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Describe an interesting business (interesting to you) using the terminology from Chapters 1 through 8.

There is a sample write-up in the Course Information module. Please DO NOT copy the sample.

Please highlight your selected terms in bold (I need to know which terms you have chosen for discussion).  You should properly use and explain how your selected terms apply to the business.  I think students find this easier if they describe a local business, or a business they want to start, as opposed to writing about a big corporation.

The write-up should be typed, be at least 500 words long, and use at least eight terms from the book. A good method is this: 1-select a business term, 2-tell me the meaning and importance of the term, and, finally, 3-tell me how the term applies to the operation or vision of the business.  If you use this method of describing a term, you will have a couple sentences around each selected term, and you will not have any trouble getting to 500+ words.

Chapter 4

Demanding Ethical and Socially Responsible Behavior

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

1

Learning Objectives

LO 4-1 Explain why obeying the law is only the first step in behaving ethically.

LO 4-2 Ask the three questions you need to answer when faced with a potentially unethical action.

LO 4-3 Describe management’s role in setting ethical standards.

LO 4-4 Distinguish between compliance-based and integrity-based ethics codes, and list the six steps in setting up a corporate ethics code.

LO 4-5 Define corporate social responsibility and compare corporations’ responsibilities to various stakeholders.

LO 4-6 Analyze the role of U.S. businesses in influencing ethical behavior and social responsibility in global markets.

©McGraw-Hill Education.

2

Ethics Is More than Legality 1 of 2

LO 4-1

Life after Scandal

Scandals have shaken the real estate, mortgage, and banking industries.

How do we restore trust in the free market system?

Punish those who have broken the law.

Make accounting records more transparent.

Consider what is ethical, not just what is legal.

Ethical Standards are Fundamental

Ethics — Standards of moral behavior; that is, behavior accepted by society as right versus wrong.

Few Americans have moral absolutes.

©McGraw-Hill Education.

3

Ethics Is More than Legality 2 of 2

LO 4-1

Basic Moral Values

Right:

Integrity

Respect for human life

Self-control

Honesty

Courage

Self-sacrifice

Wrong:

Cheating

Cowardice

Cruelty

©McGraw-Hill Education.

4

Ethics Begins with Each of Us

LO 4-2

Plagiarizing from online materials is the most common form of cheating in schools today.

Studies found a strong relationship between academic dishonesty and dishonesty at work.

When facing ethical dilemmas, ask yourself these questions:

Is my proposed action legal?

Is it balanced?

How will it make me feel about myself?

©McGraw-Hill Education.

5

Managing Businesses Ethically and Responsibly

LO 4-3

Ethics Start at the Top

Managers can help instill corporate values in employees.

Trust between workers and managers must be based on fairness, honesty, openness, and moral integrity.

Overly ambitious goals and incentives can create an environment in which unethical actions can occur

©McGraw-Hill Education.

6

Setting Corporate Ethical Standards 1 of 3

LO 4-4

An increasing number of companies have adopted written codes of ethics.

Compliance-based ethics code

Emphasize preventing unlawful behavior by increasing control and by penalizing wrongdoers.

Integrity-based ethics code

Define the organization’s guiding values, create an environment that supports ethically sound behavior, and stress a shared accountability among employees.

©McGraw-Hill Education.

7

Figure 4.2 Overview of the Hershey Company’s Code of Ethics

LO 4-4

Jump to long description in appendix

Hershey’s Kiss photo: © Richard Watkins/Alamy

©McGraw-Hill Education.

8

Figure 4.3 Strategies for Ethics Management

LO 4-4

Blank Features of compliance-based ethics codes Features of integrity-based ethics codes
Ideal Conform to outside standards (laws and regulations) Conform to outside standards (laws and regulations) and chosen internal standards
Objective Avoid criminal misconduct Enable responsible employee conduct
Leaders Lawyers Managers with aid of lawyers and others
Methods Education, reduced employee discretion, controls, penalties Education, leadership, accountability, decision processes, controls, and penalties

©McGraw-Hill Education.

9

Setting Corporate Ethical Standards 2 of 3

LO 4-4

How to improve U.S. business ethics

Top management must adopt and unconditionally support an explicit corporate code of conduct.

Employees must understand that senior management expects all employees to act ethically.

Managers and others must be trained to consider the ethical implications of all business decisions.

©McGraw-Hill Education.

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Setting Corporate Ethical Standards 3 of 3

LO 4-4

How to improve U.S. business ethics continued

An ethics office must be set up with which employees can communicate anonymously. Whistleblowers — Insiders who report illegal or unethical behavior.

Involve outsiders such as suppliers, subcontractors, distributors and customers.

The ethics code must be enforced.

©McGraw-Hill Education.

11

Corporate Social Responsibility 1 of 9

LO 4-5

Corporate social responsibility (CSR) — A business’s concern for the welfare of society.

CSR is based on a commitment to integrity, fairness, and respect.

CSR proponents argue that businesses owe their existence to the societies they serve and cannot exist in societies that fail.

©McGraw-Hill Education.

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Corporate Social Responsibility 2 of 9

LO 4-5

Corporate philanthropy — Includes charitable donations.

Corporate social initiatives — Include enhanced forms of corporate philanthropy directly related to the company’s competencies.

Corporate responsibility — Includes everything from hiring minority workers to making safe products.

Corporate policy — The position a firm takes on social and political issues.

©McGraw-Hill Education.

13

Corporate Social Responsibility 3 of 9

LO 4-5

Positive Impacts of Companies

Xerox offers a Social Service Leave program.

More and more companies are encouraging employees to volunteer while on company time.

The majority of MBA students surveyed reported they would take a lower salary to work for a socially responsible company.

©McGraw-Hill Education.

14

Corporate Social Responsibility 4 of 9

LO 4-5

Responsibility to Customers

President Kennedy’s basic rights of consumers

The right to safety

The right to be informed

The right to choose

The right to be heard

©McGraw-Hill Education.

15

Corporate Social Responsibility 5 of 9

LO 4-5

Responsibility to Customers continued

How do customers know about companies’ social efforts?

The primary use of social media is to communicate CSR efforts.

Social media allows companies to reach a broad, diverse group and connect directly to them.

Now more than ever, it’s important for companies to live up to their expectations.

©McGraw-Hill Education.

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Corporate Social Responsibility 6 of 9

LO 4-5

Responsibility to Investors

Insider trading — An unethical activity in which insiders use private company information to further their own fortunes or those of their family and friends.

Unethical behavior does financial damage to a company and investors are cheated.

Responsibility to Employees

Create jobs and provide a chance for upward mobility.

Treat employees with respect.

Offer salaries and benefits that help employees reach their personal goals.

©McGraw-Hill Education.

17

Corporate Social Responsibility 7 of 9

LO 4-5

Responsibility to Employees continued

Employee fraud costs U.S. businesses about 5% of annual revenue.

Disgruntled workers relieve frustration by:

Blaming mistakes on others

Not accepting responsibility

Manipulating budgets and expenses

Making commitments they intend to ignore

Hoarding resources

Doing the minimum

Making results look better than they are

©McGraw-Hill Education.

