use Activity: Electra Bikes is just one of many companies who have expanded internationally. Form groups and have students explore the international business strategies of select brands. Either allow students to select their own companies or provide examples for each section to work on. Ask groups to present what they’ve found. (Note to Professor: For a variety of presentation content and to reinforce the difficulty of expanding internationally, you might want to select some companies that have experienced a degree of failure in international expansions.) 04-105

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Class Discussion: What are the benefits to expanding internationally? What are the drawbacks? What are the risks? ConveyerPape: Supplying Conveyer Belts Internationally

Learning Objective: 3-4 Summarize the different levels of organizational involvement in international trade. Activity Summary: ConveyerPape creates conveyer belts used to make paper. The company is determining how to best provide its products in regions all across the world. Students explore the various circumstances that arise as ConveyerPape thinks through the decision. How to Use Activity: This case walks students through the various considerations needed before entering a new market. When students complete the activity, extend the concepts from this case by exploring brands like Pizza Hut, McDonalds, and KFC. Each have expanded internationally and have done so under a different set of considerations and strategies. This activity can be conducted as a facilitated discussion, an independent research project, or groupwork. Class Discussion: What are some aspects a brand should consider when expanding internationally? What are the risks associated with international expansion compared to doing business confined within the United States?

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BONUS TEACHING RESOURCES Effects of Trade Legislation

This textbook emphasizes that free and open trade between nations is healthy for the economies of most nations. Reviewing historical events will not necessarily indicate a causeand-effect relationship, but insight can be gained by studying trade legislation of the past. Various scholars have analyzed the reasons for the stock market crash of 1929—especially in the wake of the most recent recession. Actually, that crash did not occur in a single day at the New York Stock Exchange. The so-called crash took nearly three years, stretching from the bull market high of September 3, 1929, to July 8, 1932, the date the Dow Jones Industrial Average hit a record low of 41.22. Many individuals suggest that the impending passage of the Smoot-Hawley Tariff Act led to the crash. The Smoot-Hawley Act was designed to give American firms an advantage over foreign companies. There were several reasons why a tariff bill would have such a negative effect on people involved in the stock market. Many people felt the bill was bad for American business firms. It would raise tariff barriers that would make it more difficult for foreign firms to sell their wares in the United States. Opponents of the measure realized that if high tariffs made selling in the United States more difficult for foreign firms, then foreign sales would drop. The end result would be that foreign firms would be less able to buy needed goods from American firms. Secondly, in international trade, it has become an almost automatic reflex for a country whose firms are hurt by high tariffs to retaliate by increasing its own tariffs. The passage of the Smoot-Hawley Act resulted in high tariffs on an international scale. International trade became very difficult, and the United States had almost no meaningful trade with other nations. Because of the current unfavorable balance of trade with Japan and China, many legislators and union officials have suggested tougher trade legislation is needed for the United States. Legislators point out that Japanese products flood this country while American firms have barely gotten a toe inside the door of the Japanese market. Although Americans have made in-roads into the Chinese market, the United States has more of a trade deficit with China than any other country. Another problem occurs when nations subsidize industries or market groups. For example, several European nations have subsidies for agricultural or farm products and place restrictions on United States farm product exports. Japan also provides subsidies or protected markets for its agricultural products. Naturally, United States farm interests feel these are unfair trade restrictions. 04-107

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Legislation is frequently suggested to counter perceived unfair trade restrictions. But opponents of restrictive legislation for the United States point out the results of the SmootHawley Act and suggest a similar trade bill would damage the nation’s economic health just as the 1930 act did. Many advocates of ―freer‖ trade believe the best way to deal with restrictive trade policies of other countries is to negotiate for freer markets. 1. Why did the United States pass the Smoot-Hawley Act in 1930? The government passed the act to give American firms an advantage over foreign companies in the midst of the Depression. Instead, it had a detrimental effect. 2. What interest groups would be interested in passing similar legislation today? Likely groups might include anti-globalization groups that may wish to limit trade more within the United States. It also might include humanitarian groups that believe too much unregulated free trade between countries may hurt minorities or citizens of developing countries, while benefiting their more developed trading partners (the controversy surrounding NAFTA raises such concerns). 3. Other than tariff duties, what other trade restrictions could nations impose on the products of other nations? Quotas, or restrictions on the number of units of a particular product that can be imported into a country, and embargoes, prohibitions on trade in a particular product, can limit the types and amounts of products traded between countries as well.

Controversial Issue: High Dollar, Low Dollar—Which Is Better?

In the 1950s, it took 4.2 German marks to equal a dollar. At that same time, a dollar was worth more than 350 Japanese yen. At this writing, a dollar is worth about 79 yen, and the German mark was replaced years ago by the European Union’s euro. One dollar is equivalent to about 0.77 euros. These figures reflect radical change. There are both benefits and negative consequences of this change. Consider the negative side of a declining dollar abroad. Because of the shrinking international value of the dollar, American purchases of goods and services abroad are made more difficult. For example, an American firm buying wool sweaters from a foreign firm for resale in the United States will experience a significant rise in the cost of acquiring the sweaters. In addition, American tourists will find that everything in a foreign country will cost more than it did in the earlier days of the strong dollar.

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There are positive aspects to a falling dollar. Although it makes it more difficult for Americans to purchase foreign goods, at the same time, the declining dollar makes it easier for foreign firms or citizens to make purchases in the United States. The increase in more foreign purchases of American products (increased exports) helps American business. If a low dollar persists over a long period of time, increased purchases by other countries and decreased buying of foreign products by Americans will eventually help the trade balance. Improving the trade balance means helping to reduce the United States’ balance of payments deficit. Today’s business firms must be competitive in the global economy. What is positive for one nation may be negative for another. Thus, one nation’s exchange rate in relation to the value of another nation’s currency continues to be a matter of debate. As arguments can be made for both the strong dollar and the weak dollar, most trade negotiators will probably seek a middle-of-the-road position. 1. What are the effects of a strong dollar for the United States? A strong dollar allows Americans to purchase more from foreign countries. On the downside, it may discourage firms from foreign countries to make purchases in the United States. 2. What are the effects of a relatively weak dollar for the United States? A weak dollar will prevent Americans from buying as much products from foreign countries. Costs for American businesses that acquire merchandise from foreign suppliers will also rise. It will allow companies from foreign countries to purchase more from the United States. On the flip side, this could be a positive thing. A weak dollar can actually help restore the country’s balance of payments because Americans are not spending as much abroad (decreasing debt) and foreign countries will purchase more American products (allowing more money to flow into the economy). Additionally, American suppliers may be more likely to get their inventory from the United States, rather than from foreign countries, which may further stimulate the American economy. 3. Which do you think is better—a strong dollar or a relatively weak dollar? Students’ answers will vary. Term Paper or Project Topic

These topics may be assigned as individual or collaborative projects: 1. 2. 3. 4.

History of Trade Legislation in the United States Business Opportunities and Barriers to Entry in China Study of the Trade Relationships between the United States and Japan Case Study of United States Businesses Engaged in International Trade 04-109

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5. Examples of Recent Countertrade Exchanges (select approximately five examples) 6. Impact of the Global Trade War on the Local Economy

Guest Speaker Suggestions

1. A representative of the International Trade Administration (part of the Department of Commerce) to speak about opportunities for U.S. firms in the global economy. Or, a professor of international business or international marketing could also speak about similar topics. 2. An executive from a local firm to describe doing business overseas—advantages, benefits, and problems. 3. A representative of a foreign consulate to talk about doing business in that country. 4. A professor or representative of a campus international association to speak on differences in American business practices and those of other cultures. 5. A professor or a teacher from economics or social science to talk about world trade barriers.

Teaching Suggestions

1. This chapter has much information and many terms to be mastered. Consider different approaches for imparting information to students. One outside assignment is to have students write the definitions of the ―Key Terms and Concepts.‖ Probably a better assignment is to have students write an example for each of the ―Key Terms and Concepts‖; this approach places less stress on rote memory and forces students to synthesize information. 2. Because of the number of terms in this chapter, another possibility is to have each student submit two test questions they have developed from the chapter content. The one restriction to the test questions is that they cannot duplicate questions included in ―Check Your Progress‖, or on the website. The purpose of this exercise is to encourage students to think about the content they should study to prepare for a test. To make the assignment meaningful, the instructor can promise to use some of the submitted questions. (If students wish to share their test questions with other students, they will have reviewed a great deal of information.)

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3. Also, for mastery of the information and terms of the chapter, instructors may wish to very carefully cover all content in a lecture using the PowerPoint slides to reinforce main points. 4. Again, because of the importance of this chapter, make a point of going over the answers to ―Check Your Progress.‖ 5. Students should have read the additional boxed material. Discussion questions are given in this Instructor’s Manual and are available on a slide and transparency master. Break the class into small groups. Assign different groups different boxed material to answer questions. Use the transparency to assign questions. Have groups discuss answers, and then have a group representative present the group’s answers. 6. The video case can be an outside assignment. One solution is to divide the class in three groups and assign a question to each group. Discuss written answers to cases. Examples of answers are provided in this Instructor’s Manual. 7. A list of suggestions for guest speakers and term papers or project topics is provided for each chapter in this Instructor’s Manual.

Chapter 4: Options for Organizing Business SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Big Tech Spends Big on Acquisitions Consider Ethics a Social Responsibility: This Cascade Engineering: Go B Corp or Go Home Entrepreneurship in Action: Evrnu Slows Down Fast Fashion Responding to Business Challenges: J.Crew Says Bye to its Leveraged Buyout So You’d Like to Start a Business END OF CHAPTER TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Selecting a Form of Business 04-111

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Solve the Dilemma: To Incorporate or Not to Incorporate Build Your Business Plan: Options for Organizing Business See for Yourself Case: Team Exercise CONNECT ACTIVITIES Project Athena: Amazon Acquires Whole Foods Hardware House: Finding Sources of Cash for Expansion BONUS TEACHING RESOURCES Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions

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SUMMARY This chapter examines three primary forms of business ownership—sole proprietorship, partnership, and corporation—and weighs the advantages and disadvantages of each. These forms are the most often used whether the business is a traditional bricks and mortar company, an online-only one, or a combination of both. We also take a look at S corporations, limited liability companies, and cooperatives, and discuss some trends in business ownership. You may wish to refer to Table 4.1 to compare the various forms of business ownership mentioned in the chapter.

LEARNING OBJECTIVES LO 4-1

Describe the advantages and disadvantages of the sole proprietorship form of organization.

LO 4-2

Describe the two types of business partnership and their advantages and disadvantages.

LO 4-3

Describe the corporate form of organization and its advantages and disadvantages.

LO 4-4

Assess the advantages and disadvantages of mergers, acquisitions, and leveraged buyouts.

LO 4-5

Propose an appropriate organizational form for a startup business.

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KEY TERMS AND DEFINITIONS acquisition

The purchase of one company by another, usually by buying its stock.

articles of partnership

Legal documents that set forth the basic agreement between partners.

board of directors

A group of individuals, elected by stockholders to oversee the general operation of the corporation, who set the corporation’s long-range objectives.

common stock

Stock whose owners have voting rights in the corporation, yet do not receive preferential treatment regarding dividends.

cooperative (co-op)

An organization composed of individuals or small businesses that have banded together to reap the benefits of belonging to a larger organization.

corporate charter

A legal document that the state issues to a company based on information the company provides in the articles of incorporation.

corporation

A legal entity, created by the state, whose assets and liabilities are separate from its owners.

Dividends

Profits of a corporation that are distributed in the form of cash payments to stockholders.

general partnership

A partnership that involves a complete sharing in both the management and the liability of the business.

initial public offering (IPO) Selling a corporation’s stock on public markets for the first time. joint venture

A partnership established for a specific project or for a limited time.

leveraged buyout (LBO)

A purchase in which a group of investors borrows money from banks and other institutions to acquire a company (or a division of one), using the assets of the purchased company to guarantee repayment of the loan.

limited liability company

Form of ownership that provides limited liability and taxation 04-114

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like a partnership but places fewer restrictions on members. limited partnership

A business organization that has at least one general partner, who assumes unlimited liability, and at least one limited partner, whose liability is limited to his or her investment in the business.

Merger

The combination of two companies (usually corporations) to form a new company.

nonprofit corporations

Corporations that focus on providing a service rather than earning a profit but are not owned by a government entity.

partnership

A form of business organization defined by the Uniform Partnership Act as ―an association of two or more persons who carry on as co-owners of a business for profit.‖

preferred stock

A special type of stock whose owners, though not generally having a say in running the company, have a claim to profits before other stockholders do.

private corporation

A corporation owned by just one or a few people who are closely involved in managing the business.

public corporation

A corporation whose stock anyone may buy, sell, or trade.

quasi-public corporations

Corporations owned and operated by federal, state, or local government.

S corporation

Corporation taxed as though it were a partnership with restrictions on shareholders.

sole proprietorships

Businesses owned and operated by one individual; the most common form of business organization in the United States.

stock

Shares of a corporation that may be bought or sold.

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Describe the advantages and disadvantages of the sole proprietorship form of organization.  Introduction

Key Terms: 

Sole proprietorships

 Sole Proprietorships o Advantages of Sole Proprietorships o Disadvantages of Sole Proprietorships PowerPoint Slides:

Lecture Outline and Notes: I. Introduction A. There are three principal forms of organizing a business, whether it is a traditional ―brick and mortar‖ organization or a virtual corporation that does business exclusively through the internet.

PPT 4.4-5

B. The three primary forms of business that we will examine are sole proprietorship, partnership, and corporation (Table 4.1 & Figure 4.1). 1. Proprietorships far outnumber corporations, but they net far fewer sales and less income. 2. Partnerships are the least used form of business. 3. Corporations account for the majority of all U.S. sales and income but represent a relatively small number of organizations in the United States.

PPT 4.6

II. Sole Proprietorships A. Sole proprietorships are businesses owned by one person. 1. The most common form of business organization in the United States. 2. Typically small businesses employing fewer than 50 people.

PPT 4.7

B. Advantages of Sole Proprietorships 1. They have the advantage of a simple management structure and the ability to make quick decisions. 04-116

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2. Ease and Cost of Formation a. Forming a proprietorship is easy and inexpensive, requiring only state and local licenses and permits where applicable. b. An entrepreneur starting a new sole proprietorship must find a suitable site from which to operate the business. c. Many small businesses started out in their founders’ garages. 3. Secrecy a. Sole proprietorships have the advantage of secrecy as operating plans and financial reports do not have to be disclosed to others. 4. Distribution and Use of Profits a. All profits from the business belong to the owner. 5. Flexibility and Control of the Business a. The proprietor has complete control over how the business is run. b. This control allows the proprietor to respond quickly to competitive conditions or to changes in the economy. 6. Government Regulation a. Sole proprietorships have the greatest degree of freedom from government regulation. b. Nonetheless, proprietors must ensure that they follow all laws that apply to their business. 7. Taxation a. Profits from the business are considered the personal income of the sole proprietor and are taxed at individual tax rates. b. The sole proprietor can also establish a tax-exempt retirement or profit-sharing account, which is exempt from current income tax. 8. Closing the Business a. A sole proprietorship can be dissolved easily; the only legal condition is that all loans must be paid off. C. Disadvantages of Sole Proprietorships

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1. Unlimited Liability a. The sole proprietor has unlimited liability in meeting the debts of the business; if the business cannot pay its obligations, the owner’s personal, nonbusiness holdings might have to be used to pay the debt. 2. Limited Sources of Funds PPT 4.8

a. There are a limited number of financial sources from which the sole proprietor can borrow (bank, friends, family, and the Small Business Administration). b. Additionally, sole proprietors might have to pay higher interest rates on funds borrowed from banks than do large corporations because they are considered higher risks. c. The proprietor may have to pledge personal assets to guarantee loans. 3. Limited Skills a. The sole proprietor must be able to perform many functions and possess skills in diverse areas such as management, marketing, finance, accounting, and personnel. 4. Lack of Continuity a. The life expectancy of a sole proprietorship is directly related to that of the owner and their ability to work. 5. Lack of Qualified Employees a. It is sometimes difficult for a small sole proprietorship to offer the same wages, benefits, and advancement possibilities that are often found in a large corporation. 6. Taxation a. Under current tax rates, sole proprietors pay a higher marginal tax rate than do small corporations on income of less than $75,000. b. The tax effect often determines whether a sole proprietor incorporates the business. D. An example of a sole proprietorship might be an entrepreneur opening up a delicatessen. As a sole proprietor, he keeps his profits but is personally responsible for all risks and financial obligations.

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LO 4-2

Describe the two types of partnership and their advantages and disadvantages. o Partnerships

PPT 4.10



Types of Partnership



Articles of Partnership



Advantages of Partnerships



Disadvantages of Partnerships



Taxation of Partnerships

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Key Terms:  Partnership  General partnership  Limited partnership  Articles of partnership

III. Partnerships A. Most states have a model law governing partnerships based on the Uniform Partnership Act, which defines a partnership as ―an association of two or more persons who carry on as co-owners of a business for profit.‖ 1. Partnerships are the least used form of business organization. B. Keys to success in a partnership include: (Table 4.2) 1. Keeping profit sharing and ownership equal. 2. Partners’ skill sets should complement each other. 3. Honesty is critical. 4. Maintain face-to-face communication. 5. Maintain transparency. 6. Be aware of funding constraints so one partner does not get stuck with additional debt. 7. To be successful, you need experience. So, tailor your business to your skills. 8. Family should be a priority; try to minimize business problems so you can enjoy your family. 9. Do not fall in love with ―the idea‖ and forget to actually implement the idea. 10. Be optimistic but also realistic in terms of sales, growth, and planning.

PPT 4.11

C. Types of Partnership 1. A general partnership involves partners sharing completely in the management of a business and the liability for its debts. 04-119

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2. A limited partnership has at least one general partner who assumes unlimited liability and at least one limited partner whose liability is limited to the amount of investment in the business. a. Limited partnerships exist for risky investment projects where the chance of loss is great. 1) Limited partners are barred from participating in the management of the business, but they share in the profits. D. Articles of Partnership (Table 4.3) 1. Articles of partnership are legal documents that set forth the basic agreement between partners. 2. Usually specify the money or assets each partner has contributed to the partnership (called partnership capital); each partner’s individual management role or duty; how the profits and losses of the partnership will be divided among the partners; and how a partner may leave the partnership and any other restrictions that might apply to the agreement. PPT 4.12

E. Advantages of Partnerships 1. Ease of Organization a. Starting a partnership requires little more than drawing up articles of partnership. b. The name of the partnership should be registered with the state. 2. Availability of Capital and Credit a. When a business has several partners, the partnership can rely on a combination of talents and pooled financial resources. b. Partnerships tend to be larger than sole proprietorships and thus have greater earning power and higher credit ratings. 3. Combined Knowledge and Skills a. Partnerships can provide diverse skills because partners are able to specialize in their areas of expertise. 4. Decision Making a. Small partnerships can react quickly to changes in the business environment. 04-120

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5. Regulatory Controls a. The partnership has fewer regulatory controls over its activities than the public corporation. PPT 4.13

F. Disadvantages of Partnerships 1. Limited partners have no voice in management and bear most of the risk of the business. 2. Partnerships may be subject to disagreements when the goals and objectives of one partner change; many partnership disputes wind up in court. 3. Unlimited Liability a. In general partnerships, the general partners have unlimited liability for total debts the business incurs; this disadvantage increases if one partner has greater personal financial resources. b. The disadvantage is reduced for limited partners, who can only lose their initial investment. 4. Business Responsibility a. All partners are responsible for the business actions and decisions of all other partners. 5. Life of the Partnership a. A partnership is terminated upon the death or withdrawal of a partner. b. In very large partnerships, provisions for continuation of the partnership may be provided for in the articles of partnership. c. Selling a partnership interest has the same effect as the death or withdrawal of a partner, and it is difficult to place a value on the partner’s share of the partnership. 6. Distribution of Profits a. The distribution of the profits as specified in the articles of partnership may not reflect each partner’s contribution. 7. Limited Sources of Funds a. There are limits to sources of funds (capital) available to a partnership because there is no public value placed on the business. b. Partnerships may have to pay higher interest rates on borrowed funds than do large corporations because they may 04-121

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be considered greater risks. G. Taxation of Partnerships 1. Partnerships are quasi-taxable organizations, which means they do not pay taxes; the individual partners report their share of the profits on their individual tax returns and are taxed at the ordinary income tax rate for individuals. H. An example of a successful partnership is Google, which arose out of a partnership between Larry Page and Sergey Brin. Today, it is the world’s top search engine. LO 4-3

Describe the corporate form of organization and its advantages and disadvantages.  Corporations

Key Terms:  Corporation  Stock

o Creating a Corporation o Types of Corporations o Elements of a Corporation

 Dividends  Corporate charter

o Advantages of Corporations

 Private corporation

o Disadvantages of Corporations

 Public corporation

 Other Types of Ownership o Joint Ventures o S Corporations o Limited Liability Companies

 Initial public offering (IPO)  Quasi-public corporations  Nonprofit corporations  Board of directors  Preferred stock  Common stock  Joint Venture  S Corporation  Limited liability company  Cooperative (coop)

PPT 4.15

IV. Corporations 04-122

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A. A corporation is a legal entity, created by the state, whose assets and liabilities are separate from its owners. 1. Legally, a corporation has many of the rights, duties, and powers of a person, including the right to receive, own, and transfer property. They can enter into contracts with individuals or with other legal entities, and they can sue and be sued in court. 2. Represent the majority of sales and income in the United States. 3. Corporations are typically owned by many individuals and organizations who own shares of the business, called stock. Thus, corporate owners are called stockholders or shareholders. a. Stockholders can buy, sell, give or receive as gifts, or inherit their shares of stock. b. Stockholders are entitled to all profits that are left after all the corporation’s other obligations have been paid; these are distributed in the form of cash payments called dividends. c. However, some corporations may retain profits to expand the business. d. Table 4.4 World’s Biggest Dividend Payers PPT 4.16

B. Creating a Corporation 1. A corporation is created under the laws of the state in which it incorporates, a procedure sometimes referred to as chartering. a. In most states, the company name must end in ―company,‖ ―corporation,‖ ―incorporated,‖ or ―limited‖ to show that the owners have limited liability. b. The individuals who create the corporation are known as the incorporators. c. Articles of incorporation must be completed and filed with the appropriate state office (often the secretary of state). d. Articles of incorporation contain basic information about the business, including: 1) Name and address of the corporation. 2) Objectives of the corporation. 3) Classes of stock (common, preferred, voting, nonvoting) and the number of shares of each class of stock to be issued. 04-123

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4) Expected life of the corporation (usually forever). 5) Financial capital required at the time of incorporation. 6) Provision for transferring shares of stock between owners. 7) Provisions for the regulation of internal corporate affairs. 8) Address of the business office registered with the state of incorporation. 9) Names and addresses of the initial board of directors. 10) Names and addresses of incorporators.

PPT 4.17

2. Based on the information in the articles of incorporation, a corporate charter is issued by the state to create the corporation. The then owners establish the corporation’s bylaws and elect a board of directors. C. Types of Corporations 1. A corporation doing business in the state in which it is chartered is a domestic corporation. 2. When a corporation does business in other states, it is then referred to as a foreign corporation.

PPT 4.18

3. If a corporation does business outside the nation in which it is incorporated, it is termed an alien corporation. 4. A private corporation is owned by only one person or a few people closely involved in its management. a. Private corporations do not offer stock for sale to the public.

PPT 4.19

b. Privately owned corporations are not required to publicly disclose financial information, but they must pay taxes.

PPT 4.20

c. Table 4.5 America’s Largest Private Companies 5. A public corporation is one whose stock anyone may buy, sell, or trade. a. Publicly owned corporations must disclose financial information to the public under specific laws that regulate the trade of stocks and other securities. b. Table 4.6 American Companies with More than Half of Their Revenues from Outside the United States c. A private corporation may ―go public‖ through an initial public offering (IPO) by selling its stock so that it can be 04-124

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traded in public markets. d. Public corporations may be ―taken private‖ when one or a few individuals purchase all of the firm’s stock so that it can no longer be traded publicly. 6. Quasi-public corporations are corporations owned and operated by federal, state, or local government. These provide a service to citizens, rather than earn profits. Examples are NASA and the United States Postal Service.

PPT 4.21

7. Nonprofit corporations focus on providing a service rather than earning a profit, but are not owned by a government entity. Examples are Children’s TV Workshop, Elks Clubs, the American Lung Association, the American Red Cross, museums, and private schools. D. Elements of a Corporation 1. The Board of Directors a. The board of directors is elected by the stockholders to oversee the general operation of the corporation. b. The board of directors sets the long-range objectives of the corporation and sees that the objectives are achieved on schedule. c. The board members are legally liable for the mismanagement of the firm or for any misappropriation of funds. d. One of the board’s most important duties is to elect or hire the chairman of the board, the president of the company, and the chief executive officer (CEO).

PPT 4.22

e. Directors can be from both inside and outside the company. Most boards include outside directors because they are thought to be less biased in their assessment of the company’s progress. 2. Stock Ownership‒corporations issue two types of stock: preferred and common. a. Preferred stock usually allows no voting rights but confers preference in the distribution of company profits. 1) Owners of preferred stock are a special class of owners because, although they generally do not have any say in running the company, they have a claim to profits before other stockholders do. 04-125

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2) Most preferred stock carries a cumulative claim to dividends, which means that if preferred stock dividends are not paid in 1 year, they accumulate to the next year. b. Common stock allows the owner voting rights. 1) Owners of common stock do not get any preferential treatment with regard to dividends, but they do get some say in the operation of the corporation by voting on board members and other important issues.

PPT 4.23

2) Common stockholders have a preemptive right to purchase new shares of the common stock directly from the corporation. E. Advantages of Corporations 1. Limited Liability a. The owners’ maximum liability or potential loss is equal to their original investment. 2. Ease of Transfer of Ownership a. Stockholders can sell or trade shares of stock without causing the termination of the corporation. 3. Perpetual Life a. The corporation may continue its existence forever or until the owners agree to sell it or to liquidate its assets. 4. External Sources of Funds a. Long-term funds can be raised more easily by a public corporation than by partnerships or sole proprietorships. b. The firm can raise new funds by selling new shares or bonds to the public. 5. Expansion Potential

PPT 4.24

a. Readily available external financing makes it easier for large public corporations to expand into national and international markets. F. Disadvantages of Corporations 1. Double Taxation a. The corporation pays taxes on its income, and stockholders pay taxes on the dividend distributions they receive from the company. 04-126

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2. Forming a Corporation a. The formation of a corporation can be costly and may require the services of an attorney. 3. Disclosure of Information a. Financial and other proprietary information must be disclosed to shareholders, creditors, and the Securities and Exchange Commission (SEC)—which oversees the securities of corporations—and competitors may be able to access these documents. 4. Employee–Owner Separation a. Nonowner employees may feel that their work benefits only the owners. b. Employee stock ownership plans (ESOPs) give shares of the company’s stock to employees to help create more of a partnership between the company and the employees and to boost productivity. PPT 4.26

V. Other Types of Ownership A. Joint Ventures 1. A joint venture is a partnership established for a specific project or for a limited time. 2. The partners in a joint venture may be individuals or organizations, as in the case of international joint ventures. 3. Control of a joint venture may be shared equally, or one partner may control decision making. B. S Corporations 1. An S corporation is a form of business ownership that is taxed as though it were a partnership. 2. Advantages include simple taxation, limited liability of shareholders, perpetual life, and ability to shift income and appreciation to others. 3. Disadvantages include restrictions on the number (75) and types (individuals, estates, and certain trusts) of shareholders and the difficulty of formation and operation.

PPT 4.27

C. Limited Liability Companies 1. A limited liability company (LLC) is a form of business ownership that provides limited liability but is taxed like a partnership. 04-127

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2. A major reason for using the LLC form is to protect members’ personal assets; they are also flexible, simple to run, and do not require the members to hold meetings, keep minutes, or make resolutions. D. Cooperatives 1. A cooperative (co-op) is an organization composed of individuals or small businesses that have banded together to reap the benefits of belonging to a larger organization. Examples are Oglethorpe Power Corp., Ocean Spray, and REI. 2. The co-op is set up not to make money for itself but to help its members make money. 3. The most common example of a co-op is found in farming or agricultural organizations. 4. Purchasing, distribution, and advertising savings can benefit the co-op members. LO 4-4

Assess the advantages and disadvantages of mergers, acquisitions, and leveraged buyouts.  Trends in Business Ownership: Mergers and Acquisitions

PPT 4.29

Key Terms:  Merger  Acquisition  Leverage buyout (LBO)

VI. Trends in Business Ownership: Mergers and Acquisitions A. Companies achieve growth and improve profitability by expanding their operations, often by developing and selling new products or by merging with or purchasing other companies.

PPT 4.30

B. Table 4.7 The Largest Mergers of All Time C. A merger occurs when two companies combine to form a new company 1. Horizontal merger: When firms that make and sell similar products merge. 2. Vertical merger: When companies operating at different but related levels of an industry merge. 3. Conglomerate merger: When firms in unrelated industries merge. D. Not all mergers are pleasant. When Duke Energy and Progress decided to merge, it was initially decided that Progress CEO Bill Johnson would lead the newly merged company. However, shortly 04-128

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after the merger, the board of directors ousted Bill Johnson and reinstalled Duke CEO Jim Rogers as CEO in a move that result in widespread criticism. E. An acquisition occurs when one company purchases another usually by buying its stock. 1. Corporate raider: A company or individual who wants to acquire or take over another company and first offers to buy some or all of its stock at a premium in a tender offer.

PPT 4.31

2. Poison pill: The firm allows stockholders to buy more shares of a stock at lower prices than the current market value to head off a hostile takeover. 3. Shark repellant: Management requires a large majority of stockholders to approve a takeover. 4. White knight: A more acceptable firm that is willing to acquire a threatened company. F. A leveraged buyout (LBO) is the purchase of a company by a group of investors with borrowed money, using the assets of the company to guarantee repayment of the loan. 1. Merger mania is what happened in the 1980s and 1990s during a prolonged wave of mergers and acquisitions. 2. Some people view mergers and acquisitions favorably, pointing out that they boost corporations’ stock prices and market value, to the benefit of their stockholders. 3. Mergers can be controversial, with critics arguing that they hurt companies because management has to focus excessively on avoiding takeovers. LO 4-5 PPT 4.33

Propose an appropriate organizational form for a startup business. VII.

Key Terms:

Solve the Dilemma: To Incorporate or Not to Incorporate

N. Thomas O’Grady and Bryan Rossisky start a small business buying flowers, shrubs, and trees wholesale and reselling them to the general public. 1. Each contribute $5,000 in startup capital. 2. They have plans to lease a 2.5 acre tract of land with a small, portable sales office. O. They must decide what form of organization is appropriate. 04-129

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PPT 4.34

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5. Bryan thinks it should be a corporation. a. Limited liability. b. Image of a large organization. 6. Thomas thinks it should be a partnership. a. Easier to start. b. Can use the combination of their talents. c. Less reports and regulatory controls. P. Critical Thinking Questions

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1. What are some of the advantages and disadvantages of Thomas and Bryan forming a corporation? 2. What are the advantages and disadvantages of their forming a partnership? 3. Which organizational form do you think would be best for Thomas and Bryan’s company and why? [Answers appear under the End of Chapter Teaching Resources section of this Instructor’s Manual.]

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Big Tech Spends Big on Acquisitions

Case Overview Amazon, Alphabet, Microsoft, Apple, and Facebook are the five largest tech companies in the United States and have been investing heavily in the acquisition of smaller businesses and startups as a way to gain valuable assets, reduce costs, and increase market share. One element these companies have in common is a focus on emerging technologies. Not all acquisitions are successful, however and organizations often shut down or divest unsuccessful acquisitions. For mergers and acquisitions to work, the two businesses should be a strategic and cultural fit. 1. What are the benefits of acquisitions? It is a way to gain valuable assets, reduce costs, and increase market share. 2. Why do you think the Big Five tech companies acquire so many startups? Most students will answer that it is often faster and more cost-effective to acquire companies that have already made the investment. 3. Why do acquisitions sometimes fail? Most students will answer that an acquisition fails because it was not profitable or was not a strategic and cultural fit. Consider Ethics and Social Responsibility: This Cascade Engineering: Go B Corp Or Go Home

1. How does Cascade use B corporation certification as a way to improve both company processes as well as the environment? Cascade Engineering looks at decisions from a beneficial viewpoint which often requires managers to make nonprogramed decisions to develop unique solutions to positively impact the community. Taking proactive steps to become a sustainable company has value to both the environment and the company. Cascade doesn’t wait for legislation and ethical guidelines to be imposed by the government, the company has taken it upon themselves to adopt eco-friendly business practices. 2. How does B corporation certification encourage corporations to be socially responsible? The B corporation certification shows that companies can succeed both financially and socially. In order to become a B-corp, a company must be both for-profit and for society. These businesses 04-131

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are purpose-driven and are designed to give back to communities, the environment, and employees. 3. Do you think it is possible for a plastics company to make a positive contribution toward sustainability? What are some of the benefits from the corporate form of organization that Cascade Engineering likely receives? Answers will vary with a few students stating that it is impossible for a plastics company to make positive contributions. Most students will point to the reduction in emissions and use of oil, elimination of waste, thus the company is able to produce goods that do not negatively affect the environment. The advantages of a corporation include: limited liability, ease of transfer of ownership, perpetual life, external sources of funds, and expansion potential. Advantages of being a B-Corp include: leading a movement, differentiating your company, and attracting talent, customers, and investors. Ethics Entrepreneurship in Action: Evrnu Slows Down Fast

1. How do private companies have more control than public corporations? Privately owned corporations are not required to disclose financial information publicly, but they must, of course, pay taxes. 2. What are some of the advantages of a privately-held company over a sole proprietorship? The advantages include: limited Liability, ease of transfer of ownership, perpetual life, expansion potential, and external sources of funds. 3. Why might private ownership be more beneficial to a small tech company like Evrnu? As a privately held company, Evrnu is able to retain tight control over the direction of the company while choosing the investors it partners with. Many small companies are not initially profitable and as a private corporation it does not have to disclose financial information Responding to Business Challenges: J.Crew Says Bye to its Leveraged Buyout

1. What are the risks associated with a leveraged buyout? Students’ answers will vary, but they must support their stance. 2. Why was J.Crew criticized after the Great Recession? J. Crew was criticized for being exclusive and out of touch. 04-132

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3. You think J.Crew can make a long-term recovery? Students’ answers will vary, but they must support their stance. So You’d Like to Start a Business

Why would you choose to form a limited partnership? This form of partnership is used more often in risky investments where the limited partner stands only to lose his or her initial investment. Real estate limited partnerships are a common example and help to protect the limited partner from the risk and instability of the housing market.

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END OF CHAPTER TEACHING RESOURCES Check Your Progress

1. Name five advantages of a sole proprietorship. a. Sole proprietorships are easy and inexpensive to form. b. Sole proprietors do not have to discuss their operating plans with anyone. c. All profits from a sole proprietorship belong to the owner. d. A sole proprietor has direct control of the sole proprietorship and can make decisions without anyone else’s approval. e. Sole proprietorships have the most freedom from government regulations. 2. List two different types of partnerships and describe each. A general partnership is a complete sharing in the management of the business, and each partner has unlimited liability for the debts of the business. A limited partnership has at least one general partner who assumes unlimited liability and at least one limited partner whose liability is limited to their initial investment. A limited partner does not participate in the management of the business. 3. Differentiate among the different types of corporations. Can you supply an example of each type? A private corporation is owned by just one or a few people who are closely involved in managing the business. These people, often a family, own all of the corporation’s stock, and no stock is sold to the public. Examples will vary, but Levi Strauss & Co. is a private corporation. The stock of a public corporation is not held in the hands of a few persons. Instead, its stock may be bought, sold, or traded by anyone. Walmart, IBM, Sears, and ExxonMobil are public corporations. Quasi-public corporations such as NASA or the U.S. Postal Service are owned and operated by federal, state, or local governments. Nonprofit corporations are not owned by the government and focus on providing a service rather than earning a profit. The University of Southern California, the American Red Cross, and Greenpeace are examples of such organizations.

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4. Would you rather own preferred stock or common stock? Why? The answer depends on what type of involvement in the firm the stockholder desires. Preferred stock owners receive a fixed dividend before common stockholders can receive any dividends on their shares. The disadvantage of preferred stock is that their owners have no voting right to elect the board of directors. Although common stock owners receive no preferential treatment in the distribution of profits, they do get to vote on members of the board of directors and other important issues relevant to the operation of the firm. 5. Contrast how profits are distributed in sole proprietorships, partnerships, and corporations. Sole proprietorships keep all profits and decide how to use them. In a partnership, profits are distributed to the owners in the proportions specified in the articles of partnership. Corporate profits are distributed to the owners in the form of dividend payments, but only after all other expenses have been paid. 6. Which form of business organization has the least government regulation? Which has the most? Sole proprietorships have the least government regulation. Public corporations have the most regulation. 7. Compare the liability of the owners of partnerships, sole proprietorships, and corporations. Sole proprietors have the greatest liability because, as sole owners, they have no one to share the burden with if they fail or are sued. General partners also have great liability, but it is shared among all the general partners. The liability of limited partners and corporate stockholders is limited to their initial investment. 8. Why would secrecy in operating a business be important to an owner? What form of organization would be most appropriate for a business requiring great secrecy? Secrecy is important to business owners because they do not want their competitors to learn their trade secrets. A sole proprietorship would probably be most appropriate for a business requiring great secrecy because the secret can be kept by the owner. 9. Which form of business requires the most specialization of skills? Which requires the least? Why? Corporations allow the most specialization of skills. Sole proprietorships probably require the least specialization; sole proprietors must be able to ―wear many hats‖ and 04-135

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perform many functions. The number of employees in a corporation allows for a high degree of specialization, whereas a sole proprietorship with a small number of employees cannot afford the specialization possible in a larger company. 10. The most common example of a cooperative is a farm co-op. Explain the reasons for this and the benefits that result for members of cooperatives. Cooperatives are organizations composed of individuals or small businesses that have banded together to reap the benefits of belonging to a larger organization. Farm co-ops are beneficial because they can purchase supplies, such as fertilizer and seed, in large quantities at discounted prices and pass the savings on to member farmers. They also store and market grain, help distribute members’ products more efficiently than each farmer could on an individual basis, and advertise members’ products. They allow farmers to save money and to earn a higher profit.

Get Involved

1. Select a publicly owned corporation and bring to class a list of its subsidiaries. These data should be available in the firm’s corporate annual report, Standard and Poor’s Corporate Records, or Moody Corporate Manuals. Ask your librarian for help in finding these resources. Students’ responses will vary depending upon the companies they chose. One example might be Berkshire Hathaway. Among its many subsidiaries, Berkshire Hathaway owns Business Wire, Jordan’s Furniture, GEICO Auto, BNSF, The Pampered Chef, See’s Candies, International Dairy Queen, Inc., Fruit of the Loom Companies, and Benjamin Moore & Co. 2. Select a publicly owned corporation and make a list of its outside directors. Information of this nature can be found in several places in your library; the company’s annual report; its list of corporate directors; and various financial sources. If possible, include each director’s title and the name of the company that employs him or her on a full-time basis. Students’ responses will vary depending upon the companies they choose. One example might be Procter & Gamble. As of this writing, its outside directors include Ernesto Zedillo Ponce de Leon, former President of Mexico (Chair of the Governance & Public Responsibility Committee and member of the Innovation & Technology Committee); Scott Cook, Chairman of the Executive Committee of the Board of Intuit Inc. (Chair of the Innovation & Technology Committee and member of the Compensation & Leadership Development Committee); Susan Desmond-Hellmann, CEO of the Bill and 04-136

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Melinda Gates Foundation (member of the Audit and Innovation & Technology Committees); Kenneth I. Chenault, Chairman and CEO of American Express (member of the Audit and Compensation & Leadership Development Committees); Angela F. Braly, former Chair of the Board, President, and CEO of WellPoint (chair of the Governance & Policy Responsibility Committee and member of the Audit Committee); W. James McNearney Jr., Chairman of Boeing (Lead Director, Chair of the Compensation & Leadership Development Committee and member of the Governance & Public Responsibility Committee); Margaret C. Whitman, President and CEO of HewlettPackard (member of the Compensation & Leadership Development and Innovation & Technology Committees); Patricia A. Woertz, retired Chairman of Archer Daniels Midland Company (Chair of the Audit Committee and member of the Governance and Public Responsibility Committee); Terry Lundgren, Chairman and CEO of Macy’s, Inc. (member of the Compensation & Leadership Development and Innovation & Technology Committees); and Francis S. Blake, former Chairman of the Board and CEO of Home Depot (member of the Audit and Governance & Public Responsibility Committees).

Build Your Skills: Selecting a Form of Business

Suggestions for Use: BUILD YOUR SKILLS Selecting a Form of Business Suggestions for Use: You could broaden the focus of this exercise, depending on class size and time available, by asking students to elaborate on the points of their outline. For example, you could break the class into groups and assign ―Sole Proprietorships— Advantages‖ to one group, ―Sole Proprietorships—Disadvantages‖ to another group, and so on. Let them decide how they will present the information when you get to the part in the lecture where you ask them to discuss their assigned subject area. Answers will vary but students need to justify their answers taking into consideration Ali’s resources, goals, and opportunities. SOLE PROPRIETORSHIPS Advantages

Disadvantages



Ease and low cost of formation



Unlimited liability

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Secrecy

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Limited sources of funds



Control over profits



Limited skills



Control of the business



Lack of continuity

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Freedom from government regulation

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Difficulty keeping qualified employees

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Taxation

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Ease of business dissolution

Taxation issues

PARTNERSHIPS Advantages

Disadvantages

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Ease of organization



Unlimited liability



Availability of capital and



Mutual business responsibility

credit



Limited life of the partnership

Combined knowledge and



Difficulty selling a partnership



skills

interest



Faster decision making



Fewer regulatory controls



Fixed distribution of profits

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Potential for unfair sharing of profits

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Limited sources of funds

CORPORATIONS Advantages

Disadvantages



Limited liability



Double taxation



Ease of transfer of ownership



Cost of forming a corporation



Perpetual life



Disclosure of information



External sources of funds



Employee–owner separation



Expansion potential

Solve the Dilemma: To Incorporate or Not to Incorporate

Thomas O’Grady and Bryan Rossisky have decided to start a small business buying flowers, shrubs, and trees wholesale and reselling them to the general public. Thomas and Bryan are trying to decide what form of organization would be appropriate.

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1. What are some of the advantages and disadvantages of Thomas and Bryan forming a corporation? Advantages include: limited liability, ease of transfer of ownership, perpetual life, external sources of funds, and expansion potential. Disadvantages include: double taxation, cost of forming a corporation, disclosure of information, and employee–owner separation. 2. What are the advantages and disadvantages of their forming a partnership? Advantages include: ease of organization, availability of capital and credit, combined knowledge and skills, faster decision making, fewer regulatory controls, and fixed distribution of profits. Disadvantages include: unlimited liability, mutual business responsibility, limited life of partnership, difficulty selling a partnership interest, potential for unfair sharing of profits, and limited sources of funds. 3. Which organizational form do you think would be best for Thomas and Bryan’s company and why? Students’ answers will vary, but they must support their stance. Build Your Business Plan: Options for Organizing Business

Ask the students how many of their families are involved in a family business. Why did their family decide to start their own business? How have the students been affected by the involvement of the family in the business? Perhaps their family vacations are limited because there is a feeling that ―they can’t be away from the business.‖ It would be interesting to see if these students would like to start their own business, or if they have been turned off by how this has affected their family life. For those who have never experienced a family business, why would they like to own their own business? Have them debate the pros and cons of having a partnership instead. If they elect to have a partnership, as many business plan teams do, what do they have to resolve at the inception of their business? See for Yourself Case: Investors Sleep on Casper’s IPO

Case Overview Known for its ―bed-in-a-box‖ concept, Casper Sleep Inc. was considered a so-called unicorn company leading up to its initial public offering (IPO). Casper slashed its IPO price from $17 04-139

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to $12. Within a few months of the IPO, investors filed a lawsuit against the company for allegedly misleading them and not disclosing material information prior to the IPO. Shareholders have claimed that Casper violated Section 11 of the Securities Act by omitting facts that were material (i.e., information that would have potentially made an investor decide another way to invest) in the registration statement. Analyzing whether a material fact was omitted became much more difficult considering the impact of COVID-19 on the company’s financial statements in 2020. Should the shareholders prove to a jury that Casper is at fault, the company would be liable for a significant amount of money 1. Why do you think a company would mislead investors? Students’ answers will vary but students will focus on the profit motive. 2. Why do companies file initial public offerings? Students’ answers will vary but students will focus on securing additional capital for expansion. A private corporation that needs more money to expand or to take advantage of opportunities may have to obtain financing by ―going public. Privately owned firms are occasionally forced to go public with stock offering when a major owner dies and the heirs have large estate taxes to pay. 3. Explain why Casper’s IPO got a lower valuation than initially expected. Leading up to the IPO, Casper’s revenue was up 20% from the year prior, but losses were also up 5%. Additionally, focused on stealing business from traditional mattress brands, the company spent more than $400 million in less than 3 years on marketing alone. The bigger issue was that Casper’s true value was much less than $1 billion.

Team Exercise

Students will form groups and find examples of mergers and acquisitions. Mergers can be broken down into traditional mergers, horizontal mergers, and conglomerate mergers. When companies are found, students will note how long the merger or acquisition took, if there were any requirements by the government before approval of the merger or acquisition, and if any failed mergers or acquisitions were found that did not achieve government approval. They will report their findings to the class, and explain what the companies hoped to gain from the merger or acquisition.

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CONNECT ACTIVITIES Project Athena: Amazon Acquires Whole Foods

Learning Objective: 4-4 Assess the advantages and disadvantages of mergers, acquisitions, and leveraged buyouts. Activity Summary: Amazon’s takeover of Whole Foods in 2017 renewed interest and momentum in the grocery segment—often thought of as dwindling due to the rise in ecommerce. In this case, students explore the terms associated with mergers while applying the concepts to Amazon’s famous $13.4 billion acquisition. How to Use Activity: Use this activity to supplement your lecture of the vocabulary concepts associated with this chapter. This exercise serves as a solid reinforcement to the terms presented in the text. It can also be extended by having students explore other acquisitions— both friendly and hostile. Class Discussion: What could be attractive to Amazon by purchasing Whole Foods? With Whole Foods now being owned by Amazon, what are some disadvantages from either the customer’s or businesses’ point of view? With a successful brand like Amazon acquiring Whole Foods, is there any risk in the transaction? Why or why not? Hardware House: Finding Sources of Cash for Expansion

Learning Objective: 4-2 Describe the two types of business partnership and their advantages and disadvantages. Activity Summary: There are distinct advantages and disadvantages associated with each form of business ownership. Through following the growth of the Hardware House, students apply the concepts of business ownership to its evolution. How to Use Activity: After completing this video case, students should be comfortable with understanding and applying the forms of business ownership. If there continues to be a knowledge gap, students can create a table of the various forms and list characteristics of each, advantages, and disadvantages. Beyond reflection, students can apply the business formation concepts to either a company they work for, have worked for, or a company they’d like to work for. Class Discussion: Consider the types of business formations you just learned about. Do you have a preference to work for a particular type? Reflect on your work experiences. What types business formations have you worked for? Suppose you are starting up a new company, what form of organization would you select?

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BONUS TEACHING RESOURCES Term Paper or Project Topic

These topics may be assigned as individual or collaborative projects: 1. 2. 3. 4.

Requirements for Incorporation (in your state) Advantages and Disadvantages of Leveraged Buyouts A History of Cooperatives in the United States A Study of Successful Sole Proprietorships (or Partnerships)

(Note to instructor: This study could be done by interviewing a number of sole proprietors or partners in your area. The number to be interviewed can be determined by the instructor.)

Guest Speaker Suggestions

1. A sole proprietor from a local firm to discuss formation, management, advantages, and disadvantages of sole proprietorships. 2. A member of a partnership in your local area to discuss formation, management, advantages, and disadvantages of partnerships. 3. An executive from a private or public corporation in your local area to discuss formation, management, advantages, and disadvantages of corporations. 4. A representative of a bank or financial institution to speak—from a lender’s perspective—about the differences between sole proprietorships, partnerships, and corporations. 5. An attorney to talk about some of the legal aspects of forming a business.

Teaching Suggestions

13. This chapter is very important to students’ understanding of business organizations. Most instructors will stress the chapter content in lectures by using the ―Lecture Outline and Notes.‖ 14. The ―Supplemental Lecture,‖ with three scenarios presented, helps to emphasize the differences in the forms of organization. The ―Controversial Issue‖ illustrates the problems in dissolving a partnership.

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15. Focusing on the boxed material and the case study will help students achieve the objectives of the chapter. Answers for both the boxed material and case studies are provided in this Instructor’s Manual. 16. The ―Check Your Progress‖ section in the textbook will help in understanding chapter content. These topics may be assigned as an outside class assignment. One of the problems in giving textbook questions as outside assignments is that students frequently do not do the assignments and wait for the instructor to give them the answers. Instructors can avoid these problems in several ways: (1) collecting assignments at random and assigning a grade; (2) occasionally giving some of the same questions as a quiz, thus rewarding students who have done their assignments; (3) having students hand in assignments and giving credit for work submitted (or penalties for work not submitted); and (4) calling on students at random to write on the chalkboard their answers to specific questions (giving a small number of points for correct answers).

Chapter 5: Small Business, Entrepreneurship, and Franchising SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Subway Loses Its Way Entrepreneurship in Action a Growing Success: Leola Produce Auction Consider Ethics and Social Responsibility: Sseko Celebrates Women Every Day Technology and the Economy: An Entrepreneur Goes Digital for Growth So You Want to Be an Entrepreneur or Small Business Owner END OF CHAPTER TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Creativity Solve the Dilemma: The Small Business Challenge Build Your Business Plan: Small Business, Entrepreneurship, and Franchising 05-144

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See for Yourself Case: Small Business Fight to Survive the Pandemic Team Exercise CONNECT ACTIVITIES Entrepreneurs Reinvent Pizza The Ruffled Hem: Shopping as an Experience The Buzz About Burt’s Bees BONUS TEACHING RESOURCES Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions

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SUMMARY This chapter surveys the world of entrepreneurship and small business. First, we define entrepreneurship and small business and examine the role of small business in the American economy. Then, we explore the advantages and disadvantages of small business ownership and analyze why small businesses succeed or fail. Next, we discuss how an entrepreneur goes about starting a business and the challenges facing small businesses today. Finally, we look at entrepreneurship in larger organizations.

LEARNING OBJECTIVES LO 5-1

Define entrepreneurship and small business.

LO 5-2

Explain the importance of small business in the U.S. economy and why certain fields attract small business.

LO 5-3

Specify the advantages of small business ownership.

LO 5-4

Analyze the disadvantages of small business ownership and the reasons why many small businesses fail.

LO 5-5

Describe how to start a small business and what resources are needed.

LO 5-6

Evaluate the demographic, technological, and economic trends that are affecting the future of small business.

LO 5-7

Explain why many large businesses are trying to ―think small.‖

LO 5-8

Assess two entrepreneurs’ plans for starting a small business.

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KEY TERMS AND DEFINITIONS business plan

A precise statement of the rationale for a business and a step-bystep explanation of how it will achieve its goals.

entrepreneurship

The process of creating and managing a business to achieve desired objectives.

franchise

A license to sell another’s products or to use another’s name in business or both.

franchisee

The purchaser of a franchise.

franchiser

The company that sells a franchise.

intrapreneurs

Individuals in large firms who take responsibility for the development of innovations within the larger organization.

Microentrepreneurs

Entrepreneurs who develop businesses with five or fewer employees.

sharing economy

An economic model involving the sharing of underutilized resources.

small business

Any independently owned and operated business that is not dominant in its competitive area and does not employ more than 500 people.

Small Business Administration (SBA)

An independent agency of the federal government that offers managerial and financial assistance to small businesses.

social entrepreneurs

Individuals who use entrepreneurship to address social problems.

undercapitalization

The lack of funds to operate a business normally.

venture capitalists

Persons or organizations that agree to provide some funds for a new business in exchange for an ownership interest or stock.

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Define entrepreneurship and small business.  Introduction  The Nature of Entrepreneurship o What Is a Small Business? o The Role of Small Business in the American Economy

Key Terms:  Entrepreneurship  Microentrepreneur  Social entrepreneur  Small business  Small Business Administration (SBA)

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Lecture Outline and Notes: I. The Nature of Entrepreneurship and Small Business A. Entrepreneurship is the process of creating and managing a business to achieve desired objectives. The entrepreneurship movement has been accelerating.

PPT 5.7

1. Some entrepreneurs who start small businesses have the ability to see emerging trends; in response, they create a company to provide a product that meets customer needs. 2. Technology once available only to the largest firms can now be obtained by small businesses.

PPT 5.8

3. Companies such as Procter & Gamble, McDonald’s, and Dell Computers all started out as small businesses. Now they have become major global corporations. Many of the entrepreneurs that founded these businesses, such as Steve Jobs (Apple), Michael Dell (Dell Computers), Larry Page and Sergey Brin (Google), and Bill Gates (Microsoft), are recognized as some of the greatest entrepreneurs (Table 5.1). B. What Is a Small Business? 1. The textbook’s definition of small business is any independently owned and operated business that is not dominant in its competitive area and employs fewer than 500 people. 2. This is similar to the definition used by the Small Business Administration (SBA), an independent agency of the federal government that offers managerial and financial assistance to small businesses.

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C. The Role of Small Business in the American Economy (Table 5.2) 1. Small businesses are vital to the soundness of the American economy. 2. Over 99% of all U.S. firms are classified as small businesses, and they employ 50% of private workers. 3. They represent 98% of all U.S. exporters of goods and contribute 33% of the value of these exports. PPT 5.9

4. Job Creation a. Small businesses fuel job creation and innovation and provide significant opportunities for minorities and women to succeed in business. b. Small businesses generate 63% of net new jobs. c. Many new jobs are also created by big-company/smallcompany alliances. d. Women own more than 9 million businesses nationwide. e. Minority-owned businesses have been growing faster than other classifiable firms as well, representing 28.6% of all small businesses. f. Eighty-two percent of all businesses employ fewer than 500 people (Table 5.3). Businesses employing 19 or fewer people account for 66% of all businesses.

PPT 5.9

5. Innovation a. Small businesses contribute highly to innovation and bring significant benefits to customers. For instance, the airplane, audio tape recorder, fiber-optic examining equipment, the heart valve, optical scanner, pacemaker, personal computer, soft contact lenses, the Internet, and even the zipper were innovations by small businesses. a. Examples of innovators include: 1) Stitch Fix, which offers fashion clothing customized for each individual. 2) Andrew Blackmon co-founded the online tuxedo rental service The Black Tux.

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LO 5-2

Explain the importance of small business in the U.S. economy and why certain fields attract small business.  Industries That Attract Small Business

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Key Terms:  Sharing economy

D. Industries That Attract Small Business 1. Small businesses are found in every industry, but some areas are especially attractive because they are relatively easy to enter, require low initial financing, and/or offer relatively easy ways to target a specific group of customers. 2. Retailing a. A retailer acquires goods from producers or wholesalers and sells them to consumers. Retailing is attractive to small business owners because they can easily gain experience and exposure in the field, and the financial cost of opening a retail store is relatively low. 3. Wholesaling a. Wholesalers supply products to industrial, retail, and institutional users for resale or for use in making other products. b.

PPT 5.11

Small businesses are successful in wholesaling activities because they are close to final customers and know how to keep them satisfied.

4. Services a. Service providers work for others but do not actually produce tangible goods. b. The service sector accounts for 80% of U.S. jobs. c. Many service providers are also retailers because they provide their services to ultimate consumers. 5. Manufacturing a. Small businesses can often customize products to meet specific customer needs and wants.

PPT 5.12

6. Technology a. High-technology businesses depend heavily on advanced scientific and engineering knowledge. b. In general, high-technology businesses require greater capital and have higher initial start-up costs than do other small businesses.

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7. Sharing Economy PPT 5.13

a. The past few years have seen a rise in the sharing economy, an economic model involving the sharing of underutilized resources. b. Entrepreneurs earn income by renting out an underutilized resource such as lodging or vehicles. c. Uber is the company most associated with the sharing economy.

PPT 5.14

E. Successful Traits of Young Entrepreneurs (Table 5.4) 1. Intuitive 2. Productive 3. Resourceful 4. Charismatic 5. Innovative 6. Risk-taker 7. Persistent 8. Friendly

LO 5-3

Specify the advantages of small business ownership.

Key Terms:

 Advantages of Small Business Ownership o Independence o Costs o Flexibility o Focus o Reputation

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II. Advantages of Small Business Ownership A. Independence 1. Independence and the opportunity to better themselves are leading reasons why entrepreneurs go into business for themselves. 2. Freedom to work where and when they want is desired by many small business entrepreneurs. B. Costs 1. Small businesses usually require less money to start and maintain than large ones. C. Flexibility 1. Small businesses have the flexibility to adapt to changing market demands. 2. With only one layer of management, decisions can be made quickly. D. Focus 1. Small firms can focus their efforts on a precisely defined market niche—a specific group of customers—to address a need that other companies have not addressed. E. Reputation 1. Many small firms can develop enviable reputations for quality and service, demonstrating a commitment to customer satisfaction.

LO 5-4

Analyze the disadvantages of small business ownership and the reasons why many small businesses fail.

Key Terms:  Undercapitalization

 Disadvantages of Small Business Ownership o High Stress Level o High Failure Rate

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III. Disadvantages of Small Business Ownership PPT 5.18

A. High Stress Level 1. Worries about the business, competition, or changing market demand cause stress. 2. Long work days are the norm. B. High Failure Rate (Table 5.5) 1. There is no guarantee of small business success. 2. Half of all small businesses fail within 5 years. 3. Small businesses fail for many reasons. a. Poor business management causes many failures. b. Other causes include a poor business concept, burdens imposed by government regulation, insufficient funds during slow sales periods, and competition from others. 4. Undercapitalization a. The shortest path to failure in business is undercapitalization—lacking sufficient funds needed to operate the business normally. 5. Managerial Inexperience or Incompetence

PPT 5.19

a. Poor management is the cause of many business failures: Just because an entrepreneur has a brilliant vision for a small business does not mean they have the knowledge or experience to manage a growing business effectively. b. Expanding a hobby into a business may work if a genuine market niche exists, but all too often people start such a business without identifying a real need for the goods or services. 6. Inability to Cope With Growth a. Growth requires specialized management skills that the owner may neither have nor have the time to acquire. b. Growth often requires the owner to give up a certain amount of direct authority, and it can be hard for someone who has called all the shots to give up control.

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LO 5-5

Describe how to start a small business and what resources are needed.  Starting a Small Business o The Business Plan o Forms of Business Ownership o Financial Resources o Approaches to Starting a Small Business

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Key Terms: 

Business plan



Venture capitalists



Franchise



Franchiser



Franchisee

o Help for Small Business Managers

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IV. Starting a Small Business A. Creating a small business involves starting out with a concept or idea. Then, it involves creating a business plan. Next, the entrepreneur must devise a strategy to guide planning and development. PPT 5.20

B. The Business Plan 1. A business plan is a precise statement of the rationale for the business and a step-by-step explanation of how it will achieve its goals. 2. It should include an explanation of the business, an analysis of the competition, estimates of income and expenses, a strategy for acquiring sufficient funds to keep the business going, and other information. 3. The business plan should act as a guide and reference document. 4. It should be revised periodically to ensure that the firm’s goals and strategies can adapt to changes in the environment. 5. Business plans also allow companies to assess market potential, determine price and manufacturing requirements, identify optimal distribution channels, and refine product selection. C. Forms of Business Ownership 1. After developing a business plan, the entrepreneur has to decide on an appropriate legal form of business ownership, such as a sole proprietorship, partnership, or corporation. D. Financial Resources 1. To make money from a small business, the owner must provide or obtain money (capital) to start the business and to keep it running smoothly. Financing options include loans, stocks, or equity financing.

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PPT 5.23

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2. Equity Financing a. Equity financing occurs when the owner uses real personal assets rather than borrowing funds from outside sources to get started in a new business. b. Small businesses can also obtain equity financing by finding investors for their operations. 1) They may sell stock in the business to family members, friends, employees, or other investors. 2) Venture capitalists are persons or organizations that agree to provide some funds for a new business in exchange for an ownership interest or stock. 3) This form of equity financing requires that the small business owner share the profits or the control of the business. 3. Debt Financing a. Banks are the main suppliers of external debt financing to small businesses. b. The Small Business Administration offers financial assistance to qualifying businesses. c. Small business owners can look to family and friends as sources for loans of long-term funds or other assets, such as computers or automobiles that are exchanged for an ownership interest in a business. d. The amount a financial institution is willing to loan depends on its assessment of the venture’s likelihood of success and of the entrepreneur’s ability to repay the loan. 1) The owner is often required to put up collateral—a financial interest in the property or fixtures of the business—to guarantee payment of the debt. 2) The small business owner may also have to offer some personal property as collateral, such as a home, in which case the loan is called a mortgage. e. Financial institutions can also grant a small business a line of credit— an agreement by which a financial institution promises to lend a business a predetermined sum on demand. f. Small businesses may also obtain funding from their suppliers in the form of trade credit; suppliers allow the business to take possession of the needed goods and services and pay for them at a later date or in installments. g. Occasionally, small businesses engage in bartering, trading their own products for the goods and services offered by other businesses. h. Some community groups, state, and local agencies sponsor loans, especially to minority businesspeople or for development in certain areas. 05-157

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E. Approaches to Starting a Small Business 1. Starting From Scratch Versus Buying an Existing Business a. Buying an already existing business has the advantage of providing a network of existing customers and suppliers. b. However, the entrepreneur must deal with the problems the business already has. 2. Franchising a. A license to sell another’s products or to use another’s name in business, or both, is a franchise. 1) The company that sells a franchise is the franchiser. 2) The purchaser of a franchise is called a franchisee. b. The franchisee acquires the rights to a name, logo, methods of operation, national advertising, products, and other elements associated with the franchiser’s business in return for a financial commitment and the agreement to conduct business in accordance to the franchiser’s standard of operations. c. The initial fee to join a franchise varies greatly. In addition, franchisees buy equipment, pay for training, and obtain a mortgage or lease. The franchisee also pays the franchiser a monthly or annual fee based on the percentage of sales or profits. d. Advantages of franchising

PPT 5.26

1) Franchising allows a franchisee the opportunity to set up a small business relatively quickly, and a franchise outlet often reaches the break-even point faster than an independent business would because of its association with an established brand. 2) Management training and support 3) Brand-name appeal 4) Standardized quality of goods and services 5) National and local advertising programs 6) Financial assistance 7) Proven products and business formats 8) Centralized buying power 9) Site selection and territorial protection 10) Greater chance for success

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e. Disadvantages of franchising 1) Franchise fees and profit sharing with the franchiser 2) Strict adherence to standardized operations 3) Restrictions on purchasing 4) Limited product line 5) Possible market saturation 6) Less freedom in business decisions f. The practice of franchising first began in the United States in the 19th century when Singer used it to sell sewing machines. The concept of franchising grew especially rapidly during the 1960s, when it expanded to diverse industries.

PPT 5.28

g. Fastest Growing Franchises (Table 5.6) F. Help for Small Business Managers

PPT 5.29

1. Many organizations exist to help small businesses a. Small Business Administration 1) Small Business Development Centers 2) Service Corps of Retired Executives 3) Active Corps of Executives 4) Small Business Institutes b. College courses and seminars c. Chambers of commerce and U.S. Department of Commerce d. National publications such as Inc. and Entrepreneur, as well as weekly business journals/newspapers. e. Advice and help from other small businesses f. Networking—building relationships and sharing information with colleagues—is vital for any businessperson.

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LO 5-6

Evaluate the demographic, technological, and economic trends that are affecting the future of small business.

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Key Terms:

 The Future for Small Business o Demographic Trends o Technological and Economic Trends PPT 5.30

V. The Future for Small Business A. Demographic Trends 1. The baby boom generation (those born between 1946 and 1964) is wealthy and aging but not actively pursued by most small businesses. 2. Another market with huge potential for small business is the millennials (those born between 1981 and 1997). They number around 83 million. Millennials are not solely concerned about money; they are also concerned with advancement, recognition, and improved capabilities. 3. The growing number of immigrants living in the United States represents another potential market for small business. Immigrants represent about 17% of the population.

PPT 5.31

B. Technological and Economic Trends 1. Technological advances have opened many new markets to small business. 2. Small businesses can react quickly to changes in the economy. 3. Changes in communication and technology can allow small companies to customize their services quickly for international customers. 4. Deregulation of the energy market and interest in alternative fuels and in fuel conservation has spawned many small businesses. C.

Most Business-Friendly States (Table 5.7)

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LO 5-7

Explain why many large businesses are trying to ―think small.‖ o Making Big Businesses Act ―Small‖

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Key Terms:  Intrapreneurs

VI. Making Big Businesses Act ―Small‖ A. The success and competitiveness of small businesses have led many large corporations to take a closer look at what makes their smaller rivals tick. B. Many large corporations are focusing on downsizing. This process involves the reduction of management layers, corporate staff, and work tasks in order to make the firm more flexible, resourceful, and innovative like a smaller business. C. Many companies are trying to instill a spirit of entrepreneurship. In major corporations, intrapreneurs, like entrepreneurs, are employees who take responsibility for the development of innovations of any kind within the large organization. VII. So You Want to Be an Entrepreneur or Small Business Owner A. Starting your own business is not easy, but a few techniques will help your success. 1. Set clear payment schedules for all clients. 2. Take the time to learn about tax breaks. 3. Focus on your current customers. 4. Make it clear to your customers what the basic price is for what you are selling and charge for extra features, extra services, and so on. 5. Make sure the office has the conveniences employees need. 6. Use your actions to set an example. 7. Don’t forget to increase productivity in addition to cutting costs.

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LO 5-8

PPT 5.32-5.34

Assess two entrepreneurs’ plans for starting a small business. VII.

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Key Terms:

Solve the Dilemma: The Small Business Challenge A. Jack Gray and his best friend, Bruce McVay, decided to start their own small business. 1. Jack had developed recipes for fat-free and low-fat cookies and muffins to satisfy his personal health needs. 2. Bruce had extensive experience in managing food-service establishments.

B. They knew that a start-up company needs a quality product, adequate funds, a written business plan, some outside financial support, and a good promotion program.

PPT 5.35

C. Each had $35,000 to invest and with their homes and other resources, they had borrowing power of an additional $125,000. D. Remaining decisions: 1. What form of organization to use 2. How to market their product 3. How to determine exactly what product to sell a. Cookies and muffins

PPT 5.36

b. Additional products E. Critical Thinking Questions: 1. Evaluate the idea of a low-fat cookie and muffin retail store. 2. Are there any concerns in connection with starting a small business that Jack and Bruce have not considered? 3. What advice would you give Jack and Bruce as they start up their business? [Answers appear under the End of Chapter Teaching Resources section of this Instructor's Manual.]

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Subway Loses Its Way

Case Overview Subway, the largest fast-food chain in the world (originally called Pete’s Super Submarines), has more than 42,000 sandwich shops in more than 100 countries. The brand redefined fast food using fresh ingredients that customers could see and by promoting a healthy alternative to competitors. Now, however, the sandwich chain is shrinking. Subway uses a franchise model to grow business and has successfully done so until recently. One reason the number of Subway locations is so high is that they are one of the cheapest franchises to buy, costing $200,000 on average. However, by 2014, sales had decreased and more competition had emerged in the market. Additionally, fast-food chains were bringing in healthier menu items such as side salads and fruit cups. Perhaps the biggest detriment to Subway was the ease of purchasing a franchise paired with the lack of restrictions related to how close each location could be in proximity to one another. This resulted in franchises cannibalizing each other’s sales. The company is attempting to better aid franchisees with store remodels and better store placements. The company is also working on improving its menu. 1. Describe the factors that contributed to Subway’s growth. Subway grew because it was one of the cheapest franchises to purchase. It also redefined fast food using fresh ingredients that customers could see and by promoting a healthy alternative to competitors. It also capitalized on the obesity epidemic with its ―Subway guy‖ campaign of a man holding an old pair of pants to demonstrate his weight loss by eating at Subway. 2. What makes Subway an attractive investment for franchisees? Subway was attractive because it was one of the cheapest franchises to purchase—$20,000 compared to $2million+ for a McDonald’s. 3. What factors have contributed to Subway’s struggles? Subway has too many franchisees that are located too close to each other, thus cannibalizing sales. Competition in the healthier menu items sector of fast food has also increased dramatically

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Consider Ethics and Social Responsibility: Sseko Celebrates Women Every Day

1. How does Sseko’s social entrepreneurship model differ from traditional charitable initiatives that other companies might take? More traditional charities would focus on creating a profitable company that would then use the proceeds for a charitable initiative. Sseko’s model uses entrepreneurial principles to create higher education opportunities for Ugandan women. Thus, Sseko is solving the social problem of African women not having the money to further their university education using a business model. 2. Do you believe the Bohannons are too focused on their social mission? Should they compromise on the values in favor of profit? The answers will vary with some students believing that the social mission of helping the women is the most important factor and at the very least does not detract from Sseko Designs and in fact complements the business. Other students might disagree arguing that the Bohannons could provide more financial support if their focus was on profits. Again, in answering whether the Bohannons should compromise in favor of profits, the answers will vary depending on the student’s perspective. 3. What are the disadvantages small business ownership Liz Forkin Bohannon faces? Ms. Bohannon faces the problem of scaling the company so it has sufficient size. This will require more funding, which she was denied by the Shark Tank entrepreneurs. The company has expanded from footwear to other products but continued expansion will require logistical solutions, more capital, and possibly different management skills that Ms. Bohannon may or may not have. Technology and the Economy: An Entrepreneur Goes Digital for Growth 1. How did Robinson struggle as a small business owner? Ms. Robinson struggled as a small business owner because she had too much responsibility and her work-life balance suffered. Although her consulting firm grew steadily, the number of clients that depended on her also grew. 2. What challenges did Robinson face when she hired her first employees? More employees meant more meetings and personal issues she had to handle. Additionally, even though she hired more staff, clients still wanted to talk to her directly.

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3. How did Robinson benefit from digitizing her business? She digitalized all of her training material and began to sell her knowledge instead of her time to personally consult. She used apps to upsell her business. Revenue increased and became more diversified, while Robinson’s marginal effort decreased.

So You Want to Be an Entrepreneur or Small Business Owner

What is one of the most common reasons people become entrepreneurs? Independence is one of the main reasons why people turn to entrepreneurship. People who do not do well in an office setting and who prefer to set their own hours and have more freedom tend to prefer entrepreneurship.

END OF CHAPTER TEACHING RESOURCES Check Your Progress

1. Why are small businesses so important to the U.S. economy? More than 82% of all U.S. firms are classified as small businesses. Small businesses are fueling job creation and innovation. 2. Which fields tend to attract entrepreneurs the most? Why? The fields of retailing, wholesaling, services, manufacturing, high technology, and the sharing economy tend to attract small businesses because these fields (except for high technology) are relatively inexpensive to enter. They generally do not require a large initial investment or a lot of experience. 3. What are the advantages of starting a small business? The disadvantages? Advantages of small business ownership include independence and flexibility in terms of the location and operating hours of the business. Additional advantages include lower costs, flexibility to adapt to changing market conditions, focus on a limited market niche, and the chance to build a reputation on quality and service. Among the disadvantages of small businesses are the high stress level and the high failure rate.

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1. What are the principal reasons for the high failure rate among small businesses? The main reasons for the high rate of failure among small businesses are undercapitalization, inability to cope with growth, poor business management, overoptimism, burdens imposed by government regulation, insufficient reserves to withstand slow sales, and vulnerability to competition. 2. What decisions must an entrepreneur make when starting a small business? When starting a small business, an entrepreneur must first conceive and write a business plan. They must then select a specific form of business ownership and secure sufficient financial resources. 3. What types of financing do small entrepreneurs typically use? What are some of the pros and cons of each? Few small business owners have the funds necessary to start a business. Small business owners can obtain financing from friends and family. However, the relationship may suffer if the business fails. Small businesses may seek financing from banks or other financial institutions. A bank may require collateral or a mortgage, and the bank can repossess the property if the business fails to repay the loan. A financial institution may grant a line of credit, an agreement by which the financial institution promises to lend the business a predetermined sum of money on demand. Other sources of financing include local and state agencies, the Small Business Administration, and venture capitalists. 7. List the types of management and financial assistance that the Small Business Administration offers. 

Counseling for firms in difficulty



Consulting on operations improvements



Training for owners/managers and employees



Business clinics



Advice from SCORE and ACE



Loan programs

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8. Describe the franchising relationship. Franchisees purchase a franchise for a fee, plus start-up costs. Franchisees may also pay a fee, based on a percentage of sales, for advertising and promotion. 9. What demographic, technological, and economic trends are influencing the future of small businesses? Aging baby boomers, echo boomers, and an increasing number of immigrants living in the United States represent potentially huge markets for small businesses. Technological advances have opened many new markets to small businesses. Small businesses can adapt to changing trends faster than large corporations. 10. Why do large corporations want to become more like small businesses? The continuous success of small businesses, their capacity to innovate, their flexibility, and their ability to adapt quickly to market changes are some of the reasons why large corporations want to become more like small businesses.

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Get Involved

1. Interview a local small business owner. Why did they start the business? What factors have led to the business’s success? What problems has the owner experienced? What advice would they offer a potential entrepreneur? Students’ answers will vary depending upon the business they choose. 2. Using business journals, find an example of a company that is trying to emulate the factors that make small businesses flexible and more responsive. Describe and evaluate the company’s activities. Have they been successful? Why or why not? Students’ answers will vary depending upon the business they choose. 3. Using the business plan outline in Appendix A, create a business plan for a business idea that you have. (A man named Frederick Smith once did a similar project for a business class at Yale. His paper became the basis for the business he later founded: Federal Express!) Students’ answers will vary depending upon their business idea.

Build Your Skills: Creativity

The Build Your Skills exercise allows students to measure their Creativity Quotient, which comes from exercising the right brain hemisphere. Students might find this interesting in determining their own creativity and relating this to their possible success in entrepreneurship. Michelangelo, the great Renaissance artist and creative genius, best known for his Sistine Chapel ceiling frescoes and his colossal 18-ft marble sculpture of David, is supposed to have said that he didn’t create his sculptures. He only uncovered what was already there, and that’s exactly what creativity is—uncovering what’s already there. Here are some additional ideas for giving your students some help in developing their creativity skills: 1. Between now and the next class session, ask students to select three items from the list of mental aerobic exercises presented below. 2. At the next class session, have them report on the results of this creativity conditioning exercise using one of the following formats:

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a. Have students write a two- to three-paragraph paper highlighting some positive/negative results of these mental conditioning exercises. b. Take a few minutes at the beginning of class and ask several students to describe the results of these mental conditioning exercises. c. Break into groups of three to four students and have them share some outcomes of these mental conditioning exercises. Mental Aerobic Exercises 

If you’re right-handed, try using your left hand to do things. If you’re left-handed, switch to your right for a while.



Do a jigsaw or crossword puzzle.



Try a new way of expressing your creativity (cook something you’ve never made before, paint a picture, write a poem, throw a party that has an interesting theme).



Guess at measurements rather than using a ruler, tape measure, or measuring cup. Then, measure and see how close you were.



Watch three-quarters of a movie on video, stop the tape, and think of your own ending.



Stretch your thinking beyond what might be your typical approach to solving problems. See whether you can solve one of these brain teasers (answers provided below): 1. Arrange the letters below into one word: NEW DOOR 2. Change the Roman numeral that represents the number 9 (IX) into a 6 using only one line.

3. Determine in what order the numbers below are arranged: 8, 5, 4, 9, 1, 7, 6, 3, 2, 0 

Go to the library and look up an article or find a biography about a famous creative person (Thomas Edison, Walt Disney, Steven Spielberg, etc.) and spend 20 min skimming the book or reading the article, looking for insights into the creative process. For example, Thomas Edison is considered to be the most 05-169

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prolific inventor the world has ever seen. Among his inventions are the incandescent light bulb, the phonograph, and the motion picture projector. One quotation attributed to Edison is, ―[Creative] genius is 99% perspiration and 1% inspiration.‖ 

Go to a day care center and spend half an hour observing 2-, 3-, and 4-year-olds at play. Jot down any ―creative‖ things you observe the children doing. (―Tests show that a child’s creativity plummets 90% between ages 5 and 7. By the age of 40, most adults are about 2% as creative as they were at 5.‖)

Answers to brain teasers: (If no one gets the answer for any of these brain teasers, you may want to give the hint provided in parentheses before giving the answer.) 1. ONE WORD (HINT: Are you taking the instructions very literally?) 2. SIX (HINT: The instructions did not say it had to be a Roman numeral six) 3. Alphabetically (HINT: Is there another way to think of these numbers besides as figures?)

Solve the Dilemma: The Small Business Challenge

1. Evaluate the idea of a low-fat cookie and muffin retail store. A low-fat cookie and muffin retail store certainly meets the demand of an increasing portion of the population that is concerned both with health and weight issues. However, lovers of such products are likely to believe that low-fat cookies and muffins cannot taste good. Thus, Jack and Bruce will have to make a special effort to convince consumers of the contrary. 2. Are there any concerns in connection with starting a small business that Jack and Bruce have not considered? Jack and Bruce have not tackled the question of the location of the store; it could be located in a mall, as an independent store along a main road, or in some other place. They also need to determine whether they intend to limit their activities to one store or to several stores. In the second case, the question of the form of development (e.g., by franchises) needs to be answered. In addition, personnel issues have to be addressed.

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3. What advice would you give Jack and Bruce as they start up their business? Interactions with local authorities and associations dealing with small business management may be advisable for Bruce and Jack to create ties with other small business owners. Also, Bruce and Jack should maintain a very strict management of their operations and ensure that they forecast their financial situation regularly. They should probably not hesitate to rely on outside providers (accountants or financial advisors) to perform some of the managerial tasks that they may not be able to conduct themselves.

Build Your Business Plan: Small Business, Entrepreneurship, and Franchising

Intuitively, students turn to the internet for their information first. While this is a good idea, you don’t want them to neglect the resources available to them locally. The Chamber of Commerce, Economic Development Authority, and City Planning Office are all possible sources for information on the community. Perhaps you might want to invite a local employee of one of these organizations to class as a guest lecturer. Students need to understand the demographics and needs of their community. On a macro level, ask them about the economic forecast for their area. Have them determine the level (number and quality) of new businesses entering the area. See for Yourself Case: Small Businesses Fight to Survive the Pandemic Case Overview

The COVID-19 pandemic disrupted the operations of America’s more than 30 million small businesses, from nail salons and restaurants to gyms and tattoo shops. Additionally, it shifted consumer behavior and created new business opportunities. Many businesses struggled to adapt, while others thrived from new patterns in consumer behavior. The CDC encouraged social distancing measures, many state and local governments issued temporary stay-at-home orders that closed nonessential businesses and ones where close contact with others was likely (e.g., gyms, movie theaters, and salons), and urged people to leave their homes only for essential needs. Even as the temporary lockdowns ended, business did not return to normal. Some called the pandemic the ―retail apocalypse.‖ Consumer spending across nearly every category declined, except for alcohol and groceries. As sales for brick-and-mortar stores slowed to a halt, many small businesses shuttered for good. Small businesses that were able to shift their businesses online had a greater chance of survival. Roughly one quarter of small businesses closed during the pandemic. 05-171

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While many small business owners struggled, the high rate of unemployment during the COVID-19 recession led to a boom in entrepreneurship. Based on data from the U.S. Census Bureau, new business formations during the pandemic hit a record high. In the long term, many of these small business owners will turn into employers, which will improve the unemployment rate.

1. How did the pandemic disrupt business operations? Businesses had to observe new social distancing protocols, local governments issued temporary stay-at-home orders that closed nonessential businesses, and even after reopening businesses many businesses had to shift to online/delivery. 2. In what ways did consumer behavior change during the pandemic? How has consumer behavior changed long term? Many consumers shifted to online purchases and limited their in-person purchases and delivery. Long term it is projected that many consumers will continue to use apps for purchasing and having the items delivered. This has fueled the growth of businesses like Grubhub and Uber Eats. 3. Why do you think new business formations during the pandemic hit a record high? Many individuals lost their jobs and had to pivot. Many of those individuals decided to start their own businesses believing that they will have more control in future recessions. Team Exercise

Have students explore successful global franchises. They should go to the companies’ websites and find the requirements for applying for three franchises. The chapter provides examples of successful franchises. Students should ask themselves: What do the companies provide, and what is expected to be provided by the franchiser? They will compare and contrast each group’s findings for the franchises researched. For example, at Subway, the franchisee is responsible for the initial franchise fee, finding locations, leasehold improvements and equipment, hiring employees and operating restaurants, and paying an 8% royalty to the company and a fee into the advertising fund. The company provides access to formulas and operational systems, store design and equipment ordering guidance, a training program, an operations manual, a representative on site during opening, periodic evaluations and ongoing support, and informative publications.

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CONNECT ACTIVITIES Entrepreneurs Reinvent Pizza

Learning Objective: 5-2 Explain the importance of small business in the U.S. economy and why certain fields attract small business. Activity Summary: Believe it or not, pizza, long an American food staple, has been losing popularity since 2000. Shifts in lifestyles and eating habits have influenced the downturn and are also influencing its reinvention. Review the three segments of the case and write your responses as instructed. No matter how you define small business, one fact is clear: Small businesses are vital to the soundness of the American economy. Small firms are also important as exporters, representing 97.5% of U.S. exporters of goods and contributing 31% of the value of exported goods. In addition, small businesses are largely responsible for fueling job creation and innovation. With their small size comes the flexibility to adapt to changing market demand. How to Use Activity: Have the students reflect on the pros and cons of purchasing a franchise versus starting a pizza restaurant from ―scratch.‖ Have them focus on the trade-offs that Darren will face and his success or failure as an independent pizza purveyor. Class Discussion: What challenges will Darren face? How will the demographic changes in pizza consumption possibly impact his decisions? What are his financing options and what are the pros and cons of each? The Ruffled Hem: Shopping as an Experience

Learning Objective: 5:-Activity Summary: This activity is important because as an entrepreneur, you must be able to identify your motivation to start your own business and know what advantages are going to keep you inspired. At the same time, you must recognize the disadvantages of entrepreneurship and what resources are available to help you overcome them. The goal of this exercise is to demonstrate understanding of the advantages and disadvantages of owning your own business and how to start a business. How to Use Activity: After reading the case, have students focus on Shanna’s advantages as a small business owner including her excellent reputation and knowledge of her customer base. Have the students reflect on the disadvantages that could impact her business and cause possible failure. Class Discussion: What does Shanna need to continue doing to be successful? How have Shanna’s financing choices impacted her business? What should her business include to help her continue her success? 07-173 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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The Buzz about Burt’s Bees

Learning Objective: 5-3 Specify the advantages of small business ownership. Activity Summary: Roxanne Quimby met Burt Shavitz at his roadside honey stand in Maine. Twenty years later, their multimillion-dollar business is thriving. Burt’s Bees is the top allnatural, earth-friendly manufacturer of personal care products. Students explore what it took for Burt’s Bees to grow from a small start-up to a company with over $250 million in revenue. How to Use Activity: After viewing the video case, have students create a word cloud with ―entrepreneur‖ in the center. Have them list words and phrases to describe the profile of an entrepreneur. The video case mentions traits such as frugality, patience, and productivity. Allow students to share their opinions on what they think an entrepreneur needs to succeed. Class Discussion: What are the traits someone needs to be successful when opening a small business? Is it possible that a business leader could need different personality traits at different points in their business journeys? Why or why not? Could what one person thinks is a successful business leader trait be deemed unsuccessful by someone else?

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BONUS TEACHING RESOURCES Term Paper or Project Topic

These topics may be assigned as individual or collaborative projects: 1. The Small Business Administration: Past and Present 2. A Study of a Successful Franchiser 3. Why Women Entrepreneurs Are Attracted to Small Business

Guest Speaker Suggestions

1. A representative of the Small Business Administration, the Small Business Development Centers, or Small Business Institutes to speak about the functions of the organization. 2. A small business owner to speak about the start-up, management, advantages, and disadvantages of going into business for himself or herself. 3. A local franchisee to speak about the start-up, operation, advantages, and disadvantages of obtaining a franchise.

Teaching Suggestions

17. For a writing exercise, begin by asking students to write for approximately 5 min on the topic of: What Are the Advantages of Franchises for the Small Business Owner? (Stop students at the end of the allotted time. Now have students give their writing to a student sitting next to them; have them compare answers. Do they agree? Talk about answers in class.) 18. Again, depending on time available, instructors may wish to review the additional boxed material using the discussion questions provided in this Instructor’s Manual. 19. Spend a short amount of time going over the answers to the questions for the video case. Students should have read these cases, and they should have either written the answers or have considered the answers. Call upon volunteers for answers.

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Chapter 6: The Nature of Management SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Lowe’s Undergoes a Major Remodel Entrepreneurship in Action: Rebecca Ray Designs has it in the Bag Responding to Business Challenges: Potbelly Sandwiched in a Crowded Market Business Disruption Stripe: CEO Rethinks Decision Making So You Want to Be a Manager END OF CHAPTER TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Functions of Management Solve the Dilemma: Making Infinity Computers Competitive Build Your Business Plan: The Nature of Management See for Yourself Case: Stakeholders See Through Everlane’s Radical Transparency Team Exercise CONNECT ACTIVITIES iSeeit! Video Case: SMART Goals iSeeIt! Video Case: Management and Leadership Growth and Crisis at Marriott International BONUS TEACHING RESOURCES Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions

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SUMMARY For any organization—small or large, for profit or nonprofit—to achieve its objectives, it must have resources to support operations, employees to make and sell the products, and financial resources to purchase additional goods and services, pay employees, and generally operate the business. To accomplish this, it must also have one or more managers to plan, organize, staff, direct, and control the work that goes on. This chapter introduces the field of management. It examines and surveys the various functions, levels, and areas of management in business. The skills that managers need for success and the steps that lead to effective decision making are also discussed.

LEARNING OBJECTIVES LO 6-1

Explain management’s role in the achievement of organizational objectives.

LO 6-2

Describe the major functions of management.

LO 6-3

Distinguish among three levels of management and the concerns of managers at each level.

LO 6-4

Specify the skills managers need in order to be successful.

LO 6-5

Summarize the systematic approach to decision making used by many business managers.

LO 6-6

Recommend a new strategy to revive a struggling business.

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KEY TERMS AND DEFINITIONS administrative managers

Those who manage an entire business or a major segment of a business; they are not specialists but coordinate the activities of specialized managers.

Agenda

A calendar, containing both specific and vague items, that covers short-term goals and long-term objectives.

analytical skills

The ability to identify relevant issues, recognize their importance, understand the relationships between them, and perceive the underlying causes of a situation.

Brainstorming

A technique in which group members spontaneously suggest ideas to solve a problem.

conceptual skills

The ability to think in abstract terms and to see how parts fit together to form a whole.

Controlling

The process of evaluating and correcting activities to keep the organization on course.

crisis management (contingency planning)

An element in planning that deals with potential disasters such as product tampering, oil spills, fire, earthquake, computer virus, airplane crash, or even a reputation crisis.

Directing

Motivating and leading employees to achieve organizational objectives.

Downsizing

The elimination of a significant number of employees from an organization.

employee empowerment

When employees are provided with the ability to take on responsibilities and make decisions about their jobs.

financial managers

Those who focus on obtaining needed funds for the successful operation of an organization and using those funds to further organizational goals.

first-line managers

Those who supervise both workers and the daily operations of an organization.

high-level managers

The president and other top executives of a business, such as the chief executive officer (CEO), chief financial officer (CFO), chief

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operating officer (COO), who have overall responsibility for the organization. human relations skills

The ability to deal with people, both inside and outside the organization.

human resources managers Those who handle the staffing function and deal with employees in a formalized manner. information technology (IT) managers

Those who are responsible for implementing, maintaining, and controlling technology applications in business, such as computer networks.

Leadership

The ability to influence employees to work toward organizational goals.

Management

A process designed to achieve an organization’s objectives using its resources effectively and efficiently in a changing environment.

Managers

Those individuals in organizations who make decisions about the use of resources and are concerned with planning, organizing, staffing, directing, and controlling the organization’s activities to reach its objectives.

marketing managers

Those who are responsible for planning, pricing, and promoting products and making them available to customers.

middle managers

Those members of an organization responsible for tactical and operational planning that will implement the general guidelines established by top management.

Mission

The statement of an organization’s fundamental purpose and basic philosophy.

Networking

The building of relationships and sharing of information with colleagues who can help managers achieve the items on their agendas.

operational plans

Very short-term plans that specify what actions individuals, work groups, or departments need to accomplish in order to achieve the tactical plan and ultimately the strategic plan.

Organizing

The structuring of resources and activities to accomplish objectives in an efficient and effective manner.

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Planning

The process of determining the organization’s objectives and deciding how to accomplish them is the first function of management.

production and operations managers

Those who develop and administer the activities involved in transforming resources into goods, services, and ideas ready for the marketplace.

Staffing

Hiring people to carry out the work of the organization.

strategic plans

Those plans that establish the long-range objectives and overall strategy or course of action by which a firm fulfills its mission.

tactical plans

Short-range plans designed to implement the activities and objectives specified in the strategic plan.

technical expertise

The specialized knowledge and training needed to perform jobs that are related to particular areas of management.

Instructor’s Manual––Chapter 7

Ferrell/Hirt/Ferrell: Business Foundations 13e

CONTENT OUTLINE The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course, and a notation of when to use POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points. Please note the reminder on when CONNECT activities can be used. This feature was created to facilitate in-class or online discussions more effectively. LO 6-1

Explain management’s role in the achievement of organizational objectives.  Introduction  The Importance of Management

Key Terms:  Management  Managers  Staffing  Downsizing

Instructor’s Manual––Chapter 7

PowerPoint Slides: PPT 6.4

PPT 6.5-6.6 PPT 6.7

Ferrell/Hirt/Ferrell: Business Foundations 13e

Lecture Outline and Notes: I. The Importance of Management A. Any organization, small or large, public or private, needs managers to plan, organize, staff, direct, and control the work that goes on. 1. In short, managers help organizations achieve their objectives. B. Management is a process designed to achieve an organization’s objectives using its resources effectively and efficiently in a changing environment. 1. Effectively means having the intended result. 2. Efficiently means accomplishing the objectives with a minimum of resources. C. Managers make decisions about the use of the organization’s resources and are concerned with planning, organizing, staffing, directing, and controlling the organization’s activities to reach its objectives (Figure 6.1). D. Every organization, in the pursuit of its objectives, must acquire resources (employees, suppliers, and financial resources) and coordinate their use to turn out a final good or service. 1. Employees are one of the most important resources, and successful companies foster employee loyalty. Downsizing is sometimes required. 2. Suppliers are another important consideration because a good supplier maximizes efficiencies and reduces expenses. 3. Financial resources pay for essential activities. a. Primary funding comes from owners and shareholders, banks, and other financial institutions. 4. Managers must carefully coordinate and control all of these resources in order for the organization to meet its objectives.

Instructor’s Manual––Chapter 7

LO 6-2

Describe the major functions of management.  Management Functions

Ferrell/Hirt/Ferrell: Business Foundations 13e

Key Terms:  Planning  Mission

o Planning

 Strategic plans

o Organizing

 Tactical plans

o Directing

 Operational plans

o Controlling

 Crisis management (contingency planning)  Organizing  Directing  Controlling

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II. Management Functions A. To harmonize the use of resources so that businesses can develop, produce, and sell products, managers engage in a series of activities: planning, organizing, directing, and controlling (Figure 6.1). B. Planning 1. Planning is the process of determining the organization’s objectives and deciding how to accomplish them. a. Designs the map that is the groundwork for all other functions. b. Involves forecasting events and determining the best course of action from a set of options or choices. c. The plan specifies what should be done, by whom, where, when, and how.

PPT 6.8

d. All organizations need to develop plans for achieving success, but before an organization can plan a course of action, it must first determine what it wants to achieve. 2. Mission a.

An organization’s mission is the statement of an organization’s fundamental purpose and basic philosophy.

Answers the question: What business are we in?

c. Clear and concise statement that describes an organization’s reason for existence. 3. Goals a.

A goal is the result that a firm wishes to achieve.

Companies usually have multiple goals.

A goal has three key components: an attribute sought, a target to be achieved, and a time frame in which the goal is to be achieved.

4. Objectives

07-184 a. Objectives, the ends resultsof desired © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior writtenorconsent McGraw by Hill LLC. the organization, derive from the

organization’s mission. b. Can be simple or elaborate. Profit,

Instructor’s Manual––Chapter 7

LO 6-3

Distinguish among three levels of management and the concerns of managers at each level.  Types of Management

Ferrell/Hirt/Ferrell: Business Foundations 13e

Key Terms:  High-level managers  Middle managers  First-line managers

o Levels of Management o Areas of Management PPT 6.14

III. Types of Management A. Levels of Management (Figure 6.3) 1. There are usually three levels of management, which form a pyramid—top management, middle management, and first line or supervisory management (Figure 6.2). a. Managers at all three levels perform all five management functions, but the amount of time they spend on each function varies. b. For high-level managers, the most important management function is planning.

PPT 6.15

c. For middle managers, the most timeconsuming function is organizing. d. For front line managers, the most timeconsuming functions are directing and controlling. 2. High-level managers include the president, the chief executive officer, the chief financial officer, the chief operations officer, and other top executives, such as the chief privacy officer, who have overall responsibility for the organization. a. In publicly owned corporations, the CEO’s boss is the firm’s board of directors. b.

High-level managers also represent their company to the public and to government

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regulators. PPT 6.16

c. High-level managers generally have many years of experience and command top salaries. In addition to top salaries, top management typically gets bonuses, long-term incentive awards, stock, and stock options (Table 6.1). 1) Executive compensation has been criticized. 2) Compensation committees and boards of directors are now seeking ways to keep compensation commensurate with performance.

PPT 6.17

d. Workforce diversity is also an important issue in today’s corporations, and effective managers have found that diversity is good for workers and for the bottom line. 1) A diverse workforce is better at making decisions regarding issues related to consumer diversity.

PPT 6.18

2) The five rules of successful diversity recruiting include the following: get employees involved, communicate your diversity, support diversity groups within your community, delegate resources, and promote your diversity (Table 6.2). 3. Middle managers are responsible for tactical and operational planning that will implement the general guidelines established by top management (e.g., plant managers, division managers, and department managers).

PPT 6.19

a. Responsibility is more narrowly focused on top managers. b. Middle managers are involved in the specific operations of the organization and spend more time organizing than other managers.

PPT 6.20-21

c. The ranks of middle managers have been shrinking as more companies downsize to

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be more productive. 4. Front-line managers supervise workers and day-to-day operations of the organization. a. They spend most of their time directing and controlling. PPT 6.22

b. Foremen, supervisors, and office managers are examples of first line management. B. Areas of Management (Table 6.3) 1. At each level of management, managers specialize in the areas of finance, production and operations, human resources, marketing, IT, and administration. 2. Financial manager focuses on obtaining the funds needed for the successful operation of the organization and using those funds to further organizational goals. 3. Production and operations manager develops and administers the activities involved in transforming resources into goods, services, and ideas ready for the marketplace. 4. Human resources manager handles the staffing function and deals with employees in a formalized manner. 5. Marketing manager is responsible for planning, pricing, and promoting products and making them available to customers. 6. Information technology (IT) manager is responsible for implementing, maintaining, and controlling technology applications in business, such as computer networks. 7. Administrative manager manages an entire business or a major segment of a business; they do not specialize in a particular function.

Instructor’s Manual––Chapter 7

LO 6-4

Specify the skills managers need in order to be successful.  Skills Needed by Managers o Technical Expertise o Conceptual Skills o Analytical Skills

Ferrell/Hirt/Ferrell: Business Foundations 13e

Key Terms:  Technical expertise  Conceptual skills  Analytical skills  Human relations skills  Leadership  Employee empowerment

o Human Relations Skills  Leadership o Employee Empowerment

Instructor’s Manual––Chapter 7

PPT 6.24

Ferrell/Hirt/Ferrell: Business Foundations 13e

IV. Skills Needed by Managers A. Managers are typically evaluated using the metrics of how effective and efficient they are. Necessary skills include technical expertise, conceptual skills, analytical skills, human relations skills, and leadership. B. Technical expertise, the specialized knowledge and training needed to perform jobs that are related to particular areas of management. 1. Technical skills are most needed by first line managers and are least critical to top-level managers. C. Conceptual skills, the ability to think in abstract terms and to see how parts fit together to form the whole. 1. Top management must be able to evaluate continually where the company will be in the future. 2. Conceptual skills also involve the ability to think creatively. D. Analytical skills refer to the ability to identify relevant issues, recognize their importance, understand the relationships between them, and perceive the underlying causes of a situation. 1. All managers need to think logically, but this skill is probably most important to the success of top-level managers.

PPT 6.25

E. People skills, or human relations skills, are the ability to deal with people, both inside and outside the organization. 1. People skills are especially important in hospitals, airline companies, banks, and other organizations that provide service. V. Leadership is the ability to influence employees to work toward organizational goals. A. There are three basic styles of leadership.

PPT 6.26

1. Autocratic leaders make all the decisions and then tell employees what must be done and how to do it.

2. Democratic leaders allow their employees to get involved in decisions. Employees 07-189 involved in decision making generally © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw require less supervision. Hill LLC.

3. Free-rein leaders let their employees work without much interference.

Instructor’s Manual––Chapter 7

LO 6-5

Summarize the systematic approach to decision making used by many business managers.

Key Terms:

 Decision Making

 Networking

Ferrell/Hirt/Ferrell: Business Foundations 13e

 Brainstorming  Agenda

o Recognizing and Defining the Decision Situation o Developing Options o Analyzing Options o Selecting the Best Option o Implementing the Decision o Monitoring the Consequences  Management in Practice PPT 6.29

PPT 6.30

VI. Decision Making A. Decision making is important in all management functions and all levels, whether the decisions are on a strategic, tactical, or operational level. A systematic approach includes a six-step process (Figure 6.4). B. Recognizing and Defining the Decision Situation 1. The first step in decision making is recognizing and defining the situation— whether the situation is positive or negative. 2. Situations calling for small-scale decisions often occur without warning; situations requiring large-scale decisions generally occur after some warning signals.

PPT 6.31

3. Once a situation has been recognized, managers must define it. C. Developing Options 1. The next step is to develop a list of possible courses of action. 2. Creativity is very important.

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D. Analyzing Options 1. Next, managers should analyze the practicality and appropriateness of each option. PPT 6.32

2. When assessing appropriateness, a decision maker should consider whether the proposed option adequately addresses the situation. E. Selecting the Best Option 1. Selection is often a subjective procedure because many situations do not lend themselves to quantitative analysis. 2. It may be possible to select a combination of several options. F. Implementing the Decision 1. Implementation can be fairly simple or very complex, depending on the nature of the decision. 2. Managers should be ready to deal with unexpected consequences. G. Monitoring the Consequences

PPT 6.33

1. Without proper monitoring, the consequences of decisions may not be known quickly enough to make efficient changes. 2. If the desired result was not achieved, managers may discover that the situation was incorrectly defined, or the decision was good even though the desired result has not yet shown up, or that implementation was flawed. VII.

Management in Practice A. Management is not exact and calculated. B. John P. Kotter says that management functions can be condensed into two basic activities: 1. Figuring out what to do despite uncertainty, great diversity, and an enormous amount of potentially relevant information. 2. Getting things done by a large and diverse set of people without having direct control over most of them.

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C. Managers spend as much as 75% of their time working with others. 1. Managers spend a lot of time establishing and updating an agenda of vague and specific items that pertain to short-term goals and longterm objectives. 2. Managers also spend a lot of time networking—building relationships and sharing information with colleagues. 3. Networks are not limited to immediate subordinates and bosses; they include other people in the company as well as customers, suppliers, and friends. 4. Networking helps managers carry out their responsibilities. 5. Websites like LinkedIn are helping managers and employees network with one another to achieve their professional goals. D. Managers spend a great deal of time confronting the complex and difficult challenges facing business today. 1. Some of the challenges relate to rapidly changing technology, increased scrutiny of individual and corporate ethics and social responsibility, impact of social media, changing nature of the workforce, new laws and regulations, increased global competition, declining education standards, and making the best use of time. E. It is only through creativity and imagination that managers can make effective decisions that benefit their organizations.

Instructor’s Manual––Chapter 7

LO 6-6

PPT 6.35

Recommend a new strategy to revive a struggling business.

Ferrell/Hirt/Ferrell: Business Foundations 13e

Key Terms:

VIII.

Solve the Dilemma: Making Infinity Computers Competitive Q. Infinity Computers Inc. produces notebook computers, which sell through direct mail catalog companies under the Infinity name and in some retail computer stores under their private brand names. 7. Products are not significantly different from competitors’ products. 8. Do not have extra product-enhancing features. 9. Very price competitive.

PPT 6.36

10. Strength from the company’s CEO/president George Anderson and the highly motivated, loyal staff. 11. Weakness from having too many employees and too great a reliance on one product. R. The strategies that initially made the firm successful are no longer working.

PPT 6.37

1. Reorganize the company to make it more responsive and competitive and to cut costs. 2. New technological developments and current competitive conditions could eliminate Infinity. S. Critical Thinking Questions: 1. Evaluate Infinity’s current situation and analyze its strengths and weaknesses. 2. Evaluate the opportunities for Infinity, including using its current strategy, and propose alternative strategies. 3. Suggest a plan for Infinity to compete successfully over the next 10 years. [Answers appear under the End of Chapter Teaching Resources section of this Instructor's Manual.]

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Lowe’s Undergoes a Major Remodel Case Overview

In an effort to improve performance, home improvement retailer Lowe’s hired former JCPenney CEO Marvin Ellison as its leader. Ellison promised a massive overhaul to make Lowe’s more competitive against Home Depot and online retailers. As a high-level manager, Ellison provided the strategic direction for Lowe’s. He restructured management positions, shut down Orchard Supply Hardware chain stores, which were previously purchased by Lowe’s, and also made changes to its product offering, cutting back on low-selling inventory. He also changed the store layout by placing high-selling items in promotional areas near the end of aisles and prioritizing placement of high-tech items for smart homes. He hired leaders experienced on the sales floor to help executives understand daily store operations. 1. What type of managerial skills is Marvin Ellison exhibiting in his decisions to overhaul Lowe’s? Ellison has used his analytical skills to determine that retail tactics were insufficient to promote higher performing products. 2. Describe ways in which Marvin Ellison is demonstrating the four management functions. Planning: He provided the strategic plan and direction for the overhaul and created a tactical plan to promote high performing products. Organizing: He eliminated senior positions and created other lower level positions and shut down one of their divisions, Orchard Supply Hardware. Directing: After eliminating Orchard Supply Hardware, he recognized the negative impact on employee morale. He addressed this issue by offering the affected employees job placement assistance, severance packages, and priority consideration for Lowe’s positions. Controlling: He hired leaders experienced on the sales floor to help executives understand daily store operations.

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Ferrell/Hirt/Ferrell: Business Foundations 13e

3. Outline the six steps of decision making that Marvin Ellison likely used in his decision to shut down Orchard Supply Hardware stores. In trying to figure out how to effectively overhaul Lowe’s to better compete with Home Depot, Marvin Ellison had to systematically go through the following steps: (1) recognizing and defining the decision situation, (2) developing options to resolve the situation, (3) analyzing the options, (4) selecting the best option, (5) implementing the decision, and (6) monitoring the consequences of the decision.

Entrepreneurship in Action: Rebecca Ray Designs Has It in the Bag

1. What management skills did Rebecca Yuhasz Smith need to found her successful business? Answers will vary, but most students will answer that Rebecca Smith needed all of the management skills to found her business. She needed technical and conceptual skills to create and produce her handbags. To plan and strategize, the business goals required analytical skills. To organize and execute, the goals required human relations and leadership skills. 2. How does Rebecca Yuhasz Smith use the four functions of management to operate her business? The management functions Rebecca Smith uses to operate her business include the following: planning the organization’s goals, organizing different job functions, leading others to develop and sell the products, and controlling activities needed for achieving objectives. 3. What types of decisions did Rebecca Yuhasz Smith need to make as her business grew? Rebecca had to make strategic decisions to accomplish the long-term goals and objectives she set for her company, in order to successfully grow into a national high-fashion business that has expanded from handbags into accessories and home décor. She also had to make decisions that affected the tactical plans to meet the vast human resource skills and other needs of the company. Rebecca had to make the correct tactical decisions to execute her growth strategy.

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Ferrell/Hirt/Ferrell: Business Foundations 13e

Responding to Business Challenges: Potbelly Sandwiched in a Crowded Market

1. Describe how Potbelly, under Johnson’s leadership, is engaging in the four management functions. Answers will vary, but Johnson had to focus on planning to differentiate Potbelly from its competitors, organizing and controlling to determine how many and which stores to close, and directing to overall the management team. 2. Do you think Johnson’s plans are more operational, tactical, strategic, or a combination? Explain your reasoning. Answers will vary, but most students will state that Johnson is using a combination of plans.

3. As Johnson works to increase sales and revamp the company, do you think an autocratic, democratic, or free-rein leadership style would be most effective? Explain your reasoning. Answers will vary, but most students will probably lean toward a democratic leadership style. Business Disruption: Stripe CEO Rethinks Decision Making

1. What is lateral thinking? Lateral thinking refers to the ability to problem solve using an indirect, creative approach to come up with original solutions to difficult questions. 2. In what ways is creativity important in decision making? Creativity is important in decision making because it depends on new and useful ideas regardless of where they originate or the method used to create them. Creativity helps decision makers generate and explore multiple options. 3. Why did the Collison brothers want Stripe to appeal to software engineers? They realized software engineers would ultimately be the most important group to appeal to rather than individuals working in finance. Engineers love Stripe because its products simplify the complex task of payment processing.

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Ferrell/Hirt/Ferrell: Business Foundations 13e

So You Want to Be a Manager—What Kind of Manager Do You Want to Be? What factors are leading to the increasing difficulty of management jobs? The requirements for management jobs become more demanding with every passing year—with the speed of technology and communication increasing by the day, and the stress of global commerce increasing pressures to perform. There is also the consideration of restructuring and downsizing, which has changed where jobs are available and has in some cases reduced the number of available positions.

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Ferrell/Hirt/Ferrell: Business Foundations 13e

END OF CHAPTER TEACHING RESOURCES Check Your Progress

1. Why is management so important, and what is its purpose? Management is the process of coordinating human, physical, and financial resources to achieve an organization’s objectives. Management is important because people in an organization must work together to achieve some stated or implied objective. Management takes place in any organization calling for the coordination of resources. 2. Explain why the American Heart Association would need management, even though its goal is not profit related. All organizations whether profit or nonprofit are involved with the process of coordinating human, physical, and financial resources to achieve their objectives. Managers and employees of nonprofit organizations work together to achieve the objectives of their organizations. 3. Why must a company have financial resources before it can use human and physical resources? An organization must have financial resources in order to purchase human resources (hire people) and to purchase physical resources. 4. Name the four functions of management and briefly describe each function. The four functions of management include planning, organizing, directing, and controlling. Planning is the process of selecting a course of action to achieve organizational objectives. Organizing consists of structuring all resources and activities to accomplish objectives in an efficient and effective manner. Directing is motivating and leading employees to achieve organizational objectives. Controlling is evaluating and correcting activities to keep the organization on course. 5. Identify the three levels of management. What is the focus of managers at each level? The three levels of management include top management, middle management, and first line management. Top management includes the president and other top executives who have overall responsibility for the organization. Middle management includes plant managers, division managers, and other managers who have a narrower focus under top managers. First line management includes all the managers who supervise workers. These managers are involved in the everyday operations of the organization.

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6. In what areas can managers specialize? From what area do top managers typically come? The areas of management include financial management, production and operations management, human resources (personnel) management, marketing management, information technology management, and administrative management. Financial managers deal primarily with an organization’s financial resources. Production and operations managers are concerned with the transformation of an organization’s resources into goods, services, and ideas. Human resources managers deal with employees in a formalized manner as related to hiring, training, and administering benefits. Marketing managers are responsible for planning, pricing, promoting products, and making them available to customers. Information technology managers deal primarily with establishing, maintaining, and controlling computer networks. Administrative managers do not specialize in any particular area but manage an entire business or major segment of a business. Many top executives come from financial management, production and operations management, or marketing management. Most top managers are actually administrative managers. 7. What skills do managers need? Give examples of how managers use these skills to do their jobs. Skills needed by managers include technical expertise, conceptual skills, analytical skills, human relations skills, and leadership. Technical expertise is the specialized knowledge needed to perform a job, such as managing an auto production line. Conceptual skills are the ability to think in abstract terms so that a manager can fit parts together to form a whole perspective of a business operation. Analytical skills are the ability to identify relevant issues and recognize their importance, understand the relationships between them, and perceive their underlying causes. Human relations skills involve dealing with people both inside and outside the organization. Leadership is the ability to influence and motivate employees to work toward the achievement of organizational goals. 8. What are the three styles of leadership? Describe situations in which each style would be appropriate. There are three styles of leadership: autocratic, democratic, and free-rein. Autocratic leaders make all decisions and then tell employees what must be done and how to do it. Autocratic leaders work best when dealing with lower level employees who are poorly motivated and require more supervision to accomplish the task. Democratic leaders allow their employees to get involved in decision making. Democratic leaders work well in organizations that allow people to participate in 07-199 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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decisions, such as accounting firms, consulting agencies, middle- and upper management areas, or corporations. Free-rein leaders let their employees work without much interference. Free-rein leaders work well in research and development firms where employees are highly educated and need freedom to conduct research projects. 9. Explain the steps in the decision-making process. Decision making is a six-step process that occurs at all management levels. The first step involves recognizing and defining the situation. Step 2 involves developing possible courses of action, both standard and creative ones. Step 3 involves analyzing the feasibility, appropriateness, and consequences of each option. Step 4 involves selecting the best option from the list of options. The decision is implemented in Step 5. Step 6 requires the monitoring of the decision’s consequences. These steps should be viewed only as a broad framework to help people in their approaches to decision making. 10. What is the mathematical formula for perfect management? What do managers spend most of their time doing? There is no mathematical formula for perfect management. Most management decisions are largely subjective. Most managers spend as much as 75% of their time working with others. They also spend a lot of time establishing and updating an agenda of goals, networking with their colleagues, and confronting the complex and difficult challenges in the business world today.

Get Involved

1. Give examples of the activities that each of the following managers might be involved in if they worked for the Coca-Cola Company:       

Financial manager Production and operations manager Personnel manager Marketing manager Administrative manager Information technology manager Foreman

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Sample student answer (answers will vary): 

Financial manager: Project income and expenses over Coca-Cola’s next quarter, project income and expenses for the next year; investigate feasibility of new Coca-Cola projects and investments from a financial standpoint, collect data on company finances and operations; develop financial and operational reports, determine long-term and short-term financing needs for Coca-Cola and its different subsidiaries, analyze the financial contributions of Coca-Cola’s product lines to ensure and provide recommendations to top management.



Production and operations manager: Develop business plans to support objectives of various product lines, purchase necessary supplies for product development, plan and design new plants and Coca-Cola production facilities, improve production and operational performance efficiency at different facilities, ensure that Coca-Cola products meet relevant quality standards.



Personnel manager: Engage in the recruiting of new employees, interview and hire qualified individuals to be a part of Coca-Cola’s various teams, oversee Coca-Cola’s performance appraisal system, properly store and retrieve personnel files, oversee CocaCola benefit systems, ensure confidentiality of employee information.



Marketing manager: Plan the promotion of new Coca-Cola products, select relevant media for promotional campaigns, appropriate the costs of advertising and other promotional campaigns, develop pricing objectives of Coca-Cola products, determine effectiveness of pricing strategies, determine product features, aid in product development and test marketing; oversee commercialization of new Coca-Cola products, delete products that do not reach certain profit objectives.



Administrative manager: Oversee the work performance of one of Coca-Cola’s companies, collect and distribute information throughout the company, manage quality and cost control of the company, frequently meet with managers from the different departments to go over planning and forecasting, direct the different administrative functions within the company.



IT manager: Create safeguards to protect company information in computer systems from unauthorized sources, create a streamlined process for people inside the company who have legitimate reasons to use the system, create contingency plans for protecting the system’s data during a crisis situation; develop efficient methods to communicate to global employees, partners, and suppliers through Coca-Cola’s IT system, provide support for training to help employees understand how to use the system.



Foreman: Supervise and direct workers in a particular department or business segment, implement plans by top and middle managers, evaluate performance of Coca-Cola

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employees, develop plans for correcting performance shortcomings, support employees in their daily operations. 2. Interview a small sample of managers, attempting to include representatives from all three levels and all areas of management. Discuss their daily activities and relate these activities to the management functions of planning, organizing, directing, and controlling. What skills do the managers say they need to carry out their tasks? Students’ answers will vary depending upon the sample of managers they choose. 3. You are a manager of a firm that manufactures conventional ovens. Over the past several years, sales of many of your products have declined; this year, your losses may be quite large. Using the steps of the decision-making process, briefly describe how you arrive at a strategy for correcting the situation. First, students will have to recognize and define the decision situation. Students should recognize the problem is that sales of conventional ovens have declined. They might define the decision situation as something like, ―Investigate options to reduce the losses from decreasing sales of conventional ovens.‖ The second step is to develop options to resolve the situation. As part of this process, students might choose to launch an investigation to find out why sales have declined. Are there new substitutes for the conventional ovens that consumers are choosing instead? Depending upon the why, students might come up with alternatives such as to investigate ways to upgrade the conventional oven, engage in heavier promotion to increase awareness of the benefits of the conventional oven, look into changing the current pricing strategy, and so on. They must then analyze the options, the third step of the process. After analyzing the options, including the advantages and disadvantages of each, students will choose the option they think is best. They should provide support for why they feel a particular option is the best choice. Then, they must implement the decision. Students should be detailed regarding how they plan on implementing the proposed solution. Afterward, they should state how they plan to monitor the consequences of the decision. For instance, they might investigate whether sales are beginning to rise again, whether sales are meeting the company’s sales goals, and so on.

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Build Your Skills: Functions of Management

Suggested Answer Key Scenario 1 Planning (selecting a course of action to achieve organizational objectives) Organizing (structuring resources and activities to accomplish objectives in an efficient and effective manner) Directing (motivating and leading employees to achieve organizational objectives) Controlling (evaluating and correcting activities to keep the organization on course) Scenario 2 Planning (you will need this function to get your group headed in the right direction) Organizing (trying to get this group of employees to carry out the plans will be a challenge) Directing (motivating and leading employees to achieve objectives will be a high priority) Controlling (you will, no doubt, have to work closely with this group until you can develop them into a group of self-starters) Scenario 3 Planning (deciding how to accomplish the new goal of making the change) Organizing (you will need to determine what new relationships should be developed in order to successfully implement the change) Directing (you have already used your influence to get your group to move toward making the change and will undoubtedly need to do more throughout the change process) Controlling (you will need to monitor what’s happening to make sure things stay on track) Scenario 4 Directing (you will need to use your leading skills [influence] to get what your department needs) Controlling (the budgeting process is one tool used in controlling) Scenario 5 07-203 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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Organizing (you chose an employee and assigned them certain responsibilities) Controlling (your monitoring of the performance of the new employee-led you to make needed corrections—discipline and eventually discharge—and your new selection system helps to ensure that your work group will achieve its objectives) Solve the Dilemma: Making Infinity Computers Competitive

1. Evaluate Infinity’s current situation and analyze its strengths and weaknesses. Infinity’s strengths include the competitive price of its products, the leadership abilities of its CEO, along with the loyalty and motivation of its employees. Its weaknesses are its tendency to follow its competitors instead of innovating, its overcapacity in terms of workforce, and its reliance on a single product. 2. Evaluate the opportunities for Infinity, including using its current strategy, and propose alternative strategies. Opportunities for Infinity may be emphasizing its price competitiveness or sticking with its current products while reducing the workforce. Other ideas are to create a differentiated product with special features at a lower price than its competitors or to increase product differentiation by incorporating ―product-enhancing‖ features. Infinity could also rely on the loyalty and motivation of its employees to offer outstanding customer service. 3. Suggest a plan for Infinity to compete successfully over the next 10 years. Responses will vary, but students should provide the kernel of a strategic plan including such sections as objectives, means to achieve the objectives, and measures of results. Build Your Business Plan: The Nature of Management

Start a discussion on what leadership skills are necessary to be an effective leader. What national figures (government official or corporate figure) do students believe are the best example of a true leader? If students have a hard time thinking of someone, use Jack Welch of GE as an example. Jack Welch led GE for 20 years utilizing the strategy of retaining only GE divisions that are #1 or #2 in the market and growing the company by an aggressive acquisition strategy. Jack instituted creative and revolutionary ideas such as Six Sigma, the 70/20/10 employee evaluation process, and an open dialog within the management structure. While it may be difficult for students to relate to Welch’s successes, all students can relate to bosses who have exhibited strong leadership skills. Query students on what those leadership skills were and how their bosses were able to command and not demand respect.

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See for Yourself Case: Stakeholders See Through Everlane’s Radical Transparency Building a Strong and Healthy Business Case Overview

Everlane, an American clothing retailer, was founded in 2010 by Michael Preysman with the promise of radical transparency. The company said it would reveal the cost to make each clothing item, pricing markups, its clothing suppliers, and its ecological impact. Current and former Everlane employees say the retailer’s ethical image is just an illusion. Employees accused Everlane of promoting poor working conditions and selling a false ethical image to the world. The company was also accused of anti-Black behavior, the company lacked consistent promotion policies, new hires felt isolated and unwelcome, leaders used inappropriate terms when referring to people of color, employees’ personal space was violated by leaders, and there was no official procedure harassment and discrimination claims. In response to the complaints and a subsequent investigation, Everlane fired a senior employee and committed to several diversity initiatives such as hiring a Black board member, diversifying the senior leadership team, working with racism accountability organizations, and introducing anti-racism training. Everlane’s commitments to ethical labor and sustainability have also attracted criticism. Everlane is on track to meet certain supply chain targets, such as eliminating virgin plastic, but many say Everlane falls short in other ways. Brand ratings platform Good on You gave Everlane a ―not good enough‖ overall rating for failing to adequately track greenhouse gas emissions, reduce water use, and guarantee living wages 1.

In what ways did Everlane fall short of its promise of radical transparency? Everlane fell short of its promise of radical transparency in multiple ways including the following: promoting poor working conditions and selling a false ethical image to the world. It was also accused of anti-Black behavior and rejecting Black models. The company also failed to meet its ecological impact goal and report its shortfalls.

How did top management contribute to a weak corporate culture? Allegedly, management teams discouraged employees from unionizing and attempted to prevent employees from discussing their salaries with one another, a right that is protected by law. Leaders were accused of using inappropriate terms when referring to people of color, violating employees’ personal space, and there was no official procedure for submitting harassment and discrimination claims.

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How do you think Everlane could improve its sustainability and social responsibility efforts? Answers will vary, but students need to support their answers.

iSeeit! Video Case: SMART Goals

Learning Objective: 6-2 Describe the major functions of management. Activity Summary: This brief video describes the process of setting goals for an organization to achieve in the future. These goals should be specific, measurable, attainable, relevant, and time-bound. This activity is important because when these key components are sufficiently addressed, the worker should have a good understanding of what will be required to meet the goal. The goal of this activity is to demonstrate your understanding of the information required to set goals and lead employees toward accomplishing the goals of the business. How to Use Activity: After assigning this activity to students, have them share their answers to the assignment questions with their classmates. Class Discussion: Have students discuss the major differences in the types of goals and the factors required to successfully achieve those goals. iSeeIt! Video Case: Management and Leadership

Learning Objective: 6-4 Specify the skills managers must have to be successful. Activity Summary: This brief video describes the three major forms of leadership, applied to a relatable scenario of directing a movie. By exploring autocratic, democratic, and free-rein styles of leadership, students learn how these three different approaches can be brought to life while focusing on the same outcome. How to Use Activity: After assigning this activity to students, tap into their personal work experiences. Allow them to discuss aspects of their current or past jobs and highlight their knowledge of the concept while connecting to the chapter material. Class Discussion: How would you describe the management style in your job? What type of leadership do you best respond to? What type of leader do you want to become? How would you describe your leadership style? Growth and Crisis at Marriott International

Learning Objective: 6-4 Specify the skills managers must have to be successful. Activity Summary Demonstrate your understanding of the different functions and levels of 07-206 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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management. The leaders of Marriott International have a strong tradition of investing in the people within the organization, supporting them to provide high-quality service to customers. Through growth and acquisitions, Marriott International became the largest hotel chain in the world in 2016 and in 2019 announced plans for further growth. However, the coronavirus pandemic in 2020 challenged the growth of Marriott International. This activity is important because, as a manager, students must be able to understand the role of management in the achievement of organizational objectives. In order to do this, they will need to understand the different functions that managers perform and the different levels of management within organizations. They must also understand that the importance of planning, organizing, leading, and controlling varies based on the manager’s level within the organization. How to Use Activity: After assigning this activity to students, have them share their answers to the assignment questions with their classmates. Class Discussion: Have students discuss how Marriott’s management has been successful, some of the challenges that they have faced, and how this case illustrates the interconnection of the management functions. Team Exercise

Students will form groups and assign the responsibility of locating examples of crisis management implementation for companies dealing with natural disasters (explosions, fires, earthquakes, etc.), technology disasters (viruses, plane crashes, compromised customer data, etc.), or ethical or legal disasters. They should ask themselves the following questions: How did these companies communicate with key stakeholders? What measures did the company take to provide support to those involved in the crisis? Report your findings to the class. Term Paper or Project Topics

These topics may be assigned as individual or collaborative projects: 1. The Team Concept in Management 2. Management Training 3. Papa John’s complicated relationship with its former CEO, John Schnatter. Guest Speaker Suggestions

1. A manager from a local firm representing top-level management, middle management, or first-line management.

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Teaching Suggestions

1. Use the ―Lecture Outline and Notes‖ and PowerPoint slides to highlight the main points of the chapter. 2. Discuss the opening vignette and other boxed material. Use the ―Boxed Text Discussion Questions‖ to review some of this boxed material. Ask students how the boxed material relates to the major functions of management, the three levels of management, and the skills managers need to be successful. 3. Go over the ―Check Your Progress‖ in the textbook. 4. Divide the class into six teams. (Large sections may require more than six teams.) Using the ―Build Your Skills‖ exercise in the textbook, assign each team one managerial function. The team should decide on some examples of activities for which the managers might be involved. Have a team representative report or write the examples on the chalkboard.

Chapter 7: Organization, Teamwork, and Communication SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Musk Breaks the Chain of Command Entrepreneurship in Action: Sugar Bowl Bakery Is a Sweet Success Responding to Business Challenges: Spacex: Out of This World Communication Technology and the Economy: Teamwork: Now Streaming at Netflix So You Want a Job in Managing Organizational Culture, Teamwork, and Communication END OF CHAPTER TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Teamwork Solve the Dilemma: Quest Star in Transition 07-208 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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Build Your Business Plan: Organization, Teamwork, and Communication See for Yourself Case: Coca-Cola Shakes Up Its Organization Team Exercise CONNECT ACTIVITIES Brewing Up Fun in the Workplace Freshii’s Unique Structure Drives Its Success Netflix: Culture Attracts Talent BONUS TEACHING RESOURCES Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions

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SUMMARY Because a business’s structure can so profoundly affect its success, this chapter will examine organizational structure in detail. First, we discuss how an organization’s culture affects its operations. Then we consider the development of structure, including how tasks and responsibilities are organized through specialization and departmentalization. Next, we explore some of the forms organizational structure may take. Finally, we consider communications within business.

LEARNING OBJECTIVES LO 7-1

Explain the importance of organizational culture.

LO 7-2

Describe how organizational structures develop.

LO 7-3

Describe how specialization and departmentalization help an organization achieve its goals.

LO 7-4

Determine how organizations assign responsibility for tasks and delegate authority.

LO 7-5

Compare and contrast some common forms of organizational structure.

LO 7-6

Distinguish between groups and teams.

LO 7-7

Identify the types of groups that exist in organizations.

LO 7-8

Describe how communication occurs in organizations.

LO 7-9

Analyze a business’s use of teams.

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KEY TERMS AND DEFINITIONS accountability

The principle that employees who accept an assignment and the authority to carry it out are answerable to a superior for the outcome.

centralized organization

A structure in which authority is concentrated at the top, and very little decision-making authority is delegated to lower levels.

committee

A permanent, formal group that performs a specific task.

customer departmentalization

The arrangement of jobs around the needs of various types of customers.

decentralized organization

An organization in which decision-making authority is delegated as far down the chain of command as possible.

delegation of authority

Giving employees not only tasks but also the power to make commitments, use resources, and take whatever actions are necessary to carry out those tasks.

departmentalization

The grouping of jobs into working units usually called departments, units, groups, or divisions.

functional departmentalization

The grouping of jobs that perform similar functional activities, such as finance, manufacturing, marketing, and human resources.

geographical departmentalization

The grouping of jobs according to geographic location, such as state, region, country, or continent.

grapevine

An informal channel of communication, separate from management’s formal, official communication channels.

group

Two or more individuals who communicate with one another, share a common identity, and have a common goal.

line-and-staff structure

A structure having a traditional line relationship between superiors and subordinates and also specialized managers— called staff managers—who are available to assist line managers.

line structure

The simplest organizational structure, in which direct lines of authority extend from the top manager to the lowest level of the

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organization. matrix structure

A structure that sets up teams from different departments, thereby creating two or more intersecting lines of authority; also called a project management structure.

multidivisional structure

A structure that organizes departments into larger groups called divisions.

organizational chart

A visual display of the organizational structure, lines of authority (chain of command), staff relationships, permanent committee arrangements, and lines of communication.

organizational culture

A firm’s shared values, beliefs, traditions, philosophies, rules, and role models for behavior (also called corporate culture).

organizational structure

The levels of management in an organization.

product departmentalization

The organization of jobs around the products of the firm.

product development teams

A specific type of project team formed to devise, design, and implement a new product.

project teams

Groups similar to task forces that normally run their operation and have total control over a specific work project.

quality assurance teams (or quality circles)

Small groups of workers brought together from throughout the organization to solve specific quality, productivity, or service problems.

responsibility

The obligation, placed on employees through delegation, to perform assigned tasks satisfactorily and be held accountable for the proper execution of work.

restructure

To change the basic structure of an organization.

self-directed work team (SDWT)

A group of employees responsible for an entire work process or segment that delivers a product to an internal or external customer.

span of management

The number of subordinates who report to a particular manager.

specialization

The division of labor into small, specific tasks and the assignment of employees to do a single task.

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structure

The arrangement or relationship of positions within an organization.

task force

A temporary group of employees responsible for bringing about a particular change.

team

A small group whose members have complementary skills; have a common purpose, goals, and approach; and hold themselves mutually accountable.

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CONTENT OUTLINE The following section provides the flow of information using the LEARNING OBJECTIVES as a guide, KEY TERMS learners will need to take away from the course, and a notation of when to use POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points. Please note the reminder on when CONNECT activities can be used. This feature was created to facilitate in-class or online discussions more effectively. LO 7-1

Explain the importance of organizational culture.  Introduction

Key Terms:  Organizational culture

 Organizational Culture PowerPoint Slides: PPT 7.4

Lecture Outline and Notes: I.

Organizational Culture Table 7.1 A. Organizational culture refers to a firm’s shared values, beliefs, traditions, philosophies, rules, and role models for behavior. B. Also referred to as corporate culture, an organizational culture exists in every organization regardless of size, type, product, or profit objective. C. In a sense, the organization’s culture provides a detailed map for employees and outsiders as to how the organization functions. 1. A firm’s culture may be expressed formally through its mission statement, codes of ethics, memos, manuals, and ceremonies. 2. A firm’s culture may be expressed informally through dress codes, work habits, extracurricular activities, and stories. A firm’s culture is more commonly expressed informally. 3. When values and philosophies are shared by all members of an organization, they will be expressed in its relationships with stakeholders. D. Organizational culture helps ensure that all members of a company share values and suggests rules for how to behave and deal with problems within the firm. E. Setting a positive organizational culture sets the tone for all other decisions. F. Organizational culture helps ensure that all members of a company share values and suggests rules for how to behave and deal with problems within the organization. 08-215

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LO 7-2

Ferrell/Hirt/Ferrell: Business Foundations 12e

Describe how organizational structures develop.

Key Terms:

 Developing Organizational Structure

 Structure  Organizational chart

PPT 7.7

II.

Developing Organizational Structure A. Structure is the arrangement or relationship of positions within an organization. 1. Develops when managers assign work tasks and activities to specific individuals or work groups and coordinate the diverse activities required to reach the firm’s objectives. 2. Structure determines the arrangement and relationship of positions within the organization in a way that facilitates the attainment of the firm’s mission, strategic plans, and objectives. 3. How well an organization makes decisions, responds to problems, and influences employees’ attitudes toward their work is largely determined by the organization’s structure. 4. Well-structured organizations are usually very effective, competitive, and sustained over the long term. a. For example, the organizational culture at the Four Seasons hotel chain is service-oriented. To encourage employees to be dedicated to service, the hotel offers unique perks such as the ability to request transfers among its 90 properties around the world. This structure helps the firm achieve its mission statement and goals. B. Organizational structure is depicted through organizational charts— visual displays of structure, lines of authority (chain of command), staff relationships, permanent committee arrangements, and lines of communication.

PPT 7.8

C. Growth requires organizing—the structuring of human, physical, and financial resources to achieve objectives in an effective and efficient manner; growth necessitates hiring people who have specialized skills. D. The Evolution of a Clothing Store, Phases 1, 2, and 3 (Figure 7.1)

08-216

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LO 7-3

Describe how specialization and departmentalization help an organization achieve its goals. 

Assigning Tasks o Specialization o Departmentalization

Ferrell/Hirt/Ferrell: Business Foundations 12e

Key Terms:  Specialization  Departmentalization  Functional departmentalization  Product departmentalization  Geographical departmentalization  Customer departmentalization

PPT 7.9

III. Assigning Tasks A. In any organization, activities must be coordinated, assigned to work groups, and controlled; this requires specialization and departmentalization. B. Specialization 1. After identifying all activities that must be accomplished, managers then break these activities down into specific tasks that can be handled by individual employees. 2. Specialization is the division of labor into small, specialized tasks and the assignment of single tasks to employees. a. Job specialization is common in automobile manufacturing because dividing work into smaller, specialized tasks results in employees performing work more quickly and efficiently. 3. The rationale for specialization is efficiency. a. Specialization minimizes the time lost when workers shift from one job to another. b. Specialization may occur when activities to be performed are too numerous for one person to handle.

PPT 7.10

4. Overspecialization can have negative consequences: Employees may become bored and dissatisfied with their jobs, leading to poor work quality, injuries, and high employee turnover. C. Departmentalization (Figure 7.2) 1. Departmentalization: the grouping of jobs into working units 08-217

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that are usually called departments, units, groups, or divisions. a. Most companies use more than one departmentalization plan to enhance productivity. b. Even cities use departmentalization to group jobs into working units. 2. Functional Departmentalization: the grouping of jobs that perform similar functional activities, such as finance, manufacturing, marketing, and human resources. PPT 7.11

a. Advantages include departmental supervision by experts, and workers doing similar jobs make them easier to manage. b. The biggest disadvantage is that decision making involving more than one department may be slow, and it requires greater coordination. c. This form of departmentalization is common in small organizations. 3. Product Departmentalization: the grouping of jobs around the firm’s products.