18

Corporate Social Responsibility 8 of 9

LO 4-5

Responsibility to Society and the Environment

Over one-third of working Americans receive their salaries from nonprofits who are dependent on funding from others.

The green movement emerged as concern about climate change increased.

Many companies are trying to minimize their carbon footprints—the amount of carbon released during an item’s production, distribution, consumption, and disposal.

Environmental efforts may increase costs, but can offer good opportunities.

The emerging renewable-energy and energy-efficiency industries account for 9 million U.S. jobs.

By 2030, as many as 40 million “green” jobs will be created.

©McGraw-Hill Education.

19

Corporate Social Responsibility 9 of 9

LO 4-5

Social Auditing

Social audit — A systematic evaluation of an organization’s progress toward implementing socially responsible and responsive programs.

Five types of watchdogs

Socially conscious investors

Socially conscious research organizations

Environmentalists

Union officials

Customers

©McGraw-Hill Education.

20

International Ethics and Social Responsibility

LO 4-6

Many businesses want socially responsible behavior from their international suppliers.

In the 1970s, the Foreign Corrupt Practices Act criminalized the act of paying foreign businesses or government leaders in order to get business.

Partners in the Organization of American States signed the Inter-American Convention Against Corruption.

©McGraw-Hill Education.

21

Appendix of Long Image Descriptions

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

22

Appendix 1 Figure 4.2 Overview of the Hershey Company’s Code of Ethics

Code of Ethics

We have each made a commitment to operate ethically and to lead with integrity. This commitment is embedded in the Hershey values. Our Code of Ethical Business Conduct (“Code”) shows us how to uphold this commitment as we interact with the various groups that have a stake in our Company’s success.

Our Commitment To Consumers: We maintain the trust consumers place in our brands, providing the best products on the market and adhering to honest marketing practices.

Our Commitment To The Marketplace: We deal fairly with our business partners, competitors and suppliers, acting ethically and upholding the law in everything we do.

Our Commitment To Stockholders: We act honestly and transparently at all times, maintaining the trust our stockholders have placed in us.

Our Commitment To The Global Community: We comply with all global trade laws, protecting our natural resources and supporting the communities where we live, work and do business.

Return to original slide

©McGraw-Hill Education.

©McGraw-Hill Education.

23

Chapter 6

Entrepreneurship and Starting a Small Business

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

1

Learning Objectives

LO 6-1 Explain why people take the risks of entrepreneurship; list the attributes of successful entrepreneurs; and describe entrepreneurial teams, intrapreneurs, and home- and web-based businesses.

LO 6-2 Discuss the importance of small business to the American economy and summarize the major causes of small-business failure.

LO 6-3 Summarize ways to learn about how small businesses operate.

LO 6-4 Analyze what it takes to start and run a small business.

LO 6-5 Outline the advantages and disadvantages small businesses have in entering global markets.

©McGraw-Hill Education.

2

The Job-Creating Power of Entrepreneurs in the United States

Entrepreneurship — Accepting the risk of starting and running a business.

Notable Entrepreneurs

French immigrant Élruthère Irènèe du Pont de Nemours started Du Pont in 1802.

David McConnell borrowed $500 from a friend to start Avon.

George Eastman started Kodak with a $3,000 investment in 1880.

Jeff Bezos started Amazon.com with investments from his family and friends.

©McGraw-Hill Education.

3

Why People Take the Entrepreneurial Challenge 1 of 9

Reasons to Take the Entrepreneurial Risk

Opportunity

Profit

Independence

Challenge

What Does It Take to be an Entrepreneur?

Self-directed and self-nurturing

Action-oriented

Highly energetic

Tolerant of uncertainty

LO 6-1

©McGraw-Hill Education.

4

Why People Take the Entrepreneurial Challenge 2 of 9

LO 6-1

Turning Your Passions and Problems into Opportunities

An idea is a good opportunity if:

It fills customers’ needs.

You have the skills and resources to start a business.

You can sell the product or service at a reasonable price and still profit.

You can get your product or service to customers before the window of opportunity closes.

You can keep the business going.

©McGraw-Hill Education.

5

Why People Take the Entrepreneurial Challenge 3 of 9

LO 6-1

Entrepreneurial Teams

Entrepreneurial team — A group of experienced people from different areas of business who join to form a managerial team with the skills to develop, make, and market a new product.

An entrepreneurial team (Steve Jobs, Steve Wozniak, and Mike Markkula) was key to Apple’s success.

©McGraw-Hill Education.

6

Why People Take the Entrepreneurial Challenge 4 of 9

LO 6-1

Entrepreneurship within Firms

Intrapreneurs — Creative people who work as entrepreneurs within corporations.

Intrapreneurs use a company’s existing resources to launch new products for the company.

©McGraw-Hill Education.

7

Why People Take the Entrepreneurial Challenge 5 of 9

LO 6-1

Micropreneurs and Home-Based Businesses

Micropreneurs — Entrepreneurs willing to accept the risk of starting and managing a business that remains small, lets them do the work they want to do, and offers them a balanced lifestyle.

About half of U.S. micropreneurs are home-based business owners—writers, consultants, video producers, architects, bookkeepers, etc.

Nearly 60 percent of home-based micropreneurs are men.

©McGraw-Hill Education.

8

Why People Take the Entrepreneurial Challenge 6 of 9

LO 6-1

Micropreneurs and Home-Based Businesses continued

Computer technology has leveled the playing field.

Corporate downsizing has led many to venture on their own.

Social attitudes have changed.

New tax laws have loosened restrictions on deducting expenses for home offices.

©McGraw-Hill Education.

9

Why People Take the Entrepreneurial Challenge 7 of 9

LO 6-1

Micropreneurs and Home-Based Businesses continued

Challenges of working at home:

Getting new customers is difficult.

Managing your time requires self-discipline.

Work and family tasks are sometimes not separated.

Government ordinances may restrict your business.

Homeowner’s insurance may not cover business-related claims.

©McGraw-Hill Education.

10

Why People Take the Entrepreneurial Challenge 8 of 9

LO 6-1

Online Businesses

Online sales reached over $381 billion in 2016, about 8 percent of all retail sales.

Forrester Research predicts online sales to reach $500 billion by 2020.

©McGraw-Hill Education.

11

Why People Take the Entrepreneurial Challenge 9 of 9

LO 6-1

Encouraging Entrepreneurship: What Government Can Do

Immigration Act passed in 1990 created a category of “investor visas” that encourage entrepreneurs to come to the U.S.

Enterprise zones — Specific geographic areas to which governments try to attract private business investment by offering lower taxes and other government support.

Incubators — Centers that offer new businesses low-cost offices with basic business services.

©McGraw-Hill Education.

12

Getting Started in Small Business 1 of 3

LO 6-2

Small versus Big Business

Small business — A business that is independently owned and operated, is not dominant in its field of operation, and meets certain standards of size (set by the Small Business Administration) in terms of employees or annual receipts.

Businesses are “small” in relation to other businesses in their industries.

©McGraw-Hill Education.

13

Getting Started in Small Business 2 of 3

LO 6-2

Small versus Big Business continued

Small business statistics:

There are 28 million small businesses in the U.S.

Of all nonfarm businesses in the U.S., almost 97% are considered small.

Small businesses account for over 50% of the GDP.