PPT 7.12

a. Each division develops and implements its own product plans, monitors the results, and takes corrective action as necessary. b. For example, PepsiCo Inc. uses product departmentalization in North America but chooses to divide its segments into a type of geographical departmentalization. c. Some advantages are the coordination of all activities related to the product and the simplification of the decision-making process. d. The disadvantages include duplicating specialized functions and emphasizing one product rather than achievement of overall organizational objectives.

PPT 7.13

4. Geographical Departmentalization: the grouping of jobs by geographical location, such as state, region, country, or continent. a. An advantage is that organizations can respond to the unique requirements of a geographic area. b. Grouping by location can require a large administrative staff and control system to coordinate operations, and tasks are duplicated among the different regions. 08-218

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5. Customer Departmentalization: the grouping of jobs around the needs of various customers.

PPT 7.15

a. An advantage is it allows companies to address unique requirements of each group. b. Does not focus on the organization as a whole and requires a large administrative staff. LO 7-4

Determine how organizations assign responsibility for tasks and delegate authority. 

Assigning Responsibility

Key Terms:  Delegation of authority  Responsibility

o Delegation of Authority

 Accountability

o Degree of Centralization

 Centralized organization

o Span of Management

 Decentralized organization

o Organizational Layers

 Span of management  Organizational layers

PPT 7.16

IV. Assigning Responsibility A. Delegation of Authority 1. Delegation of authority is not only giving tasks to employees but also empowering them to make commitments, use resources, and take whatever actions are necessary to carry out those tasks. 2. Delegation gives a responsibility, or obligation, to employees to carry out assigned tasks satisfactorily. 3. The principle of accountability means that subordinates who accept an assignment and the authority to carry it out are answerable to a superior for the outcome. 4. The process of delegation establishes a pattern of relationships and accountability between superior and subordinates.

PPT 7.17

5. However, the act of delegating authority to a subordinate does not relieve the superior of accountability for the delegated job. B. Degree of Centralization 1. The extent to which authority is delegated throughout an organization determines its degree of centralization. 2. In centralized organizations, authority is concentrated at the top level, and very little decision-making authority is delegated to lower levels. 08-219

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a. Organizations tend to be more centralized when the decisions to be made are risky and low-level managers are not highly skilled in decision making. b. Overcentralization can cause problems in part because it may take longer for the organization as a whole to implement decisions and to respond to changes and problems on a regional scale. 3. In decentralized organizations, authority is delegated as far down the chain of command as possible. a. Decentralization is characteristic of organizations that operate in complex, unpredictable environments. b. Lower level managers, interacting externally, often develop a good understanding of this environment, thus improving responsiveness and enhancing creativity. c. The delegation of authority to lower levels of managers may increase productivity. d. Decentralization requires that lower level managers have strong decision-making skills. e. In recent years, the trend has been toward more decentralized organizations. C. Span of Management 1. There is no simple guideline as to how many subordinates managers should manage but experts suggest: a. Top managers should not directly supervise more than four to eight people. PPT 7.19

b. Lower level managers, supervising relatively routine tasks, can manage a larger number of subordinates. 2. Span of management refers to the number of subordinates who report to a particular manager (Figure 7.3). a. A wide span of management exists when a manager directly supervises a large number of employees. b. A narrow span of management exists when a manager directly supervises only a few subordinates.

PPT 7.20 -7.21

3. A narrow span is appropriate when superiors and subordinates are not close together, the manager has many other responsibilities, frequent interaction is needed, and problems are common. 4. A wide span is appropriate when superiors and subordinates 08-220

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are close together, the manager has few other responsibilities, a low level of interaction is needed, few problems arise, subordinates are highly competent, and operating procedures are in place. 5. Narrow spans are typical in centralized firms, while wide spans are more common in decentralized firms. D. Organizational Layers 1. Organizational layers are the levels of management in an organization. 2. A company with many layers is considered tall; its span of management is narrow. Administrative costs are usually higher and communications slower. 3. Organizations with few layers are considered flat and have wide spans of management. In this type of structure, managers perform more administrative duties and spend more time supervising and working with subordinates. 4. Companies that decentralize flatten their structures and widen their spans of management, often by eliminating layers of middle management. LO 7-5

Compare and contrast some common forms of organizational structure. 

Key Terms:  Line structure

Forms of Organizational Structure

 Line-and-staff structure

o Line Structure

 Multidivisional structure

o Line-and-Staff Structure o Multidivisional Structure

 Matrix structure

o Matrix Structure PPT 7.23

V. Forms of Organizational Structure A. Line Structure

PPT 7.24

1. Line structure is based on the direct lines of authority, extending from the top executive to the lowest level employee (Figure 7.4). 2. Line structures are the simplest form and most common in small businesses. 3. An advantage of the line structure is the clear chain of command that enables managers to make decisions quickly; a mid-level manager, for example, needs to consult only their immediate supervisor, not several people. 4. A disadvantage of the line structure is that it requires managers 08-221

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to be knowledgeable about the wide range of activities for which they are responsible. B. Line-and-Staff Structure PPT 7.25

1. A line-and-staff structure has a traditional line relationship

between superiors and subordinates, and specialized managers—called staff managers—are available to assist line managers (Figure 7.5). a. Line managers are directly involved in the operation of the business, while staff managers provide advice and support on specialized matters. b. Staff managers do not have direct authority over line managers, but they do have authority over their own subordinates. 2. Line-and-staff organizations may experience overstaffing and

PPT 7.26

ambiguous lines of communication. Employees may become frustrated because of their lack of authority to carry out decisions. C. Multidivisional Structure 1. A multidivisional structure organizes departments into larger groups called divisions. a. Just as departments can be formed on the basis of geography, customer, product, or a combination of these, so too divisions can be formed based on any of these methods of organizing.

PPT 7.27

b. Permits delegation of decision-making authority allowing division and department managers to specialize, so better decisions are made faster. They allow those closest to the action to make decisions that will affect them. D. Matrix Structure 1. A matrix structure, also called a project management structure, sets up teams from different departments thereby creating two or more intersecting lines of authority. It is also called a project management structure (Figure 7.6). a. Employees are responsible to two managers. b. Matrix structures are usually temporary; team members go back to their functional or line departments after a project is finished. 2. An advantage of the matrix structure is that this form of organization provides flexibility, enhances cooperation and 08-222

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creativity, and enables organizations to respond quickly to changes. 3. The matrix structure is generally expensive and quite complex. Employees may be confused about who has authority—the project manager or the immediate supervisor. LO 7-6

Distinguish between groups and teams. 

LO 7-7

The Role of Groups and Teams in Organizations

Identify the types of groups that exist in organizations.

Key Terms:  Group  Team  Committee  Task force

o Committees

 Project teams

o Task Forces

 Product development teams

o Teams

 Quality assurance teams (or quality circles)  Self-directed work team (SDWT)

PPT 7.28

VI. The Role of Groups and Teams in Organizations A. Regardless of how they are organized, most of the essential work of business occurs in individual work groups and teams. 1. A group has been defined as two or more individuals who communicate with one another, share a common identity, and have a common goal. 2. A team is a small group whose members have complementary skills; a common purpose, goals, and approach; and hold themselves mutually accountable.

PPT 7.29

3. All teams are groups but not all groups are teams (Table 7.2). 4. Work groups emphasize individual work products, individual accountability, and even individual leadership; work teams share leadership roles, have both individual and mutual accountability, and create collective work products. B. The type of groups an organization establishes depends on the tasks it needs to accomplish and the situation it faces.

PPT 7.30

C. Committees 1. A committee is usually a permanent, formal group that does some specific task, for example, an ethics committee. D. Task Forces 1. A task force is a temporary group of employees responsible 08-223

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for bringing about a particular change. 2. They typically come from all departments and levels of an organization. E. Teams

PPT 7.31

1. Teams have the advantages of being able to pool members’ knowledge and skills, creating more solutions to problems than individuals working alone, and enhancing employee acceptance of and commitment to team goals. 2. Project teams are similar to task forces but normally run their own operation and have total control over a specific work project. They are almost always temporary, although a large project may last several years. a. Product development teams are a special type of project team formed to devise, design, and implement a new product. 3. Quality assurance teams (or quality circles) are fairly small groups of workers brought together from throughout the organization to solve specific quality, productivity, or service problems. 4.

A self-directed work team (SDWT) is a group of employees responsible for an entire work process or segment that delivers a product to an internal or external customer. a. Self-directed work teams permit the flexibility to change rapidly to meet the competition or respond to customer needs. b. The defining characteristic of SDWTs is the extent to which it is empowered or given authority to make and implement work decisions.

LO 7-8

Describe how communication occurs in organizations. 

Key Terms:  Grapevine

Communicating in Organizations o Formal and Informal Communication o Monitoring Communications o Improving Communication Effectiveness

VII.

Communicating in Organizations

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B. The success of communication systems within the organization has a tremendous effect on the firm’s overall success. C. Alternatives to face-to-face communication, such as meetings, are increasing due to technological advances. 1. Many companies use internal networks called intranets to share information with employees. Employees in different locations rely on email, voice mail, and online newsletters. Another innovative approach is cloud computing technology that can access information over a network. Increased internet at work has also created problems involving employee abuse. 2. A survey of employees revealed that approximately 65% consider how their employers communicate with them to be a key factor in their job satisfaction. D. Formal and Informal Communication (Table 7.3) PPT 7.32

1. Formal channels of communication are intentionally defined and designed by the organization. 2. They represent communication flow within the formal organizational structure as shown on organizational charts (Figure 7.7).

PPT 7.33

a. Upward communication flows from lower to higher levels of the organization and includes such information as progress reports, suggestions for improvement, inquiries, and grievances. b. Downward communication refers to the traditional flow of information from upper organizational levels to lower levels. This type of communication involves directions, assignment of tasks and responsibilities, performance feedback, and certain details about the organization’s strategies and goals.

PPT 7.34

c. Horizontal communication involves the exchange of information among colleagues and peers on the same organizational level, such as across or within departments. Horizontal communication informs, supports, and coordinates activities both within the department and between other departments, for example, task forces and project teams. d. Diagonal communication occurs when individuals from different units and organizational levels communicate. 3.

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communicate informally. a. Friendships and other nonwork social relationships comprise the informal organization of a firm, and their impact can be great. b. The grapevine, an informal channel of communication, separate from management’s channels of formal, official communication. 1) The channel through which the most significant informal communication flows. Grapevines exist in all organizations. 2) Information passed along the grapevine may relate to the job or organization, or it may be gossip and rumors unrelated to either. 3) Managers who understand how the grapevine works can utilize it by feeding it facts to squelch rumors and incorrect information. They can also obtain valuable information from the grapevine that could improve decision making. E. Monitoring Communications PPT 7.35

Technological advances and the increased use of electronic communication at work have made monitoring its use necessary for most companies.

Failing to monitor employees’ use of email, social media, and internet can be costly. a. Must balance respect for employee privacy but not abdicate employer responsibility.

F. Improving Communication Effectiveness PPT 7.37

1. Without effective communication, the activities and overall productivity of projects, groups, teams, and individuals will be diminished. 2. One of the major issues of effective communication is in obtaining feedback. a. Listening is a skill that involves hearing, and most employees listen much more than they actively communicate to others. b. Managers should encourage employees to provide feedback, even if it’s negative. 3. Strong and effective communication channels are a 08-226

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requirement for companies to distribute information to different levels of the company. 4. The use of Zoom and Webex for videoconferencing, team collaboration, and even daily communication between employees is changing the work environment. 5. During the COVID-19 pandemic employees were forced to work from home and many have continued to do so on a permanent basis. 6. Employees need to be coached on best practices in using digital communication so that it’s not a distraction or disruptive to productivity. 7. Communication is necessary in helping every organizational member understand what is expected of them. Many business problems can be avoided if clear communication exists within the company.

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LO 7-9 PPT 7.38

Analyze a business’s use of teams. VIII.

Ferrell/Hirt/Ferrell: Business Foundations 12e

Key Terms:

Solve the Dilemma: Quest Star in Transition

T. Quest Star (QS) manufactures quality stereo loudspeakers and wants to improve its ability to compete against Japanese firms. U. QS Intracommunication Leadership Initiative (ILI) has flattened the layers of management. 12. Uses teams and peer pressure to accomplish the plant’s goals instead of multiple management layers. 13. Employees make all decisions within the boundaries of their responsibilities. 14. They elect team representatives to coordinate with other teams.

PPT 7.39

PPT 7.40

15. Teams are assigned tasks ranging from establishing policies to evaluating on-the-job safety. 16. Employees who are not self-motivated team players are having difficulty getting used to their peers’ authority within the system. 17. Upper level managers face stress and frustration because they must train workers to supervise themselves. C. Critical Thinking Questions: 1. What techniques or skills should an employee have to assume a leadership role within a work group? 2. If each work group has a team representative, what problems will be faced in supervising these representatives? 3. What are the pros and cons of the system developed by QS? (Answers appear under the End of Chapter Teaching Resources section of this Instructor’s Manual.)

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Musk Breaks the Chain of Command

Elon Musk, the founder, CEO, CTO, and chief designer at SpaceX and CEO of Tesla is a busy businessperson, so efficient communication is a top priority for him. Musk prefers freeflowing communication and feels that hierarchy shouldn’t get in the way of getting the job done. He says if it becomes apparent to an employee that they are not adding value to a meeting, they should leave rather than waste their time. He also tells employees to avoid acronyms and nicknames for products and processes at the company to keep communication straightforward and easy-to-understand. 1. What is the chain of command? A chain of command is an organizational structure that documents how each member of a company reports to one another (who reports to whom). 2. Why does Musk suggest Tesla employees break the chain of command? He believes it makes for more efficient and timely communication that helps get the job done. 3. Describe how Musk promotes free-flowing communication. Musk tells the employees that ―communication should travel via the shortest path necessary to get the job done.‖ He also encourages his employees to ditch large meetings. He also tells employees to avoid acronyms and nicknames for products and processes at the company to keep communication straightforward and easy-to-understand. Responding to Business Challenges: Spacex: Out of This World Communication

1. What characteristics does Gwynne Shotwell have that makes her a good fit for SpaceX’s organizational culture? Gwynne Shotwell recognizes the value of strong communication and teamwork. She is well-suited to SpaceX’s self-driven organizational culture and is a risk-taker. 2. How does SpaceX display teamwork to overcome challenges? The organizational culture inspired by Musk means that employees are always collaborating on how to make his seemingly impossible ideas into a reality. When the rocket exploded in 2016, SpaceX investigators teamed up with each other to

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investigate the cause of the explosion. They were able to determine that the issue was the fuel tank. 3. How do you think strong communication skills helped Gwynne Shotwell lead SpaceX through its explosion crisis? Shotwell balances Musk as a less emotional and steadier leader. When the rockets exploded, she quickly realized that as the leader of the company, she needed to display confidence to the other employees. Thus she was able to communicate strong, confident leadership. Entrepreneurship in Action: Sugar Bowl Bakery Hits the Sweet Spot

1. How do the founders of Sugar Bowl Bakery use teamwork to make their bakery a success? The brothers were able to share operational responsibility. Each person could specialize in a certain area and then collaborate to make decisions. Brother Andrew Ly took English language night courses so he could build business connections and promote the company. Even today Andrew Ly and his brothers hold monthly meetings to discuss conflicts and new ideas. This allows them to discuss ideas they might not have thought of individually and come to a mutually agreed-upon course of action. 2. Why is it important for the brothers to continue to hold monthly meetings to discuss new ideas? Meeting regularly to discuss conflicts and ideas ensures that everyone’s input is heard. It is important for the successful management of a firm that conflicts are addressed and worked out. Conflicts can help lead to alternative courses of action and new ideas that benefit the company. These regular meetings allow the owners to brainstorm creative solutions while ensuring that everyone is on the same page. 3. Do you think Sugar Bowl has a centralized or decentralized structure? Why? Most students will note that the narrative does not specifically address this question but clues to the answer are embedded in the text. The narrative notes that the company is still very much a ―team endeavor‖ with one of the original founders having the role of CEO and a majority of the second-generation working at the company. Since there is a culture of ―shared responsibility,‖ it would imply that the company has a decentralized structure. Technology and the Economy: Teamwork: Now Streaming at Netflix

2. Describe how Netflix uses teams in its organization. Employees at Netflix work in cross-functional teams, meaning that employees from 08-230

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different functional areas work together to create solutions. Another quality infused into the culture at Netflix is to always be recruiting. Everyone at Netflix has the responsibility of building a great team. 3. Do you think Netflix has more of a narrow span of management or a wide span of management? Explain your reasoning. Answers will vary but most students will state that Netflix uses a wide span of management since employees must have strong collaborative skills to work with cross-functional teams. 4. Based on how Netflix seems to delegate authority, what degree of centralization do you think Netflix uses in its organizational structure? Explain your reasoning. Students should answer that Netflix is structured as a decentralized organization since it has an organizational structure that provides employees with more freedom to manage themselves. Netflix also values independent decision making, teamwork, honest communication, effective people, and few rules, which shows a high degree of decentralization. So You Want a Job in Managing Organizational Culture, Teamwork, and Communication?

How has technology created new job positions? The area of corporate communications provides lots of opportunities for specific jobs that facilitate communication systems. Thanks to technology, there are job positions to help disseminate information through online newsletters, intranets, crowdsourcing, or internal computer networks to share information to increase collaboration. In addition to the many advances using electronic communications, there are technology concerns that create new job opportunities. Monitoring workplace communications such as the use of email and the internet has created new industries. There have to be internal controls in the organization to make sure that the organization does not engage in any copyright infringement. If this is an area of interest, there are specific jobs that provide an opportunity to use your technological skills to assist in maintaining appropriate standards in communicating and using technology.

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END OF CHAPTER TEACHING RESOURCES Check Your Progress

1. Identify four types of departmentalization and give an example of each type. Departmentalization is grouping jobs into working units usually called departments, units, groups, or divisions. (1) Functional departmentalization is the grouping of jobs that perform similar functional activities, such as finance, manufacturing, marketing, and human resources. (2) Product departmentalization is grouping jobs around the products of a firm. (3) Geographical departmentalization is grouping jobs by geographic location, such as country, region, or an even smaller area. (4) Customer departmentalization is grouping jobs around the needs of various types of customers, which allows an organization to respond to the needs of each group of customers. (Examples of these departmentalization types will vary according to the examples given by students.) 2. Explain the difference between groups and teams. In a group, two or more individuals communicate with one another, share a common identity, and have a common goal. The purpose of the group is the same as the broader organizational mission, whereas the team has a specific purpose that is defined by the team itself. The leadership roles in the team are shared, and both the team members and the whole team are accountable for the results of their work. In a group, the leadership is clearly focused on one person; thus, each individual is accountable. A team requires a collective effort and the participation of all team members, two characteristics that are not necessarily required in a group. All teams are groups, but not all groups are teams. 3. What are self-managed work teams and what tasks might they perform that traditionally are performed by managers? A self-managed work team is a group of employees responsible for an entire work process or segment that delivers a product to an internal or external customer. They might be given the authority to implement work decisions, especially when problems arise in the production process. 4. Explain how delegating authority, responsibility, and accountability are related. All of these are related, but there is a difference in the meaning of each of these words. Delegation of authority is the assigning of tasks to employees while giving them the power to make commitments, use resources, and take actions necessary to accomplish them. Responsibility is the obligation to carry out assigned tasks satisfactorily. 08-232

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Accountability means that a subordinate is answerable to a superior for the outcome of an assigned task. 5. Distinguish between centralization and decentralization. Under what circumstances is each appropriate? A centralized organization is one in which top-level managers delegate very little authority to lower level employees. A decentralized organization is one in which authority is delegated as far down the chain of command as possible. A centralized organization is appropriate when the decisions to be made are risky and when low-level managers are not highly skilled in decision making. Decentralization is appropriate when the organization operates in complex and unpredictable environments. 6. Define span of management. Why do some organizations have narrow spans and others wide spans? Span of management is the number of subordinates who report to a particular manager. A wide span of management exists when a manager directly supervises a large number of employees. A narrow span of management exists when a manager directly supervises only a few subordinates. The nature of spans of management in a company depends on the physical distance between managers and subordinates, on the managers’ responsibilities other than supervision, and on the degree of interaction required between managers and subordinates. Other factors include the frequency of problems, competency level of subordinates, and the existence of specific operating procedures. 7. Discuss the different forms of organizational structure. What are the primary advantages and disadvantages of each form? The process of delegation establishes a pattern of authority and accountability, often called bureaucracy, within the organization. Various forms of bureaucracy include line structure, line-and-staff structure, and matrix structure, as well as committees. A line structure is based on direct lines of authority that extend from the top executive to employees at the lowest level of an organization. This structure provides a clear chain of command, but it also requires managers to possess a wide range of knowledge. In the line-and-staff structure, there is a line relationship between superiors and subordinates, and line departments are directly involved in the operation of the organization. Specialized managers, called staff managers, are available to assist line managers.

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The matrix structure involves setting up teams from different departments and creating two or more intersecting lines of authority. The matrix structure improves crosspollination of ideas but is generally temporary. 8. Discuss the role of the grapevine within organizations. How can managers use it to further the goals of the firm? The grapevine is an informal channel of communication separate from management’s formal, official communication channels. Astute managers try to identify informal leaders to gain their support for the organization’s objectives. Managers can use the grapevine to their advantage, feeding it facts to squelch rumors and incorrect information. They can also obtain valuable facts from the grapevine to improve decision making. 9. How have technological advances made electronic oversight a necessity in many companies? Technological advances as alternatives to face-to-face communication have caused problems as employees face information overload. Electronic oversight is necessary in many companies to insure that employees use technology appropriately and efficiently. 10. Discuss how an organization’s culture might influence its ability to achieve its objectives. Do you think that managers can ―manage‖ the organization’s culture? When an organization’s culture consists of values shared by all members of the organization, results can be positive as all members work toward those shared objectives. Managers can ―manage‖ an organization’s culture by establishing values and rules through authority, partly in organizational and policy manuals, and partly by example. The manager’s awareness of a company’s culture is management’s strongest tool in dealing with problems and weaknesses. Get Involved

1. Explain, using a specific example (perhaps your own future business), how an organizational structure might evolve. How would you handle the issues of specialization, delegation of authority, and centralization? Which structure would you use? Explain your answers. Students’ answers will vary. 2. Interview the department chairperson in charge of one of the academic departments in your college or university. Using Table 7.2 as a guideline, explore whether the professors function more like a group or a team. Contrast what you learned here with what you see on your school’s basketball, football, or baseball team. 08-234

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Students’ answers will vary.

Build Your Skills: Teamwork

1. Typically, most people categorize very few of the teams they’ve been involved with as ―really great.‖ 2. Obviously, most—if not all—of the circled items should come from column two of the table. 3. Some ideas that you might want to bring out in the discussion generated from this question are: 

Everybody pulls together.



Enthusiasm runs high.



Believe in what you’re doing.



Be passionate about achieving your team’s goals.



There was a clear challenge.



The teams must feel like they can make a difference.



Team members need to take individual responsibility for doing their best.



Team members need to look out for each other and care about each other as individuals.



Have a clearly defined and clearly communicated vision or goal for the team—one for which everybody on the team can take ownership.



Establish some guidelines among the team members that include adopting the characteristics of a ―good team experience‖ from the table.

Solve the Dilemma: Quest Star in Transition

1. What techniques or skills should an employee have to assume a leadership role within a work group? To assume a leadership role within a work group, an employee should have very good technical knowledge of the tasks conducted by the team. This individual should also have some conceptual skills in order to relate to the various activities performed within the 08-235

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group. Finally, human relations skills are necessary for the leader to provide information to the rest of the group and for the members of the group to give feedback to their leader. 2. If each work group has a team representative, what problems will be faced in supervising these representatives? Each team representative is likely to defend the interests of their own group and to neglect the actions that may favor the performance of the other groups. In other words, the degree of team collaboration is likely to be low. 3. What are the pros and cons of the system developed by QS? The program introduced by QS is likely to lead to greater employee involvement, innovation, improved collaboration among employees of each team, and employees’ enhanced sense of accomplishment. Overall, it is likely to increase the firm’s productivity and competitiveness. The cons, however, are that employees have to learn how to supervise themselves, something they were not used to doing under the old system. As a result, they are having difficulty getting used to their peers’ authority under the new system. Training programs are necessary to teach employees how to supervise themselves and work together in teams.

Build Your Business Plan: Organization, Teamwork, and Communication

You really need to encourage students to have a positive outlook about working with others on a team. At this point, students have been working on their group’s business plan for 6–8 weeks. Surprise the students by walking into class and having them evaluate how well their groups are doing. Have them complete a simple evaluation form regarding each member’s contribution-to-date on the business proposal. This is an ideal time for such an activity because they still have plenty of time to resolve any problems the group might be having and still end up with a strong group project. See for Yourself Case: Coca-Cola Shakes Up Its Organization

The Coca-Cola Company is a total beverage company with 86,200 employees worldwide and more than 500 brands in more than 200 countries and territories. Coca-Cola has felt the effects of declining soda sales as consumers become health conscious. This, paired with the sudden impact of the COVID-19 pandemic, has hurt the soda giant. The company’s gradual decline in soda sales was marked by a sharp decline in overall sales as a result of the global pandemic. A significant portion of Coca-Cola’s sales come from theaters, restaurants, and sporting events, which were closed or under reduced operations for the duration of the COVID-19 pandemic. In response to slow sales, which were accelerated by the pandemic, Coca-Cola eliminated several brands to slim down its portfolio, including Tab, Zico, and Odwalla. 08-236

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Along with eliminating underperforming brands, Coca-Cola announced plans to restructure the company and focus its drink portfolio on larger and more popular brands. To help streamline the organization, nine new divisions will replace 17 business units and will focus on scaling new products faster while eliminating the duplication of resources. As a result of the structural changes, Coca-Cola reallocated people and resources, including voluntary and involuntary reductions in employees. 1. What factors have contributed to declining sales for Coca-Cola? Consumers have become more health conscious. This, paired with the sudden impact of the COVID-19 pandemic, has hurt the soda giant. 2. How will a new organizational structure benefit Coca-Cola? The changes in the operating model will shift marketing to drive more growth and put execution closer to customers and consumers while prioritizing a portfolio of strong brands and a disciplined innovation framework. This reduction in duplication of resources and focus on scaling new products faster should improve profitability. 3. How does the restructuring affect Coca-Cola employees? As a result of the structural changes, Coca-Cola reallocated people and resources, including voluntary and involuntary reductions in employees. Team Exercise

Students will form groups; assign the responsibility of providing the organizational structure for a company in which one of your team members has worked. Was the organization centralized or decentralized in terms of decision making? Would you consider the span of control to be wide or narrow? Were any types of teams, committees, or task forces used in the organization? Report your findings to the class.

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CONNECT ACTIVITIES Brewing Up Fun in the Workplace

Learning Objective: 7-1 Explain the importance of organizational culture. Activity Summary: This activity explores the importance of organizational culture through the lens of New Belgium Brewing. An organizational culture exists in every organization, regardless of size, organizational type, product, or profit objective. How to Use Activity: Company culture takes many forms. Have students select companies to research and describe their cultures. Then have students explain if they feel they would be successful within that environment while describing why or why not. Class Discussion: How would you describe company culture? If you’ve worked before, how would you describe the culture of your company? What types of company cultures do you feel you’d be most successful in? Are there any company cultures you think it may be difficult to perform at your best? Which is more important—a company’s strategy or its culture? Freshii’s Unique Structure Drives Its Success

Learning Objective: 7-5 Compare and contrast some common forms of organizational structure. Activity Summary: Freshii is a fast-casual franchised restaurant chain, based in Toronto, Ontario, Canada. Founded in 2005, the company has grown to over 350 locations all over the world. One contributor to Freshii’s success is the structure of the organization. Students will learn how the structure is helping the company achieve its goals and growing rapidly. How to Use Activity: Create an assignment were students interview a business professional. Through the informational interview, have students explore the individual’s role and responsibility, the operational structure of the company, and the company’s culture. Provide a template of example questions if necessary. Once students have completed their informational interview, debrief their experiences through class discussion. (Note to Professor: Optionally, have students complete a reflection where they extrapolate their learnings to their future career.) Class Discussion: What were your takeaways from the informational interviews? Did anything that you learned surprise you? Can you see yourself being successful in either the role, responsibilities, structure, or company of the person you interviewed? Netflix: Culture Attracts Talent

Learning Objective: 7-1 Explain the importance of organizational culture. 08-238

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Activity Summary: Managers in organizations help shape the behaviors, programs, and policies that enhance and support an organization’s culture. In this activity, students explore the culture of one of today’s most popular brands: Netflix. How to Use Activity: After watching the video, abstract the concept of company culture to just culture in general. Ask students to define what culture they would like to have—whether in their lives, their careers, or even perhaps the culture of their very classroom. (Note to Professor: When students have a voice in shaping the culture of the classroom, they typically are more engaged with in-class participation and submission of class assignments. Consider facilitating this activity as a discussion or a discussion board; then, design a cultural manifesto for shared accountability of the new classroom culture.) Class Discussion: What type of culture resonates best for you, either in the classroom or the workplace? What are the behaviors that support a successful culture? What do you need to be successful in this class? How can I as your professor best support your learning and growth?

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BONUS TEACHING RESOURCES Term Paper or Project Topics

These topics may be assigned as individual or collaborative projects: 1. Specialization Techniques of Henry Ford 2. A Comparison of Policy Manuals (Employee Handbooks) in Selected Firms

Guest Speaker Suggestions

1. A professor or teacher to talk about organizational structure. 2. A representative from a business firm to speak about changes in organizational structure for that firm.

Teaching Suggestions

20. Start the session with a ―writing to learn‖ exercise. Select three or four of the questions in ―Check Your Progress.‖ Have students choose one of the three or four selected questions and write their answers. Allot only a few minutes for this writing exercise. Call on volunteers or randomly call on students for answers. 21. Cover desired portions of chapter content using the ―Lecture Outline and Notes.‖ If students have been assigned the chapter as a reading assignment, not every fact in the chapter needs to be given in a lecture. 22. Having students draw organizational charts will help reinforce the characteristics of each of the organizational forms. After the students have drawn their charts individually, have them compare their drawings in pairs (or possibly in groups). 23. Students should have read the boxed material. Go over the discussion questions in class. Spending time on the discussion questions, the case study, the boxed material, and so on, helps students analyze and think about what they have learned.

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LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Walmart Invests in Tech to Tackle the Competition Consider Technology and the Economy: Sunny Skies Ahead for Weather Insights Entrepreneurship in Action: Attabotics Startup Sets Its Sights on Supply Chain Automation Responding to Business Challenges: Target Aims for Bullseye With Supply Chain Improvements So You Want a Job in Operations Management END OF CHAPTER TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Reduce Cycle Time Solve the Dilemma: Planning for Pizza Build Your Business Plan: Managing Service and Manufacturing Operations See for Yourself Case: How Sweet It Is: Creating Supply Chain Efficiencies at the Cocoa Exchange Team Exercise CONNECT ACTIVITIES Yelp is Simplifying Restaurant Operations New Belgium Brewery: Operations Management Scaling Up an Up Scale Customer Furniture Business BONUS TEACHING RESOURCES Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions

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SUMMARY

Here, we discuss the role of production or operations management in acquiring and managing the resources necessary to create goods and services. Production and operations management involves planning and designing the processes that will transform those resources into finished products, managing the movement of those resources through the transformation process, and ensuring that the products are of the quality expected by customers.

LEARNING OBJECTIVES LO 8-1

Define operations management.

LO 8-2

Differentiate between operations and manufacturing.

LO 8-3

Explain how operations management differs in manufacturing and service firms.

LO 8-4

Describe the elements involved in planning and designing an operations system.

LO 8-5

Specify some techniques managers may use to manage the logistics of transforming inputs into finished products.

LO 8-6

Assess the importance of quality in operations management.

LO 8-7

Propose a solution to a business’s operations dilemma.

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KEY TERMS AND DEFINITIONS capacity

The maximum load that an organizational unit can carry or operate.

computer-assisted design (CAD)

The design of components, products, and processes on computers instead of on paper.

computer-assisted manufacturing (CAM)

Manufacturing that employs specialized computer systems to actually guide and control the transformation processes.

computer-integrated manufacturing (CIM)

A complete system that designs products, manages machines and materials, and controls the operations function.

continuous manufacturing organizations

Companies that use continuously running assembly lines, creating products with many similar characteristics.

customization

Making products to meet a particular customer’s needs or wants.

economic order quantity (EOQ) model

A model that identifies the optimum number of items to order to minimize the costs of managing (ordering, storing, and using) them.

fixed-position layout

A layout that brings all resources required to create a product to a central location.

flexible manufacturing

The direction of machinery by computers to adapt to different versions of similar operations.

inputs

The resources—such as labor, money, materials, and energy— that are converted into outputs.

intermittent organizations

Organizations that deal with products of a lesser magnitude than do project organizations; their products are not necessarily unique but possess a significant number of differences.

inventory

All raw materials, components, completed or partially completed products, and pieces of equipment a firm uses.

inventory control

The process of determining how many supplies and goods are needed and keeping track of quantities on hand, where each item is, and who is responsible for it.

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ISO 9000

A series of quality assurance standards designed by the International Organization for Standardization (ISO) to ensure consistent product quality under many conditions.

ISO 14000

A comprehensive set of environmental standards that encourages a cleaner and safer world by promoting a more uniform approach to environmental management and helping companies attain and measure improvements in their environmental performance.

ISO 19600

A comprehensive set of guidelines for compliance management that address risks, legal requirements, and stakeholder needs.

just-in-time (JIT) inventory management

A technique using smaller quantities of materials that arrive ―just in time‖ for use in the transformation process and therefore require less storage space and other inventory management expense.

manufacturing

The activities and processes used in making tangible products; also called production.

material requirements planning (MRP)

A planning system that schedules the precise quantity of materials needed to make the product.

modular design

The creation of an item in self-contained units, or modules, that can be combined or interchanged to create different products.

operations

The activities and processes used in making both tangible and intangible products.

operations management (OM)

The development and administration of the activities involved in transforming resources into goods and services.

process layout

A layout that organizes the transformation process into departments that group-related processes.

product layout

A layout requiring that production be broken down into relatively simple tasks assigned to workers, who are usually positioned along an assembly line.

production

The activities and processes used in making tangible products; also called manufacturing.

project organization

A company using a fixed-position layout because it is typically involved in large, complex projects such as construction or exploration. 08-244

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purchasing

The buying of all the materials needed by the organization; also called procurement.

quality control

The processes an organization uses to maintain its established quality standards.

routing

The sequence of operations through which the product must pass.

scheduling

The assignment of required tasks to departments or even specific machines, workers, or teams.

standardization

The making of identical, interchangeable components or products.

statistical process control

A system in which management collects and analyzes information about the production process to pinpoint quality problems in the production system.

supply chain management

Connecting and integrating all parties or members of the distribution system in order to satisfy customers.

total quality management (TQM)

A philosophy that uniform commitment to quality in all areas of an organization will promote a culture that meets customers’ perceptions of quality.

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Define operations management.

Key Terms:

LO 8-2

Differentiate between operations and manufacturing.

 Operations management (OM)

Introduction



 Production

The Nature of Operations Management

 Operations

o The Transformation Process

PowerPoint Slides: PPT 8.4

 Manufacturing



 Inputs

Lecture Outline and Notes: I. The Nature of Operations Management A. Operations management (OM) refers to the development and administration of the activities involved in transforming resources into goods and services. 1. Operations managers oversee the transformation process and the planning and designing of operations systems, managing logistics, quality, and productivity. 2. Quality and productivity have become fundamental aspects of operations management because a company that cannot make products of the quality desired by consumers, using resources efficiently and effectively, will not be able to remain in business. 3. OM has historically been called production or manufacturing.

PPT 8.5

4. Also, the term ―operations‖ represents an interest in viewing the operations function as a whole rather than simply inputs and outputs. 5. Production and manufacturing refer to the activities and processes used in making tangible goods and services. These two terms are often used interchangeably. 08-246

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6. Operations describes the activities and processes—including production—involved in producing both tangible and intangible products.

PPT 8.6 PPT 8.7–8.8

B. The Transformation Process 1. The transformation process converts inputs into products (Figures 8.1, 8.2). a. Inputs are resources such as labor, money, materials, and energy. 2. The transformation process combines inputs in predetermined ways using different equipment, administrative procedures, and technology to create a product. 3. To ensure that the transformation process generates quality products efficiently, operations managers control the process by taking measurements (feedback) at various points in the transformation process, comparing measurements to established standards, and taking corrective action for any deviation. 4. Transformation may take place through one or more processes.

LO 8-3

Explain how operations management differs in manufacturing and service firms.

Key Terms:

o Operations Management in Service Businesses

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A. Operations Management in Service Businesses (Table 8.1) 1. Different types of transformation processes take place in organizations that provide services. 2. Unlike tangible goods, services are effectively actions or performances that must be directed toward the consumers who use them. 3. Regardless of the level of customer contact, service businesses strive to provide a standardized process.

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4. Services Versus Tangible Products a. Manufacturers produce tangible products, while service providers produce intangible products. b. The very nature of the service provider’s product requires a higher degree of customer contact. c. The actual performance of the service typically occurs at the point of consumption. d. Service providers are often more limited than manufacturers in selecting work methods, assigning jobs, scheduling work, and exercising control over operations. e. The quality of the service experience is often controlled by a service contact employee. 5. Uniformity of Inputs a. Manufacturers typically have more control over the amount of variability of the resources they use than do service providers. b. Products of service organizations tend to be more ―customized‖ than those of their manufacturing counterparts.

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6. Uniformity of Products a. Because of the human element inherent in providing services, each service tends to be performed differently. b. Human and technological elements associated with a service can result in a different day-to-day or even hourto-hour performance of that service. 7. Labor Required a. Service providers are generally more labor intensive because of the high level of customer contact, perishability of the output, and high degree of variation of inputs and outputs. b. A manufacturer is likely to be more capital intensive.

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8. Measurement of Productivity a. For manufacturers, measuring productivity is fairly straightforward because of the tangibility of the output and its high degree of uniformity. b. For service providers, variation in service requirements from job to job and intangibility of the product make productivity measurement more difficult. 9. Most organizations are a combination of manufacturer and service provider, with both tangible and intangible qualities embodied in what they produce. a. Subway’s tangible inputs are bread, tomatoes, and lettuce, while their outputs are customized sandwiches.

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LO 8-4

Describe the elements involved in planning and designing an operations system.  Planning and Designing Operations Systems o Planning the Product o Designing the Operations Processes

Ferrell/Hirt/Ferrell: Business Foundations 12e

Key Terms:  Standardization  Modular design  Customization  Capacity  Fixed-position layout

o Planning Capacity

 Project organization

o Planning Facilities

 Process layout

o Sustainability and Manufacturing

 Intermittent organizations  Product layout  Continuous manufacturing organizations  Computer-assisted design (CAD)  Computer-assisted manufacturing (CAM)  Flexible manufacturing  Computer-integrated manufacturing (CIM)

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II. Planning and Designing Operations Systems A. Before a company can make a product, it must decide what it will produce and for what group of customers, what processes it will use to make the products, and what facilities it needs to produce them. B. Planning the Product 1. Before making a product, a company must determine what consumers want and then design a product to satisfy that want. 2. Most companies use marketing research to find out what consumers want. 3. Developing a product can be a lengthy, expensive process. 4. The engineering or research and development department is charged with turning a product idea into a workable design that can be produced economically, as well as can be produced efficiently. 5. Operations managers plan for the types and quantities of materials needed to produce the product, the skills and quantity of people needed to make the product, and the actual processes through which the inputs must pass.

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C. Designing the Operations Processes 1. Before beginning production, a firm must determine the appropriate method of transforming resources into the desired product. 2. Often, customers’ specific needs and desires dictate the process. 3. Usually products are designed to be manufactured by one of three processes. a. Standardization 1) Standardization is making identical, interchangeable components, or even complete products. 2) It speeds up production and quality control and reduces production costs; however, a customer might not get exactly what they want. b. Modular design 1) Modular design is the creation of an item in selfcontained units, or modules, which can be combined or interchanged to create different products.

PPT 8.17

2) It allows products to be repaired quickly, thus reducing the cost of labor, but the component itself is expensive, raising the cost of repair materials. c. Customization 1) Customization is making products to meet a particular customer’s needs or wants. 2) Products produced in this way are generally unique. 3) Mass customization is making products to meet the needs and wants of a large number of individual customers. d. Blockchain 1) Blockchain is a secure, public database (or ledger) that records all transactions and is spread across multiple computers. 2) The global blockchain is difficult to tamper with and growing rapidly.

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A. Planning Capacity 1. Capacity refers to the maximum load that an organizational unit can carry or operate. a. The unit of measurement may be a worker or machine, a department, a branch, or even an entire plant. b. Maximum capacity can be stated in terms of the inputs or outputs provided. 2. Efficiently planning the organization’s capacity needs is an important process for the operations manager. a. Capacity levels that fall short can result in unmet demand (lost customers). b. When there is more capacity than needed, operating costs are driven up needlessly due to unused and often expensive resources. c. To avoid such situations, organizations must accurately forecast demand and then plan capacity based on these forecasts. 3. Once a capacity decision—such as factory size—has been implemented, it is very difficult to change the decision without incurring substantial costs.

PPT 8.19

E. Planning Facilities 1. Many products are produced in factories, but others are produced in stores, at home, or where the product ultimately will be used. 2. Companies must decide where to locate their operations facilities, what layout is best for producing their particular product, and even what technology to apply to the transformation process. a. Some companies are using both physical and virtual locations. 08-253

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3. Facility Location a. Once a facility location decision has been made and implemented, the firm must live with it due to the high costs involved. b. When making the facility location decision, the firm must pay careful attention to factors such as proximity to market; availability of raw materials, transportation, power, and labor; climatic influences; community characteristics (quality of life); and taxes and inducements. c. The facility location is complex because it involves the evaluation of factors—many of which cannot be measured with precision. 4. Facility Layout a. Facility layout—the arrangement of the physical components of an organization—is a complex, highly technical task. b. There are three basic layouts used in industry. 1) A fixed-position layout has a central location for the basic product, and all the resources required to create the product are brought to the location. A company using a fixed-position layout may be called a project organization because it is typically involved in large, complex projects such as construction or exploration. 2) The process layout organizes the transformation process into departments that group-related processes. Intermittent organizations, which create products to customers’ specifications and produce relatively few units of each product, use the process layout. 3) The product layout breaks down work into relatively simple tasks assigned to workers positioned along an assembly line. Companies that use this layout are known as continuous manufacturing organizations because once they are set up, they run continuously, creating products with many similar characteristics. c. Many companies use a combination of layout designs.

PPT 8.21

5. Technology a. Every industry has a basic underlying technology that dictates the nature of its transformation process. 08-254

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b. Additionally, computers and robots have strongly influenced the operations of many businesses. 1) Computer-assisted design (CAD) is the design of components, products, or processes on computers instead of paper. 2) Computer-assisted manufacturing (CAM) is the use of computers in manufacturing to guide and control the transformation process. 3) Drones, Robotics, and AI. Drones refer to unmanned aerial vehicles and have long been used in military operations. Use of drones in business operations will vastly change the technology landscape. 4) AI relates to machine (computer) learning that is able to perform activities and tasks that usually require human intelligence such as decisions, visual perception, and speech recognition. In short, it makes computers act like humans. 5) Robots perform a variety of tasks too difficult, dangerous, or repetitive for humans and are becoming increasingly important in assembly line uses such as spot welding and painting.

PPT 8.22– 8.23

6) Flexible manufacturing is a system that uses computers to direct machinery to adapt to different versions of similar operations. 7) Computer-integrated manufacturing (CIM) is a complete system that utilizes CAD/CAM, flexible manufacturing, and robotics to design products, manage machines and materials, and control the operations function. F. Sustainability and Manufacturing 1. Manufacturing and operations systems are moving quickly to establish environmental sustainability and to reduce negative impacts on the natural environment. 2. Sustainability deals with conducting activities in such a way as to provide for the long-term well-being of the natural environment, including all biological entities. 3. Issues include pollution of land, air, and water; climate change; waste management; deforestation; urban sprawl; protection of biodiversity; and genetically modified foods. 4. Sustainability is increasingly important to stakeholders and can lead to improved profits. 08-255

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LO 8-5

Specify some techniques managers may use to manage the logistics of transforming inputs into finished products.

Key Terms: 

Supply chain management



Purchasing

o Procurement



Inventory

o Managing Inventory



Inventory control

o Outsourcing



Economic order quantity (EOQ) model



Just-in-time (JIT) inventory management



Material requirements planning (MRP)



Routing



Scheduling

 Managing the Supply Chain

o Routing and Scheduling

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III. Managing the Supply Chain A. A major function of operations is supply chain management, which refers to connecting and integrating all parties or members of the distribution system in order to satisfy customers. 1. Also called logistics, supply chain management includes all the activities involved in obtaining and managing raw materials and component parts, managing finished products, packaging them, and getting them to customers. 2. The supply chain integrates firms such as raw material suppliers, manufacturers, retailers, and ultimate consumers into a seamless flow of information and products.

PPT 8.25

3. Advances in technology continue to push supply chain to one of the most important functions in business. 4. AI is moving rapidly across supply chain functions. AI has the potential to make the world more efficient in predictable, physical work such as assembly lines, packaging, shipping, and other repetitive tasks. 5. Blockchain, mentioned previously, is an emerging information technology that will change supply chain relationships. It is a distributed ledger that can manage blocks of information without the control of intermediaries or third parties. 08-256

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B. Procurement 1. Purchasing (or procurement) is the buying of all the materials needed by the organization. 2. The purchasing department aims to obtain items of the desired quality in the right quantities at the lowest possible cost. 3. Not all organizations purchase materials; sometimes, a firm can make materials more economically than an outside supplier. Others lease rather than buy equipment.

PPT 8.26

C. Managing Inventory 1. Inventory is every raw material, component, completed or partially completed product, and piece of equipment a firm uses. 2. There are three basic types of inventory: a. Finished goods inventory includes those products that are ready for sale, such as a fully assembled automobile ready to ship to a dealer. b. Work-in-process inventory consists of those products that are partly completed or are in some stage of the transformation process. c. Raw materials inventory includes all the materials that have been purchased to be used as inputs for making other products.

PPT 8.28

3. Inventory control is the process of determining how many supplies and goods are needed and keeping track of quantities on hand, where each item is, and who is responsible for each item. a. OM must be closely coordinated with inventory control. 4. Inventory managers spend a great deal of time trying to determine the proper inventory level for each item. a. The economic order quantity (EOQ) model is an approach to inventory management that identifies the optimum number of items to order to minimize the costs of managing (ordering, storing, and using) them. b. Just-in-time (JIT) inventory management eliminates waste by using smaller quantities of materials that arrive ―just in time‖ for use in the transformation process and therefore require less storage space and other inventory management expense. 08-257

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1) One downside to JIT inventory management might be shortages if unforeseen circumstances, such as natural disasters, occur. c. Material requirements planning (MRP) is a planning system that schedules the precise quantity of materials needed to make the product.

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D. Outsourcing 2. Outsourcing has increasingly become a component of supply chain management in operations; it refers to the contracting of manufacturing or other tasks to independent companies, often overseas. (Top outsourcing providers are listed in Table 8.2.) a. Many athletic shoe manufacturers, such as Nike, outsource production to China and Vietnam to take advantage of lower labor costs. 3. Companies that hire suppliers must make sure that their suppliers are following company standards of conduct, as failure to do so could lead to criticism of the parent company. 4. Outsourcing has increasingly been linked with the development of a competitive advantage through improved product quality, speeding up the time it takes products to get to the customer, and overall supply chain efficiencies. a. Outsourcing allows companies to free up time and resources to focus on what they do best and to create better opportunities to focus on customer satisfaction.

PPT 8.32

5. However, outsourcing may create conflict with labor and negative public opinion when it results in U.S. workers being replaced by lower cost workers in other countries. E. Routing and Scheduling 1. Routing is the sequence of operations through which the product must pass.

PPT 8.33

PPT 8.34

a. The sequence depends on the product specifications developed by the engineering department of the company. 2. Scheduling is the process of assigning required tasks to departments or even specific machines, workers, or teams. a. A popular scheduling technique is the Program Evaluation and Review Technique (PERT), which identifies the major activities required to complete a project, arranges them in a sequence, determines the critical path, and estimates the time required for each event. b. The path that requires the longest time from start to finish is called the critical path because it determines the minimum amount of time in which the process can be completed. 1) Producing a Big Mac involves several steps, including grilling the patties; assembling the ingredients; and placing the Big Mac in its package. If any of the activities on the critical path for production fall behind schedule, the sandwich will not be completed on time, causing customers to wait longer than they usually would (Figure 8.3). 08-259

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LO 8-6

Assess the importance of quality in operations management.  Managing Quality o International Organization for Standardization (ISO) o Inspection

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Key Terms:  Quality control  Total quality management (TQM)  Statistical process control  ISO 9000

o Sampling  Integrating Operations and Supply Chain Management

 ISO 14000  ISO 19600

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IV. Managing Quality A. Quality, like cost and efficiency, is a critical element of operations management because defective products can quickly ruin a firm. 1. Quality reflects the degree to which a product meets the demands and requirements of customers. a. For instance, customers often consider the quality of service of many airlines to be poor due to frequent flight delays, lost baggage, and so on (Table 8.3). b. Independent sources such as the J.D. Power & Associates annual initial quality survey can be helpful for companies in measuring the quality of their products (Figure 8.4).

PPT 8.36 PPT 8.37

2. A company has to decide which quality characteristics it considers important and then define those characteristics in terms that can be measured. 3. The Malcolm Baldrige National Quality Award is given each year to companies that meet rigorous standards of quality. 4. Quality control refers to the processes an organization uses to maintain its established quality standards. 5. A method companies may use is statistical process control, where management collects and analyzes information about the production process to pinpoint quality problems. 6. To regain a competitive edge, a number of firms have adopted total quality management (TQM), a philosophy that uniform commitment to quality in all areas of the organization will promote a culture that meets customers’ perceptions of quality.

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a. TQM involves coordinating efforts to improve customer satisfaction, increase employee participation and empowerment, strengthen supplier partnerships, and form and foster an organizational culture of continuous quality improvement. b. Continuous improvement of an organization’s products is built around the notion that quality is free; in contrast, not having high-quality products is expensive. c. A primary tool of continuous improvement is benchmarking, the measuring and evaluating of the quality of the firm’s goods, services, or processes as compared with the quality produced by the best performing companies in the industry.

PPT 8.38

d. TQM should be incorporated throughout the transformation process, and quality control should be viewed as an element of the product itself, rather than as a function of the operations process. B. International Organization for Standardization (ISO) 1. Regardless of whether a company has a TQM program, it must first determine what standard of quality it desires and then assess whether its products meet that standard. a. Product specifications and quality standards must be set so the company can create a product that will compete in the marketplace. b. Quality standards can be incorporated into service businesses as well. 1) Quality standards for manufacturing might be the thickness of metal for amount of a certain material. 2) Service industry standards could be things such as how long a customer waits or how many fries are in an order. c. The next step is inspection. 2. ISO 9000 is a series of quality assurance standards designed by the International Organization for Standardization (ISO) to ensure consistent product quality under many conditions.

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a. The standards provide a framework for documenting how a certified business keeps records, trains employees, tests products, and fixes defects. b. Certification has become a virtual necessity for doing business in some high-technology businesses. 3. ISO 14000 is a comprehensive set of environmental standards that encourages a cleaner, safer world. a.

Helps create a uniform standard across nations with varying regulations.

4. ISO 19600 is a comprehensive set of guidelines that address risks, legal requirements, and stakeholder needs. a. These are guidelines rather than requirements; companies that comply with ISO 19600 cannot be certified. PPT 8.39

C. Inspection 1. Inspection reveals whether products meet established quality standards. 2. Some inspection techniques are simple—such as weighing, measuring, or observing—while others are more elaborate. 3. Organizations normally inspect purchased items, work-in-process items, and finished items. 4. The inspection of purchased items and finished items takes place after the fact; the inspection of work-in-process is preventive.

PPT 8.40

D. Sampling 1. When inspection procedures are expensive to perform, use elaborate testing equipment, destroy products, and/or require many hours to complete, it is usually desirable to test just a sample of the output. 2. If the sample passes inspection, the inspector may assume that all the items from the lot would also pass inspection. 3. Sampling will probably be used if tests are destructive to the product. 4. If human life or safety depends on the item, 100% of the output is inspected.

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V. Integrating Operations and Supply Chain Management A. Managing supply chains requires vigilance and the ability to make quick tactical changes. 1. Managing partners in the supply chain and operations is important because many stakeholders hold the firm responsible for appropriate conduct related to quality. B. Businesses can manage the risks of global supply chains through the following: 1. Adopt a Global Supplier Code of Conduct 2. Encourage compliance and procurement employees to work together to ensure ethical sourcing practices at reasonable prices. 3. Create a diverse supply chain to minimize risks. 4. Perform regular audits on suppliers to ensure compliance to standards.

LO 8-7

Propose a solution to a business’s operations dilemma.

Key Terms:

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VI. Solve the Dilemma: Planning for Pizza V. McKing Corporation operates fast-food restaurants in 50 states, selling hamburgers, roast beef and chicken sandwiches, french fries, and salads. W. Wants to diversify into the growing pizza business. 18. Ideal pizza to sell was a 16-in. pie in three varieties: cheese, pepperoni, and deluxe (multiple toppings). C. Marketing and human resources personnel prepared: 1. Training manuals for employees 2. Advertising materials 3. Rationale to present to the restaurant managers (many stores are franchised)

PPT 8.44

D. Issues: 1. The drive-through windows in current restaurants are too small for a 16-in. pizza to pass through. 2. Concerns that if this aspect of operations has been overlooked perhaps the product is not ready to be launched. 3. There may be other problems yet to be uncovered.

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E. Critical Thinking Questions: 1. What mistake did McKing make in approaching the introduction of pizza? 2. How could this product introduction have been coordinated to avoid the problems that were encountered? 3. If you were an executive at McKing, how would you proceed with the introduction of pizza into the restaurants? (Answers appear under the End of Chapter Teaching Resources section of this Instructor’s Manual.)

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Walmart Invests in Tech to Tackle the Competition

Overview Omni-channel retailing, where retailers offer a seamless experience on mobile, desktop, or traditional retail spaces, is one of Walmart’s greatest strengths. Walmart uses four stores in the United States as test centers where they continuously rotate new technology, digital tools, and physical enhancements in and out of the stores—all with the intention of helping associates better and more easily serve customers. The stores are focused on accelerating inventory movement from the back room to the sales floor, blending online and in-store inventory, speeding up in-store pick rates for online orders, and experimenting with new checkout technologies. Walmart is also exploring how to use a combination of in-store signage and handheld devices to help associates navigate to the right locations when picking items for online orders. So far, this change has reduced the time it takes associates to find items and has increased the percentage of times the associate finds the item on their first attempt. Walmart plans to revamp 1,000 stores with a new format that encourages customers to use Walmart’s app while shopping and provides contactless checkout options. Walmart is using technology to compete with Amazon and other online retailers. 1.

What is omni-channel retailing? Omni-channel retailing is where retailers offer a seamless experience on mobile, desktop, or traditional retail spaces.

Why does Walmart’s large network of stores serve as an advantage over online competitors? Answers will vary but most students will emphasize that with thousands of stores, Walmart has locations close to most of its customers. That means that customers can easily order online and pick up the merchandise in a nearby store. The stores operate as both physical shopping destinations and online fulfillment centers.

Describe how Walmart is attempting to improve its inventory management at the store level. Walmart is focusing on accelerating inventory movement from the back room to the sales floor, blending online and in-store inventory, speeding up in-store pick rates for online orders, and experimenting with new checkout technologies.

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Technology and the Economy: Sunny Skies Ahead for Weather, and other retailers.

1. What are some ways that accurate weather predictions can be used to improve business operations? Weather data could reduce annual legal, insurance, and risk mitigation costs, while 99% said that they could also reduce operational costs. 2. How do you think weather affects a company’s supply chain? Weather could affect a company’s shipping and delivery, as well as the amount and type of products that need to be sourced. 3. How can NASCAR use the data from The Weather Company to improve operations and create better customer satisfaction? Weather Company’s weather data and weather station at each race helped to improve race operations and fan engagement. This information helped NASCAR ―minimize delays‖ and improved customer experiences. Entrepreneurship in Action: Attabotics Startup Sets Its Sights on Supply Chain Automation

1. How does Attabotics affect facility layout? Attabotics’ technology, which is used in areas such as retail, food and beverage, and medical supply facilities, condenses traditional warehouses with row-and-aisle configurations into vertical storage structures. 2. What is the benefit of vertical storage? Vertical storage products requires upward of 85% less space. This allows companies to use smaller warehouses and operate fulfillment centers closer to high-density, urban areas. With smaller warehouses closer to customers, companies can reduce their carbon footprint. 3. In what other ways do you think robotics will affect supply chain management? Answers will vary but students need to support their answers.

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Consider Ethics and Social Responsibility: Target Aims for Bullseye With Supply Chain Improvements

4. Describe the many ways Target is trying to improve its supply chain in order to compete. Target invested $5 billion toward improving its supply chain and technology infrastructure in a 2-year period, including raising its delivery time standards for suppliers and investing in same-day delivery. Target tested a new distribution strategy in order to make its stores quicker at restocking and distributing to stores and customers. Target also acquired Shipt, a same-day grocery delivery service that delivers directly to consumers’ doors. Shipt allows Target to compete directly against same-day delivery services offered by Amazon Fresh. Additionally, Target added fresh groceries and adult beverages to its drive up and pickup services. 5. Why might changes to its inventory management improve Target’s distribution? Target’s distribution strategy reduces the replenish cycle down to hours. In Target’s smaller stores, located in more urban areas, the company reduced the amount of inventory it has. Instead of large shipments of inventory, Target makes smaller deliveries to fulfill exactly what the stores need. This is more of a just-in-time approach to inventory management, which reduces waste and allows stores to get exactly what they need when they need it. 6. What are some of the risks of adopting a just-in-time approach? What are some ways that blockchain increases transparency in the supply chain? Answers will vary but most students will focus on JIT issues such as running out of inventory and unhappy customers. Blockchain permits retailers to track items from beginning to end during the supply chain process. Since blockchain is a secure database that records all transactions and is spread across multiple computers there is no concern of tampering. Additionally, a user can track an item at any time during the supply chain process.

So You Want a Job in Operations Management

What role do supply chain managers play in the success of businesses? Supply chain managers have a tremendous impact on the success of an organization. These managers are engaged in every facet of the business process, including planning, purchasing, production, transportation, storage and distribution, customer service, and more. Their 10-268

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performance helps organizations control expenses, boost sales, and maximize profits.

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END OF CHAPTER TEACHING RESOURCES Check Your Progress

1. What is operations management? Operations management is the development and administration of the activities involved in transforming resources into goods and services. 2. Differentiate among the terms operations, production, and manufacturing. Production and manufacturing are used interchangeably to represent the activities and processes used in making tangible products. Operations is a broader term, describing those processes used in the making of both tangible and intangible products. 3. Compare and contrast a manufacturer versus a service provider in terms of operations management. Manufacturers and service providers both must schedule and control operations as well as allocate necessary resources. However, though manufacturers and service providers often perform similar activities, they differ in the following five basic ways: (1) nature and consumption of outputs, (2) uniformity of inputs, (3) uniformity of outputs, (4) labor requirements, and (5) measurement of productivity. 4. Who is involved in planning products? The functions involved in planning products include research, engineering, and operations management. In larger corporations, these functions may be separate departments; however, in smaller companies, one or two individuals may be responsible for all planning functions. It is important to have every part of a firm involved in planning products to ensure that they not only satisfy customers but also allow a firm to achieve its objectives. 5. In what industry would the fixed-position layout be most efficient? The process layout? The product layout? Use real examples. A fixed-position layout uses a central location for the basic product, and all resources required to create the product are moved to that location. Students’ examples will vary, but a bridge under construction would be one example of fixed-position layout. The process or functional layout organizes the transformation process into departments according to the type of work to be done. Known as intermittent organizations, they deal with products of lesser magnitude than product organizations. They are able to create a product to a customer’s specifications and produce relatively few units of each product. Students’ examples will vary, but a factory that engages in printing activities would be 10-270

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one example of process layout. A product or line layout requires that the work of creating a product be broken down into activities or tasks requiring relatively short periods of time and be assigned to workers positioned along the line. The product moves from one worker to another, and each one in turn performs the required tasks or activities. Organizations using this layout are known as continuous manufacturing organizations because once they are set up they run continuously, creating products with many similar characteristics. Students’ examples will vary, but a company that makes plastic components would be one example of product layout. 6. What criteria do businesses use when deciding where to locate a plant? The following factors are considered for plant location: a. Proximity to market b. Availability of raw materials c. Availability of transportation d. Availability of power e. Climatic influences f. Availability of labor g. Community characteristics h. Taxes and inducements 7. What is flexible manufacturing? How can it help firms improve quality? In flexible manufacturing, computers direct machinery to adapt to different versions of similar operations. This can help the firm improve quality because one machine can be programed to carry out its function for several different versions of an engine. This eliminates the need to shut down the production line to refit the machine. 8. Define supply chain management and summarize the activities it involves. Supply chain management refers to connecting and integrating all parties or members of the distribution system in order to satisfy customers. It includes all the activities involved in obtaining and managing raw materials and component parts, managing finished products, packaging them, and getting them to customers. Its primary activities include purchasing, managing inventory, and scheduling. 10-271

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9. Describe some of the methods a firm may use to control inventory. A firm may use a variety of methods to control inventory including economic order quantity (identifies the optimum number of items to order to minimize the costs of managing them), just-in-time inventory management (eliminates waste by using smaller quantities of materials that arrive ―just-in-time‖ for use), and material requirements planning (a planning system that schedules the precise quantity of materials needed to make the product). 10. When might a firm decide to inspect a sample of its products rather than test every product for quality? Whether to inspect 100% of the output or only part of it is related to the cost of the inspection process, destructiveness of the inspection process, and the importance of the item to the safety of consumers or others. The greater the cost and the more destructive the inspection process, the more likely the firm is to use sampling techniques. However, the more important an item is to the safety of consumers or others, the more likely the firm is to examine all items.

Get Involved

1. Compare and contrast OM at McDonald’s with that of Honda of America. Compare and contrast OM at McDonald’s with that of a bank in your neighborhood. Sample answer (not exhaustive):

Inputs

Equipment

McDonald’s

Honda of America

Local bank

Human labor, money, management, energy, cooking oil, meat, condiments, pickles, ketchup, mustard, bread, soft drinks, milk, coffee, juice concentrate, water, potatoes, plastic toys, menus, ice cream cones, wrappers Drive-thru equipment (loudspeaker, signs), cash registers, ovens, cutlery, playground

Human labor at factory, salespeople, money, management, energy, engines, braking systems, steel, glass, door panels, windows, rubber, tires, dashboard needles, transmission gears, steering wheel, seats, airconditioner vents, radios, mirrors, paint Metal forming equipment, machining equipment, car lifts, robotics, conveyor

Human labor, money, management, information and customer data, paper, calculators, knowledge

Teller machines, drive-thru equipment, computers, filing systems, ATM

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equipment, fryer, ice cream machine, coffee maker, soda dispensers, ice makers, shelves, food preparation tables (assembly line)

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systems, lubrication equipment, wheel spoke spinning machine, assembly line, welding machines, hydraulic press machines, stamping parts, rotational equipment Assembly line

machines, counters, drawers

Method of manufacturing Output

Assembly line

_________________

A quality food product and an enjoyable environment

Finished automobiles

Financial services that can be customized to the needs of customers

Physical Good Contact with customer (services)

Yes Extensive

Yes None except at dealerships

Control over uniformity of outputs

Strong control over consistency of food products; less control over service

Large amount of control

Level of standardization

Some customization as consumers can request varying adjustments to their food products

Very standardized although car models might differ

Possibly (money) Extensive, including online and in-person (high touch and high tech) Financial services must comply with regulatory requirements, although service may vary Mass customization provides opportunities to adjust financial products to needs of specific customers

2. Find a real company that uses JIT, either in your local community or in a business journal. Why did the company decide to use JIT? What have been the advantages and disadvantages of using JIT for that particular company? What has been the overall effect on the quality of the company’s goods or services? What has been the overall effect on the company’s bottom line? Students’ answers will vary based on the company they choose. 3. Interview someone from your local Chamber of Commerce and ask them what incentives the community offers to encourage organizations to locate there. (See if these incentives relate to the criteria firms use to make location decisions.) Students’ answers will vary.

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Build Your Skills: Reduce Cycle Time

The goal of this exercise is to help students understand the concept of cycle time and the five dimensions of cycle time: speed, connectivity, interactive relationships, customization, and responsiveness. During the role-play, students should be able to define the business activities that are related to the dimensions. The main concern is that students gather enough information to complete all boxes. In some cases, it may be hard for them to determine both strengths and weaknesses. For example, in some categories, the ―customer‖ may be able to identify only positive things, and in some cases, everything may be negative. The important thing is for the students to understand the variables that relate to cycle time improvement. Solve the Dilemma: Planning for Pizza

1. What mistake did McKing make in approaching the introduction of pizza? McKing failed to consider operations issues when designing the product. Specifically, it did not ensure that product delivery (the drive-through service) was feasible for the new pizza product. 2. How could this product introduction have been coordinated to avoid the problems that were encountered? Introduction of this product could have been coordinated better by teaming operations management personnel with the research and design personnel. Operations managers would know how to evaluate the product from an operational issue, thus taking into consideration how the product will be produced and delivered to the customer. 3. If you were an executive at McKing, how would you proceed with the introduction of pizza into the restaurants? Students’ answers will vary, but each should demonstrate an understanding of the problem being corrected. Build Your Business Plan: Managing Service and Manufacturing Operations

You need to stress to the students the growth in the service industry and the effect this has had on all of them. Sometimes students are confused and view the service industry as replacing the manufacturing industry. There has been a shift in the manufacturing sector of outsourcing and importing that has hurt the labor force. However, students need to understand this is only indirectly related to the growth of the service sector. What students need to understand is that unemployed workers in the manufacturing industry need to consider making the transition to the service sector. Ask students what preparation would be necessary for the labor force to enter the service sector.

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See for Yourself Case: Scentsy: The Smell of Success

Scentsy, a direct selling company founded by the Thompsons, is a distributor of wickless candles, decorative warmers, diffusers, cleaning products, and other scented items. Founded in 2004, on a sheep farm in Ohio, Scentsy has grown into a company with more than 250,000 independent contractors in more than 14 countries with distribution centers in the United States, Australia, Mexico, the Netherlands, and the United Kingdom. When the COVID-19 pandemic struck the United States in 2020, Scentsy had to act fast. Stay-at-home orders were issued throughout the country, and the business was engulfed in uncertainty. From the beginning, Scentsy was classified by local and state government as an essential business in the states it distributes products. When its Lexington, Kentucky, warehouse operations were shut down by local authorities, Scentsy’s legal team worked with state officials to demonstrate that the company met their definition of an essential business. Extensive safety measures were put in place for the company’s essential workers who could not do their jobs from home. Scentsy’s inventory management philosophy is grounded by the fact that the cost of having too little inventory to support the potential growth of its independent consultants is much greater than the cost of having excess inventory. The Thompsons made the critical early decision to lean into growth and invest heavily in additional inventory (raw materials and finished goods) and employees to be able to service growth while operating under challenging conditions such as social distancing, extra cleaning cycles, and personal protective equipment needs. They implemented hazard pay for essential workers, which led to a significant philosophical shift and the implementation of living wage standards. Overseas factory shutdowns created concern around sustainable growth. Supply chain managers worked with suppliers to facilitate large purchase orders. The company also engaged in supply chain mapping, identifying and selecting alternative overseas and domestic suppliers. The company’s ability to supply cleaning items while stock outs happened in the retail space validated the company’s decision to move production in-house. Being more vertically integrated over time has allowed Scentsy to become less reliant on others in the supply chain, making the company nimbler and more flexible. Scentsy’s independent salesforce thrives on social events. However, due to the pandemic, the company canceled its in-person events for the year, including the Scentsy World Tour, a traveling event with onsite training and a sneak peek of new products. Scentsy successfully shifted from in-person to virtual events. Scentsy stands out because it successfully meets the needs of key stakeholder groups. The company has been recognized by the Direct Selling Association for its customer-centric sales 10-275

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and marketing. Additionally, Scentsy’s efforts to bolster its supply chain amid a global pandemic and its ability to effectively communicate with its consultants were a recipe for success. 1. Describe Scentsy’s inventory management philosophy.

Scentsy’s inventory management philosophy is grounded by the fact that the cost of having too little inventory to support the potential growth of its independent consultants is much greater than the cost of having excess inventory. 2. What temporary measures did Scentsy put in place to support manufacturing and shipping operations? To meet the needs of consultants and consumers, each department analyzed its workforce and re-deployed employees to operations based on willingness, ability, and previous experience to enhance the company’s ability to produce products and fulfill orders. A process was put in place for high-level management and other white-collar workers to volunteer after-hours and on weekends to support manufacturing and shipping operations until the company could hire and train more than 800 new employees, effectively doubling its operations and consultant support teams. 3. Why do you think Scentsy sales spiked amid the pandemic? Quarantine, working from home, and the availability of stimulus funds created a perfect storm that led to the massive demand for Scentsy home fragrance and cleaning products. Team Exercise

Students will form groups and assign the responsibility of finding companies that outsource their production to other countries. Questions to ask include: What are the key advantages of this outsourcing decision? Do you see any drawbacks or weaknesses in this approach? Why would a company not outsource when such a tactic can be undertaken to cut manufacturing costs? Students will then report their findings to the class.

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CONNECT ACTIVITIES Yelp is Simplifying Restaurant Operations

Learning Objective: 8-3 Explain how operations management differs in manufacturing and service firms. Activity Summary: Businesses strive to standardize their process and utilize technology to create an automatic and structured response. In the service industry, it is challenging because the output is generally intangible and can rarely be saved, stored, or resold. Therefore, it is difficult to accurately estimate demand in order to match supply. Students will demonstrate understanding of how operations management works in a service-oriented business in this activity. New Belgium Brewery: Operations Management

Learning Objective: 8-1 Define operations management. Activity Summary: New Belgium Brewery is a small but constantly growing business that has won many awards and achieved a strong reputation for quality products and environmental responsibility. Students will learn the operational practices New Belgium puts into place to ensure a quality product to support a successful service and manufacturing operation. How to Use Activity: Have class off location! Work with a local business to get a tour of a manufacturing plant. Student will see concepts like line inputs, outputs, and transformation processes brought to life. Class Discussion: A supply chain encompasses the end-to-end development process of a particular good or service from concept to completion. What considerations might a business leader need to think of when planning a good’s production? At its core, a supply chain is a process that is followed. How would you describe the supply chain of a typical restaurant like McDonalds? Suppose you ordered a Big Mac. What needs to happen from a supply chain perspective at the farming, corporate, and restaurant levels to ensure the proper making of the sandwich? Scaling Up an Up Scale Customer Furniture Business

Learning Objective: 8-4 Describe the elements involved in planning and designing an operations system. Activity Summary: Students will explore the challenges faced by a local furniture manufacturer on their journey to meet their growing customer base. At the conclusion of the case, students will have a grasp on operations management and planning operations systems to effectively meet its supply chain. 10-277

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How to Use Activity: This exercise places students in the hot seat to make key business decisions. Consider exploring these supply chain concepts further by focusing on a logistics company, such as UPS or FedEx. Have students research all that needs to get their package delivered—everything from sticking the label on the package to it being delivered at the recipient’s door. (Note to Professor: This activity can be strengthened even more by having students research the process and effects of specifically overnight shipping.) Class Discussion: What are the steps needed for a package to go from one place to another? What considerations might these companies make when designing operations processes? Consider FedEx’s headquarters in Memphis and UPS’ in Louisville. The headquarters for both companies are situated within 500 miles of each other. Is this a coincidence? Why or why not? (Note to Professor: FedEx and UPS’ headquarters are situated within the geographic mean of the entire U.S. population, allowing them to be in the center of almost everyone within the country. As a result, packages can emerge from their hubs in a solid position to travel to the recipient. Connect back to the chapter’s section on Planning Facilities.)

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BONUS TEACHING RESOURCES Term Paper or Project Topics

These topics may be assigned as individual or collaborative projects: 1. 2. 3. 4.

The Influence of W. Edwards Deming on Modern Quality Control A Study of Just-in-Time Inventory Concepts in American Manufacturing Advantages and Disadvantages of Robots in Manufacturing Utilization of Quality Circles in Organizations

Guest Speaker Suggestions

1. A professor of production and operations management to talk about different production and operations processes. 2. A representative of a manufacturing firm to talk about production and operations management processes. 3. A quality-control manager from a local firm to talk about quality control techniques, statistical sampling, quality circles, or other quality programs employed at that firm. 4. A software representative to demonstrate CAD or CAM applications. Many of these software representatives will have videos or other visual presentations designed to inform potential users about their products. Some of these demonstration packages would be informative for class use. 5. A representative of a firm that markets industrial robots. As in the case of CAD and CAM software, industrial robot representatives may have videos and visual presentations to provide information about the use of industrial robots. Teaching Suggestions

24. This chapter offers the instructor an opportunity to relate experiences of a visit to a manufacturing plant. Or, the instructor may ask students to relate their knowledge of the production processes and facility layout of local manufacturing plants. Using local examples will add interest to the discussion. Use this discussion before proceeding to the chapter lecture. 25. Use the PowerPoint slides to enhance the lecture. 26. Emphasize the boxed material and cases in the textbook. Use ―Boxed Text Discussion Questions‖ and answers, which are provided in this Instructor’s Manual. Comments on the case are also given in this Instructor’s Manual. 27. Review the objectives given at the beginning of the chapter (also given at the beginning 10-279

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of each chapter in this Instructor’s Manual). Have students answer without referring to the ―Review Your Understanding‖ at the end of the chapter. 28. A student tour of a manufacturing facility would be ideal, but time and travel considerations often preclude such plans. An alternative is for the instructor to tour a local manufacturing facility and report back to students the different production and operations processes and layout facilities. The instructor might videotape some of the production and operations processes, giving students a view of a local manufacturing facility.

Chapter 9: Motivating the Workforce SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Hilton Motivates Its Employees With a Touch of Hospitality Responding to Business Challenges: Burgerville’s Employee Motivation Strategy Is Hot Off the Grill Consider Ethics and Social Responsibility: A Perfect Fit: Patagonia’s Passionate Employees Business Disruption: Lockheed Martin Flexes Its Work Schedule So You Think You May Be Good at Motivating a Workforce END OF CHAPTER TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Motivating Solve the Dilemma: Motivating to Win Build Your Business Plan: Motivating the Workforce See for Yourself Case: Inside Google’s High-Performance Culture Team Exercise CONNECT ACTIVITIES Employees Love SAS iSeeIt! Video Case: Maslow's Hierarchy of Needs Video case: Appletree Answers 10-280

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BONUS TEACHING RESOURCES Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions

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SUMMARY Because employees do the actual work of the business and influence whether the firm achieves its objectives, most top managers agree that employees are an organization’s most valuable resource. To achieve organizational objectives, employees must have the motivation, ability (appropriate knowledge and skills), and tools (proper training and equipment) to perform their jobs. We examine employees’ needs and motivation, managers’ views of workers, and several strategies for motivating employees. Managers who understand the needs of their employees can help them reach higher levels of productivity and thus contribute to the achievement of organizational goals.

LEARNING OBJECTIVES LO 9-1

Explain why the study of human relations is important.

LO 9-2

Summarize early studies that laid the groundwork for understanding employee motivation.

LO 9-3

Compare and contrast the human relations theories of Abraham Maslow and Frederick Herzberg.

LO 9-4

Investigate various theories of motivation, including Theories X, Y, and Z; equity theory; expectancy theory; and goal-setting theory.

LO 9-5

Describe some of the strategies that managers use to motivate employees.

LO 9-6

Critique a business’s program for motivating its sales force.

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KEY TERMS AND DEFINITIONS behavior modification

Changing behavior and encouraging appropriate actions by relating the consequences of behavior to the behavior itself.

classical theory of motivation

Theory suggesting that money is the sole motivator for workers.

compressed workweek

A 4-day (or shorter) period in which an employee works 40 hr.

equity theory

An assumption that how much people are willing to contribute to an organization depends on their assessment of the fairness, or equity, of the rewards they will receive in exchange.

esteem needs

The need for respect—both self-respect and respect from others.

expectancy theory

The assumption that motivation depends not only on how much a person wants something but also on how likely they are to get it.

extrinsic rewards

Benefits and/or recognition received from someone else.

flextime

A program that allows employees to choose their starting and ending times, provided that they are at work during a specified core period.

goal-setting theory

Refers to the impact that setting goals has on performance.

human relations

The study of the behavior of individuals and groups in organizational settings.

hygiene factors

Aspects of Herzberg’s theory of motivation that focus on the work setting and not the content of the work; these aspects include adequate wages, comfortable and safe working conditions, fair company policies, and job security.

intrinsic rewards

The personal satisfaction and enjoyment felt after attaining a goal.

job enlargement

The addition of more tasks to a job instead of treating each task as separate.

job enrichment

The incorporation of motivational factors such as opportunity for achievement, recognition, responsibility, and advancement, into a job.

job rotation

Movement of employees from one job to another in an effort to relieve the boredom often associated with job specialization. 10-283

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job sharing

Performance of one full-time job by two people on part-time hours.

Maslow’s hierarchy

A theory that arranges the five basic needs of people—physiological, security, social, esteem, and self-actualization—into the order in which people strive to satisfy them.

morale

An employee’s attitude toward their job, employer, and colleagues.

motivation

An inner drive that directs a person’s behavior toward goals.

motivational factors

Aspects of Herzberg’s theory of motivation that focus on the content of the work itself; these aspects include achievement, recognition, involvement, responsibility, and advancement.

physiological needs

The most basic human needs to be satisfied—water, food, shelter, and clothing.

reinforcement theory

The theory that behavior can be strengthened or weakened through the use of rewards and punishments.

security needs

The need to protect oneself from physical and economic harm.

self-actualization needs

The need to be the best one can be; at the top of Maslow’s hierarchy.

social needs

The need for love, companionship, and friendship—the desire for acceptance by others.

Theory X

McGregor’s traditional view of management whereby it is assumed that workers generally dislike work and must be forced to do their jobs.

Theory Y

McGregor’s humanistic view of management whereby it is assumed that workers like to work and that under proper conditions employees will seek out responsibility in an attempt to satisfy their social, esteem, and self-actualization needs.

Theory Z

A management philosophy that stresses employee participation in all aspects of company decision making.

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Explain why the study of human relations is important.  Introduction  Nature of Human Relations

Key Terms:  Human relations  Motivation  Morale  Intrinsic rewards  Extrinsic rewards

PowerPoint Slides: PPT 9.4

Lecture Outline and Notes: I. Nature of Human Relations A. Human relations is the study of individual and group behavior in organizational settings; it is concerned with what motivates employees to perform their jobs. 1. In business, human relations involves motivating employees to achieve organizational objectives efficiently and effectively. 2. A central question for the human resources manager is: ―What motivates employees to perform?‖ 3. Successful companies provide important lessons about how to treat employees. Most top managers agree that employees are a company’s most important resource.

PPT 9.6

B. Motivation is an inner drive that directs behavior toward goals (Figure 9.1). 1. A goal is the satisfaction of a need, while a need is the difference between a desired state and an actual state. 2. Motivation explains why people behave as they do; a lack of motivation explains why people avoid doing what they should do. 3. Human relations is concerned with the needs of employees, their goals and how they try to achieve them, and the impact of those needs and goals on job performance. 4. Motivating employees to stay engaged is a key 10-285

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responsibility of management. a. Engagement involves emotional involvement and commitment by the employee. b. Being engaged results in carrying out the expectations and obligations of employment by the employee. 5. A person who recognizes or feels a need is motivated to take action to satisfy the need and achieve a goal. a. For example, a salesperson whose performance is far below other salespeople’s performance will likely try to change their tactics to improve their skills. C. Morale is an employee’s attitude toward their job, employer, and colleagues. PPT 9.8

1. High morale contributes to high levels of productivity, high returns to stakeholders, and employee loyalty. a. When employees have high morale, motivation is high, and goals are achieved 2. Low morale may cause high absenteeism and turnover. 3. Many companies offer diverse benefits to boost morale and satisfaction, including involving employees in decision making, showing appreciation for their efforts, and creating a pleasant work environment. 4. Human resources managers can also use benefits as well as daily motivational incentives to increase morale. D. Perceptions of rewards 1. An intrinsic reward is the personal satisfaction and enjoyment you feel from attaining a goal.

PPT 9.9

2. An extrinsic reward is the benefit or recognition you receive from someone else. 3. Intrinsic and extrinsic rewards both increase employee motivation. 4. Respect, involvement, appreciation, adequate compensation, promotions, a pleasant work environment, and a positive organizational culture are all morale boosters, all of which can help companies retain good employees (Table 9.1).

PPT 9.10

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LO 9-2

Summarize early studies that laid the groundwork for understanding employee motivation. 

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Key Terms:  Classical theory of motivation

Historical Perspectives on Employee Motivation o Classical Theory of Motivation o The Hawthorne Studies

PPT 9.12

II. Historical Perspectives on Employee Motivation A. From early studies, researchers have attempted to find ways to motivate workers. B. Classical Theory of Motivation 1. According to the classical theory of motivation, money is the sole motivator for workers and can lead to increased productivity. 2. Frederick Taylor and Frank and Lillian Gilbreth conducted time and motion studies in an effort to improve employees’ productivity, which led to the application of scientific principles to management. a. Taylor believed managers should break down each job into component tasks, determine how best to perform each task, and specify the output for each worker in order to improve productivity. b. Taylor suggested that managers link a worker’s pay directly to output. i. He developed the piece-rate system, under which employees were paid a certain amount for each unit they produced. c. Taylor and most early 20th-century managers generally felt that money and job security were the primary motivators of employees. 3. Managers are increasingly striving to relate pay to performance in order to motivate employees and boost productivity. However, there are other considerations as well.

PPT 9.13

C. The Hawthorne Studies 1. Elton Mayo and Harvard researchers continued Taylor’s work in studies at the Hawthorne Works Plant of the Western Electric Company that sought to identify what physical working conditions in the workplace stimulated 10-287

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employees to be most productive. 2. The studies found that employee productivity increased regardless of the physical conditions; they were responding to the attention they received, a phenomenon known as ―the Hawthorne effect.‖ 3. The researchers concluded that social and psychological factors could significantly affect productivity and morale. 4. They revealed that human factors influence employee behavior. LO 9-3

Compare and contrast the human relations theories of Abraham Maslow and Frederick Herzberg.  Theories of Employee Motivation o Maslow’s Hierarchy of Needs o Herzberg’s Two-Factor Theory

Key Terms:  Maslow’s hierarchy  Physiological needs  Security needs  Social needs  Esteem needs  Self-actualization needs  Hygiene factors  Motivational factors

PPT 9.14

III. Theories of Employee Motivation A. Maslow’s Hierarchy of Needs (Figure 9.2) 1. According to Maslow, an employee is motivated by where they are at any given time relative to their needs. 2. Managers should understand their employees’ needs in order to discover what the most appropriate motivators would be at any given time. 3. Psychologist Abraham Maslow arranged humans’ five basic needs into Maslow’s hierarchy in the order in which people strive to satisfy them. a. Physiological needs are the first to be satisfied and include the needs for the essentials of life—water, food, shelter, and clothing. b. Security needs relate to protecting oneself from physical and economic harm. c. Social needs are the needs for love, companionship, and friendship—the desire for acceptance from others. d. Esteem needs relate to the desire for respect—both 10-288

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self-respect and respect from others. Competition is a form of esteem that motivates people to be more productive. e. Self-actualization is the desire to be the best one can be. 4. Maslow’s theory maintains that needs at the bottom of the hierarchy must be satisfied before higher level needs can be met. 5. Maslow’s theory also suggests that if lower level needs are reactivated, the individual will try to satisfy that need rather than higher level needs. 6. Managers can learn from Maslow’s hierarchy that employees will be motivated to contribute to organizational goals only if they first satisfy their physiological, security, and social needs through their work. PPT 9.15 PPT 9.16

B. Herzberg’s Two-Factor Theory (Table 9.2) 1. Frederick Herzberg studied various factors relating to the job and their relation to employee motivation and concluded that job factors can be classified into two categories. a. Hygiene factors relate to the work setting rather than the content of the work and include adequate wages, comfortable and safe working conditions, fair company policies, and job security. These factors do not necessarily motivate employees, but their absence may be a source of dissatisfaction. b. Motivational factors relate to the content of the work itself and include achievement, recognition, involvement, responsibility, and advancement. They promote higher levels of performance. Their absence may not lead to dissatisfaction, but their presence is likely to motivate people to excel. 2. Herzberg’s motivational factors and Maslow’s esteem and self-actualization needs are similar. 3. The higher level needs in Maslow’s hierarchy and the motivational factors identified by Herzberg are important in improving productivity.

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LO 9-4

Investigate various theories of motivation, including Theories X, Y, and Z; equity theory; expectancy theory; and goal-setting theory. o McGregor’s Theory X and Theory Y o Theory Z o Equity Theory o Expectancy Theory

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Key Terms:  Theory X  Theory Y  Theory Z  Equity theory  Expectancy theory  Goal-setting theory

o Goal-Setting Theory PPT 9.18

C. McGregor’s Theory X and Theory Y. 1. Douglas McGregor contrasted two views of management, the traditional view called Theory X and a humanistic view, which he called Theory Y. 2. Theory X managers assume that workers generally dislike work and must be forced to do their jobs. a. The average person naturally dislikes work and will avoid it when possible.

PPT 9.19

Theory X assumes that the average worker prefers to be directed, avoids responsibility, has relatively little ambition, and wants security.

ii.

Most workers must be coerced, controlled, directed, or threatened with punishment to get them to work toward achieving organizational objectives.

iii.

Theory X focuses on physiological and security needs and virtually ignores the higher needs discussed by Maslow.

3. Theory Y assumes that workers like to work and will normally seek out responsibility to satisfy their social, esteem, and self-actualization needs. a. Theory Y managers maintain less control and supervision, do not use fear as a motivator, and are more democratic in decision making. b. Theory Y assumes people will exercise self-direction and self-control to achieve objectives to which they are committed. c. Theory Y makes the following assumptions about how employees see work: i.

The expenditure of physical and mental effort in 10-290

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work is as natural as play or rest. ii.

People will exercise self-direction and self-control to achieve objectives to which they are committed.

iii.

People will commit to objectives when they realize that the achievement of those goals will bring them personal reward.

iv.

The average person will accept and seek responsibility.

Imagination, ingenuity, and creativity can help solve organizational problems, but most organizations do not make adequate use of these characteristics in their employees.

vi.

Organizations today do not make full use of workers’ intellectual potential.

d. Theory Y managers address the high-level needs in Maslow’s hierarchy as well as physiological and security needs. e. Theory Y has gained widespread support and has displaced Theory X. D. Theory Z PPT 9.20

1. Theory Z is a management philosophy that stresses employee participation in all aspects of company decision making. 2. Theory Z was developed by William Ouchi, and it incorporates and adapts many elements of the Japanese approach to management. a. Managers and workers share responsibilities; the management style is participative, and employment is long term. b. Some have begun to question Theory Z. c. Theory Z results in employees feeling organizational ownership, and research has found that these feelings of ownership may produce positive attitudinal and behavior effects for employees. 3. Theory Y and Theory Z are complementary. 4. Comparisons of Theories X, Y, and Z (Table 9.3)

PPT 9.21

E. Equity Theory 1. According to equity theory, how much people are willing to contribute to an organization depends on their 10-291

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assessment of the fairness, or equity, of the rewards they will receive in exchange. 2. In theory, the rewards an individual receives are proportional to the contribution made to the organization. 3. Each worker regularly develops a personal input–output ratio by taking stock of their contribution (inputs) to the organization in time, effort, skills, and experience and assessing the rewards (outputs) offered by the organization in pay, benefits, recognition, and promotions. 4. The worker compares their input–output ratio to other employees. If the ratios are close, the worker will feel that they are being treated equitably. 5. An employee who feels that their rewards don’t match their contributions (in equity) will probably try to get a raise or leave the organization. 6. Almost all issues involved in equity theory are subjective and can cause problems for managers. 7. Managers should try to avoid equity problems by ensuring that rewards are distributed on the basis of performance and that all employees clearly understand the basis for their pay and benefits. F. Expectancy Theory

PPT 9.23

1. Psychologist Victor Vroom’s expectancy theory assumes that motivation depends not only on how much a person wants something but on the person’s perception of how likely they are to get it. 2. A person who wants something and has reason to be optimistic will be strongly motivated. G. Goal-Setting Theory 1. Goal-setting theory refers to the impact that setting goals has on performance. 2. Goals act as motivators to focus employee efforts. 3. In 1954, Peter Drucker introduced the term management by objectives (MBO) that refers to the need to develop goals that both managers and employees can understand and agree upon. 4. Linking personal and organizational objectives can give employees a greater sense of commitment toward achieving organizational goals.

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LO 9-5

Describe some of the strategies that managers use to motivate employees. 

Strategies for Motivating Employees

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Key Terms:  Behavior modification  Reinforcement theory  Job rotation

o Behavior Modification

 Job enlargement

o Job Design

 Job enrichment

o Importance of Motivational Strategies

 Flextime  Compressed workweek  Job sharing

PPT 9.25

IV. Strategies for Motivating Employees A. Based on the theories of motivation discussed earlier, businesses have developed a number of strategies for motivating employees to achieve organizational objectives and for boosting morale and productivity. B. Behavior Modification 1. Behavior modification involves changing behavior and encouraging appropriate actions by relating the consequences to the behavior itself. 2. The concept of behavior modification was developed by psychologist B. F. Skinner, who showed that reward and punishment can modify behavior. 3. If behavior is positively reinforced, or rewarded, that behavior will tend to be repeated, while behavior that is punished will tend to be eliminated. 4. In the long run, rewarding appropriate behavior will generally be a more effective way to modify behavior.

PPT 9.26

PPT 9.27

C. Job Design 1. Managers have several strategies they can use to design jobs to help improve employee motivation. 2. Job rotation allows employees to move from one job to another to relieve the boredom associated with specialization (Table 9.4). a. Job rotation allows workers to undertake a variety of tasks and to learn new skills. b. One drawback of job rotation is that employees may eventually become bored with all the jobs in the cycle. c. Job rotation is extremely useful when a person is being 10-293

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trained for a position that requires an understanding of the various units in an organization. d. Job rotation is also used to cross-train today’s selfdirected work teams. 3. Job enlargement involves adding tasks to a job instead of treating each task as a separate job. a. Job enlargement, like job rotation, was developed to overcome the boredom associated with specialization. b. Jobs are more satisfying as the number of tasks performed by an individual increases. 4. Job enrichment involves incorporating motivational factors such as opportunity for achievement, recognition, responsibility, and advancement into a job. a. Job enrichment gives workers not only more tasks within the job but more control and authority over the job.

PPT 9.28

b. Job enrichment enhances a worker’s feeling of responsibility and provides opportunities for growth and advancement when the worker is able to take on more challenging tasks. 5. Many managers have turned to flexible scheduling strategies such as flextime, compressed workweeks, job sharing, part-time work, and telecommuting. a. Managers are using flexible scheduling strategies to meet problems of poor motivation and high absenteeism.

PPT 9.29

b. Flextime is a program that allows employees to choose their starting and ending times as long as they are at work during a specified core period. (Figure 9.3) c. A compressed workweek is a 4-day (or shorter) period in which an employee works 40 hr. d. Job sharing occurs when two people do one job. The company benefits by gaining the skills of two people for one job, often at a lower total salary. Job sharing gives both people an opportunity to work as well as time for other obligations such as parenting. e. Other flexible scheduling strategies are being used. i.

One strategy allows full-time workers to work part time for a certain period.

ii.

Another allows employees to split their time between the office and home. Some firms allow 10-294

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employees to work at home a few days of the week (sometimes called telecommuting). f. Usually companies offer flexible work schedules to give more options to employees who are trying to juggle work and family responsibilities. g. Preliminary findings indicate such plans increase job satisfaction, which, in turn, increase productivity. i. More flexible schedules are associated with healthier lifestyle choices such as increased physical activity and healthier sleep habits. ii. However, there may be some downsides. Some have found that working from home limits their career advancement opportunities. Also, telecommuting may blur the boundaries between office and home. PPT 9.32

D. Importance of Motivational Strategies 1. Motivation is a process that affects all the relationships within an organization and influences many areas such as pay, promotion, job design, training opportunities, and reporting relationships. 2. Motivating employees to increase satisfaction and productivity is an important concern for organizations seeking to remain competitive in the global marketplace. 3. The economic environment can change an employee’s motivation. a. In a slow growth or recession economy, sales can flatten or decrease and morale can drop because of the need to cut jobs. b. In the most recent recession, many workers feared losing their jobs and increased the amount they were saving. c. In good economic times, employees may be more demanding and be on the lookout for better opportunities. d. New rewards or incentives may help motivate workers in such economies.

PPT 9.349.35

4. Table 9.5 shows Companies with Excellent Motivational Strategies, along with the types of strategies they use to motivate employees.

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LO 9-6 PPT 9.36

Critique a business’s program for motivating its sales force. VI.

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Key Terms:

Solve the Dilemma: Motivating to Win X. Eagle Pharmaceutical has long been recognized for its innovative techniques for motivating its salesforce. Y. Features the salesperson who has been most successful in previous quarter in company newsletter ―Touchdown.‖ 1. Receive football jersey 2. Plaque 3. $1,000 worth of Eagle stock Z. ―Superbowl Club‖ for employees who reach/exceed their sales goals

PPT 9.37

AA. ―Heisman Award‖ trip to Caribbean to top 20 salespeople BB.

Video conference hookup

1. Between honored salesperson and four regional sales managers to share some tactics and strategies winning salesperson uses. PPT 9.38

2. Managers summarize these ideas and pass them along to their salespeople. CC.

Critical Thinking Questions:

1. Which motivational theories are in use at Eagle? 2. What is the value of getting employees to compete against a goal instead of against one another? 3. Put yourself in the shoes of one of the four regional sales managers and argue against potential cutbacks to the motivational program. (Answers appear under the End of Chapter Teaching Resources section of this Instructor's Manual.)

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Hilton Motivates Its Employees With a Touch of Hospitality

Hilton is widely recognized as being an employee-centric company due, in large part, to its innovative workplace practices. Hilton has improved its resources for veterans and working parents, expanded its parental leave policy, and created dozens of new professional development and advancement courses. Hilton prioritizes a culture of respect, inclusion, and hospitality. 1. Describe the motivational strategies Hilton uses. Hilton implemented various motivational strategies designed to enhance employee engagement including: the Hilton Senior Leadership Business Immersion program where senior leaders and board members spend 3 days doing the work of frontline employees such as checking in guests, carrying luggage to rooms, handling guest issues, and cleaning rooms. The company also promotes lifelong learning with its leadership development framework, Lead@Hilton. Hilton also understands that recognition matters as demonstrated by its employee recognition program. 2. How does Hilton’s immersion program benefit employees? This 3-day immersion program provides management with authentic insights into challenges the staff face and what improvements are needed. 3. Do you believe that satisfied employees will lead to satisfied hotel guests?

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Answers will vary but most students will agree that the Hilton approach of trying to prevent burnout and staff turnover plays a critical role in improving customer experiences. Responding to Business Challenges: Burgerville’s Employee Motivation Strategy Is Hot Off the Grill 1. Is health care a hygiene factor or a motivational factor? Health care is a hygiene factor since it is a benefit and falls under salary. 2. Burgerville offers development programs to help employees advance. Which need does this meet on Maslow’s hierarchy of needs? This falls under self-actualization since it helps employees be the “best they can be.” 3. Do Burgerville managers seem to adopt a Theory X approach or a Theory Y approach to managing employees? Explain your reasoning. Most students will say that Burgerville managers seem to adopt a Theory Y approach to managing employees since they promote a culture where employees advance. It empowers employees by paying competitively within the industry, and it places high precedence on employee input and feedback. Consider Ethics and Social Responsibility: A Perfect Fit: Patagonia’s Passionate Employees

1. How does Patagonia use training and a fun, informal work environment to encourage employees to support Patagonia’s mission? Patagonia ensures employees understand and support its mission statement using a mix of inperson training, video training, and online instruction to help employees learn about company expectations. Patagonia also creates excitement for the company’s mission with a fun, informal work environment for employees. For example, it instituted a flextime policy that allows employees to go surfing during the day. 2. Why do you think Yvon Chouinard decided to make his company so focused on employee satisfaction? New employees are hired based in large part on their passion for the firm’s goals. Yvon Chouinard wanted the firm’s main goal to be improving the planet not pursuing profits. At Patagonia, employees are viewed as important partners toward advancing environmental preservation. 3. Do you think that an informal work environment that provides employees freedom to take off during the day will be harmful or helpful in the long run? Why? Answers will vary with some students maintaining that an informal work environment fosters collaboration and dedication that will continue to generate long-term success. Others will contend that in the long run an informal environment does not provide enough structure and accountability and will be harmful. 10-298

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Business Disruption: Lockheed Martin Flexes Its Work Schedule

1. What are the advantages of a compressed workweek? A compressed workweek results in 3-day weekends so the employees have more flexibility to engage in personal activities. Many think this helps promote work–life balance. It also reduces computing time and costs. 2. What are the disadvantages of a compressed workweek? Longer days can cause worker fatigue and can negatively impact work–life balance for employees who have scheduling conflicts or family obligations. 3. Why do you think employers such as Lockheed Martin offer compressed work schedules? Answers will vary depending on students’ personal perspective and lifestyle. So You Think You Might Be Good at Motivating a Workforce

Why are human relations programs important in the workforce? They are necessary to teach employees about sensitivity to other cultures, religions, and beliefs, as well as for teaching the workforce about the organization so that they understand how they fit into the larger picture. Employees need to appreciate the benefits of working together to make the firm run smoothly, and they also need to understand how their contributions help the firm. In order to stay motivated, most employees need to feel like what they do each day contributes something of value to the firm. Disclosing information and including employees in decision-making processes will also help employees feel valuable and wanted within the firm.

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END OF CHAPTER TEACHING RESOURCES Check Your Progress

1. Why do managers need to understand the needs of their employees? Managers need to understand the needs of their employees because in an organizational setting, individuals and groups need to be satisfied in order to achieve organizational goals. Human relations is concerned with the needs of employees, their goals, and the impact of these needs and goals on job performance. Social and psychological factors significantly affect productivity and morale. Managers who understand employees’ needs, beliefs, and expectations are most successful in motivating them. 2. Describe the motivation process. Motivational factors that relate to the content of the work itself include achievement, recognition, involvement, responsibility, and advancement. These factors promote higher levels of performance. 3. What was the goal of the Hawthorne studies? What was the outcome of those studies? In the Hawthorne studies, Elton Mayo and a team of researchers tried to determine what physical conditions in the workplace, such as light and noise levels, stimulate employees to be most productive. Their studies revealed that social and psychological factors significantly affect productivity and morale. Productivity increased regardless of the physical conditions. Employees were responding to the attention they received, not the changing physical work conditions. This phenomenon is known as the Hawthorne effect. 4. Explain Maslow’s hierarchy of needs. What does it tell us about employee motivation? Abraham Maslow theorized that human beings have five basic needs: physiological, security, social, esteem, and self-actualization. Maslow’s hierarchy arranged these needs in the order in which people strive to satisfy them. Maslow’s theory suggests that employees will be motivated to contribute to organizational goals only if they are first able to satisfy their physiological, security, and social needs through their work. 5. What are Herzberg’s hygiene and motivational factors? How can managers use them to motivate workers? Hygiene factors relate to the work setting—not work content—and include adequate wages, comfortable working conditions, fair company policies, and job security. Motivational factors relate to the content of the work and include achievement, recognition, the work itself, involvement, responsibility, and advancement. Managers 10-300

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must make certain that hygiene factors are present or workers will become dissatisfied and possibly leave. They can motivate workers by providing motivational factors. 6. Contrast the assumptions of Theory X and Theory Y. Why has Theory Y replaced Theory X in management today? Theory X assumes that (1) workers do not like work and will avoid it when possible; (2) workers must be coerced, controlled, directed, or threatened with punishment to get them to work toward achievement of organizational goals; and (3) workers prefer to be directed, prefer to avoid responsibility, want security, and have little ambition. By contrast, Theory Y assumes (1) the expenditure of physical and mental effort and work is natural, (2) workers will exercise self-direction and self-control in the service of objectives to which they are committed, (3) workers will commit to objectives when they realize that achievement to those objectives will bring them personal reward, and (4) workers will accept and seek out responsibilities. Probably the main reason Theory Y has supplanted Theory X is that managers had determined that Theory X management styles did not lead to improved productivity. Also, many organizations have studied the success of Japanese worker productivity. The Japanese had long ago dropped the Theory X management style. 7. What is Theory Z? How can businesses apply Theory Z to the workplace? Theory Z stresses employee participation in all aspects of organizational decision making. This theory includes many elements of the Japanese approach to management. Theory Z is less formal and more personal, work relationships are long term, there is less specialization, there is more group decision making, less control, and managers focus on the worker’s whole life. Businesses wishing to apply Theory Z have to change to a more participative, employee-involved, or work-team oriented program. This means dropping old traditional manager–employee management styles. For Theory Z to work, management must be committed to employee involvement. 8. Identify and describe four job design strategies. There are several strategies managers may use to structure jobs to promote employee motivation. a. Job rotation allows employees to move from one job to another in an effort to relieve boredom associated with specialization. b. Job enlargement involves adding tasks to a job instead of treating each task as a separate job.

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c. Job enrichment involves achievement, recognition, responsibility, and advancement into the job situation. d. Flexible scheduling strategies involve deviations from the traditional 40-hr workweek consisting of five 8-hr days with fixed starting and ending times. 9. Name and describe some flexible scheduling strategies. How can flexible schedules help motivate workers? Flexible scheduling strategies include: a. Flextime—allows employees to choose their starting and ending times as long as they are at work during a specified core period. b. The compressed workweek—a 4-day (or shorter) period in which an employee works 40 hr. c. Job sharing—when two people do one job. A business may use flexible scheduling strategies to accommodate the needs of employees (e.g., students or parents) as well as to motivate them. Alternative schedules may be needed to survive tough economic times. 10. Why are motivational strategies important to both employees and employers? Motivation can foster employee loyalty and boost productivity. It affects all relationships within an organization and influences many areas such as pay, promotion, job design, training opportunities, and reporting relationships. Motivating employees is important for organizations seeking to remain competitive in the global marketplace. Get Involved

1. Consider a person who is without housing: How would a person be motivated and what actions would that person take? Use the motivation process to explain. Which of the needs in Maslow’s hierarchy are likely to be most important? Least important? Motivation involves trying to meet both needs and goals. A person who is without housing would be motivated to find a way to meet their physiological needs such as food and shelter. They might be motivated to join a program that offers job training or the chance to work such as Goodwill. They might also try to get involved with a housing program. In this case, physiological needs would be most important, followed by security needs. Because the person is more concerned with surviving, social, esteem, and selfactualization needs are likely to be the least important. 10-302

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2. View the video Cheaper by the Dozen (1950) and report on how the Gilbreths tried to incorporate their passion for efficiency into their family life. Student answers will vary. 3. What events and trends in society, technology, and economics do you think will shape management theory in the future? Student answers will vary. Build Your Skills: Motivating

Suggestions for Use Before assigning the exercise, you might ask some or all of the following questions to lay the groundwork for the exercise. 

What is your favorite recreational activity to pursue during your leisure time? Maybe you have a passion for playing tennis, rollerblading, hiking in the mountains, water skiing, snowboarding, golfing, or bicycling.



What is it about you that is different when you’re ―at play,‖ doing whatever activity it is you enjoy doing, than when you’re ―on the job‖ performing a task? (Because I have chosen when to play, what to play, and where to play, there are no pressures, deadlines, or requirements imposed on me by others. The freedom that comes from play often does not exist when I’m ―on the job,‖ so my approach to both tend to be totally different.)



What characteristics does ―play‖ possess that ―work‖ often does not that can make play more appealing than work?

(See column two of the exercise chart in the textbook on the Build Your Skills: Motivating page for some ideas here.) Critical Thinking Questions: 1. What prevents managers from making work more like play? Many managers believe that people can’t enjoy themselves and get work done at the same time. Work to them is serious business. Therefore, they tend not to encourage many of the practices outlined in column four of the chart. Many of these options also cause some managers to feel as though they have lost control over employees’ behavior because the environment is too loose or because employees have so much say about how, where, and when the work gets done. 10-303

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2. Are these forces real or imagined? For the most part, these forces are imagined because research supports that there is increased productivity in environments that allow creativity, humor, and other less restrictive behaviors to take place. Obviously, it is possible for everybody to be focused on having fun to the point of not getting the job done. As with everything in life, balance is necessary. 3. What would be the likely (positive and negative) results of making work more like play? Likely positive results are increased synergy, more creative approaches to solving problems, increased feelings of ownership for what’s going on, greater job satisfaction, and increased productivity. Likely negative results are that controlling bosses will not be able to adapt very well to this environment; without the right kind of leadership, these systems can be misdirected; and not all employees are suited to many of these approaches. 4. Could others in the organization accept such creative behaviors? It depends on how they perceive the behaviors. Most likely, however, if others in the organization see tangible results coming out of work groups characterized by such creative behaviors, they will be more inclined to accept the behaviors. Solve the Dilemma: Motivating to Win

1. Which motivational theories are in use at Eagle? Eagle uses expectancy theory in combination with the self-esteem needs of Maslow and the motivational factors of Herzberg to motivate its employees. Each of the awards, and in particular being featured in the company newsletter, receiving a jersey, and being awarded a plaque, enhance employee self-esteem (Maslow) and are considered motivational factors (Herzberg). The winning salesperson also gets their ―successful tactics and strategies‖ recognized; they are summarized and passed on to other salespeople (another way of encouraging salespeople to work toward a common goal rather than compete against one another). The criteria for award selection are clear and understood by each employee. The drives to excel and accomplish the objectives necessary for the rewards are consistent with the expectancy theory of motivation. 2. What is the value of getting employees to compete against a goal instead of against one another? Competition against a goal instead of against one another is important because of its impact on teamwork. Employees are less likely to help each other out when competing 10-304

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against one another than when competing against a goal. Further, competition against a goal offers each employee the opportunity to succeed, regardless of the performance of other employees. 3. Put yourself in the shoes of one of the four regional sales managers and argue against potential cutbacks to the motivational program. Students’ answers will vary but should present logical arguments that demonstrate relevant understanding of the chapter material. One possible answer is that cutbacks will force salespeople to modify their expectations and may discourage them from working as hard. Build Your Business Plan: Motivating the Workforce

Consider having an open discussion with the students about what their previous employers have used to motivate them. Did it cost the employer much to implement this program? Perhaps it wasn’t money, but time, which is an opportunity cost. Following a discussion of what students think works and what doesn’t as motivators to employees, challenge the students to be creative when selecting motivating techniques that would work for their business. See for Yourself Case: Inside Google’s High-Performance Culture

Google is the number one search engine, retaining an impressive 90% of the global market share of mobile, web, and in-app searches Google has a wide variety of products such as web analytics, advertising, and digital book publishing. As one of the largest tech companies in the world, Google must motivate its employees to continuously innovate. To create a high-performance culture, Google invests in its employees. When Sergey Brin and Larry Page founded the company, they recognized employees had to put in long hours to make the company not only successful but also flexible enough to adapt to the changing environment. The company strives to make its corporate culture fun and innovative. In addition to satisfying the needs of its current employees, Google works to ensure it recruits top talent. Google recruiters take a creative approach to reviewing resumes to ensure the company hires the most creative, talented individuals. The recruiters focus on the bottom part of the resume where candidates focus showcase their innovation and creative talents. 1. How does Google invest in its employees? The Googleplex campus contains amenities such as onsite gyms, swimming pools, a bowling alley, an outdoor volleyball court, and even high-tech ―nap pods‖ for optimized downtime. Google employees are provided with perks to make the campus seem like a second home. They built a sense of community with breakout zones and microkitchens around the campus 10-305

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in addition to its peer-to-peer coaching program, Googler-to-Googler. Google also invested in its employees while they were working remotely: giving each employee a $1,000 home office allowance, fitness coaches, and virtual cooking classes. 2. Describe Google’s approach to building effective teams. It ensures that employees feel safe psychologically; that is, employees should feel free to contribute to meetings and conversations without fear of rejection, embarrassment, or punishment. The company also looks for a specific set of qualities for its leaders to make sure teams are productive. Google also conducted a study that found the best leaders empowered their teams instead of micromanaging. 3. In what ways does Google empower its employees? Google’s decentralized structure, means decision-making authority is delegated as far down the chain of command as possible. This can improve responsiveness, enhance creativity, and empower employees to make decisions. Employees can use 20% of their time for personal side projects which has resulted in many new products. The company also has the Google.org Fellowship that allows its employees to work full time for nonprofit partners for up to 6 months. Team Exercise

Students will form groups and outline a compensation package that they would consider ideal in motivating an employee, recognizing performance, and assisting the company in attaining its cost-to-performance objectives. They should think about the impact of intrinsic and extrinsic motivation and recognition. They should ask themselves the question: How can flexible scheduling strategies be used effectively to motivate employees? Students will then report their compensation packages to the class.

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CONNECT ACTIVITIES Employees Love SAS

Learning Objective 9-1: Explain why the study of human relations is important. Activity Summary: SAS, a software company established in 1976, has consistently been praised as one of the best places to work. Year after year, the company receives high rankings and awards from magazines such as Fortune and Working Mother. Students will grasp what SAS is doing to motivate its workforce. How to Use Activity: After completing this case, ask students to write down how they like to be motivated. What needs, goals, and rewards do they have in order to be spurred to work productively for the benefit of a specific employer? Class Discussion: We’re all driven to work for a variety of reasons—what motivates you? Responses from students may include money, type of work, colleagues, benefits, and so on. What is the most effective way for you to be motivated? As one progresses through their career, how might their motivation change? iSeeIt! Video Case: Maslow's Hierarchy of Needs

Learning Objective 9-3: Compare and contrast the human relations theories of Abraham Maslow and Frederick Herzberg. Activity Summary: This activity describes how regardless of individual, humans as a collective have very similar needs in work and life, according to Maslow’s research. How to Use Activity: Using Maslow’s Hierarchy of Needs have students list examples that align with each level. Class Discussion: What examples can you share that align with each level on Maslow’s hierarchy? Do you agree with Maslow’s hierarchy? Do you think anything doesn’t belong or is missing? Video case: Appletree Answers

Learning Objective 9-4: Investigate various theories of motivation, including Theories X, Y, and Z; equity theory; expectancy theory; and goal-setting theory. Activity Summary: Appletree Answers provides call centers and receptionist services for companies all across the world. Leadership at the company knows the importance of having a motivated workforce; it’s good for business, employees, and customers. After completing the exercise, students will understand the basics of select motivation theories. How to Use Activity: Invite students to extend their knowledge by hosting a World Café 10-307

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across select motivation theories presented in either the case or the text. Class Discussion: Which theory of motivation resonates most with you? Suppose you were starting a company. How would you motivate employees?

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BONUS TEACHING RESOURCES Term Paper or Project Topics

These topics may be assigned as individual or collaborative projects: 1. 2. 3. 4. 5.

Advantages and Disadvantages of Flexible Scheduling Japanese Management Frederick Taylor: Father of Scientific Management B. F. Skinner and Behavior Modification Motivational Factors of Frederick Herzberg

Guest Speaker Suggestions

1. A human relations professor to speak about the study of human relations, motivation, or job design. 2. A representative of a business firm to talk about management styles, team concepts, job design, or flexible scheduling. (If the representative cannot come to class, the instructor may wish to go to the firm and videotape segments of the firm to illustrate the different management styles or team concepts.) 3. A management information systems professor to talk about the potential for ―telecommuting.‖ Teaching Suggestions

29. Begin the class session with a brief writing assignment. Have students write for a few minutes on the following: Why is the study of human relations important? Call on different students to give their written answers. Use these answers and/or your discussion as a lead-in to the lecture. 30. Use the ―Lecture Outline and Notes‖ and slides to emphasize the main points of the chapter. 31. Discuss the ―Check Your Progress‖ questions in the textbook. 32. Examine the boxed materials. Questions and answers are provided in this Instructor’s Manual. 33. Have students discuss the relative advantages and disadvantages of Theory X, Theory Y, and Theory Z.

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SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Estée Lauder Gives Diversity and Inclusion a Makeover Technology and the Economy: Ultimate Software Introduces the Ultimate Human Resource Tool Business Disruption: Pay Day: Employers Choose Bonuses Over Raises Consider Ethics and Social Responsibility: Women “Lean in” to Leadership So You Want to Work in Human Resources END OF CHAPTER TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Appreciating and Valuing Diversity Solve the Dilemma: Morale Among the Survivors Build Your Business Plan: Managing Human Resources See for Yourself Case: Diversity Inspires Innovation at Apple Team Exercise CONNECT ACTIVITIES Working With Unions at Freeman Lululemon Selects for Culture Fit iSeeIt! Video Case: Human Resource Planning BONUS TEACHING RESOURCES Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions

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SUMMARY This chapter focuses on the quantity and quality of human resources. First, we look at how human resource managers plan for, recruit, and select qualified employees. Next, we look at training, appraising, and compensating employees—aspects of human resource management designed to retain valued employees. Along the way, we’ll also consider the challenges of managing unionized employees and workplace diversity.

LEARNING OBJECTIVES LO 10-1

Explain the significance of human resource management.

LO 10-2

Summarize the processes of recruiting and selecting human resources for a company.

LO 10-3

Discuss how workers are trained and their performance appraised.

LO 10-4

Identify the types of turnover companies may experience.

LO 10-5

Explain why turnover is an important issue.

LO 10-5

Specify the various ways a worker may be compensated.

LO 10-6

Evaluate some of the issues associated with unionized employees, including collective bargaining and dispute resolution.

LO 10-7

Discuss the importance of diversity in the workforce.

LO 10-8

Assess an organization’s efforts to reduce its workforce size and to manage the resulting effects.

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KEY TERMS AND DEFINITIONS affirmative action programs

Legally mandated plans that try to increase job opportunities for minority groups by analyzing the current pool of workers, identifying areas where women and minorities are underrepresented, and establishing specific hiring and promotion goals, with target dates, for addressing the discrepancy.

arbitration

Settlement of a labor/management dispute by a third party whose solution is legally binding and enforceable.

benefits

Nonfinancial forms of compensation provided to employees such as pension plans, health insurance, paid vacation and holidays, and the like.

bonuses

Monetary rewards offered by companies for exceptional performance as incentives to further increase productivity.

boycott

An attempt to keep people from purchasing the products of a company.

collective bargaining

The negotiation process through which management and unions reach an agreement about compensation, working hours, and working conditions for the bargaining unit.

commission

An incentive system that pays a fixed amount or a percentage of the employee’s sales.

conciliation

A method of outside resolution of labor and management differences in which a third party is brought in to keep the two sides talking.

development

Training that augments the skills and knowledge of managers and professionals.

diversity

The participation of different ages, genders, races, ethnicities, nationalities, and abilities in the workplace.

human resource management (HRM)

All the activities involved in determining an organization’s human resource needs, as well as acquiring, training, and compensating people to fill those needs.

inclusion

The degree to which diverse individuals are valued and welcomed by the organization. 10-312

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job analysis

The determination, through observation and study, of pertinent information about a job—including specific tasks and necessary abilities, knowledge, and skills.

job description

A formal, written explanation of a specific job, usually including job title, tasks, relationship with other jobs, physical and mental skills required, duties, responsibilities, and working conditions.

job specification

A description of the qualifications necessary for a specific job, in terms of education, experience, and personal and physical characteristics.

labor contract

The formal, written document that spells out the relationship between the union and management for a specified period of time—usually 2 or 3 years.

labor unions

Employee organizations formed to deal with employers for achieving better pay, hours, and working conditions.

lockout

Management’s version of a strike, wherein a work site is closed so that employees cannot go to work.

mediation

A method of outside resolution of labor and management differences in which the third party’s role is to suggest or propose a solution to the problem.

mentoring

Involves supporting, training, and guiding an employee in their professional development.

orientation

Familiarizing newly hired employees with fellow workers, company procedures, and the physical properties of the company.

Picketing

A public protest against management practices that involves union members marching and carrying anti-management signs at the employer’s plant or work site.

profit sharing

A form of compensation whereby a percentage of company profits is distributed to the employees whose work helped to generate them.

promotion

An advancement to a higher level job with increased authority, responsibility, and pay.

recruiting

Forming a pool of qualified applicants from which management 10-313

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can select employees. Salary

A financial reward calculated on a weekly, monthly, or annual basis.

selection

The process of collecting information about applicants and using that information to make hiring decisions.

separations

Employment changes involving resignation, retirement, termination, or layoff.

strikebreakers

People hired by management to replace striking employees; called ―scabs‖ by striking union members.

strikes

Employee walkouts; one of the most effective weapons labor has.

Title VII of the Civil Rights Act

Prohibits discrimination in employment and created the Equal Employment Opportunity Commission.

training

Teaching employees to do specific job tasks through either classroom development or on-the-job experience.

transfer

A move to another job within a company at essentially the same level and wage.

turnover

Occurs when employees quit or are fired and must be replaced by new employees.

wage/salary survey

A study that tells a company how much compensation comparable firms are paying for specific jobs that the firms have in common.

wages

Financial rewards based on the number of hours the employee works or the level of output achieved.

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Explain the significance of human resource management.  Introduction  The Nature of Human Resource Management  Planning for Human Resource Needs

Key Terms:  Human resource management (HRM)  Job analysis  Job description  Job specification

PowerPoint Slides: PPT 10.5

Lecture Outline and Notes: I. The Nature of Human Resource Management A. Human resource management refers to all the activities involved in determining an organization’s human resource needs as well as acquiring, training, and compensating people to fill those needs. 1. Managers try maximizing employee satisfaction while motivating them to meet organizational objectives productively. 2. Human resource management has increased in importance over the last few decades. a. Today’s workforce includes significantly more women, African Americans, Hispanics and other minorities, as well as disabled and older workers. b. Effective human resource managers are aware of changing employee conditions and use them to increase efficiency and productivity. c. Every manager in an organization practices some of the functions of human resource management at all times. II. Planning for Human Resource Needs

PPT 10.6

A. After determining how many employees and what skills are needed to achieve organizational objectives, a firm must ascertain how many employees it currently has and project how many may be retiring or leaving. B. Current and forecasted employee requirements then enable the manager to determine hiring and qualification requirements. 11-316

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C. Next, a strategy for satisfying human resource needs is developed, which may include outsourcing, automation, or the use of temporary workers. D. Job analysis determines, through observation and study, the specific tasks that comprise a job—the skills, knowledge, and abilities needed to perform it; and the job environment. Managers use job analysis in two ways. 1. To develop a job description—a formal, written description of a specific job, including job title, tasks to be performed, relationship with other jobs, physical and mental skills required, duties, responsibilities, and working conditions. 2. To develop a job specification—a description of the qualifications necessary for a specific job in terms of education, experience, personal characteristics, and physical characteristics. 3. Both job descriptions and job specifications are used to develop recruiting materials. LO 10-2

Summarize the processes of recruiting and selecting human resources for a company. 

Key Terms:

Recruiting and Selecting New Employees

 Selection

o Recruiting

 Title VII of the Civil Rights Act

o Selection  PPT 10.7

 Recruiting

Legal Issues in Recruiting and Selecting

III. Recruiting and Selecting New Employees A. Recruiting 1.

Recruiting means forming a pool of qualified applicants from which management will select employees.

2. There are two sources for applicants. a. Internal sources of applicants are the organization’s current employees. This approach is relatively inexpensive. b. External sources are outside the firm. i.

External sources consist of newspaper and journal ads, employment agencies, recommendations from current employees, unsolicited applications, online websites, and social networking sites such as LinkedIn.

ii.

Internships are also a good way to solicit for employees.

iii.

Using these sources is more expensive than hiring from within.

iv.

Recruiting for entry-level managerial and professional 11-317

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positions is often carried out on university campuses. v.

For managerial and professional positions above the entry level, employment agencies or executive search firms (headhunters) are often used.

B. Selection

PPT 10.8

1. Selection is the process of collecting information about applicants and using that information to decide which ones to hire. 2. The application is the first stage of the process. a. The applicant usually fills out an application with information on current salary, reason for seeking a new job, years of experience, availability, and level of interest. A brief interview is sometimes included. b. The goal at this stage is to get acquainted with the applicants and eliminate those obviously not qualified for the job. c. The process can be lengthy and expensive but necessary in order to find applicants who can do the work and fit into the firm’s structure and culture. d. Careful hiring saves the company money it would spend later in recruiting, selecting, and training replacement employees. e. Many companies now accept online applications and some contain a questionnaire. f. Applications supply basic information such as name and work history but they also reveal clues about the applicants. Imaginative responses may reveal creativity and hastily written responses could mean a person who does not pay attention to details. 3. The interview is the second phase of the selection process. The interview provides in-depth information both to the company and to the prospective employee. a. An interviewee’s questions may be as revealing as their answers b. ―Tell me about yourself‖ is the most common question, but all of the questions help managers obtain that detailed picture of the applicant they are looking for (Table 10.1). 4. Testing is the third stage of the selection process.

PPT 10.9

a. Ability, performance, aptitude, IQ, or personality tests may be given to determine whether an applicant has the necessary skills for a certain kind of work and his or her ability to fit into the firm’s culture. 11-318

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i) Myers–Brigg is used to assess an applicant’s potential for a certain kind of job. ii) Polygraph (lie detector) tests, once a common tool for evaluating applicants’ honesty, were restricted in 1988 to specific government jobs and jobs involving security or access to drugs. b. Applicants may also undergo physical examinations to determine their suitability for some jobs. c. Many companies require applicants to be screened for illegal drug use. 5. Reference checking, the final step, involves verifying educational background and previous work experience (Table 10.2). a. Background checking is important because applicants sometimes misrepresent themselves on their applications or résumés.

PPT 10.11

i) An internet search is often done to determine social media or other public activities. b. Many organizations will confirm employment but will not release details about the quality of a previous employee’s work. IV. Legal Issues in Recruiting and Selecting A. Legal constraints and regulations are present in almost every phase of the recruitment and selection process, and violations can result in lawsuits and fines.

PPT 10.13

B. Title VII of the Civil Rights Act of 1964 bans discrimination in employment. 1. The Equal Employment Opportunity Commission (EEOC) is the federal agency set up to enforce Title VII of the Civil Rights Act of 1964 and is specifically charged with increasing job opportunities for women and minorities and with eliminating job discrimination based on race, religion, color, sex, national origin, or handicap. 2. Employers must not impose sex distinctions in job specifications, job descriptions, and newspaper ads. 3. The Civil Rights Act of 1964 also outlaws the use of discriminatory tests for applicants. C. The Americans with Disabilities Act (ADA) prevents discrimination against disabled persons. 11-319

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D. The Age Discrimination in Employment Act, passed in 1967 and amended in 1978, specifically outlaws discrimination against people 40 and older and also outlaws policies that require employees to retire beforehand. PPT 10.14

LO 10-3

E. The Equal Pay Act mandates that men and women who do equal work must receive the same wage.

Describe how workers are trained and their performance appraised.  Developing the Workforce

Key Terms: 

Training



Development

o Training and Development o Assessing Performance PPT 10.16

V. Developing the Workforce A. Orientation familiarizes the newly hired employees with fellow workers, company procedures, and the physical properties of the company. 1. It generally includes a tour of the facility, introductions, and the distribution of manuals describing the organization’s various policies. B. It also involves socializing the new employee into the ethics and culture of the company.

PPT 10.17

C. Training and Development 1. Training is teaching employees how to do their specific job tasks. a. On-the-job training allows workers to learn by actually performing the tasks of the job.

PPT 10.18

b. Classroom training teaches employees with lectures, conferences, videotapes, case studies, and web-based training. i. One example is McDonald’s Hamburger University. McDonald’s has expanded its famous Hamburger University into China to train Chinese students in such areas as restaurant management, leadership development, and other skills. 2. Some companies ask experienced workers to mentor new employees. Mentoring involves supporting, training, and 11-320

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guiding an employee in their professional development. 3. Development is training that augments the skills and knowledge of managers and professionals. 4. Training and development are also used to improve the skills of employees in their present positions and to prepare them for increased responsibility and job promotions. PPT 10.19

D. Assessing Performance 1. A performance appraisal identifies an employee’s strengths and weaknesses on the job. 2. It has three main objectives: a. It provides employees with feedback on how they are doing and what they need to do to improve their performance. b. It provides a basis for determining how to compensate and reward. c. It provides the organization with information about the quality of its selection, training, and development activities. 3. Performance appraisals may be objective or subjective. a. Objective assessments are quantifiable. b. Subjective assessments are used when jobs do not lend themselves to objective appraisals. A ranking system is used to assess various performance factors. i. Productivity and quality are two important performance measurements, but many appraisals also include teamwork as well as financial management. 4. Another performance appraisal method used is the 360-degree feedback system, which provides feedback from a panel that typically includes superiors, peers, and subordinates. 5. HR managers are more likely to view performance reviews as more effective than employees are.

LO 10-4 LO 10-5

Identify the types of turnover companies may experience.

Key Terms: 

Turnover

Explain why turnover is an important issue.



Promotion



Transfer



Separations

o Turnover

PPT 10.20–

E. Turnover 11-321

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1. Turnover, which occurs when employees quit or are fired and must be replaced by new employees, results in lost productivity, fees to recruit new employees, management time devoted to interviewing, and socialization costs for new employees. 2. Part of the reason for turnover may be overworked employees as a result of downsizing and a lack of training and advancement opportunities. 3. Turnover is not always an unhappy occasion when it occurs in the form of promotions or transfers. a. A promotion is an advancement to a higher level position within an organization that has increased authority, responsibility, and salary. In some companies and most labor unions, seniority determines who should be promoted. b. A transfer is a move from one job to another within a company at essentially the same wage and job level. c. A separation is the departure of the employee from the organization because of resignation, retirement, layoff, or termination (Table 10.3).

PPT 10.22

Employees may be terminated, or fired, for poor performance, violation of work rules, absenteeism, and so on.

ii.

Recent legislation and court decisions require companies to fire employees for just cause only. Managers should exercise care to warn employees when their performance is unacceptable and may lead to dismissal, as well as documenting warnings in employee work records.

iii.

Usually a function of economic trouble, layoffs are sometimes temporary; employees may be brought back when business conditions improve.

iv.

When layoffs are permanent, sometimes companies will help employees find other jobs or extend benefits while the employees search for new employment.

PPT 10.23

d. Because of the expense of recruiting and training new employees, well-organized human resource departments try to minimize losses caused by separations and transfers.

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LO 10-6

Specify the various ways a worker may be compensated. 

Ferrell/Hirt/Ferrell: Business Foundations 13e

Key Terms:

Compensating the Workforce

 Wage/salary survey

o Financial Compensation

 Wages

o Benefits

 Commission  Salary  Bonuses  Profit sharing  Benefits

PPT 10.24

VI.

Compensating the Workforce A. Designing fair financial compensation plans for employees is important because wages and salaries are a substantial portion of an organization’s expenses. 1. Wages that are too high may result in high-priced products, while wages that are too low may harm morale and result in costly turnover. 2. Designing a fair financial compensation plan is a difficult task. 3. A wage/salary survey tells a company how much compensation comparable firms are paying for specific jobs that the firms have in common. B. Financial Compensation

PPT 10.25

1. Wages are financial rewards based on the number of hours the employee works or the level of output produced. a. Time wages are based on the number of hours worked. They are easy to compute but provide no incentive to increase productivity. b. Minimum wage is a federally mandated minimum amount per hour. c. Tipped wages may be $2.13 per hour as long as tips plus the wage of $2.13 per hour equal the minimum wage of $7.25 per hour, although some states require minimum wage and then tips added on top. d. Piece wages are based on the level of output. A major advantage of piece wages is that employees are encouraged to supervise their own activities and to increase output. 2. Commissions are payments to an employee for a fixed amount or a percentage of the employee’s sales. This method motivates employees to sell as much as they can. 11-323

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3. A salary is a financial reward calculated on a weekly, monthly, or annual basis. This method is associated with white-collar workers and professionals. 4. Other forms of financial compensation: a. Bonuses are an addition to regular compensation and are given as rewards for exceptional performance. b. Profit sharing is a distribution of a percentage of company profits to the employees whose work helped generate those profits. i. Employee stock ownership plans (ESOPs) have gained in popularity in recent years. ii. Profit sharing can motivate employees to work hard, because increased productivity and sales mean that the profits or stock dividends will increase. C. Benefits PPT 10.26– 10.27

1. Benefits are nonfinancial forms of compensation provided to employees such as pension plans; health, disability, and life insurance; sick leave, holidays, credit union membership, health programs, childcare, eldercare, and more. a. Employer costs for compensation in the United States average $38.26 per hour worked. Wages and salaries account for 70%, while benefits account for 29%. 2. Such benefits increase employee security, and to a certain extent, morale, and motivation. 3. A benefit increasingly offered is the employee assistance program (EAP). a. Most EAPs offer counseling for and assistance with employees’ personal problems that might hurt job performance if not addressed (e.g., drug and alcohol abuse, fitness programs). b. EAPs help reduce costs associated with poor productivity, absenteeism, and other workplace issues by helping employees deal with personal problems that contribute to these issues. 4. Companies try to provide the benefits they believe their employees want, but diverse people may want different things. Some companies use fringe benefit programs to allow employees to choose the benefits they would like, up to a specified amount. a. Traditional fringe benefits include sick leave, pension plans, health plans, and bonuses. 11-324

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b. Soft benefits (to help achieve a work–life balance) include on-site childcare, spas, food service, and even hair salons. c. Cafeteria benefit plans allow employees to select the benefits most important to them. LO 10-7

Evaluate some of the issues associated with unionized employees, including collective bargaining and dispute resolution. 

Managing Unionized Employees o Collective Bargaining o Resolving Disputes

Key Terms:  Labor union  Collective bargaining  Labor contract  Picketing  Strikes  Boycott  Lockout  Strikebreakers  Conciliation  Mediation  Arbitration

PPT 10.29

VII.