Nearly 600,000 businesses are started every year.

Small businesses have generated 65% of new jobs since 1995.

Small businesses employ about half of all private-sector employees.

About 80% of U.S. workers’ first jobs were in small businesses.

©McGraw-Hill Education.

14

Getting Started in Small Business 3 of 3

LO 6-2

Importance of Small Businesses

More personal customer service

Ability to respond quickly to opportunities

Small-Business Success and Failure

Business failures are lower than the reports because:

Owner closing a business to start another is reported as a “failure.”

Changing forms of ownership is reported as a “failure.”

Retirement is reported as a “failure.”

©McGraw-Hill Education.

15

Figure 6.3 Causes of Small-Business Failure

LO 6-2

©McGraw-Hill Education.

16

Figure 6.4 Situations for Small-Business Success

LO 6-2

©McGraw-Hill Education.

17

Learning about Small-Business Operations

LO 6-3

Learn from Others

Investigate your local colleges for classes on small business and entrepreneurship.

Talk to and work for successful local entrepreneurs.

Get Some Experience

Gain three years experience in the field.

Start a part-time small business.

Take Over a Successful Firm

Serve as an apprentice and eventually take over once the owner steps down.

©McGraw-Hill Education.

18

Managing a Small Business 1 of 13

LO 6-4

Major Business Functions

Planning

Financing

Knowing customers

Managing employees

Keeping records

©McGraw-Hill Education.

19

Managing a Small Business 2 of 13

LO 6-4

Planning Your Business

Business plan — A detailed written statement that describes the nature of the business, the target market, the advantages the business will have in relation to competition, and the resources and qualifications of the owner(s).

A business plan forces potential owners to be specific about what they will offer.

A business plan is mandatory for talking with bankers or investors.

©McGraw-Hill Education.

20

Managing a Small Business 3 of 13

LO 6-4

Planning Your Business continued

Writing a business plan

A good plan takes a long time to prepare.

A good executive summary catches interest and tempts potential investors to read on.

Getting the plan into the right hands is almost as important as getting the right information in it.

©McGraw-Hill Education.

21

Managing a Small Business 4 of 13

LO 6-4

Financing Your Small Business

Sources of capital:

Personal savings

Family

Business associates

Banks and finance institutions

Government agencies

Angel investors

Venture capitalists — Individuals or companies that invest in new businesses in exchange for partial ownership of those businesses.

©McGraw-Hill Education.

22

Managing a Small Business 5 of 13

LO 6-4

Financing Your Small Business continued

Community development financial institutions

CDFIs are playing a big role in the economic recovery.

Only 1% of loans were not paid back in the last 30 years!

CDFIs provide business counseling as well as loans.

©McGraw-Hill Education.

23

Managing a Small Business 6 of 13

LO 6-4

The Small Business Administration (SBA)

Small Business Administration (SBA) — A U.S. government agency that advises and assists small businesses by providing management training and financial advice and loans.

SBA started a microloan program in 1991 that provides very small loans to small-business owners.

The program judges worthiness based on the borrowers’ integrity and soundness of their business ideas.

©McGraw-Hill Education.

24

Managing a Small Business 7 of 13

LO 6-4

The Small Business Administration (SBA) continued

Small Business Investment Company (SBIC) — A program through which private investment companies licensed by the SBA lend money to small businesses.

An SBIC must have a minimum of $5 million in capital and can borrow up to $2 from the SBA for each $1 of capital it has.

SBICs are able to identify a business’s trouble spots early, giving entrepreneurs advice, and in some cases rescheduling loan payments.

©McGraw-Hill Education.

25

Managing a Small Business 8 of 13

LO 6-4

The Small Business Administration (SBA) continued

Small Business Development Centers (SBDC) are funded jointly by the federal government and individual states.

SBDCs are able to evaluate the feasibility of your idea, develop your business plan, and complete your funding application—for no charge.

©McGraw-Hill Education.

26

Figure 6.5 Types of SBA Financial Assistance

LO 6-4

The SBA may provide the following types of financial assistance:

Guaranteed loans

Microloans

Export Express

Community Adjustment and Investment Program (CAIP)

Pollution control loans

504 certified development company (CDC) loans

CAPLine loans

©McGraw-Hill Education.

27

Managing a Small Business 9 of 13

LO 6-4

Knowing Your Customers

Market — People with unsatisfied wants and needs who have both resources and willingness to buy.

Set out to fill the market’s needs by offering top quality and great service at a fair price.

One of the great advantages of small businesses is the ability to know the market and quickly adapt to market needs.

Managing Your Employees

Hiring, training, and motivating employees is critical.

Employees of small companies are often more satisfied with their jobs because they feel challenged and respected.

Entrepreneurs best serve themselves and the business if they recruit and groom employees for management positions.

©McGraw-Hill Education.

28

Managing a Small Business 10 of 13

LO 6-4

Keeping Records

A good accountant can help in:

Deciding whether to buy or lease equipment

Deciding whether to own or rent a building

Tax planning

Financial forecasting

Choosing sources of financing

Writing requests for funds

©McGraw-Hill Education.

29

Managing a Small Business 11 of 13

LO 6-4

Looking for Help

Owners need outside consulting advice early in the process.

Small and medium-sized firms cannot afford to hire experts as employees.

A competent lawyer can help with:

Leases

Contracts

Partnership agreements

Protection against liabilities

©McGraw-Hill Education.

30

Managing a Small Business 12 of 13

LO 6-4

Looking for Help continued

Marketing decisions need to be made long before introducing a product or opening a store.

A marketing research study can help you determine:

Where to locate

Whom to select as your target market

What is an effective strategy for reaching the market

©McGraw-Hill Education.

31

Managing a Small Business 13 of 13

LO 6-4

Looking for Help continued

A commercial loan officer can help:

Design an acceptable business plan

Give financial advice

Lend money

An insurance agent can help you know:

Risks associated with the business

How to cover risks with insurance

How to prevent risks with safety devices

Service Corps of Retired Executives (SCORE)

More than 11,000 volunteers from industry, trade associations, and education who counsel small business at no cost.

©McGraw-Hill Education.

32

Going Global: Small-Business Prospects

LO 6-5

Small and medium-sized businesses accounted for 99 percent of recent export growth.

Advantages of global trade for small businesses:

Overseas buyers enjoy dealing with individuals.

Small companies can usually begin shipping much faster.

They provide a wide variety of suppliers.

They can give more personal service and attention.

©McGraw-Hill Education.

33

Appendix of Long Image Descriptions

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

34

Appendix 1 Figure 6.3 Causes of Small-Business Failure

The following are some of the causes of small-business failure:

Plunging in without first testing the waters on a small scale.

Underpricing or overpricing goods or services.

Underestimating how much time it will take to build a market.

Starting with too little capital.

Starting with too much capital and being careless in its use.

Going into business with little or no experience and without first learning something about the industry or market.

Borrowing money without planning just how and when to pay it back.

Attempting to do too much business with too little capital.

Not allowing for setbacks and unexpected expenses.

Buying too much on credit.

Extending credit too freely.

Expanding credit too rapidly.

Failing to keep complete, accurate records, so that the owners drift into trouble without realizing it.

Carrying habits of personal extravagance into the business.

Not understanding business cycles.

Forgetting about taxes, insurance, and other costs of doing business.

Mistaking the freedom of being in business for oneself for the liberty to work or not, according to whim.

Return to original slide

©McGraw-Hill Education.

©McGraw-Hill Education.

35

Appendix 2 Figure 6.4 Situations for Small-Business Success

The following factors increase the chances of small-business success:

The customer requires a lot of personal attention, as in a salon.

The product is not easily made by mass-production techniques (e.g., custom-tailored clothes or custom auto-body work).

Sales are not large enough to appeal to a large firm (e.g., a novelty shop).

The neighborhood is not attractive because of crime or poverty. This provides a unique opportunity for small grocery stores and laundries.

A large business sells a franchise operation to local buyers. (Don’t forget franchising as an excellent way to enter the world of small business.)

The owner pays attention to new competitors.

The business is in a growth industry (e.g., computer services or web design).

Return to original slide

©McGraw-Hill Education.

©McGraw-Hill Education.

36

Chapter 2

Understanding Economics and How It Affects Business

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

1

Learning Objectives

LO 2-1 Explain basic economics.

LO 2-2 Explain what capitalism is and how free markets work.

LO 2-3 Compare socialism and communism.

LO 2-4 Analyze the trend toward mixed economies.

LO 2-5 Describe the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle.

LO 2-6 Contrast fiscal policy and monetary policy, and explain how each affects the economy.

©McGraw-Hill Education.

2

How Economic Conditions Affect Businesses 1 of 7

LO 2-1

What Is Economics?

Economics — The study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals.

Macroeconomics — The part of economics study that looks at the operation of a nation’s economy as a whole.

Microeconomics — The part of economics study that looks at the behavior of people and organizations in particular markets.

©McGraw-Hill Education.

How Economic Conditions Affect Businesses 2 of 7

LO 2-1

What Is Economics? continued

Resource development — The study of how to increase resources and to create conditions that will make better use of those resources.

Examples of ways to increase resources

New energy sources

New ways of growing foods

New ways of creating goods and services

©McGraw-Hill Education.

4

How Economic Conditions Affect Businesses 3 of 7

LO 2-1

The Secret to Creating a Wealthy Economy

Thomas Malthus and the dismal science

Malthus believed that if the rich had most of the wealth and the poor had most of the population, resources would run out.

This belief led the writer Thomas Carlyle to call economics “the dismal science.”

Latest world statistics show population growing more slowly than expected.

©McGraw-Hill Education.

How Economic Conditions Affect Businesses 4 of 7

LO 2-1

The Secret to Creating a Wealthy Economy continued

Population as a resource

Contrary to Malthus, some macroeconomists believe a large population can be a resource.

An educated population is highly valuable.

Business owners provide jobs and economic growth for their employees and communities as well as for themselves.

©McGraw-Hill Education.

How Economic Conditions Affect Businesses 5 of 7

LO 2-1

Adam Smith and the Creation of Wealth

Smith believed that:

Freedom was vital to any economy’s survival.

Freedom to own land or property and the right to keep the profits of a business is essential.

People will work hard if they believe they will be rewarded.

©McGraw-Hill Education.

How Economic Conditions Affect Businesses 6 of 7

LO 2-1

How Businesses Benefit the Community

Invisible hand theory

As people improve their own situation in life, they help the economy prosper through the production of goods, services and ideas.

Invisible hand — A phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all.

©McGraw-Hill Education.

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How Economic Conditions Affect Businesses 7 of 7

LO 2-1

How Businesses Benefit the Community continued

Understanding the invisible hand theory

A farmer earns money by selling his crops.

To earn more, the farmer hires workers to produce more crops.

When the farmer produces more, there is plenty of food for the community.

The farmer helped his employees and his community while helping himself.

©McGraw-Hill Education.

9

Understanding Free-Market Capitalism 1 of 8

LO 2-2

Capitalism — An economic system in which all or most of the factors of production and distribution are privately owned and operated for profit.

Countries with capitalist systems:

United States

England

Australia

Canada

©McGraw-Hill Education.

10

Understanding Free-Market Capitalism 2 of 8

LO 2-2

State capitalism — A combination of freer markets and some government control.

China has experienced rapid growth using state capitalism.

©McGraw-Hill Education.

11

Understanding Free-Market Capitalism 3 of 8

LO 2-2

Capitalism’s Four Basic Rights

The right to own private property

The right to own a business and keep all that business’s profits

The right to freedom of competition

The right to freedom of choice

©McGraw-Hill Education.

Understanding Free-Market Capitalism 4 of 8

LO 2-2

Roosevelt’s Four Additional Freedoms

Freedom of speech and expression

Freedom to worship in your own way

Freedom from want

Freedom from fear

©McGraw-Hill Education.

13

Understanding Free-Market Capitalism 5 of 8

LO 2-2

How Free Markets Work

Free market — Decisions about what and how much to produce are made by the market.

Consumers send signals about what they like and how they like it.

Price tells companies how much of a product they should produce.

If something is wanted but hard to get, the price will rise until more products are available.

How Prices Are Determined

A seller may want to sell shirts for $50, but only a few people may buy them at that price.

If the seller lowers the price, quantity demanded increases.

©McGraw-Hill Education.

14

Understanding Free-Market Capitalism 6 of 8

LO 2-2

Supply — The quantity of products that manufacturers or owners are willing to sell at different prices at a specific time.

Demand — The quantity of products that people are willing to buy at different prices at a specific time.

Market price (equilibrium point) – The price determined by supply and demand.

©McGraw-Hill Education.

15

Figure 2.1 The Supply Curve at Various Prices

LO 2-2

©McGraw-Hill Education.

16

Figure 2.2 The Demand Curve at Various Prices

LO 2-2

©McGraw-Hill Education.

17

Figure 2.3 The Equilibrium Point

LO 2-2

©McGraw-Hill Education.

18

Understanding Free-Market Capitalism 7 of 8

LO 2-2

Competition within Free Markets

Perfect Competition

Monopolistic Competition

Oligopoly

Monopoly

©McGraw-Hill Education.

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Understanding Free-Market Capitalism 8 of 8

LO 2-2

Benefits and Limitations of Free Markets

Benefits:

It allows for open competition among companies.

It provides opportunities for poor people to work their way out of poverty.

Limitations:

People may start to let greed drive them.

©McGraw-Hill Education.

Understanding Socialism 1 of 3

LO 2-3

Socialism — An economic system based on the premise that some, if not most, basic businesses should be owned by the government so that profits can be more evenly distributed among the people.

Entrepreneurs run smaller businesses.

Citizens are highly taxed.

Government is more involved in protecting the environment and the poor.

©McGraw-Hill Education.

21

Understanding Socialism 2 of 3

LO 2-3

The Benefits of Socialism

Social equality

Free education

Free health care

Free child care

Longer vacations

Shorter work weeks

Generous sick leave

©McGraw-Hill Education.

22

Understanding Socialism 3 of 3

LO 2-3

The Negative Consequences of Socialism

Few incentives for businesspeople to take risks.

Brain drain — The loss of the best and brightest people to other countries.