Managing Unionized Employees A. A labor union is an employee organization formed to deal with employers for achieving better pay, hours, and working conditions. 1. Union workers make, on average ($200 per week), more than nonunion employees. 2. Significant aspects of HRM, particularly compensation, are dictated by union contracts at many companies. B. Although unions provide employees with considerable negotiation power, union growth has slowed in recent years, and prospects for growth do not look good. 1. Most blue-collar workers have already been organized. 2. The United States has shifted from manufacturing to a service economy, further reducing the demand for blue-collar workers. 3. An increased focus on productivity and efficiency has led to more participative management, blurring the line between management and workers. 4. Nonetheless, labor unions have been successful in organizing 11-325

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blue-collar manufacturing, government, and health care workers, as well as smaller percentages of employees in other industries. C. Collective Bargaining (Figure 10.1) PPT 10.30– 10.31

1. Collective bargaining is the negotiation process through which management and unions reach an agreement about compensation, working hours, and working conditions for the bargaining unit. 2. The objective of negotiation is to reach agreement about a labor contract—the formal, written document that spells out the relationship between the union and management for a specified period of time. a. In collective bargaining, each side tries to negotiate an agreement that meets its demands; compromise is frequently necessary. b. Management negotiates to gain or retain control over employment issues (hiring, firing, standards, schedules, etc.). c. Unions focus on contract issues such as magnitude of wages, better pay, holidays, better scheduling, and benefits. d. Unions focus on magnitude of wages. Many labor contracts contain a cost-of-living escalator clause (COLA). e. Givebacks are wage or benefit concessions accepted by employees during tough economic times. D. Resolving Disputes 1. At times, labor and management cannot agree on a labor contract.

PPT 10.32

2. When collective bargaining breaks down, either side may resort to more drastic measures to achieve its objectives. 3. Labor Tactics a. Picketing is a public protest against management practices with workers marching (often waving anti-management signs and placards) at the employer’s plant. b. Strikes—employee walkouts—are one of labor’s most effective weapons against management; however, they are a weapon of last resort. c. A boycott is an attempt to keep people from purchasing a company’s products. 4. Management Tactics 11-326

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a. A lockout, management’s version of a strike; actually closes a work site so that employees cannot go to work. b. Strikebreakers, called ―scabs‖ by striking union members, are people hired by management to replace striking employees. It is often a measure of last resort for management. 5. Outside Resolution a. Outside resolution may be necessary if other means of dispute resolution fail. b. In such cases, the parties have three choices: i.

Conciliation involves the use of a neutral third party, a conciliator, to keep labor and management bargaining. The conciliator’s goal is to get both parties to focus on the issues and prevent negotiations from breaking down.

ii.

Mediation involves using a neutral third party, a mediator, to suggest a solution to the problem. This third party has no formal power over labor or management.

iii.

Arbitration involves bringing in a neutral third party, an arbitrator, to settle the dispute. An arbitrator’s solution is legally binding and enforceable.

iv.

Generally, arbitration occurs on a voluntary basis; management and labor must agree to it. Sometimes, management and labor submit to compulsory arbitration, in which an outside party (usually the federal government) requests arbitration to head off a prolonged strike.

PPT 10.33

LO 10-8

Describe the importance of diversity in the workforce. o The Importance of Workforce Diversity 

The Characteristics of Diversity



Why Is Diversity Important?



The Benefits of Workforce Diversity



Affirmative Action



Employee Relationships and Sexual Harassment

Key Terms: 

Inclusion



Diversity



Affirmative action programs

o Trends in Management of the Workforce PPT 10.35

VIII.

The Importance of Workforce Diversity 11-327

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A. The Characteristics of Diversity (Figure 10.2) 1. Diversity refers to the participation of different ages, genders, races, ethnicities, nationalities, and abilities in the workplace. 2. Differences can be separated into primary and secondary characteristics of diversity. a. Primary characteristics of diversity are inborn and cannot be changed and include age, gender, race, ethnicity, abilities, and sexual orientation. b. Secondary characteristics of diversity can be changed and include work background, income, marital status, military experience, religious beliefs, geographic location, parental status, and education. c. Although defining characteristics as primary or secondary can help enhance our understanding, we must remember that each person is defined by the interrelation of all characteristics. B. Why Is Diversity Important?

PPT 10.37– 10.38

1. The U.S. workforce is becoming more diverse. Employment of women, African Americans, Hispanics, and other minorities, as well as disabled workers, will continue to rise. a. By 2044, minorities will make up more than 50% of the U.S. population 2. More and more companies are trying to improve HRM programs to recruit, develop, and retain more diverse employees to better serve their diverse customers. 3. Effectively managing diversity in the workforce involves cultivating and valuing its benefits and minimizing its problems. C. The Benefits of Workforce Diversity (Table 10.4 ) 1. There are a number of benefits to fostering and valuing workforce diversity.

PPT 10.39

a. More productive use of a company’s human resources. b. Reduced conflict among employees of different ethnicities, races, religions, and sexual orientations as they learn to respect each other’s differences. c. More productive working relationships among diverse employees as they learn more about and accept each other. d. Increased commitment to and sharing of organizational goals among diverse employees at all organizational levels. e. Increased innovation and creativity as diverse employees 11-328

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bring new, unique perspectives to decision-making and problem-solving tasks. f. Increased ability to serve the needs of an increasingly diverse customer base. g. Increased inclusion recognizes contributions, presence, and perspectives of different groups integrating them into the work environment. 2. As workforce diversity becomes a valued organizational asset, companies spend less time managing conflict and more time accomplishing tasks and satisfying customers. D. Affirmative Action

PPT 10.40

1. Many companies strive to improve their working environments through affirmative action programs, which are legally mandated plans that try to increase job opportunities for minority groups by analyzing the current pool of workers, identifying areas where women and minorities are underrepresented, and establishing specific hiring and promotion goals to resolve the discrepancy. 2. Legislation reinforces affirmative action but prohibits organizations from setting hiring quotas that might result in reverse discrimination. E. Employee Relationships and Sexual Harassment 1. Sexual harassment in the workplace has become one of the biggest ethical and legal challenges facing corporations. 2. Sexual harassment is a term used to describe unwanted behavior anywhere from suggestive remarks to sexual assault.

PPT 10.41

3. Another type of sexual harassment in the workplace is known as a hostile work environment. 4. Over the past few years, sexual harassment has become a national issue signaled by the #MeToo era. 5. As sexual harassment concerns increase, corporations are responding by implementing training programs to prevent the behavior. IX. Trends in Management of the Workforce A. The last recession and financial crisis along with advances in information technology have had a major impact on employment. Rising employee health care benefits remain a significant issue, even with the passing of the Affordable Care Act. B. New technology is blurring the lines between work time and leisure 11-329

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time.

PPT 10.42

C. It is important for managers to be aware of legal issues regarding workers’ rights. LO 10-9 PPT 10.43

Assess an organization’s efforts to reduce its workforce size and to manage the resulting effects. X.

Key Terms:

Solve the Dilemma: Morale Among the Survivors DD. Medallion Corporation manufactures quality carpeting and linoleum for homes through the United States 1. Recession and subsequent downturn in home sales sharply cut the company’s sales. 2. Company laid off hundreds of employees in the home office (manufacturing facilities) and salespeople. i.

One additional month of work

ii.

One month of severance pay

iii.

Opportunity to sign up for classes to help with transitions

3. Several months later, morale was at an all-time low for the company although productivity had improved. PPT 10.44

B. Consultants’ suggestion: 1. Suggested that the leaner, flatter organizational structure would be suitable for more team activity. 2. Set up task forces and teams to deal with employee concerns. 3. Diversity of the workforce led to conflict and misunderstandings among team members. C. Critical Thinking Questions:

PPT 10.45

1. What did Medallion’s HRM department do right in dealing with the employees who were laid off? 2. What are some of the potential problems that must be dealt with after an organization experiences a major trauma such as massive layoffs? 3. What can Medallion do to make the team approach work more smoothly? What role do you think diversity training should play? (Answers appear under the End of Chapter Teaching Resources section of this Instructor's Manual.)

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Estée Lauder Gives Diversity and Inclusion a Makeover

1. Why is workforce diversity important? Answers will vary but students should include (1) Increased commitment to and sharing of organizational goals among diverse employees at all organizational levels. (2) Increased innovation and creativity as diverse employees bring new, unique perspectives to decision-making and problem-solving tasks. (3) Increased ability to serve the needs of an increasingly diverse customer base. 2. How is Estée Lauder improving its diversity and inclusion efforts? To foster a more diverse and inclusive environment, Estée Lauder vowed to hire more Black employees, double diverse recruiting, ensure equal access to leadership training, require more diverse sets of candidates for executive and director-level positions, and purchase more products from Black-owned companies. Estée Lauder set forth plans to increase diverse recruiting and guarantee equal access to leadership training so that a more diverse set of candidates can be proposed for executive positions. Estee Lauder is reviewing its products to insure that its products are culturally sensitive. Estee Lauder has also launched New Equity and Engagement Center of Excellence to oversee and manage the success of its commitments to diversity and inclusion. 3. How does expanding the shade ranges of its products support diversity? Expanding shade ranges for a variety of products to accommodate more skin tones will make its products more appealing to a wide range of customers and promotes inclusivity. Technology and the Economy: Ultimate Software Introduces the Ultimate Human Resource Tool

1. How can companies use Xander to understand and manage their human resources? Answers will vary but Xander machine learning to analyze employee’s responses to open-ended questions to improve responses. It gives real-time feedback from the responses to provide companies with the ability to improve employee experience and performance. 2. What types of HR issues would Xander be particularly useful? Answers will vary but Xander could help companies gain insights into areas like employee satisfaction. In addition to sentiment, Xander can predict workforce behaviors such as retention. 3. What are some potential HR issues companies using Xander might need to 11-331

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consider when using the tool to solicit employee responses? Answers will vary but privacy is certainly a concern. Business Disruption: Pay Day: Employers Choose Bonuses Over Raises

1. What are some of the benefits of bonuses for companies and employees? Bonuses give companies the flexibility to lower costs during economic downturns and reward employees when financial performance is good. Companies have found that cutting bonuses is more favorable than cutting salaries during economic downturns. On the other hand, bonuses can lead to increased compensation for top performers. Companies can use bonuses to reward top performers they deem as strategically important without having to raise wages for all employees. Bonuses are a great tool to attract top-tier talent. 2. What might be some disadvantages of bonuses for employees? The biggest downside to bonuses is that they are not guaranteed. 3. Do you think that lowering bonuses to increase salaries for the entire workforce will disincentivize top performers at companies? Answers will vary. Consider Ethics and Social Responsibility: Women “Lean in” to Leadership

1. Do you think Lean In and Lean In circles will have a long-term beneficial impact? Answers will vary. 2. Describe some ways that companies can support women in leadership. Answers will vary. 3. In what ways can both men and women maintain a strong work–life balance? Answers will vary. So You Want to Work in Human Resources

What is the value of having a diverse workforce, and why does it present challenges to human resource managers? Diversity is an asset and can help a company keep from having blind spots or harmony in thought, background, and perspective, which stifles good team decisions. However, a diverse workforce can present some management challenges. Human resource management is often responsible for managing diversity training and compliance to make sure employees do not violate the ethical culture of the organization or break the law. Different people have different goals, motivations, and ways of thinking about issues that are informed by their culture, religion, and the people closest to them.

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END OF CHAPTER TEACHING RESOURCES Check Your Progress

1. Distinguish among job analysis, job descriptions, and job specifications. How do they relate to planning in human resource management? Job analysis is observing the specific tasks that make up a job; the skills, knowledge, and abilities needed to perform it; and the job environment. A job description is a formal, written description of a specific job. A job specification is a description of the qualifications necessary for a specific job. Employment analysis establishes the general personnel requirements of the business. Next, managers analyze the jobs within the organization to match the human resources to the available jobs. 2. What activities are involved in acquiring and maintaining the appropriate level of qualified human resources? Name the stages of the selection process. Human resource managers are concerned with maximizing employees’ satisfaction and improving their efficiency to meet organizational objectives. Human resource managers are involved with planning and forecasting, recruitment and selection, training and development, and determining compensation. The selection process includes completing an application, interviewing, testing, and checking references. 3. What are the two types of training programs? Relate training to kinds of jobs. Training is teaching employees to do specific job tasks through either classroom development or on-the-job experience. On-the-job training allows workers to learn by actually performing the task on the job under the guidance of an experienced employee. Classroom training uses lectures, conferences, films, case studies, and web-based training to teach employees about a job and its requirements. 4. What is the significance of a performance appraisal? How do managers appraise employees? The performance appraisal seeks to identify an employee’s strengths and weaknesses on the job. It is one of the most difficult tasks for managers. It provides employees with feedback on how they are doing and what they need to do to improve their performance. It provides a basis for determining how to distribute rewards. It provides the organization with information about the quality of its selection, training, and development activities. Appraisals can be objective or subjective. Whether objective or subjective, the manager discusses the appraisal results with the employee.

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5. Why does turnover occur? List the types of turnover. Why do businesses want to reduce turnover due to separations? Turnovers can occur because they are initiated by the employer or by the employee. Sometimes the turnovers, especially layoffs, are initiated because of economic downturns. The types of turnover include promotions, transfers, and separations. Promotion is advancement to a higher level job with increased authority, responsibility, and pay. A transfer is a move to another job within the company at essentially the same level and wages. Separations include resignation, discharge, layoff, and retirement. Businesses want to reduce turnover due to separation because selection and training of new employees is an expensive and time-consuming process. 6. Relate wages, salaries, bonuses, and benefits to Herzberg’s distinction between hygiene and motivation factors. How does the form of compensation relate to the type of job? Frederick Herzberg’s theory of motivation focused on job factors, as discussed in Chapter 9. Hygiene factors relate to the work setting and include adequate wages, comfortable working conditions, fair company policies, and job security. Motivational factors relate to the content of the work and include achievement, recognition, the work itself, involvement, responsibility, and advancement. It should be obvious to students that adequate wages, salaries, and benefits are necessary hygiene factors for employees. In general, salaries are associated with white-collar workers such as office personnel, executives, and professionals. Time-based wages are associated with blue-collar workers, clerks, maintenance personnel, and so forth. Finally, piece-based wages are associated with skilled craftworkers, while commissions are associated with certain types of sales positions. 7. What is the role of benefits? Name some examples of benefits. The role of benefits is to attract and help retain employees, increase employee security, and to a certain extent, increase morale and motivation. In addition, utilization of the benefits may keep employees healthy and productive, thereby reducing absenteeism, waste, and turnover. Some examples of benefits include pension plans, holidays, health programs, employee assistance programs, health insurance, and so on. 8. Describe the negotiation process through which management and unions reach an agreement on a contract. Collective bargaining is the negotiation process through which management and unions reach an agreement about issues such as compensation, working hours, and working conditions. The union prepares a list of concessions it wants from management; 11-334

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management then defines what it is willing to concede to the union and still maintain a reasonable level of profitability. Management tries to maintain control over work schedules, the hiring and firing of workers, production standards, and other work policies. Unions tend to focus on issues such as magnitude of wages, better pay rates for holidays, overtime, undesirable shifts, scheduling of pay increases, and benefits. After union representatives and management negotiate issues and reach agreement on the terms of a contract, union members vote on the contract. If they ratify the contract, it becomes the legally binding agreement between the union and management for a specified period. 9. Besides collective bargaining and grievance procedures, what other alternatives are available to labor and management to handle labor disputes? Both labor and management can use pressure tactics to resolve disputes. Although most labor disputes are handled through collective bargaining or grievance procedures, sometimes management or labor may resort to more drastic measures to achieve their objectives. Labor might use picketing or boycotts. Picketing is a public protest against management practices and involves union members marching—often waving antimanagement signs and placards—at the employer’s plant or work site. Boycotts are an attempt to keep people from purchasing the company’s products. The most effective weapon wielded by unions against management is the strike. A strike makes carrying out the normal operations of a business difficult or impossible. A lockout is management’s version of a strike; management actually closes down the workplace so the employees cannot work. Strikebreakers are people hired by management to replace striking employees; they’re sometimes called scabs by the union workers. Another tactic is to bring in a third party to aid in conciliation, mediation, or arbitration. 10. What are the benefits associated with a diverse workforce? Some of the benefits of workforce diversity include more productive use of a firm’s human resources, reduced conflict among employees, increased attention to organizational goals, increased innovation and creativity in decision making and problem-solving, and greater ability to serve a diverse customer base. Get Involved

1. Although many companies screen applicants and test employees for illegal drug use, such testing is somewhat controversial. Find some companies in your community that test applicants and/or employees for drugs. Why do they have such a policy? How do the employees feel about it? Using this information, debate the pros and cons of drug testing in the workplace. Student answers will vary depending upon the company they choose.

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2. If collective bargaining and the grievance procedures have not been able to settle a current labor dispute, what tactics would you and other employees adopt? Which tactics would be best for which situations? Give examples. Most likely, students will choose to strike, picket, or boycott. Boycotts may be good for situations where employees are strong enough to band together to make a difference. If the situation is severe enough, employees might even be able to get consumers to join in their cause. Human rights violations might be a good example of a situation where boycotts can be effective. Picketing would be good in situations in which employees need to arouse sympathy for their cause. Situations might include cuts in benefits. Students should realize that strikes are the most risky and should be used as a last resort. The strikes in Chicago over teacher pay provide a good example of a situation where striking might be used. 3. Find some examples of companies that value their diverse workforces, perhaps some of the companies mentioned in the chapter. In what ways have these firms derived benefits from promoting cultural diversity? How have they dealt with the problems associated with cultural diversity? Student answers will vary.

Build Your Skills: Appreciating and Valuing Diversity

Suggestions for Use After students have completed the self-assessment, ask them to discuss the results either in small groups or as a class. Encourage the students to share their experiences learning about other cultures using the suggested methods provided in the text and to generate some ideas of their own.

Solve the Dilemma: Morale Among the Survivors

1. What did Medallion’s HRM department do right in dealing with the employees who were laid off? Medallion’s HRM department implemented an employee assistance program for laid-off employees. This employee assistance program included free classes on job search tactics and résumé writing. These classes helped to smooth the transition and to reduce any animosity the laid-off employees might have felt toward the organization.

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2. What are some of the potential problems that must be dealt with after an organization experiences a major trauma such as massive layoffs? After a major layoff, employee morale is likely to be very low. It is not uncommon for the remaining employees to (1) feel a sense of loss (they miss the people who were laid off), (2) feel guilty for being kept, (3) feel uncertain about their own professional future, and (4) experience role ambiguity related to the new and leaner structure. 3. What can Medallion do to make the team approach work more smoothly? What role do you think diversity training should play? Medallion can smooth the transition to the team approach by ensuring that employees are clear as to their roles and responsibilities. Toward that end, Medallion should provide its employees with new job descriptions that include explanations of how the team is to function and implement a diversity training program. Finally, Medallion should ensure that its task force handling employee concerns maintains employee confidentiality, so employees do not fear retribution for voicing concerns. Diversity training should play a key role in the transition because it will help to reduce conflict (and improve productivity) among employees of different ethnicities, races, religions, and sexual orientations.

Build Your Business Plan: Managing Human Resources

Have students identify how they have learned about jobs they have applied for in the past. What sources work best in your community? Assuming that the majority of employees (if not all) they will be hiring will be part time, ask them in class to go through the steps they need to take in order to determine the size of their workforce. This will force them to start thinking about how to organize their business. See for Yourself Case: Diversity Inspires Innovation at Apple

Apple has invested heavily in diversity, equity, and inclusion. The company considers the diversity of its employees to be one of its greatest strengths and believes that to create products that serve everyone, it must foster an inclusive work environment. Apple has focused on hiring more women and underrepresented individuals, including those who identify as Black, Hispanic, Native American, or Native Hawaiian & Other Pacific Islander. Additionally, Apple has achieved gender pay equity in every country where it operates, meaning women earn the same as their male counterparts.

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1. Why are diversity, equity, and inclusion important? Answers will vary but students should include (1) Increased commitment to and sharing of organizational goals among diverse employees at all organizational levels. (2) Increased innovation and creativity as diverse employees bring new, unique perspectives to decisionmaking and problem-solving tasks. (3) Increased ability to serve the needs of an increasingly diverse customer base. 2. Describe how Apple is creating a pipeline for diverse talent. Apple’s $100 million Racial Equity and Justice Initiative (REJI) helps the company provide opportunities for women and historically underrepresented groups. Apple also supports a global innovation and learning hub for historically black colleges and universities. In addition to REJI, Apple is committed to doing more. It continues to build upon its contributions to community organizations such as community colleges, nonprofits, and other local organizations that empower the next generation. 3. How do Apple’s Diversity Network Associations create an inclusive work environment? Apple’s Diversity Network Associations, employee-led groups brings more than 25,000 employees together through education, leadership programs, and networking. Groups include Accessibility@Apple, Amigos@Apple, Black@Apple, Pride@ Apple, Women@Apple, and more. The network helps employees feel welcome and offers resources and support to the employees. Team Exercise

Students will form groups and go to monster.com and look up job descriptions for positions in business (account executive in advertising, marketing manager, human resource director, production supervisor, financial analyst, bank teller, etc.). They should ask themselves: What are the key requirements for the position that I have been assigned (education, work experience, language/computer skills, etc.)? Does the position announcement provide a thorough understanding of the job? Was any key information that I would have expected omitted? Students will then report their findings to the class.

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CONNECT ACTIVITIES Working With Unions at Freeman:

Learning Objective 10-7: Discuss some of the issues associated with unionized employees, including collective bargaining and dispute resolution. Activity Summary: The United States has shifted from a manufacturing to a service economy, further reducing the demand for blue-collar workers. Nonetheless, labor unions have been successful in organizing blue-collar manufacturing, government, and health care workers, as well as workers in some other industries like carpenters, electronics, and entertainment industry employees. This exercise is important because significant aspects of HRM are dictated to a large degree by union contracts at many companies, and you are likely to work with unionized employees throughout your career. You may even be a member of a labor union at some point in your career. The goal of this exercise is to demonstrate your understanding of the HRM process and union labor. How to Use Activity: After assigning the video, ask students to put themselves in the shoes of a union organizer and the human resource manager. Have the students also think about the pros and cons of union membership for an employee. What are the disadvantages to the company of having a union? Class Discussion: What are the advantages that Freeman experiences as a result of working with labor unions? What HR activities are impacted by having a union? Lululemon Selects for Culture Fit

Learning Objective 10-2: Summarize the processes of recruiting and selecting human resources for a company. Activity Summary: This activity is important because human resource management is more than focusing on the employees already working for a company. It involves processes including recruitment, selection, training, development, appraisal, and separation. It is important to understand how these processes influence and are influenced by company culture. The goal of this exercise is to demonstrate students understanding of how Lululemon selects new employees based on cultural fit. How to Use Activity: After assigning the video, ask students to put themselves in the shoes of a hiring manager. What are the recruiting, selection, and testing steps they would utilize to ensure they’re hiring the most qualified candidates? Class Discussion: If you were a part of HR, what recruiting, selection, and testing actions would you perform to ensure you’re hiring the most qualified candidates? What methods would you use to recruit a pool of candidates? What questions would you ask in the 11-339

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interviewing process? Would you test applicants in a specific way (e.g., IQ, personality, drug)? How would you ensure your company is diverse?

iSeeIt! Video Case: Human Resource Planning

Learning Objective 10-1: Explain the significance of human resource management. Activity Summary: This brief video describes a job analysis, including how it is created and what it is used for in the human resource management process. How to Use Activity: Now that students understand how a job is analyzed and created, have them create their own hiring plan for a fictitious position including the job description, hiring criteria, and financial criteria. Class Discussion: How might you determine the appropriate pay range for the position you’re hiring for? In the same way that you are planning to ask a candidate questions, they will likely have questions for you. What questions should you be prepared to answer as the hiring manager representing the company?

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BONUS TEACHING RESOURCES Term Paper or Project Topics

These topics may be assigned as individual or collaborative projects: 1. 2. 3. 4.

The Advantages and Disadvantages of Piece-Rate Compensation Plans The Benefits of Providing Childcare or Day Care for Employees Employee Stock Ownership Plans (ESOPs) The Effects of the Age Discrimination in Employment Act (1967)

Guest Speaker Suggestions

1. A human resource management representative from a business firm to speak about different aspects of the selection process, compensation plans, and benefits plans. 2. A representative from the EEOC to speak about how it helps to ban discrimination in employment and how it seeks to increase job opportunities for women and minorities. 3. A representative from a college or university office for students with disabilities to speak about providing opportunities for the handicapped in the workplace.

Teaching Suggestions

34. Review the ―Boxed Text Discussion Questions‖ provided in this Instructor’s Manual. Have students gone over these questions before class? Call on various students for answers. 35. Have students select and complete an exercise from ―Get Involved.‖ Then, at the next session, have them give a brief presentation of their work to the class. 36. Discuss the ―Check Your Progress‖ questions in the textbook.

Chapter 11: Customer-Driven Marketing SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE 11-341

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Lucid Goes for Luxury With Electric Vehicles Technology and the Economy: Virtual Reality Conceals the World, Augmented Reality Improves It Responding to Business Challenges: Kraft Heinz Plays Ketchup Consider Ethics and Social Responsibility: Ford’s F-150 Races Ahead So You Want a Job in Marketing END OF CHAPTER TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: The Marketing Mix Solve the Dilemma: Will It Go? Build Your Business Plan: Customer-Driven Marketing See for Yourself Case: Marriott: Your Home Away From Home Team Exercise CONNECT ACTIVITIES LEGO: Inspire the Builders of Tomorrow…Girls Included! McDonald’s Market Challenge BONUS TEACHING RESOURCES Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions

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SUMMARY In this chapter, we focus on the basic principles of marketing. First we define and examine the nature of marketing. Then we look at how marketers develop marketing strategies to satisfy the needs and wants of their customers. Next, we discuss buying behavior and how marketers use research to determine what consumers want to buy and why. Finally, we explore the impact of the environment on marketing activities.

LEARNING OBJECTIVES LO 11-1

Define marketing

LO 11-2

Describe the exchange process.

LO 11-3

Specify the functions of marketing.

LO 11-4

Explain the marketing concept and its implications for developing marketing strategies.

LO 11-5

Examine the development of a marketing strategy, including market segmentation and marketing mix.

LO 11-6

Describe how marketers conduct marketing research and study buying behavior.

LO 11-7

Summarize the environmental forces that influence marketing decisions.

LO 11-8

Propose a solution for resolving its problem with a company’s marketing plans.

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KEY TERMS AND DEFINITIONS attitude

Knowledge and positive or negative feelings about something.

buying behavior

The decision processes and actions of people who purchase and use products.

concentration approach

A market segmentation approach whereby a company develops one marketing strategy for a single market segment.

culture

The integrated, accepted pattern of human behavior, including thought, speech, beliefs, actions, and artifacts.

distribution

Making products available to customers in the quantities desired; sometimes referred to as ―place‖ because it helps to remember the marketing mix as the ―4 Ps.‖

exchange

The act of giving up one thing (money, credit, labor, goods) in return for something else (goods, services, or ideas).

learning

Changes in a person’s behavior based on information and experience.

market

A group of people who have a need, purchasing power, and the desire and authority to spend money on goods, services, and ideas.

market orientation

An approach that requires organizations to gather information about customer needs, share that information throughout the entire firm, and use that information to build long-term relationships with customers.

market segment

A collection of individuals, groups, or organizations who share one or more characteristics and thus have relatively similar product needs and desires.

market segmentation

A strategy whereby a firm divides the total market into groups of people who have relatively similar product needs.

marketing

A group of activities designed to expedite transactions by creating, distributing, pricing, and promoting goods, services, and ideas.

marketing concept

The idea that an organization should try to satisfy customers’ needs through coordinated activities that also allow it to achieve 11-344

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its own goals. marketing mix

The four marketing activities—product, price, promotion, and distribution—that the firm can control to achieve specific goals within a dynamic marketing environment.

marketing research

A systematic, objective process of getting information about potential customers to guide marketing decisions.

marketing strategy

A plan of action for developing, pricing, distributing, and promoting products that meet the needs of specific customers.

motivation

An inner drive that directs a person’s behavior toward goals.

multisegment approach

A market segmentation approach whereby the marketer aims its efforts at two or more segments, developing a marketing strategy for each.

perception

The process by which a person selects, organizes, and interprets information received from their senses.

price

A value placed on an object exchanged between a buyer and a seller.

primary data

Marketing information that is observed, recorded, or collected directly from respondents.

promotion

A persuasive form of communication that attempts to expedite a marketing exchange by influencing individuals, groups, and organizations to accept goods, services, and ideas.

reference groups

Groups with whom buyers identify and whose values or attitudes they adopt.

secondary data

Information that is compiled inside or outside an organization for some purpose other than changing the current situation.

social classes

A ranking of people into higher or lower positions of respect.

social roles

A set of expectations for individuals based on some position they occupy.

target market

A specific group of consumers on whose needs and wants a company focuses its marketing efforts.

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total-market approach

An approach whereby a firm tries to appeal to everyone and assumes that all buyers have similar needs.

value

A customer’s subjective assessment of benefits relative to costs in determining the worth of a product.

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Define marketing

Key Terms:

 Introduction PowerPoint Slides:

 Marketing

Lecture Outline and Notes: I. Nature of Marketing

PPT 11.4

A. Marketing, a vital part of any business undertaking, is a group of activities designed to expedite transactions by creating, distributing, pricing, and promoting goods, services, and ideas. 1. Creates value by allowing individuals and organizations to obtain what they need and want. 2. Other functional areas of the business must be coordinated with marketing decisions. 3. May be the hardest concept for organizations to master as motives are often unclear; few principles can be applied consistently; and markets tend to fragment, each desiring customized products, new value, or better service. 4. What marketing is NOT: a. It is not manipulating consumers to get them to buy products they do not want. b. It is more than selling and advertising; it is a systematic approach to satisfying consumers.

LO 11-2

Describe the exchange process. 

The Exchange Relationship

Key Terms: 

Exchange

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PPT 11.6

B. The Exchange Relationship 1. An exchange is the act of giving up one thing in return for something else. 2. Businesses exchange their goods, services, or ideas for money or credit supplied by customers in a voluntary exchange relationship. 3. For an exchange to occur, certain conditions are required. a. Buyers and sellers must be able to communicate about the ―something of value‖ available to each.

PPT 11.7

b. Each participant must be willing to give up its respective ―something of value‖ to receive the ―something‖ held by the other (Figure 11.1). c. The tangible product itself is often not as important as the image or benefits associated with the product. i. This intangible ―something of value‖ may be capability gained from using a product or the image evoked by it, or even the brand name.

LO 11-3

Specify the functions of marketing. o Functions of Marketing

Key Terms: 

Value

o Creating Value With Marketing

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C. Functions of Marketing 1. Buying a. A marketer must understand buyers’ needs and desires to determine what products to make available. 2. Selling a. Selling expedites the exchange process, and marketers view selling as a persuasive activity that is accomplished through promotion. 3. Transporting a. Transporting is the process of moving products from the seller to the buyer. 4. Storing a. Storing includes warehousing activities. 5. Grading a. Grading refers to standardizing products and displaying and labeling them so that consumers clearly understand their nature and quality. 6. Financing a. Financing involves arranging credit, which makes the purchase of products possible. 7. Marketing Research a. Through marketing research, marketers ascertain the need for new goods and services. 8. Risk Taking a. Risk taking is associated with the chance of loss from marketing decisions that involve the use of resources. b. Developing a new product creates a chance of loss if consumers do not like it enough to buy it. D. Creating Value With Marketing 1. Value is a customer’s subjective assessment of benefits relative to costs in determining the worth of a product. 2. Customer value = customer benefits − customer costs. 3. Customer benefits are anything a buyer receives in an exchange. 4. Customer costs include anything a buyer must give up to obtain the benefits the product provides. a. Two nonmonetary costs are the time and effort customers expend to find and purchase desired products. 5. Customers will seek out benefits based on their experiences and often derive benefits from the act of shopping and selecting products.

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LO 11-4

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Explain the marketing concept and its Key Terms: implications for developing marketing strategies.  Marketing concept o The Marketing Concept  Market orientation o Evolution of the Marketing Concept E. The Marketing Concept 1. The marketing concept is the idea that an organization should try to satisfy customers’ needs through coordinated activities that allow it to achieve its own goals. a. The marketing concept guides all marketing activities. b. According to the marketing concept, a business must find out what consumers need and want and then develop the product that fulfills that need or want. c. The business must then get the product to the customer. d. A business must also continually alter, adapt, and develop products that keep pace with changing consumer needs and wants.

PPT 11.13–11.14

2. Determining the true needs of buyers is increasingly difficult because buying motivation is not understood by either the buyer or the organization. 3. Although customer satisfaction is the goal of the marketing concept, a business must also achieve its own objectives; if it does not, it will not survive. 4. To implement the marketing concept, a firm must have good information about what consumers want, adopt a consumer orientation, and coordinate its efforts throughout the entire organization. a. A breakdown at any point in the organization can result in lost sales, lost revenues, and dissatisfied customers. 5. Employees who know how to understand and satisfy customers’ needs and wants are those who focus on ideas, benefits, and other aspects of the product or service. These employees do not focus on selling the goods or services, but rather on providing value to the customer. a. For instance, Mattel has realized dolls should come in different sizes.

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F. Evolution of the Marketing Concept 1. The Production Orientation a. During the Industrial Revolution, new technologies and management ideas made it possible to manufacture products with greater efficiency; demand for manufactured goods was very strong. Companies, therefore, adopted a production orientation. 2. The Sales Orientation

PPT 11.16

a. By the first part of the 20th century, supply caught up with demand, and businesspeople came to believe that personal selling and advertising were the most important activities to increase profits. Companies, therefore, adopted a sales orientation. 3. The Market Orientation a. By the 1950s, some businesspeople began to recognize that success required determining what customers want and making products that satisfy those wants rather than making products and then persuading consumers to buy them. b. A market orientation requires organizations to gather information about customer needs, share that information throughout the entire firm, and use that information to help build long-term relationships with customers. c. Trying to assess what consumers want is difficult and further complicated by the rate at which trends, fashions, and tastes can change. i. For example, the Tesla meets the needs of consumers who care about the environment and wish to improve their environmental footprint by driving an electric vehicle. ii. It is more efficient and less expensive for the company to retain existing customers and even increase the amount of business each customer provides the organization than to find new customers. d. Most companies are turning to technologies associated with customer-relationship management to help build relationships and boost business with existing customers.

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e. Communication remains a major element of any strategy to develop and manage long-term customer relationships. i. Regardless of the medium through which communication occurs, customers should ultimately be the drivers of marketing strategy because they understand what they want. ii. Customer relationship management (CRM) systems should ensure that marketers listen to customers in order to respond to their needs and concerns and build long-term relationships. LO 11-5

Examine the development of a marketing strategy, including market segmentation and marketing mix. 

Developing a Marketing Strategy o Selecting a Target Market o Developing a Marketing Mix

Key Terms:  Marketing strategy  Market  Target market  Total-market approach  Market segmentation  Market segment  Concentration approach  Multisegment approach  Marketing mix  Price  Distribution  Promotion

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II. Developing a Marketing Strategy A. A marketing strategy is a plan of action for developing, pricing, distributing, and promoting products that meet the needs of specific customers. 1. A marketing strategy consists of two major components: selecting the target market and developing an appropriate marketing mix to satisfy that target market. B. Selecting a Target Market 1. A market is a group of people who have a need, purchasing power, and the desire and authority to spend money on goods, services, and ideas.

PPT 11.20

2. A target market is a more specific group of consumers on whose needs and wants a company focuses its marketing efforts. 3. A target market can either be small or encompass the total market (Figure 11.2).

PPT 11.18

a. Some firms use a total-market approach, in which they try to appeal to the entire market and assume that all buyers have similar needs and wants. b. Most firms use market segmentation and divide the total market into groups of people who have relatively similar product needs.

PPT 11.19

c. A market segment is a collection of individuals, groups, or organizations that share at least one characteristic and have relatively similar product needs and desires. 4. Market Segmentation Approaches (Table 11.1) a.

The concentration approach is a market segmentation approach in which a marketer directs one marketing strategy toward a single market segment. (Porsche, for example, uses a concentration approach.)

b. The multisegment approach is a market segmentation approach in which the marketer aims its marketing efforts at two or more segments, developing a marketing strategy for each. (Raleigh Bicycles uses a multisegment approach.) i.

Niche marketing is a narrow market segment focus when efforts are on one small, well-defined segment that has a unique, specific set of needs. (Airline marketers have used this strategy.)

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c. For a firm to successfully use the concentration or multisegment approach to market segmentation, several requirements must be met such as heterogeneous consumer needs, identifiable and divisible segments, designated comparable segments, profit potential for at least one segment, and the ability to reach the chosen market segment with a particular market strategy. Or a firm to successfully use the concentration or multisegment approach to market segmentation, several requirements must be met such as heterogeneous consumer needs, identifiable and divisible segments, designated comparable segments, profit potential for at least one segment, and the ability to reach the chosen market segment with a particular market strategy. 5. Bases for Segmenting Markets—businesses segment markets on the basis of several variables: a. Demographic—age, sex, race, ethnicity, income, education, occupation, family size, family life cycle, religion, and social class. These characteristics are often closely related to customers’ product needs and purchasing behaviors. b. Geographic factors—climate, terrain, natural resources, population density, and subcultural values. These influence consumer needs and product usage. c. Psychographic—personality characteristics, motives, and lifestyles. d. Behavioristic—how consumers’ behavior toward the product affects its use. C. Developing a Marketing Mix

PPT 11.24 PPT 11.25

1. The marketing mix refers to four marketing activities that the firm can control to achieve specific goals within a dynamic marketing environment (Figure 11.3). a. The buyer or target market is the central focus of all four marketing activities: product, price, promotion, and distribution.

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2. Product a. A product is a complex mix of tangible and intangible attributes and includes everything the buyer receives from an exchange. i.

A good is a physical entity you can touch.

ii.

A service is the application of human and mechanical efforts to people or objects to provide intangible benefits to customers.

iii.

An idea is a concept, philosophy, image, or issue.

b. A product has emotional and psychological, as well as physical characteristics. c. Almost every purchase or exchange involves consumers trying to maximize benefits and satisfaction and minimize unfavorable attributes. d. The product is an important variable—often the central focus—of the marketing mix; the other variables (price, promotion, and distribution) must be coordinated with product decisions. PPT 11.27

3. Price a. Price represents the value placed on what is exchanged between a buyer and a seller. b. Price quantifies value and is the basis of most market exchanges. c. Price is the key element of the marketing mix because it directly relates to revenue and profits. d. Price can be changed quickly to stimulate demand or respond to competitors’ actions.

PPT 11.28

4. Distribution a. Distribution is the process of making products available in desired quantities. It involves transporting, warehousing, materials handling, and inventory control. b. Distribution is sometimes referred to as ―place‖ because it helps to remember the marketing mix as the ―4 Ps.‖ c. Intermediaries, usually wholesalers and retailers, perform many of the activities required to move products efficiently. d. Eliminating wholesalers and other intermediaries would not do away with the need for the services they provide.

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5. Promotion

PPT 11.29

a. Promotion is a persuasive form of communication that attempts to expedite a marketing exchange by influencing individuals, groups, and organizations to accept goods, services, and ideas. b. Promotion includes advertising, personal selling, publicity, and sales promotion. c. The aim of promotion is to communicate directly or indirectly with individuals, groups, and organizations to facilitate exchanges. d. Digital advertising on websites and social media sites is growing.

LO 11-6

Investigate how marketers conduct marketing research and study buying behavior. 



Marketing Research and Information Systems

Key Terms:  Marketing research  Primary data  Secondary data

o Online Marketing Research

 Buying behavior

Buying Behavior

 Perception

o Psychological Variables of Buying Behavior

 Motivation  Learning

o Social Variables of Buying Behavior

 Attitude

o Understanding Buying Behavior

 Reference groups

 Social roles  Social classes  Culture

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III. Marketing Research and Information Systems A. Marketing research is a systematic, objective process of getting information about potential customers to guide marketing decisions. 1. Such information might include data about the age, income, ethnicity, gender, and educational level of people in the target market, their preferences for product features, their attitudes toward competitors’ products, and the frequency with which they use the product. 2. Marketing research is vital because the marketing concept cannot be implemented without information about customers. This research helps to guide marketing decisions. B. A marketing information system is a framework for accessing information about customers from both inside and outside sources.

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C. Two types of data are usually available to decision makers. 1. Primary data are observed, recorded, or collected directly from respondents. Primary data must be gathered by researchers. a. Primary data must be gathered by researchers who develop a method to observe phenomena or research respondents. b. Many companies use ―mystery shoppers‖ to visit their retail establishments. c. Companies use surveys and focus groups to gauge customer opinion (Table 11.2). d. Some methods for marketing research use passive observation of consumer behavior and open-ended questioning techniques.

PPT 11.33

2. Secondary data are compiled inside or outside the organization for some purpose other than changing the current situation. This type of data is already available in private or public reports. D. Online Marketing Research 1. New information technologies are changing the way businesses learn about customers and market products. 2. Virtual testing is a kind of interactive multimedia research that combines sight, sound, and animation to facilitate the testing of concepts, packaging, and design features. 3. Social networking sites are a great way for marketers to obtain information on consumers who are willing to share their opinions on products and companies, to reach new markets, and to gain varied perspectives. 4. Online surveys are becoming an important part of marketing research.

PPT 11.34

5. Marketing analytics uses data that has been collected to measure, interpret, and evaluate marketing decisions. IV. Buying Behavior A. Buying behavior refers to the decision processes and actions of people who purchase and use products. 1. Marketers analyze buying behavior because a firm’s marketing strategy should be guided by an understanding of buyers.

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2. For instance, men’s shopping habits are changing. As a result, retailers such as Saks and Barney’s have begun expanding the men’s areas in their stores. PPT 11.36

B. Psychological Variables of Buying Behavior 1. Perception is the process by which a person selects, organizes, and interprets information received from their senses. 2. Motivation is an inner drive that directs a person’s behavior toward achieving a goal. 3. Learning brings about changes in a person’s behavior based on information and experience. 4. Attitude is knowledge and positive or negative feelings about something.

PPT 11.37

5. Personality is the organization of an individual’s distinguishing character traits, attitudes, or habits. C. Social Variables of Buying Behavior 1. Social factors include social roles, which are a set of expectations for individuals based on some position they occupy. 2. Other social factors include roles, reference groups, social classes, and culture. a. Reference groups are groups that individuals identify with and whose values or attitudes they adopt. b. Social classes are determined by ranking people into higher or lower positions of respect. c. Culture is the integrated, accepted pattern of human behavior, including thought, speech, beliefs, actions, and artifacts. i. Culture determines what people wear and eat and where they live and travel. Many Hispanic Texans and New Mexicans, for example, buy masa trigo, the dough used to prepare flour tortillas, which are basic to Southwestern and Mexican cuisine. D. Understanding Buying Behavior 1. Although marketers try to understand buying behavior, it is difficult to explain exactly why a buyer purchases a particular product. 2. Tools and techniques for analyzing are not exact. 3. Trying to understand consumer wants and needs is the best way to satisfy them.

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LO 11-7

PPT 11.38 PPT 11.39

Summarize the environmental forces that influence marketing decisions. 

The Marketing Environment



Importance of Marketing to Business and Society

Ferrell/Hirt/Ferrell: Business Foundations 13e

Key Terms:

V. The Marketing Environment (Figure 11.4) A. A number of external forces directly or indirectly influence the development of marketing strategies. 1. Political, legal, and regulatory forces—laws and regulators’ interpretation of laws; law enforcement and regulatory activities; regulatory bodies, legislators and legislation; and political actions of interest groups. 2. Social forces—the public’s opinions and attitudes toward issues such as living standards, ethics, the environment, lifestyles, and quality of life. 3. Competitive and economic forces—competitive relationships, unemployment, purchasing power, and general economic conditions. 4. Technological forces—computers and advances in communications and transportation that improve distribution, promotion, and new product development. B. Marketing environment forces can change quickly and radically, and changes in one may cause changes in others. C. Marketing requires creativity and consumer focus because environmental forces can change quickly and dramatically. D. Although the forces in the marketing environment are sometimes called uncontrollables, to some degree, a marketing manager can influence some environmental variables.

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PPT 11.41

VI.

Ferrell/Hirt/Ferrell: Business Foundations 13e

Importance of Marketing to Business and Society A. While some critics might view marketing as a way to change what consumers want, marketing is essential in communicating the value of products and services. 1. For consumers, marketing is necessary to ensure that they get the products they desire at the right places in the right quantities at a reasonable price. 2. For businesses, marketing is necessary in order to form valuable relationships with customers to increase profitability and customer support. B. All organizations—including nonprofits, government institutions, and even people—must reach their target markets, communicate their offerings, and establish high-quality services.

LO 11-8

Propose a solution for resolving its problem with a company’s marketing plans.

Key Terms:

PPT 11.42

VII. Solve the Dilemma: Will It Go? EE. Ventura Motors makes midsized and luxury automobiles in the United States. FF. Success of two-seat sports cars like the Mazda RX-8 started company evaluating market for two-seat sports cars priced midway between moderate and luxury market. 19. Research found significant demand. 20. Ventura needed to act fast to take advantage of this market opportunity.

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C. Designed, engineered, and produced in just over 2 years 1. Higher than anticipated costs 2. Price set at $32,000 for two-seat car Olympus PPT 11.43

3. Initial sales have been slow and company executives are surprised and concerned 4. Olympus was introduced quickly, made available at all Ventura dealers, priced midway between luxury and moderate models, and advertised heavily.

PPT 11.44

D. Critical Thinking Questions: 1. What do you think were the main concerns with the Olympus two-door sports coupe? Is there a market for a two-seat, $32,000 sports car when the RX-8 sells for significantly less? 2. Evaluate the role of the marketing mix in the Olympus introduction. 3. What are some of the marketing strategies auto manufacturers use to stimulate sales of certain makes of automobiles? (Answers appear under the End of Chapter Teaching Resources section of this Instructor's Manual.)

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Lucid Goes for Luxury With Electric Vehicles Backed by Saudi Arabia’s sovereign-wealth fund, Lucid is taking aim at the luxury end of the market with the Air, hoping to not only carve into Tesla’s market share but also attract more conventional sedan buyers from BMW AG, Daimler AG’s Mercedes-Benz, and other premium brands. The company is going after the luxury segment with its vehicles. Lucid sees its customer base as having at least $100,000 in annual income. Lucid is following in Tesla’s footsteps by engaging in direct sales and bypassing the intermediaries. It is planning on opening. Twenty retail centers in upmarket locations, including New York, Miami, West Palm Beach, Boston, and the D.C. metro area, as well as other locations around California, which has half of the country’s EV sales. 1. Who are Lucid’s competitors? Tesla and conventional automakers including: VW, GMC, BMW AG, Daimler AG’s Mercedes-Benz, and other premium brands. 2. Describe Lucid’s distribution strategy. How is the company’s retail center concept different from traditional car dealers? Lucid is opening its open dealerships modeling the Tesla approach. Traditional car dealers are franchise operations not owned by the automakers. 3. Who is Lucid’s target market? Its target market is customers having at least $100,000 in annual income. Technology and the Economy: Virtual Reality Conceals the World, Augmented Reality Improves It 1. How are AR makers trying to overcome obstacles to embrace the marketing concept? They recognize that to satisfy customer needs, they will need to develop headsets and devices that customers will want to wear. They will have to address the bulkiness, GPS accuracy, and privacy concerns. 2. What type of variables do you think AR marketers are most likely to use to segment the market? Answers will vary but should include Demographic, Geographic, Psychographic, and Behavioristic bases.

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3. If you were a marketer of new AR headsets, what type of market segmentation approach would you adopt to reach consumer segments? Explain your reasoning. Answers will vary. Responding to Business Challenges: Kraft Heinz Plays Ketchup 1. How are evolving consumer perceptions changing Heinz mayonnaise products? Since consumes perceive mayonnaise as unhealthy, the company is offering healthier versions of mayo that substitute traditional oil with healthier ingredients and new flavors like roasted garlic and spicy chipotle flavors. 2. Describe how Heinz used consumer interaction as a form of marketing research. What type of data did it collect, primary or secondary? The company used primary data by asking consumers to vote for whether they wanted new flavors such as Mayochup (a combination of ketchup and mayo) in stores. 3. What type of segmentation variables is Heinz using for its Mayochup advertising? Heinz advertised in a variety of media targeting different consumer demographics, including foodie, ―top-tier lifestyle,‖ social, and major media outlets. Consider Ethics and Social Responsibility: Ford’s F-150 Races Ahead 1. Why does a multisegment approach seem to work for Ford? Ford has multiple customer segments, adopting a multisegment approach that works for the standard truck owner as well as suburbanites resulting in seven different models of its F-150. Its success has resulted in the Ford F150 being the best-selling vehicle worldwide. 2. How do you think knowing its market has allowed Ford to branch off into different markets for its F-150 trucks? Answers will vary but again knowing its market the company is working to create greener vehicles that provide with other attributes/benefits. 3. What types of segmentation variables does Ford likely use to target different types of consumers? Answers will vary but should address a multisegment approach using Demographic, Geographic, Psychographic, and Behavioristic bases.

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So You Want a Job in Marketing What are some of the job opportunities in marketing and the salaries associated with the positions? Marketing research is a vital aspect in marketing decision making and presents many job opportunities. A market analyst may make between $36,000 and $76,000, while a market research director earns a median salary of more than $107,000. Other areas include direct marketing: buyers, catalog managers, research/mail-list managers, or order fulfillment managers. Most positions in direct marketing involve planning and market analysis. E-marketing also offers many career opportunities, including customer relationship management (CRM). A CRM manager earns a median salary of approximately $67,000, and experienced individuals may earn as much as $116,000. END OF CHAPTER TEACHING RESOURCES Check Your Progress 1. What is marketing? How does it facilitate exchanges? Marketing is a group of activities designed to expedite transactions by creating, distributing, promoting, and pricing goods, services, and ideas. Businesses exchange their goods, services, or ideas for money or credit supplied by buyers in a voluntary exchange relationship. Marketing focuses on the many activities—planning, pricing, promoting, and distributing products—that foster exchanges. 2. Name the functions of marketing. How does an organization use marketing activities to achieve its objectives? The functions of marketing include buying, selling, transporting, storing, grading, financing, marketing research, and risk-taking. Each of these functions helps accomplish marketing objectives. 3. What is the marketing concept? Why is it so important? The marketing concept states that an organization should try to satisfy customers’ needs through coordinated activities that also allow it to achieve its own goals. Adoption of the marketing concept is important because it provides the organization with a philosophy of meeting customers’ needs without sacrificing the long-run needs of the organization. 4. What is a marketing strategy? A marketing strategy is the plan of action for developing, pricing, distributing, and promoting products that meet the needs of specific customers. 12-365 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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5. What is market segmentation? Describe three target market strategies. Market segmentation is the process of dividing the total market into groups of people with relatively similar product needs. The three strategies are the total-market approach, concentration approach, and multisegment approach. 6. List the variables in the marketing mix. How is each used in a marketing strategy? The marketing mix involves four variables: product, promotion, price, and distribution. The product is a complex mix of tangible and intangible attributes that provide satisfaction and benefits. Price represents the value placed on an object in an exchange; it quantifies value and is the basis of most market exchanges. Distribution makes products available in the quantities desired to as many customers as possible while holding total inventory, transportation, and storage costs as low as possible. Promotion is a persuasive form of communication that attempts to facilitate a marketing exchange by influencing individuals, groups, or organizations to accept an organization’s products. 7. Why are marketing research and information systems important to an organization’s planning and development of strategy? Marketing research is a systematic and objective effort to obtain information about potential customers in order to guide marketing decisions. A marketing information system establishes a framework for accessing information about customers from sources both inside and outside of the organization. Marketing research and information systems are important to an organization’s planning and developing strategy. They make possible a systematic approach to decision making in marketing. 8. Briefly describe the factors that influence buying behavior. How does understanding buying behavior help marketers? Psychological and social variables play a part in buyer behavior. The psychological variables include these factors: (1) perception—the process by which a person selects, organizes, and interprets information received from their senses in order to understand it; (2) motivation—an internal force that directs an individual’s behavior to achieve a goal; (3) learning—a change in a person’s behavior caused by information and experience; (4) attitude—knowledge and positive or negative feelings about something; and (5) personality—the organization of an individual’s distinguishing character traits, attitudes, and habits. Social variables of buyer behavior include the following four factors: (1) social roles—the set of expectations for individuals based on some position they occupy; (2) reference groups—groups with whom individuals identify and whose values or attitudes the individuals adopt; (3) social classes—determined by ranking people into higher or lower 12-366 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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positions of respect; and (4) culture—the integrated, accepted pattern of human behavior that includes thought, speech, beliefs, actions, and artifacts. Marketers analyze buying behavior because a firm’s marketing strategy should be guided by an understanding of what, where, when, and how consumers buy. 9. Discuss the impact of technological forces and political and legal forces on the market. Technological, political, and legal forces form part of the marketing environment. This environment influences and structures the development of marketing strategy. These forces shape the marketing environment in which the firm operates. Although these forces in the marketing environment are sometimes called uncontrollables, marketing has an opportunity to influence environmental variables.

Get Involved 1. With some or all of your classmates, watch several hours of television, paying close attention to the commercials. Pick three commercials for products with which you are somewhat familiar. Based on the commercials, determine who the target market is. Can you surmise the marketing strategy for each of the three? Students’ answers will vary depending upon the commercials they choose. 2. Discuss the decision process and influences involved in purchasing a personal computer. Buying behavior refers to the decision processes and actions of people who purchase and use products. When purchasing a personal computer, both psychological and social variables are important. Psychological variables include perception, motivation, learning, attitude, and personality. For example, suppose a person is looking for a high-quality computer, they might perceive a lower priced computer to be of lower quality. Perhaps a buyer might be motivated to purchase a tablet computer due to ease of use and storage. The person might have learned from past experiences that a specific brand of computer, such as a Dell, is a high-quality brand. The person’s attitude toward Dell products might be positive (possibly as a result of past experiences, advice from friends, or even commercials), which could prompt them to purchase a Dell. Perhaps the person feels like the shape or color of a particular computer matches their personality best. In terms of social factors, a person might be influenced by reference groups, social classes, and culture. A person might use their reference group, such as friends or family, to seek recommendations on which computer to buy. A person might also choose to buy a 12-367 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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computer that fits with their social class; for instance, a person in the upper class might choose to purchase a more expensive brand. Culture might not be as important to this decision process. However, because Apple products are so popular in American culture, a person might choose to purchase a Mac or an iPad. The marketing mix is also important in the decision-making process. A person might have specific criteria that the computer must have in order to purchase it. On the other hand, if the person cannot find the computer in the right color at the store, they might choose to purchase another color or type of computer. Those looking for less expensive computers will look for those with a lower price. Finally, the person might also be influenced by promotional materials such as TV commercials or magazine advertisements.

Build Your Skills: The Marketing Mix The correct answer is based on the emphasis of the major activity described in each example. Answer Key: 1. Distribution (B) 2. Price (D) 3. Product (A) 4. Product (A) 5. Product (A) 6. Promotion (C) 7. Price (D)

Solve the Dilemma: Will It Go? 1. What do you think were the main concerns with the Olympus two-door sports coupe? Is there a market for a two-seat, $32,000 sports car when the RX-8 sells for significantly less? The main concern with the Olympus two-door sports coupe is that it may be overpriced. The market research (assuming it is correct) revealed that ―significant demand‖ exists for a mid-range, two-seat sports coupe—the market currently being served by Mazda. Although Ventura delivered a car designed to compete in the two-seat sports car market, 12-368 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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it priced the car based on additional expenses resulting from rapid development and introduction (2 years from concept to production). However, there may be a market for the Olympus if Ventura can differentiate the car in a way that is significant to the consumer. If Ventura does not successfully differentiate its Olympus from other vehicles, it is unlikely that the market will be kind to Ventura. 2. What is the role of the marketing mix in the Olympus introduction? The marketing mix is going to be very important to the Olympus introduction. Distribution (place) is already established and will be difficult to change. While the Olympus is already in production, Ventura can manipulate price and promotion to position (or perhaps reposition) the car and control market penetration. 3. What are some of the marketing strategies auto manufacturers use to stimulate sales of certain makes of automobiles? Students’ answers will vary, but should include discussion of things such as instant rebates, low financing, free add-ons (air conditioning, stereo, etc.), dealer incentives, heavy advertising, and so forth.

Build Your Business Plan: Customer-Driven Marketing Focusing on your community and posing the questions asked at the end of this chapter in the ―Build Your Own Business Plan‖ section (i.e., Who will be the target market you will specifically try to reach?‖), have the students respond to the questions using a new Thai restaurant that you (hypothetically) are considering opening in your community. This can be an excellent way to have a lively discussion on what the ―ability and willingness of the consumers to purchase‖ really means.

See for Yourself Case: Dollar General Cashes in on Niche Business Strategy Dollar General found its niche focusing on selling small-ticket items to a target market of lowincome consumers on tight budgets. Dollar General spends $250,000 on a new store making good use of shelving space, fitting a variety of different products within a space one tenth the size of a Walmart store. The store avoids selling items in bulk like many competitors in the industry since its customers shop paycheck-to-paycheck. Dollar General would add around 1,000 new stores as part of its $22 billion proposed expansion plan. The plan is to focus on small towns consisting of low-income households and individuals that rely on government assistance. This fits the company’s strategy of catering to ―Anytown, USA.‖ 12-369 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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1. Describe how Dollar General has found success in catering to a unique market niche ignored by many of its rivals? Most retailers’ stores are too big and the cost to build too expensive. The Dollar General’s target market, with a high poverty rate and a medium household income under $35,000, has insufficient purchasing power to support stores like Walmart. 2. How does Dollar General keep costs low enough to maintain its low prices? Its stores cost $250,000 focusing on an inventory stocking system that fits a variety of different products within a space one-tenth the size of a Walmart store. 3. How do stores like Dollar General differ from other stores in a fluctuating economy? General Dollar has recognized the large income gap in the United States leaves a significant market of locations untouched by rival stores. A fluctuating economy has less impact on Dollar General because these locations are not looking to thrive economically but primarily to survive in a growing economy. Team Exercise Students will form groups and be assigned the responsibility of finding examples of companies that excel in one dimension of the marketing mix (price, product, promotion, and distribution). They will provide several company and product examples and defend why this would be an exemplary case. They will then present their research to the class.

CONNECT ACTIVITIES McDonald’s Market Challenge Learning Objective 11-5: Examine the development of a marketing strategy, including market segmentation and marketing mix. Activity Summary: Students will read a short case discussing decreasing sales for the global fast food chain, McDonald’s. Two potential causes of the decrease in sales are discussed. Companies must understand and respond to changing markets in order to remain competitive. This includes effectively engaging in the functions of marketing, identifying the market segment to which the company wants to appeal, and creating a marketing mix that appeals to that market. How to Use Activity: Have the students focus on the environmental factors that have impacted McDonald’s Business and McDonald’s response. 12-370 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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Class Discussion: How are Millennials different from the other demographic groups? What have McDonald’s competitors done to be more successful in the changing fast food market? What is McDonald’s doing to obtain marketing research information about its customers?

LEGO: Inspire the Builders of Tomorrow…Girls Included! Learning Objective 11-5: Examine the development of a marketing strategy, including market segmentation and marketing mix. Activity Summary: This activity is important because in business, it is important to understand Marketing. Marketing includes a group of activities designed to expedite transactions by creating, distributing, pricing, and promoting goods, services, and ideas. The goal of this exercise is to apply marketing concepts to LEGO’s expanded product line aimed at making their products attractive to young girls. How to Use Activity: Have the students focus on the different marketing strategies that LEGO could use. Have the students discuss the concept of ―target‖ marketing and the issues a company faces when using this approach? Class Discussion: What marketing segments did LEGO use to increase sales? What problems did the company encounter when it began focusing on LEGO products for girls? What environmental factors forced LEGO to change its strategy? BONUS TEACHING RESOURCES Term Paper or Project Topics These topics may be assigned as individual or collaborative projects: 1. 2. 3. 4.

Honda’s Way of Selling Automobiles The Team Concept in Marketing Technology in Marketing Functions How Quality Improvement Has Changed Marketing

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Guest Speaker Suggestions 1. A professor of marketing to speak about various facets of marketing. 2. A marketing executive from a local firm to speak about marketing as a career or what is involved in marketing. 3. A representative of a local nonprofit organization to speak about marketing efforts for that organization. 4. A professor to speak about distribution. 5. A professor to speak about promotion. Teaching Suggestions 1. Review the objectives at the front of the chapter. 2. Use the ―Lecture Outline and Notes‖ with the slides indicated in the margins. 3. Review ―Check Your Progress.‖

Chapter 12: Dimensions of Marketing Strategy SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: The Secret to Trader Joe’s Private Label Entrepreneurship in Action: Fitness Mirror Entrepreneur Reflects on $500 Million Sale Consider Ethics and Social Responsibility: Pepsi Named Top Plastic Polluter Business Disruption: Off the Rack: This Modern Mall Concept Buckles Down So You Want to Be a Marketing Manager END OF CHAPTER TEACHING RESOURCES Check Your Progress Get Involved 12-372 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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Build Your Skills: Analyzing Motel 6’s Marketing Strategy Solve the Dilemma: Better Health With Snacks Build Your Business Plan: Dimensions of Marketing Strategy See for Yourself Case: Doc Martens Kicks Up Its Prices Team Exercise CONNECT ACTIVITIES Traditional Business With Airline Pricing Dunkin’ Donuts Masters the Marketing Mix iSeeIt! Video Case: The Product Life Cycle BONUS TEACHING RESOURCES Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions

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SUMMARY The key to developing a marketing strategy is selecting a target market and maintaining a marketing mix that creates long-term relationships with customers. Getting just the right mix of product, price, promotion, and distribution is critical if a business is to satisfy its target customers and achieve its own objectives (implement the marketing concept). In this chapter, we’ll take a closer look at the four dimensions of the marketing mix—product, price, distribution, and promotion—used to develop the marketing strategy. The focus of these marketing mix elements is a marketing strategy that builds customer relationships and satisfaction.

LEARNING OBJECTIVES LO 12-1

Describe the role of product in the marketing mix, including how products are developed, classified, and identified.

LO 12-2

Explain the importance of price in the marketing mix, including various pricing strategies a firm might employ.

LO 12-3

Identify factors affecting distribution decisions, such as marketing channels and intensity of market coverage.

LO 12-4

Specify the activities involved in promotion, as well as promotional strategies and promotional positioning.

LO 12-5

Evaluate an organization’s marketing strategy plans.

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KEY TERMS AND DEFINITIONS advertising

A paid form of nonpersonal communication transmitted through a mass medium, such as television commercials or magazine advertisements.

advertising campaign

Designing a series of advertisements and placing them in various media to reach a particular target market.

branding

The process of naming and identifying products.

business products

Products that are used directly or indirectly in the operation or manufacturing processes of businesses.

commercialization

The full introduction of a complete marketing strategy and the launch of a product for commercial success.

consumer products

Products intended for household or family use.

direct marketing

The use of nonpersonal media to communicate products, information, and the opportunity to purchase via media such as mail, telephone, or the internet.

direct selling

The marketing of products to ultimate consumers through faceto-face sales presentations at home or in the workplace.

discounts

Temporary price reductions are often employed to boost sales.

exclusive distribution

The awarding by a manufacturer to an intermediary of the sole right to sell a product in a defined geographic territory.

generic products

Products with no brand name that often come in plain, simple packages and carry only their generic name.

integrated marketing communications

The process of coordinating the promotion mix elements and synchronizing promotion as a unified effort.

intensive distribution

A form of market coverage whereby a product is made available in as many outlets as possible.

labeling

The presentation of important information on the package.

logistics management

The planning and coordination of inbound and outbound as well as third-party services.

manufacturer brands

Brands initiated and owned by the manufacturer to identify

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products from the point of production to the point of purchase. marketing channel

A group of organizations that moves products from their producer to customers; also called a channel of distribution.

materials handling

The physical handling and movement of products in warehousing and transportation.

packaging

The external container that holds and describes the product.

penetration price

A low price designed to help a product enter the market and gain market share rapidly.

personal selling

Direct, two-way communication with buyers and potential buyers.

price skimming

Charging the highest possible price that buyers who want the product will pay.

private distributor brands

Brands, which may cost less than manufacturer brands that are owned and controlled by a wholesaler or retailer.

product line

A group of closely related products that are treated as a unit because of similar marketing strategy, production, or end-use considerations.

product mix

All the products offered by an organization.

promotional positioning

The use of promotion to create and maintain an image of a product in buyers’ minds.

psychological pricing

Encouraging purchases based on emotional rather than rational responses to the price.

publicity

Nonpersonal communication transmitted through the mass media but not paid for directly by the firm.

pull strategy

The use of promotion to create consumer demand for a product so that consumers exert pressure on marketing channel members to make it available.

push strategy

An attempt to motivate intermediaries to push the product down to their customers.

quality

The degree to which a good, service, or idea meets the

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demands and requirements of customers. reference pricing

A type of psychological pricing in which a lower priced item is compared to a more expensive brand in hopes that the consumer will use the higher price as a comparison price.

retailers

Intermediaries that buy products from manufacturers (or other intermediaries) and sell them to consumers for home and household use rather than for resale or for use in producing other products.

sales promotion

Direct inducements offering added value or some other incentive for buyers to enter into an exchange.

selective distribution

A form of market coverage whereby only a small number of all available outlets are used to expose products.

test marketing

A trial minilaunch of a product in limited areas that represent the potential market.

trademark

A brand that is registered with the U.S. Patent and Trademark Office and is thus legally protected from use by any other firm.

transportation

The shipment of products to buyers.

warehousing

The design and operation of facilities to receive, store, and ship products.

wholesalers

Intermediaries who buy from producers or from other wholesalers and sell to retailers.

Instructor’s Manual—Chapter 12

Ferrell/Hirt/Ferrell: Business Foundations 13e

Describe the role of product in the marketing mix, including how products are developed, classified, and identified. 