Fewer inventions and less innovation because the reward is not as great as in capitalistic countries.

©McGraw-Hill Education.

Understanding Communism

LO 2-3

Communism — An economic and political system in which the government makes almost all economic decisions and owns almost all the major factors of production.

Prices don’t reflect demand, which may lead to shortages of items, including food and clothing.

Most communist countries today suffer severe economic depression.

©McGraw-Hill Education.

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The Trend Toward Mixed Economies 1 of 2

LO 2-4

Two Major Economic Systems

Free-market economies — Economic systems in which the market largely determines what goods and services get produced, who gets them, and how the economy grows.

Command economies — Economic systems in which the government largely decides what goods and services will be produced, who will get them, and how the economy will grow.

©McGraw-Hill Education.

The Trend Toward Mixed Economies 2 of 2

LO 2-4

Neither free-market nor command economies have created sound economic conditions.

Communist governments are disappearing.

Socialist governments are cutting back on social programs, lowering taxes, and moving toward capitalism.

Capitalist countries are increasing social programs and moving more toward socialism.

Mixed economies — Economic systems in which some allocation of resources is made by the market and some by the government.

©McGraw-Hill Education.

Understanding the U.S. Economic System 1 of 9

LO 2-5

Key Economic Indicators

Gross domestic product (GDP) — The total value of final goods and services produced in a country in a given year.

As long as a company is within a country’s border, their numbers go into the country’s GDP (even if they are foreign-owned).

When the GDP changes, businesses feel the effect.

Gross output (GO) — A measure of total sales volume at all stages of production.

©McGraw-Hill Education.

27

Understanding the U.S. Economic System 2 of 9

LO 2-5

Key Economic Indicators continued

Unemployment rate — The number of civilians at least 16 years old who are unemployed and tried to find a job within the prior four weeks.

Four Types of Unemployment

Frictional

Structural

Cyclical

Seasonal

©McGraw-Hill Education.

28

Figure 2.5 U.S. Unemployment Rate 1989–2017

LO 2-5

©McGraw-Hill Education.

Figure 2.6 Four Types of Unemployment

LO 2-5

Structural unemployment

Cyclical unemployment

Seasonal unemployment

Frictional unemployment

©McGraw-Hill Education.

30

Understanding the U.S. Economic System 3 of 9

LO 2-5

Key Economic Indicators continued

Inflation and price indexes

Inflation — A general rise in the prices of goods and services over time.

Disinflation — A situation in which price increases are slowing (the inflation rate is declining).

Deflation — A situation in which prices are declining.

Stagflation — A situation when the economy is slowing but prices are going up anyhow.

©McGraw-Hill Education.

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Understanding the U.S. Economic System 4 of 9

LO 2-5

Key Economic Indicators continued

Inflation and price indexes continued

Consumer price index (CPI) — Monthly statistics that measure the pace of inflation or deflation.

Core inflation — CPI minus food and energy costs.

Producer Price Index (PPI) — An index that measures the change in prices at the wholesale level.

©McGraw-Hill Education.

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Understanding the U.S. Economic System 5 of 9

LO 2-5

Productivity in the United States

Productivity in the U.S. has risen due to the technological advances that have made production faster and easier.

High productivity through computers and robots can lead to high unemployment.

Productivity in the Service Sector

New technology adds to the quality of the services provided, but not to the worker’s output.

A new form of measurement needs to be created to account for the quality as well as the quantity of output.

©McGraw-Hill Education.

Understanding the U.S. Economic System 6 of 9

LO 2-5

The Business Cycle

Business cycles — The periodic rises and falls that occur in economies over time.

Four phases of long-term business cycles:

Economic Boom

Recession — Two or more consecutive quarters of decline in the GDP.

Depression — A severe recession, usually accompanied by deflation.

Recovery — When the economy stabilizes and starts to grow, eventually leading to an economic boom.

©McGraw-Hill Education.

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Understanding the U.S. Economic System 7 of 9

LO 2-6

Stabilizing the Economy through Fiscal Policy

Fiscal policy — The federal government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending.

Tools of fiscal policy:

Taxation

Government spending

©McGraw-Hill Education.

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Understanding the U.S. Economic System 8 of 9

LO 2-6

Stabilizing the Economy through Fiscal Policy continued

National deficit — The amount of money the federal government spends beyond what it collects in taxes for a given fiscal year.

National debt — The sum of government deficits over time.

National surplus — When the government takes in more revenue than it spends.

©McGraw-Hill Education.

Understanding the U.S. Economic System 9 of 9

LO 2-6

Using Monetary Policy to Keep the Economy Growing

Monetary policy — The management of the money supply and interest rates by the Federal Reserve Bank.

The Fed’s most visible role is raising and lowering of interest rates.

When the economy is booming, the Fed tends to raise interest rates.

When the economy is in a recession, the Fed tends to decrease the interest rates.

©McGraw-Hill Education.

37

Appendix of Long Image Descriptions

©McGraw-Hill Education.

38

Appendix 1 Figure 2.1 The Supply Curve at Various Prices

The graph shows the relationship between the price of T-shirts and the quantity supplied. An upward curving line, labeled supply curve, indicates that as the price of T-shirts rises, the quantity also rises.

Return to original slide

©McGraw-Hill Education.

©McGraw-Hill Education.

39

Appendix 2 Figure 2.2 The Demand Curve at Various Prices

The graph shows the relationship between the price of T-shirts and the quantity demanded. A downward curving line on the chart, labeled demand curve, indicates that as the price of T-shirts decreases, the quantity demanded increases.

Return to original slide

©McGraw-Hill Education.

©McGraw-Hill Education.

40

Appendix 3 Figure 2.3 The Equilibrium Point

The graph shows the relationship between the price of T-shirts and the quantity of T-shirts. A downward-sloping demand curve and an upward-sloping supply curve are shown. The point at which these two curves intersect is labeled as the equilibrium point. Here, it shown at a price of 15 dollars and a quantity of 25.

Return to original slide

©McGraw-Hill Education.

©McGraw-Hill Education.

41

Appendix 4 Figure 2.5 U.S. Unemployment Rate 1989–2017

In 1989, unemployment was at approximately 5.5 percent. It rose to a peak of nearly 8 percent around 1992. It then dropped to a low of just below 4 percent in 2000. It then rose again to just over 6 percent in 2003, before dropping to just below 5 percent in 2006 and 2007. Unemployment then spiked to a high of about 10 percent in 2009. Since then, it has dropped to about 4.75 percent in 2017.

Return to original slide

©McGraw-Hill Education.

©McGraw-Hill Education.

42

Chapter 1

Taking Risks and Making Profits within the Dynamic Business Environment

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

1

Learning Objectives

LO 1-1 Describe the relationship between profit and risk, and show how businesses and nonprofit organizations can raise the standard of living for all.

LO 1-2 Explain how entrepreneurship and the other factors of production contribute to the creation of wealth.

LO 1-3 Analyze the effects of the economic environment and taxes on businesses.

LO 1-4 Describe the effects of technology on businesses.

LO 1-5 Demonstrate how businesses can meet and beat competition.

LO 1-6 Analyze the social changes affecting businesses.

LO 1-7 Identify what businesses must do to meet global challenges, including war and terrorism.