Introduction



The Marketing Mix



Product Strategy o Developing New Products

Key Terms:  Test marketing  Commercialization  Consumer products  Business products  Product line

o Classifying Products

 Product mix

o Product Line and Product Mix

 Branding

o Product Life Cycle

 Trademark

o Identifying Products

 Manufacturer brands  Private distributor brands  Generic products  Packaging  Labeling  Quality

Instructor’s Manual—Chapter 12

PowerPoint Slides: PPT 12.4

Ferrell/Hirt/Ferrell: Business Foundations 13e

Lecture Outline and Notes: I. The Marketing Mix A. The key to developing a marketing strategy is maintaining the right marketing mix that satisfies the target market and creates long-term relationships with customers. B. The marketing mix involves product, price, promotion, and distribution. C. The marketing mix is the part of the marketing strategy that involves decisions regarding controllable variables. D. Successful companies offer at least one dimension of value that surpasses all competitors in the marketplace in meeting customer expectations. E. Successful companies must also maintain acceptable, and if possible, distinguishable differences in the other dimensions as well.

Instructor’s Manual—Chapter 12

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II. Product Strategy A. A product is a good, service, or idea containing tangible and intangible attributes that provide satisfaction and benefits. 1. Remember that thousands of products are introduced each year but very few succeed. 2. A firm can take considerable time to get a product ready for the market; it took more than 20 years for the first photocopier, for example. 3. Sometimes a product or idea is shelved, only to be returned to later. B. Developing New Products (Figure 12.1) 1. Before introducing new products, a business must follow a multistep process. 2. Idea Development a. New ideas can come from marketing research, engineers, and outside sources. b. New ideas can also come from customers, brainstorming, and intracompany incentives. 1) New ideas can even create a company. When Jeff Bezos came up with the idea to sell books over the internet in 1992, he had no idea it would evolve into a billion-dollar firm. After failing to convince his boss of the idea, Bezos left to start Amazon.com. 3. New Idea Screening a. In this phase, a marketing manager should look at the organization’s resources and objectives and assess the firm’s ability to produce and market the product. b. Important considerations are consumer desires; competition; technological changes; social trends; and political, economic, and environmental considerations. c. Most new product ideas are rejected during the screening stage because they seem inappropriate or impractical for the organization. 4. Business Analysis a. Business analysis is a basic assessment of a product’s compatibility in the marketplace and its potential profitability. b. The most important question relates to market demand—how the product will affect the firm’s sales, costs, and profits.

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5. Product Development a. In this stage, the firm develops a prototype that should reveal the intangible attributes as perceived by the consumer. b. Product development is often expensive, and few product ideas make it to this stage. 6. Test Marketing PPT 12.6

a. Test marketing is a trial minilaunch of a product in limited areas that represent the potential market (Figure 12.2). b. It allows a complete test of the marketing strategy in a natural environment, giving the organization the opportunity to discover weaknesses and eliminate them before the product is fully launched. c. Because test marketing requires significant resources and expertise, market research companies like ACNielsen can assist firms in test marketing their products. 7. Commercialization a. Commercialization is the full introduction of a complete marketing strategy and the launch of a product for commercial success. b. During this stage, the firm gears up for full-scale production, distribution, and promotion. C. Classifying Products

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1. How a product is used and why it is purchased determines how a product is classified. 2. Consumer products are purchased for household or family use; they are not intended for any purpose other than daily living. a. Convenience products are bought frequently, without a lengthy search, and often for immediate consumption. Consumers spend little time in planning where to buy the product and usually take any available brand. b. Shopping products are purchased after the consumer has compared competitive products. Price, features, quality, style, service, and image all influence buyers’ decisions. c. Specialty products are products that the consumer makes a special effort to obtain. They are purchased less often and consumers are unwilling to accept a substitute.

Instructor’s Manual—Chapter 12

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3. Business products are used directly or indirectly in the operation or manufacturing processes of businesses. a. Raw materials are natural products taken from the earth, oceans, and recycled solid waste. b. Major equipment covers large, expensive items used in production. c. Accessory equipment is used for production, office, or management purposes, which usually does not become part of the final product. d. Component parts are finished items, ready to be assembled into the final product. e. Processed materials are things that are used directly in production or management operations but are not readily identifiable as component parts. f. Supplies are materials that make production, management, and other operations possible. g. Industrial services include financial, legal, marketing research, security, janitorial, and exterminating services.

PPT 12.9 PPT 12.10

D. Product Line and Product Mix (Figure 12.3) 1. A product line is a group of closely related products that are treated as a unit because of similar marketing strategies and production or end-use considerations. 2. A product mix is all the products offered by the organization.

PPT 12.11 PPT 12.12 PPT 12.13

E. Product Life Cycle (Figure 12.4) 1. Like people, products are born, grow, mature, and eventually die. 2. Some products have very long lives, and others are comparatively short lived (Table 12.1). 3. In the introductory stage, consumer awareness and acceptance are limited; sales start at zero, and profits are negative (Smartwatches). 4. During the growth stage, sales increase at a rapid rate, and profits peak and then start to decline (Drones). a. Competing firms become aware that the product has achieved some success, which may result in their entry into the market.

Instructor’s Manual—Chapter 12

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5. In the maturity stage, industry sales continue to increase, peak, and then decline. Severe competition and heavy marketing expenses characterize this stage (Coca-Cola, PepsiCo). 6. During the decline stage, sales fall rapidly and profits decline (landline phones, VCRs). a. Certain models may be eliminated, and marketing expenditures may be cut. b. Plans must be made to phase out the declining product and introduce the new ones to take its place. 7. It should be noted that products do not always go one way in the life cycle; some products can rebound back into the growth stage. F. Identifying Products 1. Branding, packaging, and labeling can be used to identify or distinguish one product from other products. 2. Branding (Table 12.2) a. Branding is the process of naming and identifying products. 1) A brand is a name, term, symbol, design, or combination that identifies and distinguishes a product. 2) The brand name is the part of the brand that can be spoken and consists of letters, words, or numbers. 3) A brand mark is the part of the brand that is a distinctive design. 4) A trademark is a brand that is registered with the U.S. Patent and Trademark Office and is legally protected from use by any other firm. Protecting a brand name is important in maintaining a brand identity. (Xerox and Kleenex are now synonymous with the product.) b. There are two main categories of brands. 1) Manufacturer brands are brands initiated and owned by the manufacturer to identify products from the point of production to the point of purchase. 2) Private distributor brands are middleman or store brands owned and controlled by a wholesaler or retailer. 3) In addition, there are generic products, which have no brand name at all.

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c. Companies use two basic approaches to branding multiple products. 1) Each product within a company’s product mix is given its own brand name (Unilever sells many well-known consumer products—Dove, Axe, Knorr, Hellman’s, Dermalogica—each individually branded). 2) In family branding, each of a firm’s products is branded with the same name or at least part of the name (Gillette, Sara Lee, IBM). d. Companies may react differently to domestic versus foreign brands. 3. Packaging a. Packaging is the external container that holds and describes the product. b. The packaging influences consumers’ attitudes and their buying decisions. c. A package can perform several functions, including protection, economy, convenience, and promotion. 4. Labeling a. Labeling is the presentation of important information on the package. b. Content, nutritional information, safety precautions, and instructions are the kinds of information contained on labels. 1) For instance, as concern for the environment grows, many companies are developing products with more ecofriendly ingredients, from recycled paper to biodegradable chemicals. Labels transfer that information to the consumer. 5. Product Quality (Table 12.3) a. Quality reflects the degree to which a good, service, or idea meets the demands and requirements of customers. b. The level of quality is the amount of quality that a product possesses, and the consistency of quality depends on the product maintaining the same level of quality over time. c. Quality of service is difficult to gauge because it depends on customers’ perceptions of how well the service meets or exceeds their expectations. d. Quality is judged by consumers, not service providers.

Instructor’s Manual—Chapter 12

LO 12-2

Explain the importance of price in the marketing mix, including various pricing strategies a firm might employ. 

Pricing Strategy o Pricing Objectives o Specific Pricing Strategies

Ferrell/Hirt/Ferrell: Business Foundations 13e

Key Terms:  Price skimming  Penetration price  Psychological pricing  Reference pricing  Discounts

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III. Pricing Strategy A. Price is the value placed on the object involved in an exchange between a buyer and seller (Figure 12.5). 1. Buyers’ interest in price stems from their expectations about the usefulness of a product or the satisfaction they may derive from it. 2. Price is a key element in the marketing mix because it relates directly to the generation of revenue and profits. 3. For most products, the quantity demanded goes up as the price goes down, and vice versa. 4. Consumers vary in their response to price: some focus solely on the lowest price, while others consider quality or the prestige associated with a product and its price. 5. The product’s perceived value in the marketplace added to the production costs help determine price. 6. Price is probably the most flexible variable in the marketing mix. B. Pricing Objectives 1. Four common pricing objectives are: a. Maximizing profits and sales b. Boosting market share c. Maintaining the status quo d. Survival C. Specific Pricing Strategies 1. Pricing strategies provide guidelines for achieving the company’s pricing objectives and overall marketing strategy.

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2. Pricing New Products a. Setting the correct price is critical: the right price leads to profitability, but the wrong price may kill the product. b. There are two basic approaches to setting the base price for a new product. 1) Price skimming is charging the highest possible price that buyers who want the product will pay. 2) Penetration pricing is a low price designed to let a product enter the market and gain market share rapidly. 3) Penetration pricing is less flexible; it is more difficult to raise a penetration price than to lower a skimming price. 4) When Netflix entered the market, it offered its rentals at prices much lower than the average rental stores and did not charge late fees.

Instructor’s Manual—Chapter 12

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3. Psychological Pricing a. Psychological pricing is designed to encourage purchases based on emotional rather than rational responses to the price. b. Even/odd pricing ($9.99 rather than $10) is an example of psychological pricing. c. Symbolic/prestige pricing creates an image of high quality to buyers. 4. Reference Pricing a. Reference pricing is a type of psychological pricing in which a lower priced item is compared to a more expensive brand in hopes that the consumer will use the higher price as a comparison price. 5. Price Discounting a. Price Discounting—temporary price reductions, or price discounts, are often employed to boost sales. b. Quantity discounts reflect the economies of purchasing in large volumes. c. Seasonal discounts are used to stimulate purchases of products out of season. d. Promotional discounts attempt to improve sales by advertising price reductions on selected products to increase customer interest.

Instructor’s Manual—Chapter 12

LO 12-3

Identify factors affecting distribution decisions, such as marketing channels and intensity of market coverage. 

Ferrell/Hirt/Ferrell: Business Foundations 13e

Key Terms:  Marketing channel

Distribution Strategy

 Retailers

o Marketing Channels

 Direct marketing

o Intensity of Market Coverage o Physical Distribution o Importance of Distribution in a Marketing Strategy

 Direct selling  Wholesalers  Intensive distribution  Selective distribution  Exclusive distribution  Logistics Management  Transportation  Warehousing  Materials handling

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Ferrell/Hirt/Ferrell: Business Foundations 13e

IV. Distribution Strategy PPT 12.23

A. Marketing Channels 1. A marketing channel, or channel of distribution, is a group of marketing organizations that directs the flow of products from producers to consumers. 2. Middlemen, or intermediaries, are organizations that bridge the gap between the producer of the product and the ultimate user of the product.

PPT 12.24

a. Retailers buy products to sell to consumers rather than for resale or use in producing other products. 1) By bringing together an assortment of products from competing producers, retailers create place utility (a convenient shopping location), time utility (convenient operating hours), and ownership utility (risk of ownership).

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2) Today, there are too many stores competing for too few customers so competition is intense. (Table 12.4 profiles general merchandise retailers in the United States.) Retailing usually occurs in a store, but some companies rely on direct marketing, the use of nonpersonal media to communicate products, information, and the opportunity to purchase via media such as mail, telephone, or the internet. 3) Another form of nonstore retailing is direct selling, for example, Amway, Avon, and Herbalife.

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b. Wholesalers generally buy from producers or other wholesalers and sell to retailers. 1) Wholesalers are extremely important because of the functions they perform (Table 12.5). 2) Although it is true that wholesalers can be eliminated, their functions must be passed on to some other intermediary or even the consumer. 3) Wholesalers help consumers and retailers by buying in large quantities, then selling to retailers in smaller quantities. By stocking an assortment of goods, wholesalers match products to demand.

Instructor’s Manual—Chapter 12

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3. Supply Chain Management a. Creates alliances between channel members to improve distribution channel relationships among manufacturers and intermediaries. b. Includes all organizations involved in moving products from the producer to the ultimate consumer. c. Goes beyond traditional members to include all organizations involved in moving products. d. Focus shifts from selling to the next level to one of selling products through the channel.

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4. Channels for Consumer Products a. Please refer to Figure 12.6 in the book when discussing consumer product channels. b. Channels can vary from being very simple (straight from the producer to consumer) to highly complex (producer, agents, wholesalers, retailers, then consumers).

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c. Services are usually distributed through the most direct marketing channel because they are produced and consumed simultaneously. 5. Channels for Business Products a. Unlike consumer goods, over half of business products are sold through direct marketing channels. b. Business customers buying expensive or complex products like to communicate directly with producers to gain the technical assistance and personal assurances only the producer can offer. c. Other business products may be distributed through channels employing wholesaling intermediaries such as industrial distributors and/or manufacturer’s agents.

Instructor’s Manual—Chapter 12

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B. Logistics Management 1. Logistics management includes the planning and coordination of inbound and outbound as well as thirdparty services. 2. Transportation a. Transportation is the shipment of products to buyers, is an essential part of distribution. b. Five major modes of transportation are used to move products. 1) Railroads offer the least expensive transportation for many products. 2) Trucks have greater flexibility than railroads, can handle freight quickly and economically, can deliver door-to-door, and have more flexible packaging requirements than ships or airplanes. 3) Air transport is expensive, but it offers a high degree of dependability and speed. 4) Shipping by waterways is the least expensive and slowest form of transportation. 5) Pipelines are important for moving heavy, bulky liquids such as petroleum products, natural gas, semiliquid coal, and certain chemicals. 6) Air transport is expensive, but it offers a high degree of dependability and speed. 7) Shipping by waterways is the least expensive and slowest form of transportation. 8) Pipelines are important for moving heavy, bulky liquids such as petroleum products, natural gas, semiliquid coal, and certain chemicals. c. Factors affecting the selection of a mode of transportation include cost, capability, reliability, and availability.

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3. Warehousing a. Warehousing involves designing and operating facilities to receive, store, and ship products. b. Companies can use their own private warehouses or lease space in public warehouses. c. Warehousing is important because it makes products available for shipment to match demand at different geographic locations. 4. Materials Handling a. Materials handling is the physical handling and movement of products in warehouse operations and transportation. PPT 12.32

C. Intensity of Market Coverage 1. Intensity of market coverage relates to the number and variety of product outlets; it depends on the behavior of customers and the nature of the target market and competition. 2. Intensive distribution makes a product available in as many outlets as possible. This type of distribution is usually used for convenience goods. 3. Selective distribution uses only a small portion of all available outlets. It is used most often for products for which consumers compare price, quality, and style.

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4. Exclusive distribution exists when a manufacturer gives a middleman the sole right to sell a product in a defined geographic territory. This method is used when products are purchased and consumed over a long period of time and requires service or information to develop a satisfactory sales relationship. D. Importance of Distribution in a Marketing Strategy 1. Distribution is the least flexible element of the marketing mix. 2. Resource commitments and contractual obligations are difficult to change quickly. 3. Expanding into new markets could mean a complete change in distribution. 4. If a company does not manage its channel efficiently, a competitor may evolve to create a more effective distribution system.

Instructor’s Manual—Chapter 12

LO 12-4

Specify the activities involved in promotion, as well as promotional strategies and promotional positioning.

Key Terms:

o The Promotion Mix

 Integrated marketing communications

o Promotion Strategies: To Push or to Pull

 Advertising

o Objectives of Promotion

 Advertising

o Promotional Positioning

 Advertising campaign

 Promotion Strategy



Ferrell/Hirt/Ferrell: Business Foundations 13e

Importance of Marketing Strategy

 Personal selling  Publicity  Sales promotion  Push strategy  Pull strategy  Promotional positioning

Instructor’s Manual—Chapter 12

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V. Promotion Strategy A. The role of promotion is to communicate with individuals, groups, and organizations to facilitate an exchange directly or indirectly. 1. It encourages marketing exchanges by attempting to persuade individuals, groups, and organizations to accept goods, services, and ideas. 2. It is used not only to sell products but also to influence opinions and attitudes toward an organization, person, or cause. B. The Promotion Mix 1. Advertising, personal selling, publicity, and sales promotion are called the promotion mix because a good promotion program results from carefully selecting and blending these elements.

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2. The process of coordinating the promotion mix elements and synchronizing promotion as a unified effort is called integrated marketing communications. 3. Advertising a. Advertising is a paid form of nonpersonal communication transmitted through a mass medium.

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a. An advertising campaign involves designing a series of advertisements and placing them in various media to reach a particular target audience. 1) A product’s features, uses, and benefits affect the content of the campaign message and individual ads. 2) Characteristics of the people in the target audience also influence both content and form, as do an advertising campaign’s objectives and platform. b. Advertising media, both print and electronic, are the vehicles or forms of communication used to reach a desired audience. c. Infomercials—large blocks of radio or television air time featuring a celebrity or upbeat host talking about and demonstrating a product— have evolved as an advertising method.

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4. Personal Selling a.

Personal selling is direct, two-way communication with buyers and potential buyers.

Personal selling is the most flexible of the promotional methods.

c. There are three distinct categories of salespersons: order takers, creative salespersons, and support salespersons.

Instructor’s Manual—Chapter 12

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In general, personal selling is a six-step process: 1) Prospecting—identifying potential buyers. 2) Approaching—using a referral or calling on a customer without prior notice to determine interest in a product. 3) Presenting—getting the prospect’s attention with a product demonstration. 4) Handling objections—countering reasons for not buying the product. 5) Closing—asking the prospect to buy the product. 6) Following up—checking customer satisfaction with the purchased product.

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5. Publicity a. Publicity is nonpersonal communication transmitted through the mass media, but the firm does not directly pay for this communication. b. Publicity is mainly informative (which differs from advertising, which is informative, persuasive, or both). c. Most companies have a public relations department trying to gain favorable publicity and minimize negative publicity. d. Publicity describes what a firm is doing, what products it is launching, or other newsworthy information, but seldom calls for action, which differs from advertising. e. The mass media willingly carry publicity because they believe it has a general public interest, but most publicity appears once in the mass media and is not repeated (unlike advertising). f. While advertising costs the firm money, publicity is free. g. Publicity is extremely important when communication focuses on a company’s activities and products and is directed at interest groups, current and potential investors, regulatory agencies, and society in general. h. A variation of traditional advertising is buzz marketing, in which marketers attempt to create a trend or acceptance of a product through publicity. 1) Companies seek out trendsetters in a community and get them to ―talk up‖ their product, which is viewed as more credible than paid communication. A related concept is viral marketing, which describes the concept of getting internet users to pass on ads and promotions to others.

Instructor’s Manual—Chapter 12

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6. Sales promotion involves direct inducements offering added value or some other incentive for buyers to enter into an exchange. a. The major tools of sales promotion are store displays, premiums, samples and demonstrations, coupons, contests and sweepstakes, refunds, and trade shows. b. Sales promotion stimulates customer purchasing and increases dealer effectiveness in selling products.

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c. It is used to enhance and supplement other forms of promotion. C. Promotion Strategies: To Push or Pull (Figure 12.7) 1. In developing a promotion mix, marketers must decide whether to fashion a mix that pushes or pulls the product. 2. A push strategy is used to motivate intermediaries to push the product down to their customers. 3. With a pull strategy, promotion creates consumer demand for the product so that consumers will exert pressure on marketing channel members to make the product available.

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4. Exclusive use of advertising denotes a pull strategy, while personal selling to marketing channel members indicates a push strategy. A company can also use a combination of the two. D. Objectives of Promotion 1. The marketing mix will vary depending on a company’s objectives 2. Promotion is only one element and must be tied to organizational objectives a. Typical objectives are stimulating demand, stabilizing sales, and informing, reminding, and reinforcing consumers. E. Promotional positioning uses promotion to create and maintain an image of a product in buyers’ minds that persuades them to buy. It is a natural result of market segmentation.

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VI. Importance of Marketing Strategy A. Marketing creates value through the marketing mix. B. Creating an effective marketing mix requires carefully integrating the marketing mix into an effective marketing strategy. C. Firms that develop an effective marketing mix gain competitive advantages. D. Advantages often come when a company excels at one or more elements of the marketing mix. E. Companies must monitor demand and adapt the marketing mix when needed.

Instructor’s Manual—Chapter 12

LO 12-5

Evaluate an organization’s marketing strategy plans.

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VII.

Ferrell/Hirt/Ferrell: Business Foundations 13e

Key Terms:

Solve the Dilemma: Better Health With Snacks GG. Deluxe Chips’ Deluxos tortilla chips are the number one selling brand in North America and its Ridgerunner potato chip is also a market share leader. HH. Wants to stay on top of the market by changing marketing strategies to: 1. Match changing consumer needs and preferences II. As middle-aged consumers modify their snacking habits, Deluxe Chips is considering a new product line of light snack food. 21. The new snack will contain less fat and cholesterol.

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22. It will target 35- to 50-year-old consumers who want to be more health conscious. JJ. Marketing research suggests new healthy chips: 1. Will succeed if they taste good enough that consumers would be willing to pay more 2. May require more advertising to overcome competition 3. Should analyze customer profiles and retail store characteristics, and then match the right product with right neighborhood 4. Use store-specific micromarketing that would allow for the spending of promotional dollars more efficiently

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KK.

Critical Thinking Questions:

1. Design a marketing strategy for the new product line. 2. Critique your marketing strategy in terms of its strengths and weaknesses. 3. What are your suggestions for implementation of the marketing strategy? (Answers appear under the End of Chapter Teaching Resources section of this Instructor’s Manual.)

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: The Secret to Trader Joe’s Private Label 1. Which elements of the marketing strategy does Trader Joe’s seem to particularly

excel at? Trader Joe’s seems to excel at the distribution and product strategies. It focuses on inventory control and a focused, quality product line. 2. What advantages do private distributor brands offer over manufacturer and generic brands? The private-label products prevent the company from relying too heavily on any one supplier, and as a result, Trader Joe’s can offer lower prices than rivals. 3. Describe how Trader Joe’s distribution strategy helps to save on costs. Inventory control has been a key advantage in reducing costs and focusing on a limited number of quality products. The company employs product developers who travel the world looking for the best product/price combinations. Entrepreneurship in Action: Fitness Mirror Entrepreneur Reflects on $500 Million Sale

1. What need does Mirror satisfy? The answers will vary but many students will focus on the need to maintain a healthy lifestyle, improve an appearance, and/or maintain an exclusive lifestyle. 2. What is the benefit of putting Mirror inside Lululemon stores? Putting Mirror in brick-and-mortar stores, allows hands-on testing of the product. Consumers can book a mirror demo at one of the showrooms and try a sample workout. This trial element gives Mirror a leg up on copycat fitness mirror products that have hit the market below Mirror’s premium $1,500 price tag. 3. What stage of the product life cycle is Mirror in? Mirror is in the growth stage of the product life cycle where new companies enter the market, increasing marketing expenses.

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Consider Ethics and Social Responsibility: Pepsi Named Top Plastic Polluter

1. Why is packaging an important element of a product? Packaging distinguishes one product from others. 2. How has Pepsi reduced its plastic use? One way Pepsi has reduced its overall plastic use is by making its bottles lighter and using a process called charge compaction in its snack packaging. Charge compaction means the company lets snacks settle in the bottom of the bag before sealing to reduce the amount of packaging required. 3. In your opinion, should companies such as Pepsi lead the way in packaging innovation? Answers will vary but students need to support their answer. Business Disruption: Off the Rack: This Modern Mall Concept Buckles Down

1. Describe the distribution benefits a large retailer like American Dream offers consumers. The size of American Dream can help convince the consumers of the value of coming to its stores rather than just ordering online. Its vast number of stores will offer a number of products in one place (place utility) available when consumers want them (time utility). 2. With physical retailers declining as online shopping grows, what are some ways American Dream plans to differentiate itself from competitors? American Dream goes beyond just merchandise and food courts, with a water park, an indoor ice rink, and artificial ski slope. It is both a shopping and an entertainment venue. 3. Explain what the marketing channel looks like for American Dream. Answers will vary. So You Want to Be a Marketing Manager

What factors have made the job of marketing manager more challenging in recent years? While a career in marketing can be very rewarding, marketers today agree that the job is getting tougher. Many advertising and marketing executives say the job has gotten much more demanding in the past 10 years, viewing their number one challenge as balancing work and personal obligations. Other challenges include staying current on industry trends or technologies, keeping motivated/inspired on the job, and measuring success. 12-399 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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END OF CHAPTER TEACHING RESOURCES Check Your Progress 1. What steps do companies generally take to develop and introduce a new product? Introducing a new product involves a six-step process: (1) idea development, (2) screening new ideas, (3) business analysis, (4) product development, (5) test marketing, and (6) commercialization. 2. What is the product life cycle? How does a product’s life cycle stage affect its marketing strategy? Product life cycle refers to the life of a product in the marketplace. Like people, products are born and grow, mature, and eventually die—that is, they are pulled from the market. The four stages of the product life cycle are introduction, growth, maturity, and decline. A marketer must perform different tasks for each life cycle stage of a product. In the introductory stage, consumer awareness and acceptance are limited. Thus, buyers must be made aware of the fact that the product exists and offers benefits. In the growth stage, competing firms become aware that the product has achieved some success and may make decisions to enter the market. During the growth stage, the firm tries to strengthen its position in the market by emphasizing benefits in identifying market segments that want these benefits. The maturity stage is characterized by severe competition and heavy expenditures for marketing expenses. New competitors emphasize improvements and differentiation of the product. A company may have to introduce new brand extensions. This is done to maintain a large market share. During the decline stage, sales continue to fall rapidly. As profits drop, firms may eliminate certain models or items. Plans must be made for phasing out the product and introducing new products to take its place. 3. Which marketing mix variable is probably the most flexible? Why? Price is the most flexible variable in the marketing mix. Although it may take years to develop a product, establish channels of distribution, and design and implement promotion, a product’s price may be set and changed in a few minutes. 4. Distinguish between the two ways to set the base price for a new product. Price skimming is setting the highest possible price that buyers will pay. This method allows a company to generate revenue to offset research and development costs and guards against setting a price that does not cover expenses. It is easier to lower prices on a

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successful product than it is to raise them. However, the high price and quick profits may attract competitors into the market, thus lowering profits. By contrast, a penetration price is a low price designed to let a product enter the market and gain market share rapidly. This policy is less flexible than price skimming because it is more difficult to raise a penetration price than it is to lower a skimming price. Penetration pricing is used most often when it is suspected that competitors will enter a market soon after a product has been introduced. Penetration pricing allows the marketer to gain a large market share and discourage competitors from entering the market. It is most appropriate when demand is highly elastic. 5. What is probably the least flexible marketing mix variable? Why? Distribution is probably the least flexible marketing mix variable because marketing mix decisions involve committing resources and establishing contractual relationships; these decisions are difficult or impossible to change. 6. Describe the typical marketing channels for consumer products. There are four basic marketing channels for consumer products: a. Channel A moves the product from the producer directly to the consumer. b. In Channel B, the product moves from the producer, to a retailer, to the consumer. c. In Channel C, the product goes from the producer, to a wholesaler, to a retailer, to the consumer. d. Channel D moves the product from the producer to an agent, to a wholesaler, to a retailer, to the consumer. 7. What activities are involved in physical distribution? What functions does a warehouse perform? Physical distribution includes all the activities necessary to move products from producers to customers—inventory control, transportation, warehousing, and materials handling. Warehousing involves the design and operation of facilities to receive, store, and ship goods. Warehousing also makes products available for shipment to match demand at different geographic locations. 8. How do publicity and advertising differ? How are they related? Advertising is paid for by an identified sponsor and is usually directed to a mass market. The seller has complete control over this form of promotion. Publicity is often viewed as 12-401 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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being part of a public relations program, a broad set of communication activities designed to maintain favorable relations between an organization and the public. Advertising messages tend to be informative, persuasive, or both; publicity is mainly informative. Advertising is often designed to have an immediate impact or to give specific information to persuade a person to act. Publicity usually describes what a firm is doing and the type of products that are being launched, or it offers other newsworthy information that is not a call for action. When using advertising, the organization must pay for media time. A company may spend money to release information to the press or to call a news conference, but this is not paying for media time. Therefore, people outside the organization shape the message—either positively or negatively. Advertising can be directed and repeated a number of times; most publicity appears in the mass media only once. 9. What does the personal selling process involve? Briefly discuss the process. Personal selling is a process of informing potential buyers and persuading them to purchase a product. For most salespeople, personal selling is a six-step process: prospecting, approaching, presenting, answering objections, closing, and following up. The following is a brief description of each step in the personal selling process. 1. Prospecting is identifying potential buyers. 2. Approaching involves referrals or cold canvassing to call on potential customers. 3. Presenting is making a presentation to get the prospect’s attention and to persuade the prospect to buy. 4. Handling objections, or reasons for not buying the product, may be done before or as soon as problems arise. 5. Closing is asking the prospect to buy the product. 6. A good salesperson will follow up on a successful sale to make sure the customer is satisfied with the product.

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10. List the circumstances in which the push and pull promotional strategies are used. In developing a promotion mix, marketers must decide whether to fashion a mix that pushes or pulls the product. When using the push strategy, the marketer attempts to motivate these middlemen to push the product down to their customers. In contrast, a pull strategy uses promotion to create consumer demand for a product so that the consumers exert pressure on marketing channel members to make the product available. Consumers create a pull for the product by requesting it from their retail outlet. A company can use either strategy, or it can use a variation or combination of the two. The allocation of promotional resources to various marketing mix elements probably determines which strategy will be used. Get Involved

1. Pick three products you use every day (in school, at work, or for pleasure—perhaps one of each). Determine what phase of the product life cycle each is in. Evaluate the marketer’s strategy (product, price, promotion, and distribution) for the product and whether it is appropriate for the life cycle stage. Product Coca-Cola

Life Cycle Stage Maturity

Apple iPad

Growth

Pontiac vehicle

Decline

Marketing Strategy Heavy advertising; looking into expanding into different countries or continents such as Africa, which is requiring the firm to build factories and distribution systems; releasing smaller sizes of product and experimenting with different formulas in response to health concerns; expanding into other product lines such as juices Releasing a new ―improved‖ iPad each year; generating substantial word-of-mouth marketing before release; pricing iPads high; distributing in Apple stores and some retailers; many parts of iPad are made in Chinese factories to take advantage of lower labor and materials costs; making known benefits such as latest advances in technology Phased out by GM; now sold by individual owners; prices likely to be lower as they are used models

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2. Design a distribution channel for a manufacturer of stuffed toys. Sample Distribution Channel: Producer Creates stuffed animals

Wholesaler Stores stuffed animals and ships to various toy retailers

Retailer Displays and sells stuffed animals to consumers

Consumer Buys stuffed animals

Or Producer Creates stuffed animals

Sells on internet

Consumer Buys stuffed animals

3. Pick a nearby store and briefly describe the kinds of sales promotions used and their effectiveness. Students’ answers will vary.

Build Your Skills: Analyzing Motel 6’s Marketing Strategy

1. Motel 6 is using the multisegment approach (pleasure travelers on a budget; business travelers looking to get the most for their dollar). 2. Here are some possible answers: Marketing Mix Variable a. Product

Current Strategy

5-Year Strategy

Clean, comfortable rooms.

In appealing to business travelers, Motel 6 should provide rooms that keep pace with the increased dependence of business travelers on communication technology.

Price

The lowest price of any national motel chain.

This strategy should continue to work well for them for the next 5 years.

Distribution

Motel 6 location sites are

It makes sense to continue

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Promotion

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selected based on whether they provide convenient access to the highway system and whether they are close to areas such as shopping centers, tourist attractions, or business districts.

constructing new sites at places where people need overnight lodging. Motel 6 should look for opportunities to provide low-cost lodging in high-traffic recreational and entertainment areas (theme parks, casinos, ski resorts, etc.) where lodging might normally be higher priced.

The company’s national spokesperson, Tom Bodett, is featured in radio and television commercials that use humorous stories to show why it makes sense to stay at Motel 6 rather than a pricey hotel.

Explore other avenues for advertising—the internet and other forms of electronic communication.

Solve the Dilemma: Better Health With Snacks

1. Design a marketing strategy for the new product line. Students’ answers will vary but should reflect understanding of the chapter material. Specifically, look for inclusion and correct use of key terms such as test marketing, product line, branding, packaging, labeling, marketing channels, retailing, advertising, sales promotion, push strategy, pull strategy, and so forth. The flow of the strategy should move from development of the new product line to full-scale introduction. 2. Critique your marketing strategy in terms of its strengths and weaknesses. Students’ answers will vary but should reflect thoughtful evaluation of their marketing strategies. 3. What are your suggestions for implementation of the marketing strategy? Again, students’ answers will vary but should reflect comprehension of the relevant chapter material. Build Your Business Plan: Dimensions of Marketing Strategy

Encourage students to consider developing a short survey instrument to ascertain demand for their business, especially if the business will primarily serve the needs of college students. The questionnaire could help them determine how much college students are willing to spend 12-405 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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on a particular product category, and how far they are willing to travel to obtain or experience the good/service. As far as setting the final price, have students identify a local business they perceive is too high-priced. What you want to do is uncover the real reason students have this perception. This will help the students realize how important perception and the image of the establishment are to the customer. Using the example suggested in the Instructor’s Manual for Chapter 11, have the students suggest ideas for special opening events for your new Thai Restaurant that will not drain them financially. How will they spread the word of this new establishment? See for Yourself Case: Doc Martens Kicks Up Its Prices Doc Martens is a British footwear company. A 25-year-old soldier in Munich, Germany, Dr. Klaus Maertens created a unique air-cushioned sole that was much different from the traditional hard leather sole of the era. After sharing his design with a friend, Dr. Herbert Funk, the two entered into a partnership to produce the boots. The original price was the equivalent of $3 and the boots were sold mostly to mail carriers and factory workers.

After seeing the company’s magazine ads, Griggs, a company based in England, acquired an exclusive license to the shoes and made some design changes, including the now-iconic stitching and heel loop. The Griggs company branded the boots as Airwair and used the slogan ―with bouncing soles.‖ These shoes became the iconic 1460 Dr. Martens boots. The boots were adopted by the ska and punk music scene in the 1970s and in the 1980s the company realized that women were buying the boots. The popularity spread to the United States through the influence of American rock bands. The popularity declined in the 1990s and the cost of manufacturing in England became too expensive. To survive, the company moved most of its manufacturing operations to Asia. A slow resurgence began in the mid-2000s when high fashion designers adopted the boot. Since then the company began hand making a model in its English plant, it has invested millions in manufacturing upgrades, and introduced many new shoe styles. It also adjusted its pricing and distribution strategies. The company producing Doc Martens has transformed from a family owned local factory to an international fashion brand owned by a private-equity firm. i.

How has Dr. Martens expanded its product portfolio? Why do you think companies adjust their product mix over time?

Dr. Martens now produces 250 styles each year from oxford shoes and platforms to gladiator sandals and Mary Jane’s. Answers will vary but most students will focus their answers on company survival. 12-406 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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Why have Dr. Martens shoes become more expensive over the years?

The cost of production and materials have increased. iii.

Why are Dr. Martens shoes no longer exclusively made in the United Kingdom?

It is too expensive to produce exclusively in the United Kingdom. Asia has much cheaper manufacturing costs. Team Exercise

Students will form groups and search for examples of convenience products, shopping products, specialty products, and business products. They should discuss how these products are marketed. Students will provide examples of any ads that they can find to show examples of the promotional strategies for these products. They will then report their findings to the class.

CONNECT ACTIVITIES Airline Pricing

Learning Objective: 12-2 Explain the importance of price in the marketing mix, including various pricing strategies a firm might employ. Activity Summary: Price is a key element in the marketing mix, and the most flexible variable with the ability to be changed in a minute. Pricing objectives specify the role of price in an organization’s marketing mix and strategy. Pricing strategies help companies meet those objectives and ultimately deliver revenue and profits. Students will read a case about airline pricing strategies and demonstrate their understanding of the different pricing strategies companies use to meet their pricing objectives.

Dunkin’ Donuts Masters the Marketing Mix

Learning Objective: 12-5 Evaluate an organization’s marketing strategy plans. Activity Summary: Dunkin’ Donuts is one of the largest and most recognizable franchises across the world. The chain serves coffee, baked goods, and a variety of breakfast and sandwich offerings. Founded in 1950, the chain has grown to over 11,000 restaurants worldwide—across 41 states in the United States and 36 countries around the world. This successful brand knows the importance of the 4Ps. Without success in each of these areas, the brand would not succeed as we know it today. 12-407 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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How to Use Activity: Using a classroom response system or polling website, show the video in class and work through the questions together. Check in on the students’ progress along the way as they respond to the questions. Class Discussion: How would you describe Dunkin’ Donuts’ positioning within each element of the marketing mix? The breakfast and coffee segment is incredibly competitive. How is Dunkin’ Donuts continuing to win customers? How would you describe Dunkin’ Donuts’ competitive position within the marketplace?

iSeeIt! Video Case: The Product Life Cycle

Learning Objective: 12-1 Describe the role of product in the marketing mix, including how products are developed, classified, and identified. Activity Summary: This short video describes how products progress through four stages while on the market, more commonly referred to as the product life cycle. It’s a process every product goes through. Stages include introduction, growth, maturity, and decline. How to Use Activity: After showing the video, ask students to construct a timeline of a product as it is has or is going through its life cycle. (Note to Professor: You may prescribe products or allow students to think of their own. Further, you can facilitate a cross-curricular connection by having students create the timeline as a craft or use desktop publishing software.) Class Discussion: What are the stages of a product life cycle? What’s the longest product you can think of that has remained popular, free from hitting its decline stage? What’s the shortest product you can think of, one that declined in popularity quite quickly? Some products are designed with the intent of a long life cycle, while others are designed for a short life cycle. What examples can you think of? (Note to Professor: Fad products are often intended for a short life cycle, with a high production run in a limited time horizon.)

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BONUS TEACHING RESOURCES Term Paper or Project Topics

These topics may be assigned as individual or collaborative projects: 1. 2. 3. 4.

The Importance of Generic Products in the Marketplace The Success or Failure of New Products A Comparison of Research and Development for Japan and the United States A Comparison of Major Modes of Transportation in Your City or Geographical Area.

Guest Speaker Suggestions

1. A representative from a local firm to speak on any of the following topics: a. Research and Development b. Product Line and Product Mix c. Branding, Packaging, and Labeling d. Test Marketing 2. A representative of a distribution center to speak about the distribution process. 3. A representative of a wholesaler or other marketing intermediary to talk about the way their organization performs marketing functions.

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Teaching Suggestions

1. Cover the chapter content by using ―Lecture Outline and Notes‖ and slides or transparency masters indicated in the left margins. 2. ―Check Your Progress‖ is especially helpful for understanding the concepts of this chapter. To save time, these questions could be assigned as an outside assignment in which students will write answers or be prepared to answer in class. 3. As time permits, use the discussion of boxed material. 4. Check off each of the objectives given at the beginning of the chapter in the textbook. 5. Have students view the videocase.

Chapter 13: Digital Marketing and Social Media SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Fake Out: Amazon Kicks Counterfeits to the Curb Technology and the Economy: Shopify Aims for e-Commerce Domination Consider Ethics and Social Responsibility: Insta-Scam: Brands Crack Down on Influencer Fraud Business Disruption: The Music Industry Gets a Tune Up So You Want to Be a Digital Marketer END OF CHAPTER TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Planning a Digital Marketing and Social Networking Site Solve the Dilemma: Developing Successful Freeware Build Your Business Plan: Digital Marketing and Social Networking See for Yourself Case: Should Employees Use Social Media Sites at Work? 13-410 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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Team Exercise CONNECT ACTIVITIES NASCAR Turns to Social Media ABC Utility Adopts Social Media Marketing Developing New Products at Domino’s BONUS TEACHING RESOURCES Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions

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SUMMARY

The internet and information technology have dramatically changed the environment for business. Marketers’ new ability to convert all types of communications into digital media has created efficient, inexpensive ways of connecting businesses and consumers and has improved the flow and the usefulness of information. In this chapter, we first provide some key definitions related to digital marketing and social networking. Next, we discuss using digital media in business and digital marketing. We look at marketing mix considerations when using digital media and pay special attention to social networking. Then we focus on digital marketing strategies—particularly new communication channels like social networks—and consider how consumers are changing their information searches and consumption behavior to fit emerging technologies and trends. Finally, we examine the legal and social issues associated with information technology, digital media, and e-business.

LEARNING OBJECTIVES LO 13-1

Recognize the increasing value of digital media and digital marketing in strategic planning.

LO 13-2

Demonstrate the role of digital marketing in today’s business environment.

LO 13-3

Show how digital media affect the marketing mix.

LO 13-4

Illustrate how businesses can use different types of social networking media.

LO 13-5

Explain online monitoring and analytics for social media.

LO 13-6

Identify legal and ethical considerations in digital media.

LO 13-7

Propose recommendations to a marketer’s dilemma.

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KEY TERMS AND DEFINITIONS blogs

Web-based journals in which writers can editorialize and interact with other internet users.

digital marketing

Uses all digital media, including the internet and mobile and interactive channels, to develop communication and exchanges with customers.

digital media

Electronic media that function using digital codes via computers, cellular phones, smartphones, and other digital devices that have been released in recent years.

e-business

Carrying out the goals of business through utilization of the internet.

identity theft

When criminals obtain personal information that allows them to impersonate someone else in order to use their credit to obtain financial accounts and make purchases.

omni-channel retailing

A type of retail that integrates the different methods of shopping available to consumers (e.g., online, in a physical store, or by phone).

online fraud

Any attempt to conduct fraudulent activities online.

podcast

Audio or video file that can be downloaded from the internet with a subscription that automatically delivers new content to listening devices or personal computers.

viral marketing

A marketing tool that uses a networking effect to spread a message and create brand awareness. The purpose of this marketing technique is to encourage the consumer to share the message with friends, family, coworkers, and peers.

wikis

Websites where users can add to or edit the content of posted articles.

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PowerPoint Slides: PPT 13.4

Recognize their increasing value of digital media and digital marketing in strategic planning.

Key Terms:  E-business



Introduction



 Digital media

Growth and Benefits of Digital Communication

 Digital marketing

Lecture Outline and Notes: I.

Growth and Benefits of Digital Communication A. An e-business involves carrying out the goals of business through the use of the internet B. Digital media are electronic media that function using digital codes via computers, cellular phones, smartphones, and other digital devices that have been released in recent years. C. Digital marketing uses digital media to develop communications and exchanges with customers D. The internet has created opportunities for businesses to build relationships with consumers, to target markets more precisely, and to reach previously inaccessible markets worldwide.

PPT 13.5

E. Digital marketing has five key characteristics that distinguish it from traditional communication: addressability, interactivity, accessibility, connectivity, and control (Table 13.1). F. The internet also facilitates business transactions, allowing companies to network with manufacturers, wholesalers, retailers, suppliers, and outsource firms to serve customers more quickly and efficiently. 1. Digital communication is making it easier for businesses to conduct marketing research, exchange information, and advertise.

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Instructor’s Manual—Chapter 13

LO 13-2

Demonstrate the role of digital marketing in today’s business environment. 

PPT 13.7

Key Terms:

Using Digital Media in Business

II. Using Digital Media in Business A. Digital media have created new ways of doing business and shopping. 1. Fast communication 2. Real-time exchanges 3. More interactive 4. Build closer relationships. 5. Learn more accurately about consumer and supplier needs. B. Digital communication is fast and inexpensive. 1. Easier for businesses to fulfill their business goals by selling goods and services online. 2. A cost-effective means to conduct marketing research and judge consumer demand for potential new products. C. Digital markets are more similar to traditional markets than they are different. 1. Digital technology has had more impact on industries where the cost of business and customer transactions has been very high, for example, investment trading is less expensive online. D. Digital media can also improve communication within and between businesses. E. With more firms conducting business over the internet, there is a need to control access to their digital communication systems to ensure worker productivity.

Instructor’s Manual—Chapter 13

LO 13-3

Show how digital media affect the marketing mix. 

PPT 13.8

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Key Terms:

Digital Media and the Marketing Mix

III. Digital Media and the Marketing Mix A. There are some key differences between digital media and traditional media as pertains to the marketing mix: 1. Communications are faster and interactive. 2. Companies can reach target markets more easily, affordably, and quickly. 3. They help marketers utilize new resources in seeking out and communicating with customers. B. Digital media let marketers and customers easily share information through email, mobile phones, social networking, wikis, video sharing, podcasts, blogs, videoconferencing, and other technologies. C. Consumers now spend more time on social networking sites than they do on e-mail, and social network use continues to grow (Figure 13.1).

PPT 13.9

D. Achieving the right marketing mix remains essential. 1. Product Considerations

PPT 13.10

a. Connectivity of digital media creates opportunities for businesses to add services and to enhance product benefits. b. Some products are only available via digital media. c. The internet can make it easier to anticipate consumer needs—but competition makes quality products and service offerings more important than ever. 2. Distribution Considerations

PPT 13.11

a. The internet is a new distribution channel. b. Processing orders electronically reduces inefficiencies, costs, and redundancies while increasing speed. c. Shipping times and costs are an important element in attracting customers. d. Walmart and other retailers use online catalogs and company websites and blogs to supplement their retail stores.

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PPT 13.12

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3. Promotion Considerations a. Promotion is one of the best applications for digital media i. It increases brand awareness. ii. It takes advantage of social networks or virtual worlds to form relationships and generate positive publicity about products iii. Thanks to online promotion, consumers can be more informed now than ever, including reading consumergenerated content before making purchasing decisions b. Consumer consumption patterns are changing and marketers must adapt their promotional efforts to meet them i.

For instance, Facebook has its ―Facebook Exchange‖ and ―Facebook Canvas‖ to help businesses target their promotions to the right audiences.

4. Pricing Considerations PPT 13.13

a. Price is the most flexible element of the marketing mix. b. Digital marketing can enhance products’ value by providing extra benefits like service, information, and convenience. c. Discounts and promotions can be quickly communicated using digital media. d. Deal websites allow consumers to compare prices of products.

PPT 13.15–13.16

E. Social Media Marketing 1. Social media marketing enables firms to promote a message and create online conversations through multiple platforms. 2. Large markets can be targeted and reached through paid media, owned media, and earned media. 3. In addition to placing ads, marketers can own their own media outlets and create messages on social networks. 4. Markets can have earned media when consumers are communicating on social media sites. 5. Although digital word-of-mouth posts can promote a product or firm, they are not controllable like advertising, but if the communication is positive, it increases sales. 6. Marketing should focus on relationship building and social media can influence consumer behavior and deliver value to the firm.

Instructor’s Manual—Chapter 13

LO 13-4

Illustrate how businesses can use different types of social networking media. 

Consumer-Generated Marketing and Digital Media o Social Networks o Blogs and Wikis o Media Sharing

Ferrell/Hirt/Ferrell: Business Foundations 13e

Key Terms:  Blogs  Wikis  Viral marketing  Podcast

o Mobile Marketing o Applications and Widgets PPT 13.17

Consumer-Generated Marketing and Digital Media A. Digital media are more consumer-driven than traditional media. Two factors have sparked the increase in consumer-generated information. 1. Increased tendency for consumers to publish their thoughts, opinions, and reviews of products via blogs and other digital media.

PPT 13.18–13.19

2. Consumers tend to trust other consumers over corporations. B. Social Networks 1. It is estimated that today’s adults spend approximately 42.1 min per day on Facebook alone. 2. As social networks evolve, both marketers and the owners of social networking sites are realizing the opportunities such networks offer. 3. Facebook a. Currently the most popular social networking site in the world, Facebook has surpassed 1.5 billion users and is still growing. b. Users can become a fan of products and companies by clicking on the ―Like‖ button. c. Boosted posts, one of the features Facebook has to offer businesses, allows companies to develop an advertisement quickly from a post on their time lines. d. Social networking sites are useful for relationship marketing, or the creation of relationships that mutually benefit the business and customer.

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4. Twitter a. Twitter is a hybrid social networking and a microblogging site. b. Twitter asks one question: ―What’s happening?‖ Members can post answers of up to 140 characters. c. Twitter is often used to answer customer questions or concerns and to post updates. d. Can help build or rebuild customer relationships. e. Twitter is also expanding into video with its acquisition of the mobile application Vine. i. Vine allows users to display up to 6 s of video and share them with other users. 5. Snapchat PPT 13.20

a. The mobile app, launched in 2011, allows users to send messages and disappearing photos and videos to friends. b. The app is used mostly by users under the age of 34. 6. YouTube a. YouTube allows users to upload and share videos worldwide. b. Users watch a billion hours of YouTube videos every day, making this popular video platform an important part of marketing strategy. 7. LinkedIn a. LinkedIn is the top networking site for businesses and business professionals. b. This networking tool allows users to post a public profile, similar to a résumé, connect with colleagues, find job listings, and join private groups.

Instructor’s Manual—Chapter 13

PPT 13.21

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C. Blogs and Wikis 1. Blogs (web logs) are web-based journals through which authors can editorialize and interact with other internet users. a. More than three-fourths of internet users read blogs. b. Blogs give consumers power because companies cannot control what bloggers write. i.

Negative blog posts can damage a company’s reputation, but positive blog posts can enhance it.

c. Some firms are using their own blogs to answer concerns or defend their reputations. i.

Smart companies are using blogs to build enthusiasm for their products and create relationships with consumers.

2. Wikis are websites where users can add or edit content of posted articles. a. Wikipedia is the most famous wiki. b. Monitoring wikis can give corporations a better idea of how consumers feel about their company or products. c. Some organizations use wikis as an internal tool for complex projects.

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PPT 13.22

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D. Media Sharing 1. Media sharing sites are more limited in scope in how companies can interact with consumers and tend to be more promotional than reactive. 2. Their popularity provides the potential to reach a global audience of consumers. 3. Video sharing sites a. Allows anyone to upload videos to the internet to do so. b. YouTube is the most popular, but hundreds of other video sharing sites exist. c. Viral marketing is a marketing tool that utilizes the internet, especially video sharing and social networking sites, to spread a message and create brand awareness. Campaigns that successfully go viral are transmitted rapidly around the internet with no help from the marketer. d. Photo sharing represents an opportunity for companies to market themselves visually. 4. Podcasts are audio or video files that can be downloaded from the internet via a subscription that delivers content to listening devices or personal computers. a. Podcasts are convenient, giving users the ability to listen or view content when and where they choose. b. Podcasts are a good tool for reaching, especially the 18-34 demographic.

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PPT 13.24

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E. Mobile Marketing 1. Consumers increasingly do their business and shopping on their mobile devices and smartphones (Figure 13.2).

PPT 13.26

2. Some of the more common marketing tools on mobile devices include: a. SMS messages

PPT 13.25

b. Multimedia messages c. Mobile advertisements d. Mobile websites e. Location-based networks (e.g., Foursquare) f. Mobile applications i.

PPT 13.27

Mobile applications (apps) are software programs that run on mobile devices and give users access to certain content.

F. Applications and Widgets 1. Applications are adding an entirely new layer to the marketing environment, as Americans are estimated to spend 85% of their time on smartphones using apps. 2. The most important feature of apps is the convenience and cost savings they offer to the consumer. a. Certain apps allow consumers to scan a product’s barcode and then compare it with the prices of identical products in other stores. 3. To remain competitive, companies are beginning to use mobile marketing to offer additional incentives to consumers (QR scanning app).

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LO 13-5

PPT 13.28

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Explain online monitoring and analytics for social media. Key Terms: 

Online Monitoring and Analytics



Using Digital Media to Learn about Consumers

V. Online Monitoring and Analytics A. Without digital media monitoring and evaluation, it is not possible to maximize resources and minimize costs in social media marketing. B. Marketing analytics uses tools and methods to measure and interpret the effectiveness of marketing activities.

PPT 13.29

C. Table 13.2 breaks down the Google Analytics dashboard into five sections: real time, audience, acquisition, behavior, and conversions. D. Google Analytics is arguably the most robust web analytics tool available, and it is free to anyone with a Google account. VI. Using Digital Media to Learn About Consumers

PPT 13.30–13.31

A. Digital media can be great resources for conducting market research, gathering information about consumers, and asking customers about their preferences. B. Crowdsourcing involves using communities of interested consumers to gather input and feedback for marketing purposes. C. Consumer feedback is an important part of the digital media equation. 1. Online reviews are estimated to influence the buying decisions of approximately 90% of U.S. consumers. 2. In the case of negative feedback, digital media allow companies to directly ask consumers what can be done to improve. 3. Despite the ease and obvious importance of online feedback, many companies do not yet take full advantage of the digital tools at their disposal.

Instructor’s Manual—Chapter 13

LO 13-6

Identify legal and ethical considerations in digital media. 

Ferrell/Hirt/Ferrell: Business Foundations 13e

Key Terms:

Legal and Social Issues in Internet Marketing

 Identity theft

o Privacy

 Online fraud

o Identity Theft and Online Fraud o Intellectual Property Theft and Other Illegal Activities • PPT 13.32

Digital Media’s Impact on Marketing

VII. Legal and Social Issues in Internet Marketing A. The extraordinary growth of information technology, the internet, and social networks has generated many legal and social issues for consumers. 1. The U.S. Federal Trade Commission (FTC) compiles an annual list of consumer complaints related to the internet and digital media.

PPT 13.33

B. Privacy 1. Shopping on the internet allows companies to track consumers on a personal level without their knowledge (something that is not as much of a problem in stores). 2. Cookies are often used to track personal information collected on the web. a. Information can be used in a positive way to customize services. b. Consumers have the option of turning off cookies on their computers, but the potential for misuse has left many consumers uncomfortable with this technology. 3. Another internet privacy issue is ―scraping,‖ an activity where companies offer to collect personal information from social networking sites and other forums. 4. Due to consumer concerns over privacy, the Federal Trade Commission is considering developing regulations that would better protect consumer privacy by limiting the amount of consumer information that businesses can gather online. a. One proposed solution is a ―do not track‖ bill. b. Web advertisers see the potential for additional internet regulation as a threat. They are attempting to engage in selfregulation, such as a do-not-track icon, to stave off unfavorable Internet regulation.

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C. Identity Theft and Online Fraud 1. Identity theft occurs when criminals obtain personal information that allows them to impersonate someone else in order to access financial accounts and make purchases. (Figure 13.3) 2. Security breaches are a serious threat to organizations and individuals. 3. Phishing is using a familiar website to deceive people into divulging private information.

PPT 13.36

4. The National Fraud Center wants financial institutions to implement new technologies such as digital certificates, digital signatures, and biometrics to decrease identity theft. 5. Online fraud includes any attempt to conduct fraudulent activities online, such as by deceiving consumers into releasing personal information. 6. Cybercriminals are increasingly using online social networking sites and other digital media to commit fraud—either to damage a company’s reputation or to gather private information from consumers.

PPT 13.37

Many cybercriminals use hacking to commit online fraud. Hackers break into websites and steal users’ personal information.

Consumers must always be careful what information they give when online and only give out credit card numbers on trusted and secure sites.

D. Intellectual Property Theft and Other Illegal Activities 1. Can be ideas and creative materials, songs, movies, books, electronics, and so on. 2. Although generally protected by patents and copyrights, losses each year from illegal copying of intellectual property (IP) reach billions of dollars in the United States. a. IP theft is a problem that has grown in the digital age with sites like YouTube and illegal software downloads on the rise. b. Illicit online marketing is also becoming a serious issue for law enforcement across the globe. 13-425 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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3. Many consumers rationalize the illegal sharing of digital content. a. Many feel they don’t have the money to pay for what they want. b. Some users feel influenced to engage in this activity because their friends engage in piracy and swap digital content. c. Others enjoy the thrill with a low risk of consequences. d. Some feel being tech-savvy allows them to take advantage. PPT 13.38

VIII.

Digital Media’s Impact on Marketing

A. To be successful in business, you need to develop a strategic understanding of how digital marketing can make your business more efficient and productive. B. Businesses accustomed to traditional marketing media can find the transition to digital marketing challenging, but it is necessary to remain competitive. 1. The correct blend of traditional and new digital media in the marketing mix requires careful consideration. 2. Future marketing career opportunities will require a solid knowledge of digital and traditional marketing media.

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LO 13-7

Propose recommendations to a marketer’s dilemma.

PPT 13.40

IX. Solve the Dilemma: Developing Successful Freeware

Key Terms:

LL. Paul Easterwood, a graduate of Colorado State University with a degree in computer science, entered the job market during a slow point in the economy. MM. The only offer he received was from Pentaverate Inc. that produces freeware. 23. Freeware, or public domain software, is offered to consumers free of charge in exchange for revenue generated later. 24. Paul researched and learned from an article the enormous potential of freeware. 25. The job would be to develop freeware that people could download and would generate significant income for the firm. PPT 13.41

26. With no experience in marketing, Paul was at a loss what software would make money for the company. NN.

Paul’s first project IOWatch:

1. Virtual tours of outer space, with images and video clips downloaded to users’ PCs 2. Experienced little use and drew little advertising income PPT 13.42

3. Paul hired a consultant to figure out what people want in order to design a better second project 4. Also needed to know what went wrong with IOWatch OO.

Critical Thinking Questions:

1. As a consultant, what would you do to help Paul figure out what went wrong with IOWatch? 2. What ideas for new freeware can you give Paul? What potential uses will the new software have? 3. How will it make money? (Answers appear under the End of Chapter Teaching Resources section of this Instructor's Manual.]

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Fake Out: Amazon Kicks Counterfeits to the Curb

Facebook 1. What types of legal and social issues in internet marketing do counterfeit products create on e-retailing sites? Amazon’s simple process for listing products has created an onslaught of counterfeit listings that make it difficult for consumers to distinguish what is real. 2. How can advertisers use social media to advertise more effectively? Most consumers and manufacturers think that e-retailers have a responsibility to prevent fraud. E-retailers are taking measures to fight the fakes. Amazon requires third-party sellers to provide proof they are licensed to sell items from Adidas, Asics, Hasbro, Nike, and Samsung. Additionally, the company committed $400 million to invest in personnel and machine learning tools to fight fraud and abuse. 3. What kind of tools could social media sites build to prevent fraud? Answers will vary, but students need to support their answer. Technology and the Economy: Shopify Aims for e-Commerce Domination

1. What is Shopify, and how is it different from other e-commerce platforms? It differentiates itself from the competition by identifying common struggles e-commerce retailers face and creating tailored solutions within the Shopify ecosystem. The main difference between Shopify and Amazon is that Shopify allows merchants to create their own store on a domain they own, while Amazon is simply a marketplace to sell goods through. 2. Why do you think Shopify is appealing to small business owners? Shopify positions itself as an all-in-one service with a variety of tools to help business owners start, run, and grow a business. The company eliminates the need for many thirdparty tools and resources such as email marketing services and third-party logistics management with its products.

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3. How is Shopify a competitive threat to Amazon? Shopify introduces more marketplace functionality to promote its sellers, becoming a greater competitive threat to Amazon. Its Shop App, a consumer-facing mobile app allows users to track packages, browse from Shopify’s retailers, and make one-click purchases. Shopify is also taking on Amazon with its partnership with Walmart that opens Walmart’s online marketplace, a store- front for third-party sellers, to Shopify merchants. This gives greater reach and visibility to Shopify sellers.

Consider Ethics and Social Responsibility: Insta-Scam: Brands Crack Down on Influencer Fraud

1. What problems do advertisers have when paying influencers by their amount of social media followers? Because popular social media users called influencers or microinfluencers are mainly paid by the number of social media followers they have, influencers have an incentive to inflate their numbers. 2. How can advertisers use social media to advertise more effectively? To advertise more effectively, advertisers may choose a better metric to assess effectiveness. Social media engagement in which influencers are paid based off the amount of interaction users had with their post may be more effective. 3. What kind of tools could social media sites build to prevent fraud? Advertisers, such as Unilever, have called on social media platforms to crack down on fraudulent behavior and urged the industry to be cautious when using social media influencers. Business Disruption: The Music Industry Gets a Tune Up

1. How does music streaming display the digital characteristics of marketing, such as greater accessibility and connectivity? More consumers are paying for music streaming services to get greater access to music and avoid listening to advertisements. 2. Describe how music streaming utilizes the marketing mix. Music streaming provides a vast number of products (music selections) instantly (without the need for a physical location or intermediary) at a low price. For about $10 month, users can purchase a paid subscription to a streaming service and gain access to thousands of songs. Promoting these services are simple with internet advertising.

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3. What ethical issues do you think might occur as music streaming continues to increase? Answers will vary, but students need to support their answer. So You Want to Be a Digital Marketer

Why is it essential for marketers to know what digital media are available and how to best utilize them? Digital media are the way of the future and are rapidly changing how people communicate, how they shop, and even what they buy. Companies that do not understand this risk losing competitive advantage over others that do. On the other hand, marketers who are well versed in both traditional and new digital media will be well positioned competitively. These marketers will be able to conduct effective market research, communicate with hard-to-reach demographics, interact with consumers, and deliver customers the products that they want and need in a timely and efficient manner.

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END OF CHAPTER TEACHING RESOURCES Check Your Progress 1. What is digital marketing? Digital marketing uses all digital media, including the internet and mobile and interactive channels, to develop communication and exchanges with customers. 2. How can marketers utilize digital media to improve business? Marketers can use new digital media to improve marketing research, to communicate with consumers and stakeholders, to reach new target markets, and to receive feedback about new products. Digital media are more interactive than traditional media, allowing marketers to improve their efforts and to reach new target markets. 3. Define accessibility, addressability, connectivity, interactivity, and control. What do these terms have to do with digital marketing? Accessibility, addressability, connectivity, control, and interactivity are the five characteristics of digital media that differentiate them from traditional marketing media (see Table 13.1). Accessibility allows consumers to find information about competing products, prices, and reviews and become more informed about a firm and the relative value of its products. Addressability is the ability of a business to identify customers before they make purchases. Connectivity is the use of digital networks to provide links between information providers and users. Interactivity allows customers to express their needs and wants directly to the firm in response to its communications. Finally, control involves consumers’ ability to regulate the information they receive via the internet and the rate and sequence of their exposure to that information. 4. What is e-business? E-business simply means carrying out the goals of business through utilization of the internet. 5. How is the internet changing the practice of marketing? There are many correct responses to this question, as it is very open-ended. The internet has increased the speed of communication, has made marketing a more interactive practice between marketers and consumers, and has given consumers a voice and therefore more power to either criticize or praise products. The internet has taken away some power from established marketing firms, even allowing fans in some instances to create popular advertising campaigns and ads. However, it has also allowed marketers to improve their market research efforts and to broaden their reach into new target markets.

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In some ways, the internet has leveled the playing field and has provided small businesses with opportunities they did not have before. 6. What impact do digital media have on the marketing mix? Digital media change how marketers should approach the marketing mix somewhat, but the marketing mix remains as essential as ever. There are a few key differences when using digital media in the marketing mix. First, digital media make customer communications richer, faster, and interactive. Second, digital media help companies reach new target markets more easily, affordably, and quickly than ever before. Finally, digital media help marketers utilize new resources in seeking out and communicating with customers. One of the most important benefits of digital marketing is the ability of marketers and customers to share information easily. 7. How can businesses utilize new digital and social networking channels in their marketing campaigns? Consumers spend more time on social networking sites than they do on email, and more than three fourths of internet users read blogs. These numbers point to the pervasiveness of online social media and the importance for marketers in harvesting this potentially powerful tool. Students’ answers may vary as to how marketers can use new digital media in their marketing campaigns. They must explain their answers. 8. What are some of the privacy concerns associated with the internet and e-business? How are these concerns being addressed in the United States? A major privacy concern related to the internet is the ability to track people’s usage and even purchasing patterns on an individual level. The internet allows businesses (and cybercriminals) to access large amounts of data on consumers and other users. This information, many believe, violates what should be basic rights to privacy. The regulatory system has not been able to keep up with advances in technology and therefore has not been a sufficient safeguard for consumers. The government is considering legislation such as a ―do not track‖ bill to limit what kinds of information online companies can collect without user consent. 9. What is identity theft? How can consumers protect themselves from this crime? Identity theft occurs when criminals obtain personal information that allows them to impersonate someone else in order to use that person’s credit to access financial accounts and make purchases. Consumers can never completely protect themselves against identity theft. However, they can be careful about the type of information that they divulge as well as the types of websites they frequent when online. For instance, consumers should only do online shopping at trusted and secure sites. They should also watch out for

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internet scams such as phishing, whereby con artists counterfeit a well-known website and send out emails directing victims to it, and then trick them into revealing their personal information. 10. Why do creators want to protect their intellectual property? Provide an example on the internet where intellectual property may not be protected or where a copyright has been infringed. Intellectual property is important for creators because it is a source of competitive advantage and revenues. If innovations are not protected by IP laws, then competitors will take away market share and profits from the organization or individual that invested all the time and money into research and development. Without intellectual property protection, there is little incentive to engage in researching and innovating because it is a risky, time-consuming, and expensive endeavor with little reward. Students’ examples will vary. Get Involved

Students’ answers will vary for all of the questions in this exercise. In order for students to learn from one another, assign this as homework and then have students share and discuss their responses during the next class period. 1. Amazon.com is one of the most recognized e-businesses. Visit the site (www.amazon.com) and identify the types of products the company sells. Explain its privacy policy. Amazon.com sells videos, books, music, games, toys, clothing, jewelry, appliances, pet supplies, electronics, and even food. The Amazon Security and Privacy policy discusses customer rights and supplier responsibilities. The Conditions of Use are for users who want to buy products through Amazon.com and covers IP items such as trademarks, patents, and copyrights. The Amazon.com Privacy Notice discusses the rights of users, such as safe shopping, user privacy regarding information that is shared, Amazon.com updates, ways to unsubscribe, and information concerning personal notification services. It provides answers that detail some of the issues consumers might be most concerned about, such as cookies, third-party advertisers, and the type of personal information that Amazon.com collects. The Supplier Code describes ethical standards for those who supply products to Amazon.com. 2. Visit some of the social networking sites identified in this chapter. How do they differ in design, audience, and features? Why do you think some social networking sites like Facebook are more popular than others? Student answers will vary depending upon which sites they view. 13-433 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

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3. It has been stated that digital technology and the internet are to business today what manufacturing was to business during the Industrial Revolution. The technology revolution requires a strategic understanding greater than learning the latest software and programs or determining which computer is the fastest. Leaders in business can no longer delegate digital media to specialists and must be the connectors and the strategists of how digital media will be used in the company. Outline a plan for how you will prepare yourself to function in a business world where digital marketing knowledge will be important to your success. This question would work well as a group activity. Divide the class into groups of no more than six people and have them develop the plan together.