LO 1-8 Review how past trends are being repeated in the present and what those trends mean for tomorrow’s college graduates.

©McGraw-Hill Education.

2

Business and Wealth Building 1 of 7

LO 1-1

Business — Any activity that seeks to provide goods and services to others while operating at a profit.

Goods — Tangible products such as computers, food, clothing, cars, and appliances.

Services — Intangible products (that can’t be held in your hand) such as education, health care, insurance, recreation, and travel.

©McGraw-Hill Education.

3

Business and Wealth Building 2 of 7

LO 1-1

Successfully filling a market need means you could make money for yourself.

Entrepreneur — A person who risks time and money to start and manage a business.

©McGraw-Hill Education.

4

Business and Wealth Building 3 of 7

LO 1-1

Revenues, Profits, and Losses

Revenue — The total amount of money a business takes in during a given period by selling goods and services.

Profit — The amount of money a business earns above and beyond what it spends for salaries and other expenses.

Loss — When a business’s expenses are more than its revenues.

©McGraw-Hill Education.

5

Business and Wealth Building 4 of 7

LO 1-1

Matching Risk with Profit

Risk — The chance an entrepreneur takes of losing time and money on a business that may not prove profitable.

Not all enterprises make the same amount of profit.

Businesses take risks, but with big risks could come big profits.

©McGraw-Hill Education.

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Business and Wealth Building 5 of 7

LO 1-1

Standard of Living and Quality of Life

Standard of living — The amount of goods and services people can buy with the money they have.

The United States has one of the highest standards of living in the world.

Workers in other countries may make more money, but prices for products are higher.

Quality of life — The general well-being of a society in terms of its political freedom, natural environment, education, health care, safety, amount of leisure, and rewards that add to the satisfaction and joy that other goods and services provide.

High quality of life requires combined efforts of businesses, nonprofits, and government agencies.

©McGraw-Hill Education.

7

Business and Wealth Building 6 of 7

LO 1-1

Responding to the Various Business Stakeholders

Stakeholders — All the people who stand to gain or lose by the policies and activities of a business and whose concerns the business needs to address.

A primary challenge is to recognize and respond to the needs of stakeholders.

Outsourcing — Contracting with other companies (often in other countries) to do some of the functions of a firm, like production or accounting.

Many foreign companies are opening offices and factories in the United States, which is called insourcing.

©McGraw-Hill Education.

8

Figure 1.1 A Business and Its Stakeholders

LO 1-1

Source: John Mackey and Raj Sisodia, Conscious Capitalism (Boston, MA: Harvard Business Review Press, 2013).

Jump to long description in appendix

©McGraw-Hill Education.

9

Business and Wealth Building 7 of 7

LO 1-1

Using Business Principles in Nonprofit Organizations

Nonprofit organization — An organization whose goals do not include making a personal profit for its owners or organizers.

Nonprofit organizations use financial gains to meet social or educational goals.

©McGraw-Hill Education.

10

The Importance of Entrepreneurs to the Creation of Wealth 1 of 2

LO 1-2

The Positives to Being an Entrepreneur

The freedom to succeed

Make your own decisions

Possible wealth

The Negatives to Being an Entrepreneur

The freedom to fail

No paid vacations

No health insurance

©McGraw-Hill Education.

11

The Importance of Entrepreneurs to the Creation of Wealth 2 of 2

LO 1-2

The Five Factors of Production

Factors of production — The resources used to create wealth.

The five factors:

Land (or natural resources)

Labor (workers)

Capital

Entrepreneurship

Knowledge

What makes rich countries rich today is entrepreneurship and knowledge.

©McGraw-Hill Education.

12

Figure 1.2 The Five Factors of Production

LO 1-2

Source: Drucker Institute, druckerinstitute.com, April 2017.

©McGraw-Hill Education.

13

The Business Environment 1 of 8

LO 1-2

Business environment — The surrounding factors that either help or hinder the development of businesses.

Economic and legal environment

Technological environment

Competitive environment

Social environment

Global business environment

©McGraw-Hill Education.

14

Figure 1.3 Today’s Dynamic Business Environment

LO 1-2

©McGraw-Hill Education.

15

The Business Environment 2 of 8

LO 1-3

The Economic and Legal Environment

Government can promote entrepreneurship by:

Allowing private ownership of businesses

Minimizing interference with the free exchange of goods and services

Passing laws that enable businesspeople to write enforceable contracts

Establishing a currency that’s tradable in world markets

Minimizing corruption

©McGraw-Hill Education.

16

The Business Environment 3 of 8

LO 1-4

The Technological Environment

Technology — Everything from phones to computers and the various software programs that make business processes more effective, efficient, and productive.

How Technology Benefits Workers and You

Effectiveness — Producing the desired result.

Efficiency — Producing goods and services using the least amount of resources.

Productivity — The amount of output you generate given the amount of input (e.g., hours worked).

©McGraw-Hill Education.

17

The Business Environment 4 of 8

LO 1-4

The Technological Environment continued

The Growth of E-Commerce

E-commerce — The buying and selling of goods over the Internet.

Business-to-consumer (B2C)

Business-to-business (B2B)

Using Technology to Be Responsive to Customers

Database — An electronic storage file for information.

Identity theft — The obtaining of individuals’ personal information, such as Social Security and credit card numbers, for illegal purposes.

©McGraw-Hill Education.

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The Business Environment 5 of 8

LO 1-5

The Competitive Environment

Customers want good quality products at low prices with great customer service.

Because business is more customer-driven, some managers give frontline employees more decision-making power.

Empowerment — Giving frontline workers the responsibility, authority, freedom, training, and equipment they need to respond quickly to customer requests.

©McGraw-Hill Education.

19

The Business Environment 6 of 8

LO 1-6

The Social Environment

Demography — The statistical study of the human population with regard to its size, density, and other characteristics such as age, race, gender, and income.

Managing Diversity

Diversity has grown from just recruiting minority and female workers.

The Increase in the Number of Older Citizens

People aged 65 to 74 are currently the richest demographic group.

Retired people will be draining the economy of wealth due to Social Security.

The Increase in the Number of Single-Parent Families

Growth of single-parent households has encouraged businesses to implement programs such as family leave and flextime.

©McGraw-Hill Education.

20

The Business Environment 7 of 8

LO 1-7

The Global Environment

Globalization has grown due to efficient distribution systems and communication systems such as the Internet.

War and Terrorism

They have drained trillions of dollars from the U.S. economy.

Money was diverted to the war effort.

Adds to the cost of insurance and security.

How Global Changes Affect You

As businesses expand to serve global markets, new jobs will be created.

Rapid changes create a need for continuous learning.

©McGraw-Hill Education.

21

The Business Environment 8 of 8

LO 1-7

The Global Environment continued

The Ecological Environment

Climate change — The movement of the temperature of the planet up or down over time.

Greening — The trend toward saving energy and producing products that cause less harm to the environment.

Many companies say the evidence for climate change is overwhelming.

General Electric, Coca-Cola, Shell, Nestlé, DuPont, Johnson & Johnson, British Airways, Shanghai Electric

©McGraw-Hill Education.

22

The Evolution of U.S. Business 1 of 2

LO 1-8

Progress in the Agricultural and Manufacturing Industries

In the 1800s, the agricultural industry led economic development.

Technology, like the harvester and cotton gin, made large-scale farming successful.

This led to fewer farmers with larger farms.

Industrialization in the 19th and 20th centuries moved jobs from farms to factories.

As technology improved productivity, fewer workers were needed in factories.

©McGraw-Hill Education.

23

The Evolution of U.S. Business 2 of 2

LO 1-8

Progress in Service Industries

Services make up over 80 percent of the value of the U.S. economy.

Since the mid-1980s, the service industry generated almost all the increases in employment.

There are more high-paying jobs in service industries.

Your Future in Business

We’re in the midst of an information-based global and technical revolution.

©McGraw-Hill Education.

24

Appendix of Long Image Descriptions

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

25

Appendix 1 Figure 1.1 A Business and Its Stakeholders

Typical U.S. business stakeholders are:

Stockholders

Customers

Surrounding community

Environmentalists

Dealers (retailers)

Employees

Government leaders

Suppliers

Media

Bankers

Return to original slide

©McGraw-Hill Education.

©McGraw-Hill Education.

26

Appendix 2 Figure 1.3 Today’s Dynamic Business Environment

A circle shows Business Management and Job Creation in the center. Surrounding this are four quadrants for the four environments.

The Economic and Legal Environment:

Freedom of ownership

Contract laws

Elimination of corruption

Tradable currency

Minimum taxes and regulation

The Technological Environment:

Information technology

Databases

Bar codes

The Internet

The Social Environment:

Diversity

Demographic changes

Family changes

The Competitive Environment:

Customer service

Stakeholder recognition

Employee service

Concern for the environment

The global business environment affects the economic, legal, and technological environments.

Global competition and free trade affect the competitive environment.

The quality imperative affects the social environment.

Return to original slide

©McGraw-Hill Education.

©McGraw-Hill Education.

27

Chapter 5

How to Form a Business

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

1

Learning Objectives

LO 5-1 Compare the advantages and disadvantages of sole proprietorships.

LO 5-2 Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.

LO 5-3 Compare the advantages and disadvantages of corporations and summarize the differences between C corporations, S corporations, and limited liability companies.

LO 5-4 Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.

LO 5-5 Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.

LO 5-6 Explain the role of cooperatives.

©McGraw-Hill Education.

2

Basic Forms of Business Ownership

Sole proprietorship — A business owned, and usually managed, by one person.

Partnership — A legal form of business with two or more owners.

Corporation — A legal entity with authority to act and have liability separate from its owners.

©McGraw-Hill Education.

3

Figure 5.1 Forms of Business Ownership

Source: U.S. Census Bureau.

Jump to long description in appendix

©McGraw-Hill Education.

4

Sole Proprietorships 1 of 2

LO 5-1

Advantages of Sole Proprietorships

Ease of starting and ending the business

Being your own boss

Pride of ownership

Leaving a legacy

Retention of company profits

No special taxes

©McGraw-Hill Education.

5

Sole Proprietorships 2 of 2

LO 5-1

Disadvantages of Sole Proprietorships

Unlimited liability — The responsibility of business owners for all of the debts of the business.

Limited financial resources

Management difficulties

Overwhelming time commitment

Few fringe benefits

Limited growth

Limited life span

©McGraw-Hill Education.

6

Partnerships 1 of 4

LO 5-2

Major Types of Partnerships

General partnership — A partnership in which all owners share in operating the business and in assuming liability for the business’s debts.

Limited partnership — A partnership with one or more general partners and one or more limited partners.

©McGraw-Hill Education.

7

Partnerships 2 of 4

LO 5-2

Types of Partners

General partner — An owner (partner) who has unlimited liability and is active in managing the firm.

Limited partner — An owner who invests money in the business but does not have any management responsibility or liability for losses beyond the investment.

Limited liability — The responsibility of a business’s owners for losses only up to the amount they invest; limited partners and shareholders have limited liability.

©McGraw-Hill Education.

8

Partnerships 3 of 4

LO 5-2

Other Forms of Partnerships

Master limited partnership (MLP) — A partnership that looks much like a corporation (in that it acts like a corporation and is traded on a stock exchange) but is taxed like a partnership and thus avoids the corporate income tax.

Limited liability partnership (LLP) — A partnership that limits partners’ risk of losing their personal assets to only their own acts and omissions and to the acts and omissions of people under their supervision.

©McGraw-Hill Education.

9

Partnerships 4 of 4

LO 5-2

Advantages of Partnerships

More financial resources

Shared management and pooled/complementary skills and knowledge

Longer survival

No special taxes

Disadvantages of Partnerships

Unlimited liability

Division of profits

Disagreements among partners

Difficulty of termination

©McGraw-Hill Education.

10

Figure 5.2 Questions to Ask When Choosing a Business Partner

LO 5-2

Do you share the same goals?

Do you share the same vision for the company?

What skills does the person have? Do they complement yours?

What can the person bring to the business?

What type of decision maker is the person?

Do you trust each other?

How does the person respond to adversity?

Does he or she try to solve the problem or try to defend his or her ego?

Can the person accept constructive criticism?

To what extent can you build excitement into the partnership?

©McGraw-Hill Education.

11

Corporations 1 of 8

LO 5-3

Conventional (C) Corporation — A state-chartered legal entity with authority to act and have liability separate from its owners (its stockholders).

©McGraw-Hill Education.

12

Figure 5.4 Corporate Types

LO 5-3

Alien corporations do business in the United States but are chartered (incorporated) in another country.

Domestic corporations do business in the state in which they are chartered (incorporated).

Foreign corporations do business in one state but are chartered in another.

Closed (private) corporations have stock that is held by a few people and isn’t available to the general public.

Open (public) corporations sell stock to the general public.

Quasi-public corporations are chartered by the government as an approved monopoly to perform services to the general public.

Professional corporations are owned by those who offer professional services.

Nonprofit (or not-for-profit) corporations don’t seek personal profit for their owners.

Multinational corporations operate in several countries.

©McGraw-Hill Education.

13

Corporations 2 of 8

LO 5-3

Advantages of Corporations

Limited liability

Ability to raise more money for investment

Size

Perpetual life

Ease of ownership change

Ease of attracting talented employees

Separation of ownership from management

©McGraw-Hill Education.

14

Corporations 3 of 8

LO 5-3

Disadvantages of Corporations

Initial cost

Extensive paperwork

Double taxation

Two tax returns

Size

Difficulty of termination

Possible conflict with stockholders and board of directors

©McGraw-Hill Education.

15

Figure 5.5 How Owners Affect Management

LO 5-3

©McGraw-Hill Education.

16

Corporations 4 of 8

LO 5-3

Individuals Can Incorporate

Anyone—truckers, doctors, plumbers, athletes, and small business owners—can incorporate.

Normally stock is not issued to outsiders when individuals incorporate, so the advantages and disadvantages are not exactly the same as for large corporations.

Major advantages are limited liability and possible tax benefits.

©McGraw-Hill Education.

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Corporations 5 of 8

LO 5-3

S Corporations

S corporation — A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships.

S corporations have shareholders, directors, and employees, plus the benefit of limited liability.