Build Your Skills: Planning a Digital Marketing and Social Networking Site

Students will assume the role of a manager at Biodegradable Packaging Products Inc., a small business that produces packaging foam from recycled agricultural waste (mostly corn). The company wants to expand into e-business by using digital media to help market its product. Major customers are other businesses and could include environmentally friendly companies like Tom’s of Maine (natural toothpaste) and Celestial Seasonings (herbal tea). Students will first need to develop a social networking site or blog that will help them reach their potential customers. They must decide who their target market is and which medium will attract them the best. The task will involve planning a digital media marketing campaign using online social networking sites, blogs, or another digital media outlet based on the template provided. Social networking/blog/other site: ______ Overall image and design of your site: ______ Strategy for attracting followers to your site: ______ Solve the Dilemma: Developing Successful Freeware

1. As a consultant, what would you do to help Paul figure out what went wrong with IOWatch? Students’ answers will vary. 2. What ideas for new freeware can you give Paul? What potential uses will the new software have? Students’ answers will vary, but they should explain each of their ideas in full.

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3. How will it make money? Students’ answers will vary depending on the ideas that they listed in their answer to Question 2.

Build Your Business Plan: Digital Marketing and Social Networking

In this exercise, students will consider whether it is feasible to market a particular product on the internet, how to overcome obstacles in digitally marketing the product, and the best way to engage in digital marketing for a successful marketing campaign. Most companies today utilize digital media in some fashion—be it in marketing campaigns, promotions, or marketing research. Many companies even utilize the internet to raise awareness about causes such as sustainability, resource conservation, and maintaining a healthy lifestyle. Once students have selected the product for which they are going to develop a business plan, allow them some time to research (either in class or outside of class as homework). They should assemble some information on how that product is currently being marketed (for products that already exist), or how it should be marketed (for products that do not exist). If students pick a product that is not already marketed digitally, have them ask and answer the question: Why is this the case? Encourage them to think about what they, as marketers, might be able to do to help their chosen company develop a new marketing campaign utilizing digital media. For students who chose to invent a product, have them outline the marketing mix. Remind them that they must keep in mind every element of the marketing mix because digital media are more similar than different to traditional media. See for Yourself Case: Should Facebook and Instagram Get Social With e-Commerce

This case discusses how Facebook has progressed from connecting friends and family to also focusing on connecting individuals to products and businesses. Facebook has been the dominant social media platform for businesses and advertisers for years. With the Shops tool, Facebook wanted to create a simple and seamless shopping experience across Facebook’s family of apps and make it easier for small businesses to operate and grow. Rather than charging businesses to use Shops, Facebook decided to offer the service for free, believing it would lead to more ad spending over time. 1. Why has Facebook been so successful at attracting businesses and advertisers? One reason it has been so successful is that Facebook observes how its 2.8 billion monthly active users use the platform and leverage this data to improve its services.

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2. How do businesses benefit from Facebook Shops? The Facebook Shop feature increases the searchability and reach of small businesses and allows business owners to drive sales through conversation. Users can message business owners over Messenger, Instagram direct messaging, or WhatsApp to ask questions and get support. Facebook can also utilize what it knows about its users’ shopping habits and preferences to deliver relevant product suggestions. Finally, the convenience of Facebook Shops is derived from the merchant’s ability to upload its catalogs once to make them accessible across all of Facebook’s associated apps. 3. How does Facebook make money from Facebook Shops? If retailers make Facebook an integral part of their e-commerce strategies, it will boost user engagement on the platform and increase Facebook and Instagram’s advertising revenues in the long-run. Team Exercise

Students will develop a digital marketing promotion for a local sports team, using Twitter, Facebook, and other social networking media to promote ticket sales for next season’s schedule. In their plan, they should provide specific details and ideas for the content they would use on the sites. Also, they will need to describe how they would encourage fans and potential fans to go to their site. They will need to consider how they would use digital media to motivate sports fans to purchase tickets and merchandise and attend games.

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CONNECT ACTIVITIES NASCAR Turns to Social Media

Learning Objective: 13-1: Recognize the increasing value of digital media and digital marketing in strategic planning. Activity Summary: As social networks evolve, both marketers and the owners of social networking sites are realizing the opportunities such networks offer—an influx of advertising dollars for site owners and a large reach for the advertiser. As a result, marketers are experimenting with promotion on social networks. Some of the most prominent sites are Facebook, LinkedIn, and Twitter. Students will learn the business application of a social network. How to Use Activity: With social media continuing to grow in both the personal and professional landscapes, have students create two-column list on the ―good‖ of having your business on social media, as well as the potential ―bad‖ that can be caused by having a business on social media. Class Discussion: What are the benefits to being on social media from a business perspective? What are the potential drawbacks? What are some brands that have a successful social media presence? What tactics have they used to stand out?

ABC Utility Adopts Social Media Marketing

Learning Objective: 13-2: Demonstrate the role of digital marketing and social networking in today's business environment. Activity Summary: Managers in today’s marketplace will certainly wrestle with the fluctuation of a businesses’ positive and negative presence on social media. The activity outlined allows students to think through tips to a successful social media strategy. How to Use Activity: Ask students to build upon the questions presented in the case and formulate a list of their top ten guidelines for effective social media use. Optionally, have the group focus on specific social networks. Class Discussion: What advice would you give to a business looking to expand their social media presence? What are some ways in which a business could gain followership? Are there any areas to avoid when building a company or product’s social brand?

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Developing New Products at Domino’s Learning Objective: 13-2: Demonstrate the role of digital marketing and social networking in today's business environment. Activity Summary: Domino’s Pizza was founded over 60 years ago and has grown into the second largest pizza franchise in the world. Even given its size and longevity, Domino’s continues to create new platforms to use in its branding and promotions. This exercise is important because the internet and information technology have dramatically changed the environment for business and understanding how companies like Domino’s have embraced those changes will help you prepare for your career. The goal of this activity is to demonstrate understanding of how digital marketing and social media can be used in marketing. How to Use Activity: Have the students evaluate Domino’s social media tools and how well they meet the top 10 guidelines for effective social media use. Class Discussion: Domino’s uses social media platforms like Facebook to connect consumers with marketers and other consumers. Have students discuss what social media trends should be incorporated into their marketing plan. BONUS TEACHING RESOURCES Term Paper or Project Topics

These topics may be assigned as individual or collaborative projects: 1. 2. 3. 4.

How to measure the effectiveness of Facebook or Twitter as a marketing tool. Are digital media really more effective at reaching target markets than traditional media? How the marketing mix changes when using digital media versus traditional media. How have companies altered their approaches to advertising in the age of digital marketing?

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Guest Speaker Suggestions

1. An executive or representative from a local business that has experienced success using digital marketing. 2. A marketing professor who can discuss in greater detail the changing business climate and increase in the use of digital media. 3. A young entrepreneur who has utilized digital media and the internet while seeking to get their business off the ground. 4. A local blogger who has managed to turn their blog into a profitable business.

Teaching Suggestions

37. Instructors may want to grab the class’s attention by starting with some viral ads from the internet (easily found on YouTube or many corporate websites). 38. Have students spend part of class researching digital marketing campaigns for a company of their choice. 39. Have students break into small groups to discuss how they would approach creating a digital marketing campaign. Make sure to reinforce the importance of the marketing mix.

Chapter 14: Accounting and Financial Statements SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Holding Ernst and Young Accountable Business Disruption: Big Four Under Big Pressure Technology and the Economy: Artificial Intelligence Transforms Accounting Intelligence Consider Ethics and Social Responsibility: Women in Accounting: Gender Equality Isn’t Adding Up So You Want to Be an Accountant 15-439

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END OF CHAPTER TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Financial Analysis Solve the Dilemma: Exploring the Secrets of Accounting Build Your Business Plan: Accounting and Financial Statements See for Yourself Case: Goodwill Industries: Accounting in a Nonprofit Team Exercise CONNECT ACTIVITIES Financing the Shirt on Your Back: Threadless iSeeIt! Video Case: The Accounting Cycle Catching Up on Financials for Board Oversight BONUS TEACHING RESOURCES Guest Speaker Suggestions Teaching Suggestions

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SUMMARY Accounting, the financial ―language‖ that organizations use to record, measure, and interpret all of their financial transactions and records, is very important in business. This chapter explores the role of accounting in business and its importance in making business decisions. First, we discuss the uses of accounting information and the accounting process. Then, we briefly look at some simple financial statements and accounting tools that are useful in analyzing organizations worldwide.

LEARNING OBJECTIVES LO 14-1

Describe the different uses of accounting information.

LO 14-2

Demonstrate the accounting process.

LO 14-3

Examine the various components of an income statement in order to evaluate a firm’s ―bottom line.‖

LO 14-4

Interpret a company’s balance sheet to determine its current financial position.

LO 14-5

Analyze financial statements, using ratio analysis, to evaluate a company’s performance.

LO 14-6

Assess a company’s financial position using its accounting statements and ratio analysis.

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KEY TERMS AND DEFINITIONS accounting

The recording, measurement, and interpretation of financial information.

accounting cycle

The four-step procedure of an accounting system: examining source documents, recording transactions in an accounting journal, posting recorded transactions, and preparing financial statements.

accounting equation

Assets equal liabilities plus owners’ equity.

accounts payable

The amount a company owes to suppliers for goods and services purchased with credit.

accounts receivable

Money owed a company by its clients or customers who have promised to pay for the products at a later date.

accrued expenses

All unpaid financial obligations incurred by an organization.

annual report

Summary of a firm’s financial information, products, and growth plans for owners and potential investors.

asset utilization ratios

Ratios that measure how well a firm uses its assets to generate each $1 of sales.

assets

A firm’s economic resources or items of value that it owns, such as cash, inventory, land, equipment, buildings, and other tangible and intangible things.

balance sheet

A ―snapshot‖ of an organization’s financial position at a given moment.

budget

An internal financial plan that forecasts expenses and income over a set period of time.

cash flow

The movement of money through an organization over a daily, weekly, monthly, or yearly basis.

certified management accountants (CMA)

Private accountants who, after rigorous examination, are certified by the Institute of Management Accountants and who have some managerial responsibility.

certified public accountant (CPA)

An individual who has been state certified to provide accounting services ranging from the preparation of financial records and the filing of tax returns to the complex audits of corporate financial records.

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cost of goods sold

The amount of money a firm spent to buy or produce the products it sold during the period to which the income statement applies.

current assets

Assets that are used or converted into cash within the course of a calendar year; also called short-term assets.

current liabilities

A firm’s financial obligations to short-term creditors, which must be repaid within 1 year.

current ratio

Current assets divided by current liabilities.

debt to total assets ratio

A ratio indicating how much of the firm is financed by debt and how much by owners’ equity.

debt utilization ratios

Ratios that measure how much debt an organization is using relative to other sources of capital, such as owners’ equity.

depreciation

The process of spreading the costs of long-lived assets such as buildings and equipment over the total number of accounting periods in which they are expected to be used.

dividends per share

The actual cash received for each share owned.

double-entry bookkeeping

A system of recording and classifying business transactions that maintains the balance of the accounting equation.

earnings per share

Net income or profit divided by the number of stock shares outstanding.

expenses

The costs incurred in the day-to-day operations of an organization.

gross income

Revenues minus the cost of goods sold required to generate the revenues.

income statement

A financial report that shows an organization’s profitability over a period of time—month, quarter, or year.

inventory turnover

Sales divided by total inventory.

journal

A time-ordered list of account transactions.

ledger

A book or computer file with separate sections for each account.

liabilities

Debts that a firm owes to others.

liquidity ratios

Ratios that measure the speed with which a company can turn its assets into cash to meet short-term debt.

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managerial accounting

The internal use of accounting statements by managers in planning and directing the organization’s activities.

net income

The total profit (or loss) after all expenses, including taxes, have been deducted from revenue; also called net earnings.

owners’ equity

Equals assets minus liabilities and reflects historical value.

per share data

Data used by investors to compare the performance of one company with another on an equal, per share, basis.

private accountants

Accountants employed by large corporations, government agencies, and other organizations to prepare and analyze their financial statements.

profit

The difference between what it costs to make and sell a product and what a customer pays for it.

profit margin

Net income divided by sales.

profitability ratios

Ratios that measure the amount of operating income or net income an organization is able to generate relative to its assets, owners’ equity, and sales.

quick ratio (acid test)

A stringent measure of liquidity that eliminates inventory.

ratio analysis

Calculations that measure an organization’s financial health.

receivables turnover

Sales divided by accounts receivable.

return on assets

Net income divided by assets.

return on equity

Net income divided by owners’ equity; also called return on investment (ROI).

revenue

The total amount of money received from the sale of goods or services, as well as from related business activities.

statement of cash flows

Explains how the company’s cash changed from the beginning of the accounting period to the end.

times interest earned ratio

Operating income divided by interest expense.

total asset turnover

Sales divided by total assets.

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Describe the different uses of accounting information.

Key Terms:  Accounting



Introduction



 Certified public accountant (CPA)

The Nature of Accounting

 Private accountants

Accountants

Accounting or Bookkeeping?

The Uses of Accounting Information

 Certified management accountants (CMAs)  Managerial accounting  Cash flow  Budget  Annual report

PowerPoint Slides: PPT 14.4

Lecture Outline and Notes: I.

The Nature of Accounting A. Accounting is the recording, measurement, and interpretation of financial information. 1. Large numbers of people, both within and outside businesses, use accounting tools to evaluate organizational operations. 2. The Financial Accounting Standards Board has been setting the principles and standards of financial accounting and reporting in the private sector since 1973. 3. Scandals happen when accounting firms fail to follow generally accepted accounting principles or GAAP. 4. Today, the Public Company Accounting Oversight Board (PCAOB) establishes rules, requirements, and policies for accounting firms and businesses. B. Accountants 1. Accountants are the people who prepare accounting information. 2. Public Accountants a. Certified public accountants (CPAs) are individuals who have been certified by the state in which they practice to provide accounting services ranging from the preparation of financial records and the filing of tax returns to complex audits of 15-445

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corporate financial records. b. Certification gives a public accountant the right to express, officially, an unbiased opinion regarding the accuracy of a client’s financial statements.

PPT 14.5

c. Most are either self-employed or members of large public accounting firms, although some work for smaller second-tier firms (Table 14.1). d. Ethical accountants are more important than ever after a series of financial scandals in the early 2000s. i.

Sarbanes-Oxley made accounting firms separate their consulting and auditing businesses and punished corporate executives with potential jail sentences for inaccurate, misleading, or illegal accounting statements.

ii. However, only 5 years later in 2008, a worldwide financial crisis started, partially due to questionable lending practices and investments based on risky financial instruments. iii. The Dodd-Frank Act was passed in 2010 to strengthen the oversight of financial institutions, limiting the types of assets commercial banks can buy; the amount of capital they must maintain; and the use of derivative instruments such as options, futures, and structured investment products. e. A growing area for public accounts is forensic accounting, which involves analyzing financial documents in search of fraudulent entries or financial misconduct. These individuals are sometimes called fraud examiners. i.

Forensic accountants have been used since the 1930s but are now being rapidly added by many auditing firms. ii. The Association of Certified Fraud Examiners, which certifies certified fraud examiners (CFEs), has grown to more than 75,000 members. 2. Private Accountants a. Private accountants are employed by corporations, government agencies, and other organizations to prepare and analyze their financial statements. b. Private accountants may become certified management accountants (CMAs) by passing a rigorous examination; they have some degree of managerial responsibility. C. Accounting or Bookkeeping? 1. Although the terms accounting and bookkeeping are often used interchangeably, they should not be confused. PPT 14.6

2. Bookkeeping is much narrower and far more mechanical than accounting and is typically limited to the routine, day-to-day 15-446

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recording of business transactions. 3. Bookkeepers require less training than accountants. 4. Accountants, on the other hand, usually complete coursework beyond their 4- and 5-year accounting degrees so they not only record financial information but understand, interpret, and develop sophisticated accounting systems necessary to classify and analyze complex financial information. D. The Uses of Accounting Information (Figure 14.1) 1. Many business failures can be linked to ignorance of the information contained in financial statements. a. Likewise, most business successes can be traced to informed managers who understand the consequences of their decisions. PPT 14.7

2. Managers and owners use financial statements for internal and external purposes. 3. Internal Uses

PPT 14.9

a. Managerial accounting refers to the internal use of accounting statements by managers in planning and directing the organization’s activities. b. Cash flow is the movement of money through a business on a daily, weekly, monthly, or yearly basis. i.

It is not uncommon for even successful companies to struggle making payments because of inadequate cash flow. One common reason for a cash crush is poor managerial planning.

c. A budget is an internal financial plan that forecasts expenses and income over a set period of time. i.

While most companies prepare master budgets for the entire firm, many also prepare budgets for smaller divisions, departments, product lines, or even projects.

ii. ―Top-down‖ master budgets begin at upper management and filter down, while ―bottom-up‖ budgets start at the department or project level and are combined at the CEO’s office. iii. The major value of a budget lies in its breakdown of cash inflows and outflows. 4. External Uses a. Managers also use accounting statements to report the financial performance of a business to outside organizations. i.

Such statements are used for filing income taxes, obtaining credit from lenders, and reporting results to the firm’s 15-447

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stockholders.

PPT 14.8

b. These financial statements become the basis for the information provided in a corporation’s official annual report, a summary of the firm’s financial information, products, and growth plans for stockholders and potential investors. i.

The single most important component of an annual report is the signature of a certified public accountant attesting that the required financial statements are an accurate reflection of the underlying financial conditions of the firm; those that meet these conditions are called audited.

ii. The primary users of audited financial information are government agencies; stockholders and potential investors; and lenders, suppliers, and employees. c. Countries such as Greece and even states such as California and Illinois are experiencing debt overload, which came to the forefront during the financial crisis. d. A corporation’s stockholders use financial statements to evaluate the return on their investment and the overall quality of the firm’s management team. i.

Poor performance often results in changes in top management.

e. Banks and other lenders look at financial statements to determine a company’s ability to meet current and future debt obligations if a loan or credit is granted. LO 14-2

Demonstrate the accounting process. 

Key Terms:

The Accounting Process



Assets

The Accounting Equation



Liabilities

Double-Entry Bookkeeping



Owners’ equity



Accounting equation

The Accounting Cycle



Double-entry bookkeeping



Accounting cycle



Journal



Ledger

II. The Accounting Process PPT 14.11

A. The Accounting Equation 1. Assets are a firm’s economic resources or items of value that it owns. 2. Liabilities are debts the firm owes to others. 15-448

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3. Owners’ equity equals assets minus liabilities and includes all of the funds that have ever been contributed to the company that never have to be paid back. a. In the case of Anna’s Flowers, if Anna were to liquidate, her business, any money left over after selling all the shop’s assets and paying off its liabilities would comprise her owners’ equity. 4. Accounting equation: Assets = Liabilities + Owners’ equity. B. Double-Entry Bookkeeping PPT 14.12

1. Double-entry bookkeeping is the system of recording and classifying business transactions in separate accounts that maintain the balance of the accounting equation (Figure 14.2).

PPT 14.13

2. To keep the accounting equation in balance, each business transaction must be recorded in two separate accounts. 3. Most organizations not only classify transactions as assets, liabilities, or owners’ equity but further break them down to provide more specific information. C. The Accounting Cycle

PPT 14.14

1. The accounting cycle is the four-step process of examining source documents, recording transactions, posting transactions, and preparing financial statements (see Figure 14.3.). a. Step 1: Examine Source Documents. This includes all source documents, such as checks, credit card receipts, and sales slips that provide evidence of transactions. b. Step 2: Record Transactions. Each financial transaction is recorded in a journal, a time-ordered list of account transactions. c. Step 3: Posttransactions i. Transactions are then posted to a general ledger, a book or computer program with separate files for each account; this process is known as posting. ii. At the end of the accounting period (usually yearly but sometimes quarterly or monthly), a summary of the balances of all the accounts in the general ledger, called a trial balance, must be prepared. d. Step Four: Prepare Financial Statements. The information from the trial balance is used to prepare financial statements such as the balance sheet, income statement, and other documents. i. In the case of public corporations and certain other organizations, a CPA must attest, or certify, that the organization followed generally accepted accounting 15-449

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principles in preparing the financial statements. ii. When the statements are complete, the books are ―closed,‖ and the accounting cycle begins anew for the next accounting period. LO 14-3

Examine the various components of an income statement in order to evaluate a firm’s ―bottom line.‖ 

Financial Statements o

PPT 14.15

The Income Statement

Key Terms: 

Income statement



Revenue



Cost of goods sold



Gross income (profit)



Expenses



Depreciation



Net income

III. Financial Statements A. The physical results of the accounting process are financial statements—the income statement, the balance sheet, and the statement of cash flows. 1. Manufacturing firms, service providers, and nonprofit organizations each use a different set of accounting principles or rules upon which the accounting profession has agreed; these are sometimes referred to as generally accepted accounting principles (GAAP). 2. Many accounting concepts go by more than one name. Each country has a different set of rules the businesses within that country must follow; most use International Financial Reporting Standards.

PPT 14.16

PPT 14.17

3. Moreover, certain concepts have more than one name. For example, sales and revenues are used interchangeably, as are profits, income, and earnings (Table 14.2). 4. Not all financial statements follow precisely the same format; one size does not fill all. B. The Income Statement 1. The income statement is a financial statement showing the profitability of a firm over a period of time (Table 14.3). a. Other names for the income statement include profit and loss (P&L) statement or an operating statement. b. The income statement indicates the firm’s profitability or income, which is derived by subtracting the firm’s expenses from its revenues. 2. Revenue is the total amount of money received (or promised) from 15-450

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the sale of goods or services, as well as from other business activities such as the rental of property and investments. a. Nonbusiness entities typically obtain revenues through donations and/or grants. PPT 14.18

b. Cost of goods sold (CGS) is the amount of money a firm spent to buy or produce the products it sold during the period to which the income statement applies. (CGS = Beginning inventory + Interim purchases − Ending inventory.) c. Gross income or profit is equal to revenues minus the cost of goods sold. d. Profit is the difference between what it costs to make and sell a product and what a customer pays for it. 3. Expenses are the costs incurred in the daily operation of a business.

PPT 14.19

a. There are three common expense accounts shown on income statements. i.

Selling, general, and administrative expenses include advertising and sales salaries, salaries of executives and staff, and the costs of owning and maintaining the general office. Included in this category is a special type of expense known as depreciation, the process of spreading the costs of long-lived assets over the total number of accounting periods in which they are expected to be used.

ii.

Research, development, and engineering expenses include scientific, engineering, and marketing personnel and the equipment and information used to design and build prototypes and samples.

iii.

Interest expenses include the direct costs of borrowing money.

4. Net income is the profit (or loss) after all expenses, including taxes, have been deducted from revenue. PPT 14.20

a. Most companies present the current year’s results along with the previous 2 years’ income statements to permit comparison of performance from one period to another. b. Nvidia Corporation Consolidated Statement of Earnings (in millions except per share amounts; Table 14.4) 5. Temporary Nature of Income Statement Accounts a. Companies record their operational activities in the revenue and expense accounts during an accounting period

PPT 14.21

b. Gross profit, earnings before interest and taxes, and net income result from information in the revenue and expense accounts. 15-451

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c. At the end of each accounting period, the dollar amounts in all the revenue and expense accounts are moved into a ―Retained Earnings‖ account, one of the owners’ equity accounts.

d. This shifting of dollar values from the revenue and expense accounts allows the firm to begin the next accounting period with zero balances in those accounts. e. When a corporation elects to pay dividends, it decreases the cash account (an asset category) as well as a capital account (an owners’ equity category). LO 14-4

Interpret a company’s balance sheet to determine its current financial position.

Key Terms:  Balance sheet  Current assets



The Balance Sheet



The Statement of Cash Flows

 Accounts receivable  Current liabilities  Accounts payable  Accrued expenses  Statement of cash flows

PPT 14.23

C. The Balance Sheet 1. The balance sheet presents a ―snapshot‖ of a company’s financial position at a given moment (Table 14.5). 2. The balance sheet takes its name from its reliance on the accounting equation: Assets must equal liabilities plus owners’ equity. 3. The balance sheet presents an accumulation of all the company’s financial transactions since its founding. 4. Nvidia Consolidated Balance Sheets (in millions, except per share data; Table 14.6)

PPT 14.24

5. Assets a. Asset accounts are listed in descending order of liquidity—how quickly they could be converted into cash. b. Current assets, also called short-term assets, are those that are used or converted into cash within a year; they include cash, temporary investments, accounts receivable (money owed the company by its customers who have promised to pay at a later date), and inventory. i.

Accounts receivable usually includes an allowance for bad debts that management does not expect to collect.

c. Long-term (fixed) assets represent a commitment of 15-452

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organizational funds for at least 1 year and include long-term investments, plants and equipment, and intangible assets such as ―goodwill,‖ reputation, as well as patents and trademarks.

PPT 14.25

6. Liabilities a. Current liabilities include a firm’s financial obligations to short-term creditors, which must be repaid within a year; longterm liabilities have longer repayment terms. b. Accounts payable are amounts owed to a company’s suppliers for goods and services purchased with credit. c. Other liabilities include wages earned by employees but not yet paid and taxes owed to the government. d. These accounts may be consolidated into an accrued expense account representing all unpaid financial obligations incurred by the firm.

PPT 14.26

7. Owners’ Equity a.

Owners’ equity includes the owners’ contributions to their business along with income retained to finance continued growth and product development.

b. Owners’ equity accounts vary according to type and class of stock issued. c. Each type of stock is represented by a separate owners’ equity account, called contributed capital. PPT 14.28

D. The Statement of Cash Flows 1. The statement of cash flows explains how the company’s cash changed from the beginning of the accounting period to the end. 2. Nvidia Consolidated Statements of Cash Flows (in millions; Table 14.7) 3. Many investors and other users of financial statements want more information about a firm’s cash flow to better understand its financial health. 4. The change in cash is explained through details in three categories. a. Cash from operating activities is calculated by combining the changes in the revenue accounts, expense accounts, current assets accounts, and current liability accounts. b. Cash from investing activities is calculated from changes in the long-term or fixed asset accounts. c. Cash from financing activities is calculated from changes in the long-term liability accounts and the contributed capital 15-453

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accounts in owners’ equity. LO 14-5

Analyze financial statements, using ratio analysis, to evaluate a company’s performance. 



Ratio Analysis: Analyzing Financial Statements

Key Terms:  Ratio analysis  Profitability ratios  Profit margin

Profitability Ratios

 return on assets

Asset Utilization Ratios

 Return on equity

Liquidity Ratios

 Asset utilization ratios

Debt Utilization Ratios

 Receivables turnover

Per Share Data

 Inventory turnover

Industry Analysis

 Total asset turnover

Importance of Integrity in Accounting

 Liquidity ratios  Current ratio  Quick ratio (acid test)  Debt utilization ratios  Debt to total assets ratio  Times interest earned ratio  Per share data  Earnings per share  Dividends per share

PPT 14.29

IV. Ratio Analysis: Analyzing Financial Statements A. Ratio analysis refers to calculations that measure an organization’s financial health, bringing the information from the income statement and balance sheet into sharper focus. 1. A ratio is one number divided by another with the result showing the relationship between the two numbers. 2. Financial ratios are used to weigh and evaluate a firm’s performance. 3. The results of the ratio computation should be compared to other companies in the same industry and to the company’s own past record. 4. The income statement and the balance sheet answer two questions: (1) How much did the firm gain or lose? and (2) How much is the firm currently worth on historical values found on the balance sheet? 15-454

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PPT 14.30

PPT 14.31

Ferrell/Hirt/Ferrell: Business Foundations 13e

B. Profitability Ratios 1. Profitability ratios measure how much operating income or net income a firm is able to generate relative to its assets, owners’ equity, and sales.

PPT 14.32

2. Profit margin = Net income/Sales; it shows the overall percentage profits earned by the company.

PPT 14.33

3. Return on assets = Net income/Assets; it shows how much income the firm produces for every dollar invested in assets. 4. Return on equity = Net income/Owners’ Equity; it shows how much income is generated by each $1 the owners have invested in the firm.

PPT 14.34

a. Stockholders are always concerned with how much money they will make on their investment, and they frequently use the return on equity ratio as one of their key performance yardsticks. C. Asset Utilization Ratios 1. Asset utilization ratios measure how efficiently a firm uses its assets to generate one dollar in sales. Managers can use asset utilization ratios to pinpoint areas of inefficiently in their operation.

PPT 14.35

2. Receivables turnover = Sales/Accounts receivable; it indicates how many times a firm collects its accounts receivable in 1 year. a. It also demonstrates how quickly a firm is able to collect payments on its credit sales, and no payments mean no profit.

PPT 14.36

3. Inventory turnover = Sales/Total Inventory; it indicates how many times a firm sells and replaces its inventory over the course of a year. a. A high inventory turnover ratio may indicate great efficiency but may also suggest the possibility of lost sales due to insufficient stock levels.

PPT 14.37

4. Total asset turnover = Sales/Total assets; it measures how well an organization uses all of its assets in creating sales. It indicates whether a company is using its assets productively. D. Liquidity Ratios

PPT 14.38

1. Liquidity ratios measure the speed with which a company can turn its assets into cash to pay off short-term debt. 2. High liquidity ratios may satisfy a creditor’s need for safety, but ratios that are too high may indicate that the organization is not 15-455

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using its current assets efficiently. PPT 14.39 PPT 14.40

3. Current ratio = Current assets/Current liabilities. 4. Quick ratio (acid test) = Current assets − Inventory/Current liabilities. a. By eliminating inventory, the least liquid current asset, the quick ratio test measures how well an organization can meet its current obligations without resorting to the sale of its inventory.

PPT 14.41

E. Debt Utilization Ratios 1. Debt utilization ratios indicate how much debt the company is using relative to other sources of capital. 2. Debt financing is riskier than equity as it demands a monthly payment regardless of profitability. In addition, recessions affect heavily indebted firms far more than those financed through equity. a. Most companies tend to keep debt-to-asset levels below 50%.

PPT 14.42 PPT 14.43

3. Debt to total assets ratio = Total debt/Total assets; it indicates how much of the firm is financed by debt and how much by owners’ equity. 4. Times interest earned ratio = Operating income/Interest expense; it is a measure of the safety margin a company has with respect to the interest payments it must make to its creditors. a. A low times interest earned ratio indicates that even a small decrease in earnings may lead the company into financial straits. F. Per Share Data

PPT 14.44

1. Per share data is used by investors to compare the performance of one company with another on an equal basis. 2. Earnings per share = Net income/Number of shares outstanding.

PPT 14.45

a. Diluted earnings per share equals net income divided by the number of shares outstanding but diluted. Diluted shares include potential shares that could be issued due to the exercise of stock options or the conversion of certain types of debt into common stock. 3. Dividends per share = Dividends paid/Number of shares outstanding. Dividends result in double taxation. G. Industry Analysis (Table 14.8)

PPT 14.46

1. Trends in the ratios over an appropriate time period should be considered.

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2. Industry ratios are commonly used as a comparative measure. 3. Ratios of other firms in a specific industry provide data for comparative purposes so that performance can be evaluated. V. Importance of Integrity in Accounting A. Banks and financial institutions manipulated their accounts.

PPT 14.50

B. Repurchase agreements were a common way of removing liabilities from the books. 1. Assets/Liabilities are transferred to another entity with the promise of buying them back later. C. On the other hand, strong compliance to accounting principles creates trust among stakeholders. D. It is most important to remember that integrity in accounting processes requires ethical principles and compliance with both the spirit of the law and professional standards in the accounting profession.

LO 14-6

PPT 14.51

Assess a company’s financial position using its accounting statements and ratio analysis.

Key Terms:

VI. Solve the Dilemma: Exploring the Secrets of Accounting PP. You have been promoted from vice president of marketing at BrainDrain Co., to president and CEO. QQ. You know marketing like the back of your hand but know next to nothing about finance. RR. BrainDrain is in danger of failure if steps are not taken at once to correct large and continuing financial losses. 27. You have asked vice president of finance and accounting for a complete set of accounting statements. 28. The statements detail the financial operations of the company over the past several years. 29. You decide to attack the problem systematically and learn ―hidden secrets‖ of the company statement by statement. SS. Searching for answers:

PPT 14.52

1. With the firm’s trusted senior financial analyst by your side, you delve into the accounting statements. 2. You are resolved to ―get to the bottom‖ of the firm’s financial problems. 3. Set a new course that will take the firm from insolvency and failure to financial recovery and perpetual prosperity.

PPT 14.53

TT. Critical Thinking Questions: 15-457

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1. Describe the three basic accounting statements. What types of information does each provide that can help you evaluate the situation? 2. Which of the financial ratios are likely to prove to be of greatest value in identifying problem areas in the company? Why? Which of your company’s financial ratios might you expect to be especially poor? 3. What are the limitations of ratio analysis? (Answers appear under the End of Chapter Teaching Resources section of this Instructor's Manual.)

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Holding Ernst and Young Accountable 1. Why are the assurance services that Ernst and Young provides so important? Assurance or auditing is one of the major building blocks of effective capital markets as it provides confidence and integrity in companies’ financial statements. 2. Ernst and Young offers assurance services and advisory services. What limitations did Sarbanes-Oxley place on accounting firms regarding how they offer these services? Sarbanes-Oxley made accounting firms separate their consulting and auditing businesses and punished corporate executives with potential jail sentences for inaccurate, misleading, or illegal accounting statements. 3. Considering the accounting scandals of the early 20th century, do you believe it is advisable to have so much accounting power consolidated in four large accounting firms? Why or why not? Answers will vary, but students need to support their answer. Business Disruption: Big Four Under Big Pressure 1. Why is the Big Four’s dominance being scrutinized? Following the collapse of several high-profile companies, many believe there is a conflict of interest between the audit and nonaudit services these accounting firms provide. The Big Four have more than 75% of the global accounting market share, with an even tighter hold on the world’s largest public companies. 2. Why do critics suggest there is a conflict of interest of the Big Four accounting firms? Critics suggest accounting firms do not properly evaluate their clients’ accounts because it would interfere with their consultancy work, creating a conflict of interest. Since nonaudit services produce the majority of the Big Four’s income, critics argue this creates a conflict of interest. 3. In your opinion, are current accounting regulations sufficient? Answers will vary, but students need to support their answers. Some students might argue that their auditing activities might be compromised and need further regulations. Others may argue that since there are different teams providing the work, there is sufficient oversight. Technology and the Economy: Artificial Intelligence Transforms Accounting Intelligence 1. Describe some of the advantages of AI to the accounting industry. AI will increase time savings, reduce errors, and aid compliance. In turn, this will allow accountants to spend time on more meaningful tasks, while AI can cover tasks like data entry. 2. GL.ai, the AI system adopted by PricewaterhouseCoopers, helps identify anomalies in its clients’ general ledger systems. Why do you think this is important? 15-459

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Answers will vary, but students need to support their answer and discuss that AI should increase a company’s productivity. 3. If AI can take over basic accounting tasks such as data entry, do you think this will improve the services accountants offer to their customers? Why or why not? Again, answers will vary but students need to support their answer. Consider Ethics and Social Responsibility: Women in Accounting: Gender Equality Isn’t Adding Up 1. What are some reasons women might not be as represented among the partners or principals of the Big Four accounting firms? Women are not being assigned to as many large clients as men which makes promotion to partner or principal more difficult. Additionally, the corporate culture makes it more difficult for women to balance family and work. 2. Describe the corporate culture at the Big Four accounting firms. What might be done to make it more family friendly? Big Four firms are known to have very competitive cultures, requiring long hours. Women are still the primary childcare providers which makes ―work/life‖ balance more difficult. 3. Do you think accounting firms should work to create a better work/life balance for employees with families or should accountants expect to work long hours and make sacrifices if they choose to work for the Big Four? Answers will vary, but students need to support their answer. So You Want to Be an Accountant Do you like numbers and finances? Are you detail oriented, a perfectionist, and highly accountable for your decisions? If so, accounting may be a good field for you. If you are interested in accounting, there are always job opportunities available no matter the state of the economy. Accounting is one of the most secure job options in business. Of course, becoming an accountant is not easy. You will need at least a bachelor’s degree in accounting to get a job, and many positions require additional training. Many states demand coursework beyond the 120–150 credit hours collegiate programs require for an accounting degree. If you are really serious about getting into the accounting field, you will probably want to consider getting your master’s in accounting and taking the CPA exam.

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END OF CHAPTER TEACHING RESOURCES Check Your Progress 1. Why are accountants so important to a corporation? What function do they perform? Accountants are important because they analyze and interpret financial information to determine if the organization is using its funds efficiently and to make plans for increasing profits. Accountants develop systems that summarize all transactions into comprehensive financial statements. 2. Discuss the internal uses of accounting statements. Financial statements may be used internally for planning and directing the course of the organization. Monitoring cash flow is one important area. Financial statements are also important in the preparation of budgets for the firm. 3. What is a budget? A budget is an internal financial statement that projects revenues and expenditures for a given period of time. They may be applicable to an individual segment of the firm or the firm as a whole. Their major value is the analysis of inflows and outflows. 4. Discuss the external uses of financial statements. The main external use is to report the financial performance of the business to outside organizations. This may include filing taxes, obtaining credit, and reporting results to shareholders and analysts. 5. Describe the accounting process and cycle. The accounting process involves the accounting equation and double-entry bookkeeping. The accounting equation is Assets = Liabilities + Owners’ equity. Double-entry bookkeeping is a system of recording and classifying business transactions in accounts that maintain the balance of the accounting equation. 6. The income statements of all corporations are in the same format. True or false? Discuss. False. Different types of firms (service, manufacturing, financial, etc.) use their own accounting principles, to which the profession has agreed. These are called generally accepted accounting principles (GAAP). One way in which the format differs is in the slightly different terminology used in the financial statements. 7. Which accounts appear under ―current liabilities‖? The accounts that appear under ―current liabilities‖ are those that reflect financial obligations that must be repaid within 1 year. Those accounts include accounts payable and accrued expenses.

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8. Together, the income statement and balance sheet answer two basic questions. What are they? The income statement answers the question of the firm’s profitability, and the balance sheet answers the question of how much the firm is currently worth. 9. What are the five basic ratio classifications? What ratios are found in each category? The five basic ratio classifications and the ratios they contain are: a. Profitability ratios—profit margin, return on assets, return on equity. b. Asset utilization ratios—receivables turnover, inventory turnover, total asset turnover. c. Liquidity ratios—current ratio, quick ratio. d. Debt utilization ratio—debt to total assets, times interest earned. e. Per share data—earnings and dividends per share. 10. Why are debt ratios important in assessing the risk of the firm? Debt utilization ratios are critical to assessing the risk of the firm because a high debt level and interest obligations can threaten the existence of the firm. The more assets are financed by debt, the higher the risk level of the firm. Get Involved 1. Look up the annual report of a company with which you are familiar. Read through the financial statements, then write up an analysis of the firm’s performance using ratio analysis. Look at data over several years and analyze whether the firm’s performance is changing through time. Sample student answer (not exhaustive): Acme Company 2017

2016

2015

2016

Return on Assets

13.79

13.33

12.29

10.7

Return on Equity

73.43

64.94

74.37

58.66

Quick Ratio

0.98

1.13

0.95

Current Ratio

1.21

1.19

1.36

1.15

Total Asset Turnover

0.93

0.9

0.88

0.9

Receivables Turnover

3.7

3.63

3.52

3.67

Inventory Turnover

22.51

21.79

20.01

21.61

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73.77

65.76

55.23

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We can see that Acme’s return on assets, return on equity, and times interest earned generally increased in the past 4 years. The other ratios seemed to fluctuate a bit more during certain years, but all the ratios are higher in 2011 than in 2008. This means that Acme is earning a higher return on assets and equity and is experiencing a higher turnaround on receivables. It also seems to be replacing its inventory a bit more than in 2008 and seems to be doing better in using its total assets to generate sales. It is also doing a better job with its abilities to turn assets into cash as seen by its current ratio and quick ratio. However, note that the quick ratio is less than one; this might indicate that Acme may experience a little bit of trouble meeting obligations without selling its inventory. This is lower than its quick ratio in 2009 (but higher than the quick ratio in 2008). While students might want to say that Acme is doing well because its ratios have improved, they must also realize that these ratios—although showing some improvement—mean little without comparing them to similar companies in the industry. If the ratios of all the other companies are higher, then they might reveal that Acme is underperforming, despite its improvement in the past 4 years. Then again, the exact opposite could be true. It is also hard to determine whether, for instance, a quick ratio less than one is bad for the industry. Industries differ in terms of liquidity, inventory, and so on. While lower values in one industry might be problematic, they could be perfectly acceptable in another industry. (For example, industries with lots of inventory would have higher inventory turnover and possibly a lower quick ratio depending upon its assets and liabilities.) Finally, it is interesting that in 2008 the nation was still in the midst of the recession. Hence, it seems likely that Acme’s (and other companies’) financial ratios would improve. Students might want to go back even further to get a good snapshot of the company’s health over time. 2. Form a group of three or four students to perform an industry analysis. Each student should analyze a company in the same industry, and then all of you should compare your results. The following companies would make good group projects: Automobiles:

Fiat Chrysler, Ford, General Motors

Computers:

Apple, Hewlett-Packard

Brewing:

MillerCoors, Molson Coors, The Boston Beer Company

Chemicals:

DuPont, Dow Chemical, Monsanto

Petroleum:

Chevron, ExxonMobil, BP

Pharmaceuticals:

Merck, Lilly, Amgen

Retail:

Sears, JCPenney, Macy’s, Express

Students’ answers will vary depending on which industry they choose. Yahoo! Finance is a good resource to compare the financial ratios of companies to competitors, including the market leaders for that industry. For instance, a student who chose Chevron would find that the company had a 15-463

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return on equity of 0.91%. Students could compare this to the industry leader in the return on equity category, which is ExxonMobil at 7.45%. By comparing their results for the different companies and then seeing how these compare to the highest performance leader in the industry, students might get a better idea of how ratio analysis works. Build Your Skills: Financial Analysis profit margin = net earnings = sales

680.7 = 10.81% 6,295.4

return on assets = net earnings = assets

return on equity = net earnings = equity

680.7 = 16.07% 4,237.1

680.7 = 39.73% 1,713.4

Comparison of Western Grain Ratios With the Industry Western Grain

Industry

Difference

profit margin

10.81%

12%

−1.19%

return on assets

16.07%

18%

−1.93%

return on equity

39.73%

25%

14.73%

A comparison of the profitability ratios shows that Western Grain has a lower profit margin, which indicates that Western is not operating as efficiently as the average firm in the industry. The lower return on assets indicates that Western does not generate as much profit per $1 of assets as the average firm in the industry. This could be due to inefficient asset utilization or because Western has high equipment costs compared to the industry. By comparing these ratios, Western should be able to determine areas for improvement in performance. Solve the Dilemma: Exploring the Secrets of Accounting 1. Describe the three basic accounting statements. What types of information does each provide that can help you evaluate the situation? The three basic accounting statements are the income statement, the balance sheet, and the 15-464

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statement of cash flow. The income statement shows the profitability of a firm over a period of time—its overall revenues and the costs incurred in generating those revenues. The balance sheet is a snapshot of a company’s financial position at a given moment and indicates what the organization owns or controls and the various sources of funds used to pay for these assets (debt or equity). In other words, it shows what is owned (and who owns it) and what is owed. The statement of cash flows provides information about the movement of cash through the firm from the beginning of an accounting period to the end. 2. Which of the financial ratios are likely to prove to be of greatest value in identifying problem areas in the company? Why? Which of your company’s financial ratios might you expect to be especially poor? Students’ answers may vary but should include logical justification. For example, profitability ratios (profit margin, return on assets, and return on equity) are likely to be of great value (at least initially) because they measure how much operating or net income an organization is able to generate relative to its assets, owners’ equity, and sales. Simply, is the firm making or losing money? Because the firm is in trouble, debt, asset utilization, and liquidity ratios may be poor. 3. What are the limitations of ratio analysis? The main limitation of ratio analysis is that accounting practices of different organizations are never quite the same. Hence, making comparisons with ratios is never quite like comparing apples to apples. Another limitation is that a single or even a set of ratios provides only part of the financial story. Other information is needed to evaluate clearly a firm’s performance. For example, strategic objectives and environmental (business environment, social/political environment, etc.) factors may impede or facilitate the firm’s ability to perform, thus biasing conclusions drawn merely from ratio analysis.

Build Your Business Plan: Accounting and Financial Statements For this chapter, perhaps by using the Thai Restaurant example, ask the students what the expenses will be to start this new business. As they provide answers, write them on the board so students can visualize the scope of expenditures. A key discussion should revolve around whether they should buy or lease the building and equipment. Assuming they make the latter choice, they need to consider what type of lease (flat rate, straight percentage, combination) would be best for their new business. Given the industry the students are developing plans for, have them identify some of the reasons businesses fail in this industry. What are they going to do to try and prevent their business from being just another statistic?

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See for Yourself Case: How Regulation Credits Are Saving Tesla’s Earnings Tesla, an all-electric vehicle and energy generation products company, is widely admired for its industry-altering innovation built around its core vision of moving the world toward sustainable energy. Tesla did not invent the EV, but it was the first to create a viable EV for consumers and has set the standard of what an electric car should be. Tesla had its first profitable year a decade after it was publicly listed. Critics have been quick to point out a potential flaw in the company’s financial structure, which comes in the form of regulatory credits. Critics have been quick to point out a potential flaw in the company’s financial structure, which comes in the form of regulatory credits. In 1 year alone, Tesla made $1.6 billion by selling its excess regulatory credits to other car manufacturers. Tesla sells its credits to manufacturers who are slow to go green and need to achieve compliance. This permits the companies from having to pay heavy fines for noncompliance. Although Tesla is currently receiving substantial income from selling the credits, those revenues are expected to decline substantially (or disappear completely) as those companies begin meeting compliance requirements. If regulatory credits disappear, many profitable quarters would have been negative for Tesla. Essentially, Tesla seems to be losing money selling cars and making money selling credits. 1. How does Tesla profit from regulatory credits? Companies that exceed the zero-emission automobile standards, such as Tesla, are given credits. Credits per vehicle vary depending on the car’s drivetrain and the electric range. These credits can be sold to manufacturers who are slow to go green and need to achieve compliance. This has generated $1.6 billion in income for Tesla. 2. Why is Tesla’s income from the sale of credits is expected to decline? Tesla’s income from the sale of credits is expected to decline as other companies make the move to zero emission vehicles. Trends in the jurisdictions indicate that some requirements will become less stringent and may impact the demand for the credits. 3. What will happen to Tesla if regulatory credits disappear? If regulatory credits disappear, many profitable quarters would have been negative for Tesla. Essentially, Tesla seems to be losing money selling cars and making money selling credits. Team Exercise Students can look at websites such as Yahoo! Finance (http://finance.yahoo.com), under the company’s ―key statistics‖ link, to find many of its financial ratios, such as return on assets and return on equity. Have each member of the students’ teams look up a different company. They should explain why they think there are differences in the ratio analysis for these two ratios among the selected companies.

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CONNECT ACTIVITIES Financing the Shirt on Your Back: Threadless Learning Objective: 14-1: Describe the different uses of accounting information. Activity Summary: In 2003, two young entrepreneurs each invested $500 to begin Threadless as a mail-order business delivering t-shirts made from crowdsourced designs. By fostering their entrepreneurial energy while also making sound financial decisions, Threadless has grown into a multimillion-dollar business that provides t-shirts and other textiles printed with creative designs. This activity is important because understanding basic accounting and financial statements will be important to your success as a manager. The goal of this activity is to apply accounting and financial concepts to an entrepreneurial business. How to Use Activity: The video describes how Threadless’s accounting needs have changed as the company has gown and evolved. Have the students focus on the importance of accounting and finance to the success of a company. Class Discussion: What accounting terms and financial statements did you learn from this video? iSeeIt! Video Case: The Accounting Cycle Learning Objective: 14-2: Demonstrate the accounting process. Activity Summary: Accounting is the recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested parties the information they need to make good decisions. This short video describes how a small business prepares the information used in the accounting cycle. How to Use Activity: This video provides a brief overview of the accounting cycle, detailing the six steps. Divide the class into six groups and assign them one of the six steps. Then, have each group develop a short 5-min presentation on what their step of the process entails. Debrief as a class. Class Discussion: Why is the accounting cycle important? Is it necessary to follow the steps in sequence? Why or why not? What would happen if an accountant skipped a step? Catching Up on Financials for Board Oversight Learning Objective: 14-1: Describe the different uses of accounting information. Activity Summary: Students will become familiar with the financial language used to describe accounting principles. They’ll explore a fictitious example of being invited to serve on the board of a company and helping Cori prepare for the meeting. How to Use Activity: On the flip side of the accounting spectrum, over time companies have maliciously manufactured accounting statements for various reasons. Invite students to research famous corporate accounting scandals and present what happened, how they did it, and how they got caught. (Note to Professor: Some examples include Waste Management in 1998, Enron in 2001, and 15-468

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Bernie Madoff in 2008.) Class Discussion: What might be the motivations behind accounting statement malfeasance? What can be put into place to reduce the amount of accounting crime?

BONUS TEACHING RESOURCES Guest Speaker Suggestions 1. 2. 3. 4. 5.

A public accountant or a certified public accountant to address aspects of the job. A private accountant to address aspects of the job. An accounting professor to speak about accounting responsibilities, auditing, and so on. A representative of a firm with responsibility for the physical layout of the annual report. A professor to speak about ethical concerns and issues in accounting.

Teaching Suggestions 1. This chapter is not intended to cover all accounting principles but to give students an insight into accounting and the information statements developed by accountants. In addition, many of the terms used by accountants in financial statements are basic to interpreting and analyzing companies. Rather than pure memorization of terms, students should understand the overall concepts of the chapter. 2. Present the lecture using ―Lecture Outline and Notes‖ and slides planned for the chapter. 3. Get copies of different annual reports for the class to look over. Sometimes companies will give educational institutions copies of old annual reports. Many are downloadable from the internet. The students, using the annual report data, could ―crunch‖ selected accounting ratios to analyze the company’s financial health. This is especially helpful if the students can use 3–5 years’ worth of financial data. The discussion should focus on the analysis and application of the ratios and historical trends in the data. 4. To help students understand the objectives of the chapter, go over ―Check Your Progress‖ at the end of the chapter.

Chapter 15: Money and the Financial System SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE 15-469

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: COVID-19: Saving Makes Cents Business Disruption: Why Dogecoin Is No Longer a Joke Insider Ethics and Social Responsibility: The Federal Reserve Leans on Blackrock Technology and the Economy: Digging into the Digital Wallet So You’re Interested in Financial Systems or Banking END OF CHAPTER TEACHING RESOURCES Check Your Progress Get Involved Build Your Skills: Managing Money Solve the Dilemma: Seeing the Financial Side of Business Build Your Business Plan: Money and the Financial System See for Yourself Case: Taking a Bite Out of Purchasing Power Parity with the Big Mac Index Team Exercise CONNECT ACTIVITIES The Race to Develop Digital Currency iSeeIt! Video Case: The Federal Reserve Making Money Work for Molly's Meal Maker BONUS TEACHING RESOURCES Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions

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SUMMARY From Wall Street to Main Street, both overseas and at home, money is the one tool used to measure personal and business income and wealth. We begin our discussion with a definition of money and then explore some of the many forms money may take. Next, we examine the roles of the Federal Reserve Board and other major institutions in the financial system. Finally, we explore the future of the finance industry and some of the changes likely to occur over the course of the next several years.

LEARNING OBJECTIVES LO 15-1

Define money, its functions, and its characteristics.

LO 15-2

Describe various types of money.

LO 15-3

Specify how the Federal Reserve Board manages the money supply and regulates the American banking system.

LO 15-4

Compare and contrast commercial banks, savings and loan associations, credit unions, and mutual savings banks.

LO 15-5

Distinguish among nonbanking institutions such as insurance companies, pension funds, mutual funds, and finance companies.

LO 15-6

Analyze the challenges ahead for the banking industry.

LO 15-7

Recommend the most appropriate financial institution for a hypothetical small business.

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KEY TERMS AND DEFINITIONS automated clearinghouses (ACHs)

A system that permits payments such as deposits or withdrawals to be made to and from a bank account by magnetic computer tape.

automated teller machine (ATM)

The most familiar form of electronic banking, which dispenses cash, accepts deposits, and allows balance inquiries and cash transfers from one account to another.

brokerage firms

Firms that buy and sell stocks, bonds, and other securities for their customers and provide other financial services.

certificates of deposit (CDs)

Savings accounts that guarantee a depositor a set interest rate over a specified interval as long as the funds are not withdrawn before the end of the period—6 months or 1 year, for example.

checking account

Money stored in an account at a bank or other financial institution that can be withdrawn without advance notice, also called a demand deposit.

commercial banks

The largest and oldest of all financial institutions, relying mainly on checking and savings accounts as sources of funds for loans to businesses and individuals.

credit cards

Means of access to preapproved lines of credit granted by a bank or a finance company.

credit controls

The authority to establish and enforce credit rules for financial institutions and some private investors.

credit union

A financial institution owned and controlled by its depositors, who usually have a common employer, profession, trade group, or religion.

cryptocurrency

A digital exchange medium that uses secure online ledgers enabled by blockchain technology.

debit card

A card that looks like a credit card but works like a check; using it results in a direct, immediate, electronic payment from the cardholder’s checking account to a merchant or third party.

discount rate

The rate of interest the Fed charges to loan money to any banking institution to meet reserve requirements. 15-472

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electronic funds transfer (EFT)

Any movement of funds by means of an electronic terminal, telephone, computer, or magnetic tape.

exchange-traded funds (ETFs)

An insurance fund established in 1933 that insures individual bank accounts.

Federal Deposit Insurance Corporation (FDIC)

An independent agency of the federal government established in 1913 to regulate the nation’s banking and financial industry, also called ―the Fed.‖

Federal Reserve Board

The study of how money is managed by individuals, companies, and governments.

finance

Businesses that offer short-term loans at substantially higher rates of interest than banks.

finance companies

Businesses that protect their clients against financial losses from certain specified risks (e.g., death, accident, and theft).

insurance companies

Underwrites new issues of securities for corporations, states, and municipalities.

investment banker

Means by which the Fed controls the amount of money available in the economy.

monetary policy

Anything generally accepted in exchange for goods and services, also called currency.

money

Accounts that offer higher interest rates than standard bank rates but with greater restrictions.

money market accounts

An investment company that pools individual investor dollars and invests them in large numbers of well-diversified securities.

mutual fund

Financial institutions that are similar to savings and loan associations but, like credit unions, are owned by their depositors.

mutual savings banks

An agency that regulates and charters credit unions and insures their deposits through its National Credit Union Insurance Fund.

National Credit Union Association (NCUA)

Decisions to buy or sell U.S. Treasury bills (short-term debt issued by the U.S. government) and other investments in the open market. 15-473

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open market operations

Managed investment pools set aside by individuals, corporations, unions, and some nonprofit organizations to provide retirement income for members.

pension funds

The percentage of deposits that banking institutions must hold in reserve.

reserve requirement

Credit cards made available by stores that carry a benefit to the user.

reward cards

Accounts with funds that usually cannot be withdrawn without advance notice, also known as time deposits.

savings accounts

Financial institutions that primarily offer savings accounts and make long-term loans for residential mortgages, also called ―thrifts.‖

savings and loan associations (S&Ls)

financial institutions that primarily offer savings accounts and make long-term loans for residential mortgages, also called ―thrifts.‖

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Define money, its functions, and its characteristics.

Key Terms:



Introduction

 Finance



Money in the Financial System

 Money

o Functions of Money o Characteristics of Money PowerPoint Slides: PPT 15.4

Lecture Outline and Notes: I. Money in the Financial System A. Finance is the study of money, how it’s made, how it’s lost, and how it’s managed by individuals, companies, and governments. B. Money (or currency) is anything generally accepted in exchange for goods and services. 1. Many things have served as money: salt, cattle, and precious metals. a. Most of these materials were limited-supply commodities that had their own value to society. 2. ―IOUs,‖ slips of paper that could be exchanged for a specified supply of the underlying commodity, were developed later.

PPT 15.5

3. Finally, fiat money is paper money not readily convertible to a precious metal, such as gold; it did not gain full acceptance until the 1930s. C. Functions of Money 1. Medium of Exchange a. Money serves as a medium of exchange, making it easier for people to buy and sell goods and services and reducing the need for barter—the trading of one product or service for another of similar value.

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b. Bartering was inefficient because it was not always divisible and can be complicated in multiple-party transactions. 2. Measure of Value a. Money serves as a measure of value or a common standard for the value of all goods and services. 3. Store of Value a. Money acts as a store of value or as a way to maintain the value of accumulated wealth until it is needed to purchase goods or services.

PPT 15.6

b. Unfortunately, the value of stored money is directly dependent on the health of the economy. Inflation and deflation are both problematic for the economy (discussed in more detail later). D. Characteristics of Money 1. Acceptability a. To be effective, money must be readily acceptable as a way to pay for goods and services and settle debts. b. Acceptability is probably the most important characteristic of money: People must believe in and trust the value of what they use as money. 2. Divisibility a. To facilitate exchanges, money must be easily divided into smaller units of value. 3. Portability a. For money to function as a medium of exchange, it must be easily moved and carried. b. Most societies use paper money and metal coins. 4. Stability a. Money must be stable and maintain its declared face value. b. Stability allows people who wish to postpone purchases and save their money to do so without fear that it will decline in value, as during periods of inflation. c. Instability destroys confidence in a nation’s money, and it will ultimately lose acceptability. 15-476

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5. Durability a. Because it is in continuous use, money must be durable in order to maintain stability and acceptability (Table 15.1). PPT 15.7

6. Difficulty to Counterfeit a. Money must be difficult to duplicate illegally in order to maintain stability and acceptability. b. Because modern technology makes it easier to counterfeit paper money, most nations employ special papers and other techniques to thwart counterfeiting.

PPT 15.8

LO 15-2

c. Interestingly, although coins are much harder to counterfeit, it costs more to make pennies and nickels than their face value! (Table 15.2)

Describe various types of money. o Types of Money

Key Terms: 

Checking account



Savings accounts



Money market accounts



Certificates of Deposit (CDs)



Credit cards



Reward cards



Debit card



Cryptocurrency

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PPT 15.9

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E. Types of Money 1. Paper money and coins are the most visible types of money, but there are many others. 2. A checking account (also called a demand deposit) is money stored in an account that can be withdrawn without advance notice.

PPT 15.10

a. One way to withdraw funds is by writing a check, a written order to a financial institution to pay the indicated individual or business the amount specified from funds on deposit. As legal instruments, checks serve as a substitute for currency and are preferred due to their low risk (Figure 15.1). b. A Negotiable Order of Withdrawal (NOW) account is an interest-bearing checking account. 3. Savings accounts, also called time deposits, are funds in an interest-earning account that usually cannot be withdrawn without advance notice and/or have limits on the number of withdrawals per period. They are not usually used for transactions.

PPT 15.11

4. Money market accounts are similar to interest-bearing checking accounts but with more restrictions. a. Generally, in exchange for higher interest rates, the owner of a money market account can write only a limited number of checks each month, and there may be a restriction on the minimum amount of each check. 5. Certificates of deposit are savings accounts that guarantee a depositor a set interest rate but require the funds to be left in the financial institution for a specified period. a. If you withdraw funds early from a CD, you may face a substantial financial penalty.

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PPT 15.12-15.3

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6. Credit cards allow you to promise to pay at a later date by using preapproved lines of credit granted by a bank or finance company. a. They are a popular substitute for cash because of their convenience, easy access, and acceptance around the world. b. Credit cards allow cardholders great flexibility in paying off their purchases. c. Credit cards may be issued by banks, travel and entertainment companies, and retail store chains. d. Credit card interest rates can be very high, and consumer credit card debt is a major cause for concern. Credit cards are one of the most expensive ways to borrow money (although some people choose to pay off their credit card debt monthly). e. The Card Accountability Responsibility and Disclosure (Credit CARD) Act of 2009 limits the ability of card companies to raise interest rates, limits young adults’ access to credit cards, gives people more time to pay off bills, and makes clearer due dates mandatory on statements.

PPT 15.14

7. A debit card looks like a credit card but works like a check; use of a debit card results in a direct, immediate, electronic payment from the cardholder’s checking account to a merchant or third party. 8. Traveler’s checks, money orders, and cashier’s checks are other common forms of ―near money‖ that can be exchanged for cash or products. 9. Credit Card Fraud

PPT 15.15

a. Credit card fraud: More and more computer hackers have managed to steal credit card information and either use the information for internet purchases or make a card exactly the same as the one stolen; losses run into the billions. 10. Cryptocurrency is a digital exchange medium—often called tokens or coins—that uses secure online ledgers enabled by blockchain technology. a. Bitcoin is the most popular, but it has a fluctuating price. b. Cryptocurrencies are not favored by governments because the transactions are difficult to trace, making them useful for illegal transactions.

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LO 15-3

Specify how the Federal Reserve Board manages the money supply and regulates the American banking systems. 

The American Financial System o The Federal Reserve System

Ferrell/Hirt/Ferrell: Business Foundations 13e

Key Terms:  Federal Reserve Board  Monetary policy  Open market operations  Reserve requirement  Discount rate  Credit controls

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II. The American Financial System A. The Federal Reserve System 1. The guardian of the American financial system is the Federal Reserve Board, commonly called ―the Fed,‖ established by Congress in 1913 as an independent government agency responsible for regulating the banking and financial industry. a. The Federal Reserve System is organized into 12 geographical regions (Figure 15.2). b. The Federal Reserve Board is the chief economic policy arm of the United States. 2. The Federal Reserve Board has four major responsibilities: a. To control the money supply through monetary policy. b. To regulate financial institutions. c. To manage regional and national check-clearing procedures.

PPT 15.19

d. To supervise the federal deposit insurance programs of commercial banks belonging to the Federal Reserve System. 3. Monetary Policy

PPT 15.20

a. Monetary policy refers to the Fed’s methods of controlling the amount of money available in the economy (Table 15.3). b. Monetary policy is necessary to balance the supply of and demand for money to minimize economic fluctuations (inflation/deflation).

PPT 15.21

c. The Fed fine-tunes the money supply with four basic tools. 4. Open market operations are the buying and selling of U.S. Treasury bills and other investments in the open market by the Federal Reserve Board. a. This tool is the most commonly employed. b. To expand the supply of money, the Fed buys securities. c. To decrease the supply of money, the Fed sells securities.

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5. The second major tool is the reserve requirement, the percentage of deposits that the Fed requires banks to hold in reserve; these cannot be loaned to businesses or consumers. a. Changes to the reserve requirements will change how much banks will lend. Because the reserve requirement has such a powerful effect on the money supply, the Fed does not change it often. PPT 15.22

6. The third tool is the discount rate, the interest rate the Federal Reserve charges for money it lends to any banking institution to meet reserve requirements (Figure 15.3). a. The Fed is the ―lender of last resort‖ to these institutions. b. When the Fed wants to expand the money supply, it lowers the discount rate; when it wants to decrease the money supply, it raises the discount rate.

PPT 15.23 PPT 15.24

7. The final tool available to the Fed is credit controls—the authority to establish and enforce credit rules for financial institutions and some private investors. 8. Regulatory Functions a. The second responsibility of the Fed is to regulate member banking institutions. b. The Fed establishes and enforces banking rules that affect monetary policy and competition between banks. c. It determines which nonbanking activities (brokerage services, leasing, and insurance) are appropriate and which should be prohibited among banks. d. The Fed can also approve or disapprove mergers between banks and the formation of bank holding companies. e. Surprise annual bank inspections are conducted by examiners. 9. Check Clearing a. The Fed provides national check clearing for almost all checks drawn on a bank in one city and presented for deposit at a bank in a second city. The Fed also clears local checks. b. The Check Clearing for the 21st Century Act (Check 21 Act) allows banks to clear checks electronically by presenting an electronic image of the check. Because of this, checks can often be processed in a day. 10. Depository Insurance a.

The Fed is responsible for supervising the federal insurance funds that protect the deposits of member institutions. 15-482

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Instructor’s Manual—Chapter 15

LO 15-4

Compare and contrast commercial banks, savings and loan associations, credit unions, and mutual savings banks.

Key Terms: 

Commercial banks



Savings and loan associations (S&Ls)



Credit union



Mutual savings banks



Federal Deposit Insurance Corporation (FDIC)



National Credit Union Administration (NCUA)

o Banking Institutions

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B. Banking Institutions 1. Many banks today are hybrids in that they perform two or more functions that were traditionally separated in the banking industry of the past.

PPT 15.26

2. Commercial banks are the largest and oldest of all financial institutions and rely mainly on checking and savings accounts as their major source of funds for loans to businesses and individuals. a. Banks today offer a number of services: consumer loans, credit cards, safe-deposit boxes, trusts, and securities. b. Legislation permits commercial banks to offer insurance and investment banking products as well. This has placed U.S. banks on the same competitive footing as European banks. c. Banks are increasingly merging, even across international borders. The most recent financial crisis and recession accelerated consolidation. d. High-risk banking and financial activities that contributed to the financial crisis caused the government to pass the Dodd-Frank Act. This Act imposed two major regulations on banks: 1) Raised the required capital banks had to hold on their balance sheet. 2) Limited certain kinds of high-risk trading activities.

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3. Savings and loan associations (S&Ls) are financial institutions that primarily offer savings accounts and make long-term loans for residential mortgages. a. S&Ls, also called ―thrifts,‖ have undergone a metamorphosis in recent years after having almost collapsed during the 1980s. b. Today, they compete directly with commercial banks by offering many types of services. c. Many S&Ls have merged with commercial banks.

PPT 15.27

4. Credit unions are financial institutions owned and controlled by their depositors, who usually have a common employer, profession, trade group, or religion. a. At a credit union, a savings account is usually called a share account, while a checking account is usually called a share draft account. b. Credit unions today offer a wide variety of financial services comparable to commercial banks. 5. Mutual savings banks are financial institutions similar to savings and loan associations except that they are owned by their depositors. a. Found mostly in New England, they are becoming more popular in other parts of the country as some S&Ls have converted to mutual savings banks. 6. Insurance for Banking Institutions

PPT 15.28

a. The Federal Deposit Insurance Corporation (FDIC) was created in 1933 to provide an insurance fund that insures individual bank accounts. b. Should a member bank fail, its depositors can recover all of their funds, up to $250,000. c. Savings and loan associations accounts were insured by the Federal Savings and Loan Insurance Corporation (FSLIC) until it became insolvent with the large-scale thrift failures in the 1980s. It has since merged with the FDIC. d. The National Credit Union Administration (NCUA) is an agency that regulates and charters credit unions and insures their deposits.

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Instructor’s Manual—Chapter 15

e. These funds are intended to make people feel more secure about their savings so that they won’t panic and withdraw them during a crisis; their effectiveness seems to have been proven during the many bank failures during the 1980s and 1990s. 1) According to the FDIC, 488 banks failed between 2009 and 2014. While the future may yet bring unfortunate surprises, most depositors go to sleep every night without worrying about the safety of their savings. 2) JPMorgan Chase is the second largest commercial bank in the United States behind Bank of America. LO 15-5

Distinguish among nonbanking institutions such as insurance companies, pension funds, mutual funds, and finance companies. o Nonbanking Institutions o Electronic banking

Key Terms: 

Insurance companies



Pension funds



Mutual fund



Exchange-Traded Funds (ETFs)



Brokerage firms



Investment banker



Finance companies



Electronic funds transfer (EFT)



Automated teller machine (ATM)



Automated clearinghouse



(ACHs)

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C. Nonbanking Institutions 1. Diversified firms: Recently, a number of traditionally nonfinancial firms have moved into the financial field (Table 15.4). a. Caterpillar and General Electric are examples b. At one time, General Electric’s credit subsidiary accounted for 40% of the company’s revenues.

PPT 15.30

2. Insurance companies are businesses that protect their clients against financial losses from certain specified risks in exchange for a fee. 3. Pension funds are managed investment pools set aside by individuals, corporations, unions, and some nonprofit organizations to provide retirement income for members. a. Individual Retirement Accounts (IRAs) are a type of private pension fund set up by individuals to provide for their retirement needs; taxes on the interest earned are deferred until withdrawal upon retirement. b. The Roth IRA is similar to a traditional IRA, but the interest is tax-free upon retirement because investors do not deduct their contributions at the time they are made. c. Most corporations provide some kind of pension plan for their employees. d. Social Security, the largest pension plan, is publicly financed. The federal government collects Social Security funds from payroll taxes paid by both employers and employees. Employers deduct this money from employees’ paychecks.

PPT 15.31

4. Mutual funds pool investors’ funds and invest them in large numbers of well-diversified securities. a. Because of the large numbers of people investing in any one mutual fund, the funds can afford to invest in hundreds or thousands of securities at any one time, minimizing the risks of any single security that does not do well. b. Mutual funds provide professional financial management for people who lack the time and/or expertise to invest in particular securities. c. Money market funds invest in short-term debt securities issued by governments and large corporations.

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5. Exchange-traded funds (ETFs) are similar to mutual funds in that they invest in a pool of assets. 6. Brokerage firms and Investment Banks a. Brokerage firms buy and sell stocks and bonds for their customers and provide other financial services. b. Investment bankers underwrite new issues of securities for corporations, states, and municipalities. 1) The new issue market is called a primary market because the sale of securities is for the first time. After the first sale, the securities trade in the secondary markets by brokers. PPT 15.32

Finance companies are businesses that offer short-term loans at substantially higher rates of interest than banks; they are often a lender of last resort for individuals and businesses with poor credit ratings.

D. Electronic Banking PPT 15.34

PPT 15.35

PPT 15.36

1. Electronic funds transfer (EFT) is the transfer of funds by means of an electronic terminal, telephone, computer, or magnetic tape. The most commonly used EFTs are automated teller machines, automated clearinghouses, and home banking systems. 2. Automated teller machines (ATMs) are the most familiar form of electronic banking and dispense cash, accept deposits, and transfer funds from one account to another (Table 15.5). 3. Automated clearinghouses (ACHs) permit payments such as deposits or withdrawals to be made to and from a bank account by magnetic computer tape. a. ACHs permit direct deposits, now used by many companies and the federal government. b. The advantages of direct deposits for individuals include convenience, safety, and potential interest earnings. c. The advantages for businesses include decreased checkprocessing expenses and increased employee productivity.

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4. Online banking gives customers access to a growing number of financial services a. People can utilize banking services through home computers, laptops, PDAs, and smartphones. b. Increasingly sophisticated transactions can be carried out online. c. Computers and telecommunications technology have revolutionized world commerce. 1) Consumers and small businesses can now make a bewildering array of financial transactions at home or on the go 24 hr a day. 2) Computers and handheld devices have made online banking convenient. However, hackers have stolen millions from banking customers by tricking them into visiting websites and downloading malicious software that gives the hackers access to their passwords.

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LO 15-6

Analyze the challenges ahead for the banking industry.

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Key Terms:

 Future of Banking PPT 15.38

E. Future of Banking 1. Rapid advances in technology are forcing the banking industry to change. 2. More services than ever are available electronically and online. 3. Impact of financial crisis: The promise that banks will get bigger is now uncertain. a. Because the value of bank assets declined dramatically, most large banks had a shrinking capital base. b. To keep interest rates low and stimulate the economy, the Fed bought billions of dollars of mortgages and other financial assets on a monthly basis. c. In reaction to the financial meltdown and severe recession, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act to prevent this type of problem in the future. 4.

PPT 15.39

Shadow banking refers to companies performing banking functions that are not regulated by banking regulators. a. Shadow banking activities are increasing. b. There are also peer-to-peer lenders like Prosper, which matches investors and borrowers. c. Other sources of funding by internet websites such as GoFundMe and Kickstarter that replace loans. d. Shadow Banking refers to companies performing banking functions of some sort that are not regulated by banking regulators.

5. Peer-to-Peer lenders, like Prosper, are companies that match investors and borrowers with loans between $2,000 and $35,000. 6. Other funding by internet websites such as GoFundMe and Kickstarter help people raise funds for things as diverse as health care issues to creative projects in art, film, games, and music.

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LO 15-7

PPT 15.40

Recommend the most appropriate financial institution for a hypothetical small business.

Ferrell/Hirt/Ferrell: Business Foundations 13e

Key Terms:

III.Solve the Dilemma: Seeing the Financial Side of Business UU. Dr. Stephen Hill, a successful optometrist, developed his first saleable product (a truly scratch-resistant and lightweight lens). VV. He decided to invest his life savings and open Optometrics to manufacture and market his invention. WW. Uncertain about the ―financial side‖ of business and the various functions of different financial institutions, Dr. Hill needs help. 1. Aware he will need financial services: a. Checking and savings accounts b. Various short-term investments that can easily/quickly be converted to cash as needs dictate

PPT 15.41

c. Sources of borrowing capacity should the need for shortor long-term loans arise XX.

PPT 15.42

Despite Hill’s research:

1. He is still somewhat unclear about the merits and capacities of each type of financial institution 2. He has turned to you, his 11th patient of the day, for help. YY.

Critical Thinking Questions:

1. List the various types of U.S. financial institutions and the primary function of each. 2. What services of each financial institution is Hill’s new company likely to need? 3. Which single financial institution is likely to be best able to meet Hill’s small company’s needs now? Why? [Answers appear under the End of Chapter Teaching Resources section of this Instructor's Manual.]

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: COVID-19: Saving Makes Cents

When the COVID-19 global pandemic made waves across the globe, nonessential businesses shuttered, events were canceled, travel came to a halt, companies shifted to working from home, and many people lost their jobs. As a result, the general population’s banking habits shifted to saving cash and limiting spending. The uncertain economy brought on the highest level of savings since 1981, hitting a record 33%. Fiscal relief from stimulus payments and unemployment benefits led to an increase in both savings and disposable income. This sharp rise in savings by both consumers and corporations led to the continued growth of the largest banks. Due to solid liquidity levels, banks loaned out billions to small businesses while only having to borrow a small fraction from the Federal Reserve’s Paycheck Protection Program (PPP) Liquidity Facility. 1. Why do you think Americans chose to save their stimulus funds rather than spend them? Many Americans held the money for precautionary reasons. The Federal Deposit Insurance Corporation assured consumers and companies that banks would be safe, adding more protections. This led to banks acting as a refuge for jittery consumers and companies intending to wait out the shutdown. 2.

Why did the rise in savings contribute to the growth of the largest banks?

Individuals and companies deposited their excess funds in the largest banks because they acted as a refuge for jittery consumers and companies intending to wait out the shutdown. There were $3 trillion in deposits in 2020 with the majority going to JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup. Furthermore, the Federal Deposit Insurance Corporation assured consumers and companies that banks would be safe, adding more protections. 3. What are some of the reasons banks chose not to borrow from the Fed’s Paycheck Protection Program? Although PPP loans had a low interest rate of 0.35%, non-interest-bearing accounts made up approximately 30% of all deposits at the top four banks, giving the banks an even cheaper alternative for funding. Additionally, executives in the banking industry have suggested that banks would rather not rely on the Fed and risk giving the appearance of financial trouble.

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Business Disruption: Why Dogecoin Is No Longer a Joke

1. What is cryptocurrency? Cryptocurrency is a digital currency that uses cryptography (writing or solving codes) for security and is not issued by any government. 2. How are cryptocurrencies purchased? Cryptocurrency is backed by a decentralized network of computers that use computing power to keep up with and verify transactions. Using blockchain technology, transfers of funds between parties are validated, coded, and lumped together on a chronological, public ledger. 3. Why are cryptocurrencies such as Dogecoin risky investments? The risks include the following: The lack of a centralized entity makes it vulnerable to illicit activities, such as money laundering and tax evasion, and cryptocurrencies do not have a stable value and are subject to speculation. Insider Ethics and Social Responsibility: The Federal Reserve Leans on Blackrock

1. What type of nonbanking institution is BlackRock? Many Americans held the money for precautionary reasons. The Federal Deposit Insurance Corporation assured consumers and companies that banks would be safe, adding more protections. This led to banks acting as a refuge for jittery consumers and companies intending to wait out the shutdown. 2. Is BlackRock a threat to the broader financial system? Why or why not? Answers will vary, but students need to support their answer. 3.

Why are ETFs attractive to risk-averse investors?

The diversified nature of these funds lowers the risk because the investment is not dependent on a single company like a traditional stock. Combined with low fees, ETFs are popular for risk-averse investors. Technology and the Economy: Digging into the Digital Wallet

1. Do you think digital wallets will revolutionize electronic banking and in-store transactions? Answers will vary, but students need to support their answer, but most students will answer that digital wallets will have a tremendous impact.

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2. How do you think digital wallets will affect traditional banks? Again, answers will vary, but students need to support their answer. Many wallet apps have the added convenience of storing loyalty cards, plane tickets, and event tickets which will probably force traditional banks to respond. 3. What are some of the risks of digital wallets? What can be done to mitigate these risks? Many consumers are concerned about the risk of identity theft, and many businesses do not have the technology to accept these types of payments. Consumers can add an additional layer of protection to use multi- or two-factor authentication on their mobile device.

So You’re Interested in Financial Systems or Banking

Why are internships a good way to try out an industry before going into it as a career? Just because classes in a certain field are interesting, it does not mean that you will enjoy working in that industry. Internships provide hands-on, real-world experience with jobs that you are interested in applying for after graduation. They are a low-stakes way to try on different fields until you find one that fits. Internships also are a great way to network and build up valuable connections before you get out into the working world. They also signal to future employers that you are interested in learning and working hard and are willing to take extra steps to be successful.

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END OF CHAPTER TEACHING RESOURCES Check Your Progress

1. What are the six characteristics of money? Explain how the U.S. dollar has those six characteristics. a. Acceptability—the dollar is acceptable as payment for goods and services and settlement of debts. b. Divisibility—money must be divisible into small units to facilitate exchanges. The dollar is divisible into pennies, nickels, dimes, and quarters. c. Portability—money must be easily transported. The dollar is lightweight and folds easily. d. Durability—dollars last an average of 18 months and can be folded thousands of times. e. Stability—the dollar is reasonably stable. A dollar will buy a dollar’s worth of goods and services today or next week. f. Difficulty of counterfeiting—the dollar is extremely difficult to counterfeit because of the paper and ink used in printing. 2. What is the difference between a credit card and a debit card? Why are credit cards considerably more popular with U.S. consumers? A credit card allows consumers to make purchases and pay for them over time at a specified interest rate. With a debit card, the amount of a purchase is immediately deducted from the consumer’s account if enough funds are available. Credit cards are considerably more popular with U.S. consumers because they allow instant financing of purchases and are generally accepted around the world. Debit cards, however, are beginning to grow in popularity because of their convenience. 3. Discuss the four economic goals the Federal Reserve must try to achieve with its monetary policy. The Fed must promote stable, long-term economic growth, high levels of employment, stable prices, and a balance of international payments. It does this by controlling the money supply, regulating financial institutions, managing regional and national check clearing procedures, and supervising federal deposit insurance of commercial banks belonging to the Federal Reserve System.

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4. Explain how the Federal Reserve uses open market operations to expand and contract the money supply. The open market activities used to expand the money supply involve the Fed buying government securities. More money is placed in circulation because the Fed pays cash for the securities. The Fed contracts the money supply by selling government securities. Money is transferred from the buyers’ accounts into the Federal Reserve account, thus reducing the supply of money. 5. What are the basic differences between commercial banks and savings and loans? Although both institutions offer checking accounts, savings accounts, and make loans, commercial banks loan mainly to individuals and businesses, and savings and loans primarily make mortgage loans. 6. Why do credit unions charge lower rates than commercial banks? Credit unions charge lower rates because they are owned by their members and operated for them. Commercial banks must return a significant return on investment for their shareholders, whereas credit union members, who are the owners, prefer to get their returns in the form of higher interest rates on accounts and lower rates on loans. 7. Why do finance companies charge higher interest rates than commercial banks? Finance companies charge higher rates because they are usually a lender of last resort for customers whose other options have been exhausted. They assume a higher risk level and compensate by charging a higher interest rate. 8. How are mutual funds, money market funds, and pension funds similar? How are they different? Mutual funds, money market funds, and pension funds are similar in that each type of fund pays interest based on the performance of a portfolio of securities. In addition, individual investors do not select the specific securities in which the investment is made. The portfolio is managed for the investor and may include a wide variety of securities. Money market funds, however, focus on investment in short-term securities and function more like specialized checking accounts. Finally, unlike mutual funds and money market funds, pension funds are generally not accessible (without penalty) until the investor retires. 9. What are some of the advantages of electronic funds transfer systems? Advantages of electronic funds transfer include greater security, greater efficiency and convenience, and lower costs in completing financial transactions. 15-496

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Get Involved

1. Survey the banks, savings and loans, and credit unions in your area, and put together a list of interest rates paid on the various types of checking accounts. Find out what, if any, restrictions are in effect for NOW accounts and regular checking accounts. In which type of account and in what institution would you deposit your money? Why? Students’ answers will vary depending upon their locations. 2. Survey the same institutions as above, this time inquiring as to the rates asked for each of their various loans. Where would you prefer to obtain a car loan? A home loan? Why? Students’ answers will vary depending upon their locations.

Build Your Skills: Managing Money

This exercise is designed to have students research (through the Chamber of Commerce, Internet, etc.) available financial services in the local area. This chapter provides the professor with a good opportunity to ask someone from the local financial community to speak to the class about the issues posed in this question. The answers for Questions 1 and 2 are based on chapter material. The answer to Question 3 is not covered in the text but is designed to help students understand that it is never too early to start financial planning for retirement. 1. What kinds of institutions and services can you use to help manage your money? There are a wide variety of banking and nonbanking institutions that can help individuals manage money. Banking institutions include commercial banks, savings and loans, and mutual savings banks. Nonbank institutions include insurance companies, pension funds, mutual funds, brokerage firms, and finance companies. While nonfinancial firms such as General Electric Capital exist, they specialize in financing large businesses rather than individuals. 2. Do you want a full-service financial organization that can take care of your banking, insurance, and investing needs, or do you want to spread your business among individual specialists? Why have you made this choice? Each of the institutions mentioned in the answer to the first question has traditionally specialized in limited products. For example, savings and loans primarily made housing 15-497

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loans, brokerage firms primarily sold securities to the public, and insurance companies sold life, property, and casualty insurance. However, in the past few decades, a consolidation of financial services has been taking place. NationsBank and BankAmerica merged to create Bank of America. Citibank and Travelers merged to create Citigroup, a financial conglomerate that can participate in almost any financial transaction. Merrill Lynch, known only as a brokerage firm by many, can not only buy and sell securities but also sells insurance and provides credit cards, check-writing privileges against money market accounts, pension fund services, and retirement planning. Answers to the question of whether to have many specialized providers or one provider of financial services will vary, of course. Considerations in making such a decision should include cost (which may be lower with the one-stop approach), privacy, time, and the knowledge base of the individual. As evidenced by recent mergers, the trend is to provide full-service, one-stop financial shopping to consumers. 3.

What retirement alternatives do you have?

Student research should include information on Social Security. Discussion could center on whether students predict Social Security alone will provide for their retirement and if not, alternative strategies they may use for retirement planning. Research should also include information about Individual Retirement Accounts (IRA) and comparisons of traditional versus Roth IRAs. Traditional IRAs allow up to $3,000 in annual contributions (depending on income) with the contribution deductible from taxable income. When the income is withdrawn, it is taxed at ordinary tax rates. Roth IRAs allow investors to contribute after-tax dollars into the retirement account. Funds invested in a Roth IRA grow tax-free, and income withdrawn at retirement is not taxable. Clearly, the Roth IRA is more advantageous to young people. Students may also find information about 401 (k) retirement plans. To provide a real-life example, professors may wish to explain the retirement plan utilized by their university.

Solve the Dilemma: Seeing the Financial Side of Business

1. List the various types of U.S. financial institutions and the primary function of each. The various types of U.S. financial institutions include commercial banks, savings and loan associations, credit unions, and mutual savings banks. Commercial banks are financial institutions that hold deposits for individuals and businesses and loan most of the deposited funds to businesses, individuals, and government agencies. Savings and loan associations (S&Ls) are financial institutions that primarily offer savings accounts and make long-term loans for residential mortgages. Credit unions are financial institutions owned and controlled by their depositors. Finally, mutual savings banks are 15-498

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financial institutions similar to savings and loan associations except that they are owned by their depositors. 2. What services of each financial institution is Hill’s new company likely to need? From commercial banks, Hill would need short- and long-term financing, checking accounts, and short-term investment capabilities. From savings and loan associations or mutual savings banks, Hill would need savings account services and perhaps mortgage services if he chooses to use his personal home to finance his business operation. Finally, from a credit union, Hill would need checking and savings account services, access to financing (probably through mortgage), and short-term investment opportunities. 3. Which single financial institution is likely to be best able to meet Hill’s small company’s needs now? Why? Hill’s new company is likely to need the services of a commercial bank. Specifically, it will need services such as short- and long-term financing, corporate (and/or personal) checking accounts, and the availability of short-term investments (money market accounts, certificates of deposit, and so forth). In addition, many commercial banks offer financial consultation to small business owners, a service Hill may find desirable. Credit unions represent another possibility if one is available in his area that provides services for small businesses. These needs may go unmet at savings and loan or mutual savings financial institutions. Build Your Business Plan: Money and the Financial System

Have students estimate the revenues for the first 3 months of operation of the Thai Restaurant. This will force them to think of what the average bill will be for lunch and/or dinner and how many times the tables will turn over for each meal. Students should look for competitor information to help them answer these questions. Review Table 14.4 with them and make sure they understand all that is involved in putting together an income statement. At this point, students should be in the final stages of their written business plan and are beginning to plan and organize their oral presentations. Tell the students they should look at the judges as possible investors for their business. Remind them that they need to capture and hold the audience’s attention in the oral presentation. See for Yourself Case: Taking a Bite Out of Purchasing Power Parity With the Big Mac Index

In 1986, Pam Woodall introduced the Big Mac Index as an illustration of purchasing power parity (PPP), which is the theory that currencies will go up or down in value to keep their purchasing power consistent across countries. The Big Mac Index is based on the theory of PPP that says, in the long run, exchange rates 15-499

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should move toward the rate that would equalize the prices of an identical basket of goods and services in any two countries. Big Mac is used since it is sold in 140 countries. There are numerous limitations including transportation and promotion costs, inflation, and so on. Despite its limitations, the PPP still serves its purpose every year by providing a quick and easy measure of currency values. Users should not rely too heavily on its calculations and should always investigate further. 1. What is purchasing power parity? Purchasing power parity (PPP) is the theory that currencies will go up or down in value to keep their purchasing power consistent across countries. 2. Why is a McDonald’s Big Mac used to create the index? McDonald’s was chosen because it is sold in 140 countries and is familiar to those trying to understand PPP. 3. What are the limitations of the Big Mac Index? The limitations of PPP include the following: the idea that the price of a Big Mac will be dependent on local production, transportation costs, and promotion costs and that there may be price variation based on geographic location (e.g., city versus rural area). Other issues not taken into account in the PPP include government intervention (taxes and tariffs), market competition (monopolies), and inflation. Team Exercise

Mutual funds pool individual investor dollars and invest them in a number of different securities. Students will go to http://finance.yahoo.com and select some top-performing funds using criteria such as sector, style, or strategy. They will assume that their group has $100,000 to invest in mutual funds. Each group will select five funds in which to invest, representing a balanced (varied industries, risk, etc.) portfolio. Students will then defend their selections.

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CONNECT ACTIVITIES The Race to Develop Digital Currency

Learning Objectives: 15-2 Describe various types of money. 15-3 Specify how the Federal Reserve Board manages the money supply and regulates the American banking system. Activity Summary: While paper money and coins are the most visible type of currency, they are insignificant when compared to the value of money kept in savings, checking, and other monetary accounts. As global business and technology continue to expand, we must be aware of the issues and benefits of digital currencies. Students will read a case about digital currency. iSeeIt! Video Case: The Federal Reserve

Learning Objective: 15-3 Specify how the Federal Reserve Board manages the money supply and regulates the American banking system. Activity Summary: This short video describes what the Federal Reserve is and how its activities help regulate the economy. How to Use Activity: After learning about the functions of the Federal Reserve, have students explore the Federal Reserve online at www.federalreserve.gov. Allow students to explore deeper the functions of the Federal Reserve, how it’s structured, and its impact upon their spending—whether they know it or not. Class Discussion: What is the mission of the Federal Reserve? How is the Federal Reserve structured? Why is the Federal Reserve essential to the American economy?

Making Money Work for Molly’s Meal Maker

Learning Objective: 15-2 Describe various types of money. Activity Summary: Students will learn about a business named Molly’s Meal Maker and how she balances the responsibilities of operating a business with her financial future. Students will learn about money and financial systems throughout the case. How to Use Activity: Utilizing the basic concepts about money presented in the video and throughout the chapter, have students create their own personal budget. Students can create a budget on a sheet of paper or utilizing a spreadsheet application like Microsoft Excel or Google Sheets. Reinforce to students the importance of having a budget and responsible spending. 15-501

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Class Discussion: Why is having a budget important? How do you know whether you can afford something? What items do you buy that you consider ―needs?‖ What items do you consider ―wants?‖ How much money should you save? BONUS TEACHING RESOURCES Term Paper or Project Topics

These topics may be assigned as individual or collaborative projects: 1. 2. 3. 4. 5.

History of Banking in the United States Electronic Fund Transfer Systems Security Concerns With Automated Teller Machines (ATMs) A Study of Major Credit Card Companies Social Security: The United States’ Largest Pension Plan

Guest Speaker Suggestions

1. A representative from any one of the following institutions: commercial bank, savings and loan association, credit union, or mutual savings bank who can speak about the activities of that particular institution. 2. An official from the local Social Security Administration office to speak about funding and benefits of Social Security. 3. A representative of a firm providing private pension plans. 4. A representative of a financial network to talk about financial services offered by these firms. 5. A professor specializing in banking and finance to speak about topics pertinent to the chapter.

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Teaching Suggestions

1. Start out by having the class read an article related to banking that you select from The Wall Street Journal, Financial Times, The New York Times, or a similar publication. Have students discuss with the person sitting next to them how this article relates to the chapter content. 2. Use the ―Lecture Outline and Notes‖ to review chapter content. The slides are indicated in the left margin. 3. The ―Supplemental Lecture‖ provides additional material about the Federal Reserve System, and the ―Controversial Issue‖ focuses on some issues involved in the banking crisis. 4. Cover ―Get Involved‖ in class. Also, Exercise 1 would be appropriate for class discussion. 5. Exercise 2, also a survey of banks, savings and loans, and credit unions in your area, could be used as a group project. Different members could survey different institutions and then pool information for a group report.

Chapter 16: Financial Management and Securities Markets SUMMARY LEARNING OBJECTIVES KEY TERMS AND DEFINITIONS CONTENT OUTLINE BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Why Financial Services Are Targeting Women Entrepreneurship in Action: Bird Scooters Take Flight Business Disruption: Willing to Lose: Young Investors Day Trade During the COVID-19 Lockdown Technology and the Economy: Cashing in on New Technologies in Finance So You Want to Work in Financial Management or Securities END OF CHAPTER TEACHING RESOURCES Check Your Progress 16-503

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Get Involved Build Your Skills: Choosing Among Projects Solve the Dilemma: Surviving Rapid Growth Build Your Business Plan: Financial Management and Securities Market See for Yourself Case: How the Dow Jones Industrial Average Works Team Exercise CONNECT ACTIVITIES Financing Splenda Drives Revenues iSeeIt! Video Case: Equity and Debt Financing Hershey Foods: May Melt Your Heart BONUS TEACHING RESOURCES Term Paper or Project Topic Guest Speaker Suggestions Teaching Suggestions

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SUMMARY In this chapter, we look at both short- and long-term financial management. First, we discuss the management of short-term assets, which companies use to generate sales and conduct ordinary day-to-day business operations. Next, we turn our attention to the management of short-term liabilities, the sources of short-term funds used to finance the business. Then, we discuss the management of long-term assets such as plants, equipment, and the use of common stock (equity) and bonds (long-term liability) to finance these long-term corporate assets. Finally, we look at the securities markets, where stocks and bonds are traded.

LEARNING OBJECTIVES LO 16-1

Describe some common methods of managing current assets.

LO 16-2

Identify some sources of short-term financing (current liabilities).

LO 16-3

Summarize the importance of long-term assets and capital budgeting.

LO 16-4

Specify how companies finance their operations and manage fixed assets with long-term liabilities, particularly bonds.

LO 16-5

Explain how corporations can use equity financing by issuing stock through an investment banker.

LO 16-6

Describe the various securities markets in the United States.

LO 16-7

Critique the position of short-term assets and liabilities of a small manufacturer and recommend corrective action.

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KEY TERMS AND DEFINITIONS bonds

Debt instruments that larger companies sell to raise long-term funds.

capital budgeting

The process of analyzing the needs of the business and selecting the assets that will maximize its value.

commercial certificates of deposit (CDs)

Certificates of deposit issued by commercial banks and brokerage companies, available in minimum amounts of $100,000, which may be traded prior to maturity.

commercial paper

A written promise from one company to another to pay a specific amount of money.

dividend yield

The dividend per share divided by the stock price.

eurodollar market

A market for trading U.S. dollars in foreign countries.

factor

A finance company to which businesses sell their accounts receivable—usually for a percentage of the total face value.

floating-rate bonds

Bonds with interest rates that change with current interest rates otherwise available in the economy.

investment banking

The sale of stocks and bonds for corporations.

junk bonds

A special type of high interest rate bond that carries higher inherent risks.

line of credit

An arrangement by which a bank agrees to lend a specified amount of money to the organization upon request.

lockbox

An address, usually a commercial bank, at which a company receives payments in order to speed collections from customers.

long-term (fixed) assets

Production facilities (plants), offices, and equipment—all of which are expected to last for many years.

long-term liabilities

Debts that will be repaid over a number of years, such as longterm loans and bond issues.

marketable securities

Temporary investment of ―extra‖ cash by organizations for up to 1 year in U.S. Treasury bills, certificates of deposit, commercial paper, or Eurodollar loans. 16-506

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over-the-counter (OTC) market

A network of dealers all over the country linked by computers, telephones, and Teletype machines.

payout ratio

The percentage of earnings paid to the stockholders in dividends.

primary market

Payout ratio the market where firms raise financial capital. prime rate

The interest rate that commercial banks charge their best customers (usually large corporations) for short-term loans.

retained earnings

Earnings after expenses and taxes that are reinvested in the assets of the firm and belong to the owners in the form of equity.

secondary markets

Stock exchanges and over-the-counter markets where investors can trade their securities with others.

secured bonds

Bonds that are backed by specific collateral that must be forfeited in the event that the issuing firm defaults.

secured loans

Loans backed by collateral that the bank can claim if the borrowers do not repay them.

securities markets

The mechanism for buying and selling securities.

serial bonds

A sequence of small bond issues of progressively longer maturity.

trade credit

Credit extended by suppliers for the purchase of their goods and services.

transaction balances

Cash kept on hand by a firm to pay normal daily expenses, such as employee wages and bills for supplies and utilities.

Treasury bills (T-bills)

Short-term debt obligations the U.S. government sells to raise money.

unsecured bonds

Debentures or bonds that are not backed by specific collateral.

unsecured loans

Loans backed only by the borrower’s good reputation and previous credit rating.

working capital management

The managing of short-term assets and liabilities.

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Describe some common methods of managing current assets.

Key Terms: 

Working capital management



Introduction



Managing Current Assets and Liabilities



Transaction balances

o Managing Current Assets



Lockbox



Marketable securities



Treasury bills (Tbills)



Commercial certificates of deposit (CDs)



Commercial paper



Eurodollar market

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PowerPoint Slides: PPT 16.4

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Lecture Outline and Notes: I. Managing Current Assets and Liabilities A. Current assets are short-term resources such as cash, investments, accounts receivable, and inventory. B. Current liabilities are short-term debts such as accounts payable, accrued wages and taxes, and short-term bank loans. C. Terms current and short-term assets are often used interchangeably. D. Short-term financial management is sometimes called working capital management because current assets and liabilities continually flow (―work‖) through the organization. E. Managing Current Assets

PPT 16.5

1. The goal of financial managers who focus on current assets and liabilities is to maximize the return to the business. 2. Managing Cash a. Effective cash flow—the movement of money through an organization—is a crucial element facing any financial manager. b. Transaction balances are cash kept on hand by a business to pay normal daily business expenses.

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c. To accelerate the collection of payments from customers, companies may have customers send payments to a lockbox, an address for receiving payments that are collected by the bank and credited to the business’s account. 1) The bank can then start clearing the checks and get the money into the company’s checking account much more quickly than if the payments had been submitted directly to the company. d. Larger firms may use electronic funds transfer to speed up collections and cash flow. e. Companies generally want to collect cash quickly but pay it out slowly. 1) When companies use electronic funds transfers between buyers and suppliers, the speed of collections and disbursements increases to 1 day. 3. Investing Idle Cash. (Table 16.1) PPT 16.6-16.7

a. When cash comes in faster than it is needed to pay bills, companies may invest the ―extra‖ cash for short periods. b. Marketable securities are temporary investments of extra cash for up to 1 year in U.S. Treasury bills, certificates of deposit, commercial paper, or eurodollar loans. c. U.S. Treasury bills (T-bills) are short-term debt obligations of the U.S. government. 1) Issued weekly, these bills carry maturities of between 1 week and 1 year. They are considered risk free because the U.S. government will not default on its debt. d. Commercial certificates of deposit (CDs) are issued by commercial banks and brokerage firms, are available in minimum amounts of $100,000, and may be traded prior to maturity. e. Commercial paper is a written promise from one company to another to pay a specific amount of money. 1) Because commercial paper is backed only by the name and reputation of the issuing company, sales 16-510

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of commercial paper are restricted to only the largest and most financially stable companies. 2) During the recession, nobody wanted to rely on commercial paper, requiring the Fed to take action.

f. The eurodollar market is a market for trading U.S. dollars in foreign countries. 1) Investors have a chance to earn a slightly higher rate of return with just a little more risk than U.S. Treasury bills. 4. Managing Accounts Receivable PPT 16.8

a. Each credit sale represents an account receivable—a payment owed to a business from credit customers. b. Many firms offer discounts on purchases if they pay the invoice early. c. Discounts make cash flow through the firm faster, but they also reduce profitability. d. Profitability of accounts receivable is affected by the type of customer to which a business extends credit.

PPT 16.9

e. Information on company credit ratings is provided by credit bureaus, credit-rating agencies such as Dun & Bradstreet and industry trade groups. 5. Optimizing Inventory a. The object is to minimize the firm’s investment in inventory without experiencing production cutbacks as a result of critical materials shortfalls or lost sales due to insufficient finished goods inventories. b. Optimal inventory levels are determined in part by the method of production.

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c. Radio frequency identification (RFID) tags are becoming a popular way for companies to manage their inventory. d. Because customers may switch to a competitor when their needs are not met, inventory shortages can be as much of a drag on potential profits as too much inventory.

LO 16-2

Identify some sources of short-term financing (current liabilities). o Managing Current Liabilities

Key Terms:  Trade credit  Line of credit  Secured loans  Unsecured loans  Prime rate  Factor

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F. Managing Current Liabilities PPT 16.10

1. Accounts Payable a. Accounts payable is money an organization owes to suppliers for goods and services. b. Trade credit, the most widely used and important source of short-term financing, is credit extended by suppliers for the purchase of their goods and services. 1) Most suppliers offer trade discounts to businesses that pay their bills early. 2) Failure to take such discounts can add up to a substantial loss over the span of a year.

PPT 16.11

2. Bank Loans a. Banks provide both large and small businesses short-term funds in the form of loans or lines of credit. b. A line of credit is an arrangement by which a bank agrees to lend a specified amount of money to the organization upon request— provided that the bank has the required funds to make the loan. c. Secured loans are backed by collateral that the bank can claim if the borrower does not repay the loan. d. Unsecured loans are backed only by the borrower’s good reputation and previous credit rating. e. The principal is the amount of money a business borrows; interest is the percentage of the principal that the bank charges for use of the money it loans. f. The prime rate is the interest rate banks charge their best customers for short-term loans.

PPT 16.13

3. Nonbank Liabilities a. Insurance companies, pension funds, money market funds, and other financial institutions also make short-term loans to businesses. b. Some companies sell their accounts receivable to a finance company called a factor, which gives the selling organizations cash and assumes responsibility for collecting accounts. c. Additional nonbank liabilities that must be efficiently managed to ensure maximum profitability are taxes owed to the government and wages owed to employees. 16-513

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LO 16-3

Summarize the importance of long-term assets and capital budgeting. 

Managing Fixed Assets o Capital Budgeting and Project Selection

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Key Terms:  Long-term (fixed) assets  Capital budgeting

o Assessing Risk o Pricing Long-Term Money

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PPT 16.14

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II. Managing Fixed Assets A. Long-term (fixed) assets are those assets expected to last for many years, such as plants and equipment. 1. Leasing is one approach for companies who do not have the funds to purchase expensive buildings or equipment. a. A capital lease is a long-term contract and shows up on the balance sheet as an asset and a liability. b. An operating lease is a short-term cancelable lease and does not show up on the balance sheet.

PPT 16.15

B. Capital Budgeting and Project Selection 1. Capital budgeting is the process of analyzing the needs of business and selecting the assets that will maximize its value. 2. The capital budget is the amount of money budgeted for investment in such long-term assets. 3. It does not end with the selection, purchase, and use of an asset; all assets and projects must be continually reevaluated to ensure they remain compatible with the firm’s needs. 4. Budgeting is not an exact process, and managers must be flexible when new information is available.

PPT 16.16-16.18

C. Assessing Risk (Figure 16.1) 1. Every investment carries some risk with international investments carrying more risk a. Must consider economic and political climate. b. Risk assessments must include the stability and competitive nature of the marketplace. 1) Pharmaceutical companies face many risks with new projects. They spend millions of dollars developing new drugs without knowing if the drug will pass FDA approval. 2) Dramatic changes in the marketplace are not uncommon.

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2. Long duration projects or assets are riskier. a. The longer a project or asset is expected to last, the greater its potential risk because it is difficult to predict how long equipment will last before it wears out or becomes obsolete. b. Predicting cash flows over a long project is a gamble. PPT 16.19

D. Pricing Long-Term Money 1. There is a limited supply of funds available for investment. a. The returns on any project must cover not only the costs of operating the project but also the interest expenses for the debt used to finance its operation. b. The most efficient and profitable companies can attract the lowest cost funds because they have a reputation for less risk. c. Newer and less prosperous firms must pay higher costs to attract suppliers of funds. d. New companies have a strong motivator to use financial resources wisely because they will, over time, reduce the costs of their funds and increase overall profitability. 2. New firms tend to enter industries with the greatest rewards for success. a. Competition intensifies and drives down profit potential.

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LO 16-4

Specify how companies finance their operations and manage fixed assets with long-term liabilities, particularly bonds. 

Ferrell/Hirt/Ferrell: Business Foundations 13e

Key Terms:  Long-term liabilities

Financing with Long-Term Liabilities

 Bonds

o Bonds: Corporate IOUs

 Unsecured bonds

o Types of Bonds

 Secured bonds  Serial bonds  Floating-rate bonds  Junk bonds PPT 16.21

III. Financing With Long-Term Liabilities A. Two ways of financing to acquire fixed assets include equity financing and debt financing. B. Long-term liabilities are debts that will be repaid over a number of years, such as long-term loans and bond issues. 1. Financing with long-term liabilities is a type of debt financing. 2. Many firms acquire debt by borrowing money from pension funds, mutual funds, or life insurance funds. 3. Companies that rely too heavily on debt can get into difficulty should the economy falter.

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PPT 16.22

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C. Bonds: Corporate IOUs 1. A bond is a debt instrument that a company sells to raise long-term funds. 2. Bonds are issued by corporations; public utilities; nonprofit corporations; and federal, state, and local governments. 3. Most bonds can be transferred from one owner to another in a bond market. 4. The bond contract, or indenture, sets forth all the terms between the bondholders and issuing organizations, including the following: a. The face value—the initial sales price of the bond (Table 16.2). b. The maturity date—bond owner receives the face value of the bond along with the final interest payment. c. The coupon rate—the guaranteed percentage of face value the company will pay to the bond owner every year (interest rate).

PPT 16.23

d. Other important areas such as repayment methods, interest payment dates, procedures to be followed in case of failure to make payments, conditions for early repayment, and any collateral conditions. D. Types of Bonds 1. Unsecured bonds are debentures or bonds not backed up by collateral. 2. Secured bonds are backed by specific collateral that must be forfeited if the issuing firm defaults. 3. Serial bonds, different from secured bonds, are a sequence of small bond issues of progressively longer maturity. 4. Floating-rate bonds do not have fixed interest payments; the interest rate change with current interest rates. 5. A junk bond offers higher rates of return than other bonds but at higher risk.

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LO 16-5

Explain how corporations can use equity financing by issuing stock through an investment banker.

Ferrell/Hirt/Ferrell: Business Foundations 13e

Key Terms:  Retained earnings



Financing With Owners’ Equity

 Dividend yield



Investment Banking

 Payout ratio  Primary market  Secondary market  Investment banking

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PPT 16.24

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IV. Financing With Owners’ Equity A. Owners’ equity is the owners’ investment in an organization. B. Sole proprietors and partners own all or part of their businesses outright. 1. Their equity includes the money and assets they have brought into their ventures. C. Common stock, the single most important source of capital for most new companies, represents ownership in a corporation and gives the stock owners voting rights.

PPT 16.25

1. The par value is the dollar value of a stock printed on the stock certificate. 2. Market value—price at which the common stock is currently trading. 3. The difference between a stock’s par value and its offering price is called capital in excess of par. (See Table 16.3: A Basic Stock Quote.) D. Preferred stock gives owners preference in distribution of the company’s profits but not voting privileges. The primary advantage of owning preferred stock is that it is a safer investment than common stock. E. When a company has profits left over after paying expenses and taxes, it can retain some or all of the earnings to invest in corporate expansion or pay out some of the earnings to stockholders in the form of dividends. 1. Retained earnings are retained and reinvested in the assets of the firm; they belong to the owners in the form of equity. 2. When the board of directors distributes some of a company’s profits to the owners, it issues them cash payments called dividends. 3. The dividend yield is the dividend per share divided by the stock price. 4. Not all companies pay dividends. 5. Common Stock Prices, Earnings, Dividends and Ratios for Selected Companies (Table 16.4)

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PPT 16.26

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V. Investment Banking A. A company that needs more money may be able to obtain financing by issuing stock. 1. When stock is for the first time, it is called a new issue. 2. A company that offers its stock to the public for the very first time is said to be ―going public,‖ and the sale is called an initial public offering.

PPT 16.27

B. New issues are sold directly to the public and to institutions through the primary market, the market where firms raise financial capital. C. Secondary markets are stock exchanges where investors trade their securities with other investors rather than with the company that issued the stock or bonds. D. Investment banking is the sale of stocks and bonds for corporations. 1. Investment bankers help firms to establish prices for their securities as well as to assist in mergers.

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LO 16-6

Describe the various securities markets in the United States. 

The Securities Markets o Stock Markets

Ferrell/Hirt/Ferrell: Business Foundations 13e

Key Terms:  Securities markets  Over-the-counter (OTC) market

o The Over-the-Counter Market o Measuring Market Performance

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PPT 16.28

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VI. The Securities Markets A. Securities markets provide the following: 1. The mechanism for buying and selling securities. 2. Liquidity—the ability to turn securities into cash quickly. 3. Secondary markets permit the trading of previously issued securities. 4. Secondary market trades may take place on organized exchanges or in what is known as over-the-counter markets. B. Stock Markets

PPT 16.29

1. Formerly exchanges were divided into organized exchanges and over-the-counter markets. 2. NYSE and NASDAQ are now publicly traded companies (previously were not-for-profit organizations). a. Both exchanges bought or merged with electronic exchanges for cheaper and faster trading than floor trading. b. NASDAQ was traditionally an electronic market.

PPT 16.30

C. The Over-the-Counter Market 1. The over-the-counter (OTC) market is a network of dealers all over the country linked by computers, telephones, and Teletype machines. a. Mostly consists of penny stocks, other small stocks, and illiquid bank stocks b. NASDAQ is no longer considered an OTC market because it is now classified as an exchange. D. Measuring Market Performance (Figure 16.2)

PPT 16.31

1. There are a variety of averages and indexes available for comparison purposes. a. An index compares current stock prices with those in a specified base period. b. An average is the average of certain stock prices.

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2. Many investors follow the activity of the Dow Jones Industrial Average to see whether the stock market has gone up or down. Thirty companies currently make up the Dow (Table 16.5). 3. Recognizing financial bubbles can be difficult in the enthusiastic atmosphere of rising markets (Table 16.6). a. The most recent recession was partly precipitated by a crash of a housing bubble. PPT 16.32-16.35

1) Before the housing bubble burst in October 2007, the Dow Jones hit an all-time high. 2) The Dow Jones Industrial Average gained 10 times from August 1982 to the beginning of 2000. This was the internet bubble, difficult to see until it bursts. b. The Federal Reserve and the Federal government acted quickly to bail out failing institutions—staving off a potentially worse recession. 4. By February 12, 2020, the Dow Jones Industrial Average hit an all-time record high of 29,569. 5. Six weeks later, the DJIA bottomed at 18,213 for a 38.4% decline, one of the quickest and biggest declines in history. 5. Investors must be well-informed to make sound financial decisions.

LO 16-7

Critique the position of short-term assets and liabilities of a small manufacturer and recommend corrective action.

Key Terms:

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PPT 16.37

VII.

Ferrell/Hirt/Ferrell: Business Foundations 13e

Solve the Dilemma: Surviving Rapid Growth ZZ. Glasspray Corporation is a small firm that makes industrial fiberglass spray equipment. AAA.

Supplies a range of firms:

1. Small mom-and-pop boatmakers 2. Major industrial giants (overseas and here at home) BBB. Just about every molded fiberglass resin product is constructed with the help of one or more of the company’s machines.

PPT 16.38

PPT 16.39

CCC. Has repeatedly run into trouble with regard to the management of its current assets and liabilities as a result of extremely rapid and consistent increases in year-to-year sales. DDD. President and founder Stephen T. Rose lamented the sad state of his firm’s working capital position, ―Our current assets aren’t and our current liabilities are.‖ To the top officers, he shouted, ―We can’t afford any more increases in sales! We’re selling our way into bankruptcy! Frankly, our working capital doesn’t.‖ EEE.

Critical Thinking Questions:

1. Normally, rapidly increasing sales is a good thing. What seems to be the problem here? 2. What are the important components of a firm’s working capital? Include both current assets and current liabilities. 3. What are some management techniques applied to current liabilities that Glasspray might use to improve its working capital position? [Answers appear under the End of Chapter Teaching Resources section of this Instructor's Manual.]

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BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS Enter the World of Business: Why Financial Services Are Targeting Women

Women control an estimated $20 trillion of the world’s wealth, but also roughly two-thirds of women in major countries are said to be the primary financial decision makers over household assets. Women seem to have different priorities than men when it comes to investing in companies and feel less confident in their financial knowledge. Learning programs that educate and inform women about wealth management and investment topics to facilitate comfort and risk-taking, companies with social priorities, and investment systems or advisors who accommodate their preference for long-term investing and wealth-building are key to attracting and retaining women investors. 1. Why do fewer women invest than men? Women are as financially literate as men, but they are 44% less likely to consider themselves knowledgeable about finances, indicating a lack of confidence. This is partially fueled by a lack of exposure to investing. 2. Why are women investors a massive opportunity for wealth management firms? A recent study found that roughly 28% of women, compared to 44% of men, own individual stocks. This suggests that there is a significant opportunity for wealth management firms to capture this segment of investors. Not only do women control an estimated $20 trillion of the world’s wealth, but also roughly two-thirds of women in major countries are said to be the primary financial decision makers over household assets. 3. How can wealth management firms attract women investors? Financial advisors who allow an inclusive environment that welcomes questions and concerns as well as companies who demonstrate transparency and concern for society are more likely to earn the trust of women investors. Learning programs that educate and inform women about wealth management and investment topics to facilitate comfort and risk-taking, companies with social priorities, and investment systems or advisors who accommodate their preference for long-term investing and wealth-building are key to attracting and retaining women investors

Consider Entrepreneurship in Action: Bird Scooters Take Flight

1. How is Bird financing the business? Bird secured funding through a number of well-known private equity groups like Sequoia Capital, Index Ventures, and Greycroft. 16-526

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2. Name some of Bird’s current assets. What liabilities does it have? The liabilities would include accounts payable to the ―chargers‖ who gather the scooters and return them to service, possible accounts payable to Segway for the scooters. 3. One challenge Bird has faced involves safety issues because the scooters do not come with helmets. How do you think this issue might affect future funding for Bird? Answers will vary, but students need to support their answer. Business Disruption: Willing to Lose: Young Investors Day Trade During the COVID-19 Lockdown

1. Why do you think that Robinhood is so popular with young investors? Answers will vary, but most students will mention the fact that the trades are commission free and permit fractional share purchases. 2. What do professional and institutional investors think about Robinhood investors? Institutional investors have suggested that while the generation of Robinhood investors might have short-term success, buying these types of companies on the hope that they will survive is not the way to build. Given the amount of ―real-time‖ data available to professionals, it is very hard for amateurs to be successful in the long term. 3. What is the ―Odd Lot Theory‖ and does it make any sense to you? The Odd Lot Theory goes that small investors are prone to making emotional decisions and they buy at market tops and sell at market bottoms. Answers will vary as to whether it makes sense to an individual student. Technology and the Economy: Cashing in on New Technologies in Finance

1. In what type of markets does Fidelity operate? Fidelity is in asset management, mutual funds, it was the first financial firm to offer electronic funds transfer for money market funds. Fidelity has been investigating cuttingedge digital technology like virtual reality, cryptocurrency, and blockchain. 2. Describe how Fidelity has been a pioneer in applying new technology to finance. The company was the first financial firm to offer electronic funds transfer for money market funds. Its innovation center, the Fidelity Center for Applied Technology, spends $2.5 billion on technology innovation a year.

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3. Do you believe cryptocurrency and blockchain technology will be the next major stage in financial securities trading and investments? Why or why not? Answers will vary, but students need to support their answer. So You Want to Work in Financial Management or Securities

What has led to the downturn of the financial industry and therefore the decrease of finance jobs? A lot of these job cuts came in response to the subprime lending fallout and subsequent bank failures such as Bear Stearns, which alone lost around 7,000 employees. All of these people had to look for new jobs in new organizations, increasing the competitive level in a lot of different employment areas. For young jobseekers with relatively little experience, this may result in a great deal of frustration. On the other hand, the job market for finance majors will have to recover and rebuild with new employees. Uncertainty results in hiring freezes and layoffs but leaves firms lean and ready to grow when the cycle turns around, resulting in hiring from the bottom up.

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END OF CHAPTER TEACHING RESOURCES Check Your Progress

1. Define working capital management. Working capital management is the management of current assets and current liabilities. The term is used because the current accounts continually flow through the firm and are said to be working. 2. How can a company speed up cash flow? Why should it? Cash flow may be speeded up through the following: a. Lockboxes—with lockboxes, funds are sent to a local post office box and cleared through a local bank. The funds are available more quickly than if they were sent directly to the company. b. Electronic funds transfer—computer and communications lines are used to transfer funds immediately, thus speeding up cash flow. 3. Describe the various types of marketable securities. a. Treasury bills are short-term debt obligations of the federal government. They are issued weekly, may have a maturity of up to 1 year, and are perhaps the safest investment. b. Commercial certificates of deposit are issued by commercial banks and brokerage companies, are available in minimum amounts of $100,000, and may be traded prior to maturity. c. Commercial paper is a written promise from one company to another to pay a specific amount of money. d. Some companies invest extra cash in international markets such as the eurodollar market, a market for trading U.S. dollars in foreign countries. 4. What does it mean to have a line of credit at a bank? A line of credit is an agreement between a bank and a business in which the bank agrees to loan a specified amount to the business whenever it needs the money, as long as the bank has funds to lend.

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5. What are fixed assets? Why is assessing risk important in capital budgeting? Fixed, or long term, assets are expected to last for many years. Examples include production facilities (plants), offices, and equipment. Assessing risk is important in capital budgeting because it allows for more informed project investment decision making. That is, decision makers can use estimated returns on investments and the likelihood that the returns will be realized when deciding between competing capital expenditures. For example, a high return project may have such high risk that realizing a return is unlikely, making the investment undesirable. Without risk assessment, the project’s high return makes the project appear desirable. 6. How can a company finance fixed assets? Two common choices of financing fixed assets exist for organizations wishing to make capital expenditures. The organization can attract new owners (equity financing), and/or it can take on long-term liabilities (debt financing). Debt financing includes long-term bank loans and corporate bond issues. 7. What are bonds and what do companies do with them? A bond is a debt security that a company sells to raise long-term funds. The bond is a certificate, much like an IOU, that represents the company’s debt to the bondholder. Organizations issue bonds to finance long-term capital investment projects. 8. How can companies use equity to finance their operations and long-term growth? Companies may sell partial ownership (equity) of the organization in the form of stocks to individuals wishing to invest. Each share represents a portion of the organization’s total equity. By expanding its equity base through stock issues, an organization is able to raise funds for long-term capital expenditures. 9. What are the functions of securities markets? Securities markets provide the mechanism for buying and selling securities for both corporations and governments. The securities markets provide liquidity to investors through the secondary market. 10. What were some of the principal causes of the most recent recession? There are a number of different causes for the most recent recession. One of the early causes was a housing bubble that burst in 2007. Subprime mortgages and dubious lending practices were largely blamed for that occurrence. Complicated financial tools like derivatives and unethical accounting practices allowed firms to take excessive risks and become overleveraged with debt without investors noticing. While the recession was the 16-530

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worst since the Great Depression, many experts believe it could have been even worse if the federal government had not taken swift action to bail out troubled organizations and to prop up the economy while it recovered.

Get Involved

1. Using your local newspaper or The Wall Street Journal, find the current rates of interest on the following marketable securities. If you were a financial manager for a large corporation, which would you invest extra cash in? Which would you invest in if you worked for a small business? a. Three-month T-bills b. Six-month T-bills c. Commercial certificates of deposit d. Commercial paper e. Eurodollar deposits f. Money market deposits Students’ answers will depend upon when they conduct this research. 2. Select five of the Dow Jones Industrials from Table 16.5 in the textbook. Look up their earnings, dividends, and prices for the past 5 years. What kind of picture is presented by this information? Which stocks would you like to have owned over this past period? Do you think the next 5 years will present a similar picture? Students’ answers will vary depending upon the companies they choose. More than likely, because these companies experienced a recession in the past 5 years, causing many companies’ stock prices and earnings to decrease, the next 5 years will likely not be similar.

Build Your Skills: Choosing Among Projects

This series of questions is designed to get students to examine the factors that influence risk, return, and the expenditure of money on a capital budgeting project. Questions 1 and 3 examine risk, Question 2 examines cost, and Questions 4 and 5 examine the ability to diversify risk by taking on more than one project. It is clear that there is risk involved in finding oil. Is the probability of finding oil high or low? There is a cost factor that creates a 16-531

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risk-return trade-off. Can High Octane find oil cheaply or not, and how much oil can be found per dollar of expenditure? Obviously, students will be unable to perform specific calculations, and there will be differences of opinion. Another factor is how much revenue High Octane keeps and how much it has to share with partners. Time represents another risk. How long will High Octane have to wait to get oil out of the ground? The faster the oil is out of the ground, the faster drilling/exploration expenses can be recovered. There is also political risk and currency risk with the Brazilian and Russian projects. Students should be reminded that these risks are inherent in emerging economies. 1. Working in groups, rank the six projects from lowest risk to highest risk. The professor should not be too concerned about the actual ranking because there is not enough data given to rank in a quantitative sense. Rankings will vary based on assumptions the students make. One possible answer (lowest to highest risk) is: Project 3—The oil is already there and being produced. This has the highest probability of producing oil in the least amount of time. Project 5—The oil is in the ground, and an 80% chance of finding more oil in adjacent tracts has a very high probability, and thus, low risk. Project 4—The pipeline already exists, and the oil would get to the refinery at least one year earlier than oil from the Gulf of Mexico. Project 1—The petroleum engineers say there is a high probability of finding oil in the Sanchez field given that the Valdez field is producing in commercial quantities. It will take about 4 years to get the oil to refineries once the oil is discovered. If it takes 2 years and pipelines have to be built, the expense of this project is probably higher than the Alaska project. Project 2—The Brazilian project is more risky because the infrastructure has to be built. There is not as high a probability of finding oil as in the first four projects, and the time to get the oil out of the jungle could be 5 or 6 years. In addition, the Brazilian government wants a fee plus a share of the output. Unless High Octane finds a big field, the risk/return trade-off is higher than the other four countries. Because this drilling would occur in a new area in a foreign country, there is also some political risk. Project 6—The Russian government is quite unstable, and drilling conditions in Siberia are worse than Alaska. The Siberian government has no money to help build the infrastructure. High Octane has to bear all the risk, and Siberia wants 2% of the production. Even though these fields may be the largest in the world, the probability of a return on investment is not as high as with the other projects. 16-532

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2. Given the information provided, do the best you can to rank the projects from lowest cost to highest cost. Ranked lowest to highest cost: Projects 3 and 5 would have the lowest costs. Some students may argue that Project 5 could have the lowest cost. Project 4 would have lower costs than Project 1 because the pipeline and infrastructure already exist. Project 1 involves building a pipeline and gathering station in the Gulf of Mexico. Deepwater drilling is also more expensive than land-based drilling. Project 2 involves building an infrastructure of pipelines, pumping stations, and roads in the jungle. Getting material and supplies into the Brazilian jungle would increase costs, as would housing and feeding the drilling crew. Project 6 would be high-cost because all of the infrastructure would have to be built, and the freezing Siberian conditions would make the cost of the infrastructure more expensive than that of Brazil. Some students may argue that costs would be lower in Brazil and Russia because of the currency exchange rates. Unfortunately, this would only apply to wages because almost all the drilling equipment and infrastructure would probably be imported, and the transportation expense might negate the wage advantage. 3. What political considerations might affect your project choice? The fact that Russia (Project 6) has had an unstable government and only a limited history of capitalism is certainly a political consideration. Brazil (Project 2) has had unstable governments and foreign exchange problems, but it is a democracy with capitalism. There is the risk of political unrest in the Middle East, and Saudi Arabia (Project 3) is located in that volatile region of the world. There are even political risks in the United States (Projects 1, 4, and 5), but probably the environmental issues of drilling in the Alaskan wilderness and the potential pollution from oil spills from deepwater drilling would be greater considerations. 4. If you could choose one project, which would it be and why? This question is difficult to answer without knowing project costs and capital availability. Most students will probably pick the lowest cost, lowest risk projects—3 or 5— depending upon their estimate of costs and potential probabilities of finding oil. Some 16-533

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may prefer Project 3 over 5 because they feel that the quantity of oil in Saudi Arabian fields will be greater than that of the stripper wells in West Texas. 5. If you could choose three projects, which ones would you choose? In making this decision, consider which projects might be highly correlated to High Octane Oil’s existing production and which ones might diversify the company’s production on a geographical basis. Clearly, the first four projects are highly correlated to High Octane’s existing production capabilities, and Projects 5 and 6 (Brazil and Russia) are not. If the firm wants to diversify the geographical location of its oil resources, it might consider either Russia or Brazil. If High Octane wants to diversify its oil output, it should consider taking Brazil and either of the other two projects but avoid Russia. High Octane would certainly have to consider the costs and expected revenue of each project before actually making the decision.

Solve the Dilemma: Surviving Rapid Growth

1. Normally, rapidly increasing sales are a good thing. What seems to be the problem here? A rule of thumb in finance is to always match short- and long-run investments with shortand long-term financing, respectively. Organizations experiencing a temporary surge in sales may use short-term loans to finance the increased sales (added costs from overtime, extra raw materials, and so forth). However, short-term funds come at a premium, which is why they should be used only for short-run investments (such as a temporary increase in sales). If sales are expected to increase from year to year (and assuming the firm is already operating at or near capacity), operation expansion is the best alternative—a long-run investment that is best financed through long-term loans. The main problem with Glasspray is that each year it finances the increased sales with short-term financing (excessive current liabilities). Over time, this method of capitalizing the organization has produced an undesirable capital structure—excessive current liabilities relative to current assets. 2. What are the important components of a firm’s working capital? Include both current assets and current liabilities? The current assets associated with working capital include cash, investments, accounts receivable, and inventory. The current liabilities associated with working capital include accounts payable, accrued salaries, accrued taxes, and short-term bank loans. 16-534

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3. What are some management techniques applied to current liabilities that Glasspray might use to improve its working capital position? Students’ answers may vary, but each should involve reducing current liabilities. For example, Glasspray could begin by replacing some of the short-term debt with long-term financing or equity (the debt used to finance the increased sales), and it could take advantage of any trade credit its suppliers offer. Build Your Business Plan: Financial Management and Securities Market

An approach to this chapter would be for students to assume that business is an initial success (oh, if wishes were horses, all beggars would ride!). Involve the students in a discussion of what they should do with their money. Should they reinvest it in the business? Pay off new equipment early? Try to impress on them that many businesses are seasonal or may experience declining profits during an economic decline, so they need to be prepared for it. Those who fail to plan, plan to fail! See for Yourself Case: How the Dow Jones Industrial Average Works

The Dow Jones Industrial Average, also known as the Dow, is one of the most watched stock indexes in the world. It is a price-weighted average made up of companies including Apple, Boeing, Coca-Cola, Johnson & Johnson, and Walt Disney. Many investors follow the activity of the Dow Jones Industrial Average to gauge whether the stock market as a whole has gone up or down. 1. What is the Dow Jones Industrial Average? The Dow is made up of 30 companies that are traded on the New York Stock Exchange and the Nasdaq Stock Market from nine different sectors: industrials, financials, consumer services, technology, health care, consumer goods, energy, basic materials, and telecommunications. These companies, which are some of the most actively traded stocks, are selected because they are considered to be market leaders in their sectors. 2. Why was Salesforce added to the Dow Jones Industrial Average? Salesforce, a cloud-based software company, replaced ExxonMobil, a gas company, which had been a member of the Dow for nearly 100 years. 3. Why does the group of companies that make up the Dow Jones Industrial Average change? Since the Dow is used to measure the country’s financial well-being, the index must change as needed to reflect the market. Additionally, if a particular stock is 16-535

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underperforming compared to the overall economy, it could be removed from the index. As the market changes, so does the Dow Jones Industrial Average. Team Exercise

Students will compare and contrast financing with long-term liabilities, such as bonds versus financing with owner’s equity, typically retained earnings, common stock, and preferred stock. They will then form groups and suggest a good mix of long-term liabilities and owner’s equity for a new firm that makes wind turbines for generating alternative energy and would like to grow quickly.

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CONNECT ACTIVITIES Financing Splenda Drives Revenues

Learning Objective: 16-3 Summarize the importance of long-term assets and capital budgeting. Activity Summary: This activity is important because one of the most important jobs performed by the financial manager is to decide what fixed assets, projects, and investments will earn profits for the firm beyond the costs necessary to fund them. The process of analyzing the needs of the business and selecting the assets that will maximize its value is called capital budgeting. But capital budgeting does not end with the selection and purchase of a particular piece of land, equipment, or major investment. All assets and projects must be continually reevaluated to ensure their compatibility with the organization's needs. Students will demonstrate understanding of capital budgeting through Splenda’s entry and growth in the food sweetener market. How to Use Activity: Have the students discuss the evolution of Splenda and the financial plans for Splenda’s growth. Also focus on the steps in successful capital budgeting. Class Discussion: How would you describe impact of capital budgeting on Splenda’s market expansion? Analysts attribute Splenda’s success to an intelligent, slow-growth approach in both financing and marketing. Have the students give specific financing examples that the company employed. iSeeIt! Video Case: Equity and Debt Financing

Learning Objective: 16-5 Explain how corporations can use equity financing by issuing stock through an investment banker. Activity Summary: This short video describes how a business could raise additional funds by either borrowing money (debt), selling ownership in the company (equity), or using a combination of both. How to Use Activity: Extend this activity by creating a personal connection—connecting debt financing to a student’s life through the understanding of purchasing an automobile. Create a link between the forms of debt financing from the business environment to a major life purchase. (Note to Professor: A cross-curricular connection can be generated by having students factiously role-play the purchasing of a car through the use of tracking a down payment, a loan, interest, and more through spreadsheet software.) Class Discussion: How would you describe debt and equity? What are the positive and negative effects of borrowing money? 16-537

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Hershey Foods: May Melt Your Heart

Learning Objective: 16-5: Explain how corporations can use equity financing by issuing stock through an investment banker. Activity Summary: Students will grasp the concept of long-term financing and owner investment relations in a public corporation. How to Use Activity: Given that Hershey is a publicly traded company, locate their latest financial statements and walk through the concepts presented in this chapter while referencing the actual financial statements from Hershey. In addition, deconstruct Hershey’s stock and associated variables by explaining concepts such as market capitalization, dividend, P/E ratio, and so on. Class Discussion: What do each of the aspects on Hershey’s financial statement mean? What is the story behind Hershey’s stock price and its trajectory? Would you buy or sell HSY? Why?

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BONUS TEACHING RESOURCES Term Paper or Project Topics

These topics may be assigned as individual or collaborative projects: 1. 2. 3. 4.

The Importance of Electronic Funds Transfer for Businesses The Eurodollar Market Functions of the Corporate Financial Manager Investing in U.S. Treasury Bills

Guest Speaker Suggestions

1. A financial manager of a local company to speak about financial management of the firm. 2. A representative of a firm dealing in marketable securities, such as U.S. Treasury bills. 3. A banking official to discuss commercial certificates of deposits. 4. A stockbroker or investment banker to discuss different aspects of stocks and bonds.

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Teaching Suggestions

1. The ―Get Involved‖ exercises at the end of the chapter would make a good out-of-class assignment. As an alternative for Exercise #1, the instructor may bring copies of The Wall Street Journal to class and have teams determine the rates of interest as a collaborative endeavor. 2. Assemble students into teams so they can work on the Team Exercise at the end of the chapter. 3. Present a lecture using the ―Lecture Outline and Notes‖ with slides to reinforce major points. 4. Have students take the Chapter 16 Online Quiz and then discuss their answers.

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