Profits are taxed only as the personal income of the shareholders.

©McGraw-Hill Education.

18

Corporations 6 of 8

LO 5-3

S Corporations continued

Qualifications for S Corporations

Have no more than 100 shareholders

Have shareholders that are individuals or estates, and who (as individuals) are citizens or permanent residents of the U.S.

Have only one class of stock

Derive no more than 25% of income from passive sources

If an S corporation loses its S status, it may not operate under it again for at least 5 years.

©McGraw-Hill Education.

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Corporations 7 of 8

LO 5-3

Limited Liability Companies

Limited liability company (LLC) — A company similar to an S corporation but without the special eligibility requirements.

Advantages of LLCs:

Limited liability

Choice of taxation

Flexible ownership rules

Flexible distribution of profits and losses

Operating flexibility

©McGraw-Hill Education.

20

Corporations 8 of 8

LO 5-3

Limited Liability Companies continued

Disadvantages of LLCs:

No stock, therefore ownership is nontransferable

Limited life span

Fewer incentives

Taxes

Paperwork

©McGraw-Hill Education.

21

Corporate Expansion: Mergers and Acquisitions 1 of 2

LO 5-4

Merger — The result of two firms forming one company.

Acquisition — One company’s purchase of the property and obligations of another company.

Types of Mergers

Vertical merger — The joining of two companies in different stages of related businesses.

Horizontal merger — The joining of two firms in the same industry.

Conglomerate merger — The joining of firms in completely unrelated industries.

©McGraw-Hill Education.

22

Figure 5.8 Types of Mergers

LO 5-4

©McGraw-Hill Education.

23

Corporate Expansion: Mergers and Acquisitions 2 of 2

LO 5-4

Leveraged buyout (LBO) — An attempt by employees, management, or a group of private investors to buy out the stockholders in a company.

LBOs have ranged in size from $50 million to $34 billion and have involved everything from small family businesses to giant corporations.

Business acquisitions are not limited to U.S. buyers.

©McGraw-Hill Education.

24

Franchises 1 of 7

LO 5-5

Franchise agreement — An arrangement whereby someone with a good idea for a business (franchisor) sells the rights to use the business name and sell a product or service (franchise) to others (franchisees) in a given territory.

More than 733,000 franchised businesses operate in the U.S., employing approximately 13.3 million people.

©McGraw-Hill Education.

25

Franchises 2 of 7

LO 5-5

Advantages of Franchises

Management and marketing assistance

Personal ownership

Nationally recognized name

Financial advice and assistance

Lower failure rate

Disadvantages of Franchises

Large start-up costs

Shared profit

Management regulation

Coattail effects

Restrictions on selling

Fraudulent franchisors

©McGraw-Hill Education.

26

Franchises 3 of 7

LO 5-5

Diversity in Franchising

Women own about half of U.S. companies, yet ownership of franchises is about 21 percent.

More women are becoming franchisors. Auntie Anne’s, Decorating Den, and Build-a-Bear were started by women.

DiversityFran is an initiative to build awareness of franchising opportunities within minority communities.

Dunkin Brands’ Diversity in Franchising Initiative offers financing and development support to minorities and military veterans.

Over 20 percent of franchises are minority-owned.

©McGraw-Hill Education.

27

Franchises 4 of 7

LO 5-5

Home-Based Franchises

Advantages:

Relief from commuting stress

Extra family time

Low overhead expenses

Main Disadvantages:

Isolation

Long hours

©McGraw-Hill Education.

28

Franchises 5 of 7

LO 5-5

E-Commerce in Franchising

Most brick-and-mortar franchises have expanded online.

Many franchisors prohibit franchisee-sponsored sites because conflicts can erupt.

Sometimes “reverse royalties” are sent to franchisees who believe their sales were hurt by the franchisor’s site.

Other franchises are solely based online.

©McGraw-Hill Education.

29

Franchises 6 of 7

LO 5-5

Using Technology in Franchising

Franchisors use technology, including social media, to:

Extend their brands

Meet the needs of both customers and franchisees

Expand their businesses

©McGraw-Hill Education.

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Franchises 7 of 7

LO 5-5

Franchising in Global Markets

Canada is the most popular target for U.S.-based franchises.

Franchisors are finding it easier now to move into China, South Africa, the Philippines, and the Middle East.

International franchising goes both ways—some foreign franchises have come to the U.S., including Kumon Learning Centers and H&R Block.

©McGraw-Hill Education.

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Cooperatives

LO 5-6

Cooperative — A business owned and controlled by the people who use it—producers, consumers, or workers with similar needs who pool their resources for mutual gain.

Worldwide, co-ops serve one billion members!

Members democratically control the business by electing a board of directors that hires professional management.

©McGraw-Hill Education.

32

Appendix of Long Image Descriptions

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

33

Appendix 1 Figure 5.1 Forms of Business Ownership

Percentage of businesses:

Sole proprietorships, 72 percent

Corporations, 20 percent

Partnerships, 8 percent

Percentage of total receipts:

Corporations, 81 percent

Partnerships, 13 percent

Sole proprietorships, 6 percent

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©McGraw-Hill Education.

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Appendix 2 Figure 5.5 How Owners Affect Management

Owners and stockholders elect a board of directors. The board, in turn, hires officers. The officers set corporate objectives and select managers. The managers supervise employees, who are at the bottom of the chart. The daily operations are structured as a pyramid with officers at the top.

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35

Appendix 3 Figure 5.8 Types of Mergers

A soft drink company buys a mineral water company, which is a horizontal merger (companies in the same industry).

A soft drink company buys an artificial sweetener company, which is a vertical merger (companies in different stages in related industries).

A soft drink company buys a snack food company, which is a conglomerate merger (companies in unrelated industries).

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©McGraw-Hill Education.

©McGraw-Hill Education.

36

Chapter 7

Management and Leadership

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

1

Learning Objectives

LO 7-1 Describe the changes occurring today in the management function.

LO 7-2 Describe the four functions of management.

LO 7-3 Relate the planning process and decision making to the accomplishment of company goals.

LO 7-4 Describe the organizing function of management.

LO 7-5 Explain the differences between leaders and managers, and describe the various leadership styles.

LO 7-6 Summarize the five steps of the control function of management.

©McGraw-Hill Education.

2

Managers’ Roles Are Evolving

LO 7-1

Managers Today

Tend to be collaborative

Emphasize teams and team building

Guide, train, support, motivate, and coach employees

Need to be skilled communicators and team players

Need to be globally prepared

©McGraw-Hill Education.

The Four Functions of Management

LO 7-2

Management Functions

Planning

Organizing

Leading

Controlling

©McGraw-Hill Education.

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Figure 7.1 What Managers Do 1 of 2

LO 7-2

©McGraw-Hill Education.

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Figure 7.1 What Managers Do 2 of 2

LO 7-2

©McGraw-Hill Education.

6

Planning and Decision Making 1 of 6

LO 7-3

Vision — More than a goal; an encompassing explanation of why the organization exists and where it’s trying to go.

Mission statement — An outline of the fundamental purposes of an organization, including:

The organization’s self-concept

Its philosophy

Long-term survival needs

Customer needs

Social responsibility

Nature of the product or service

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Planning and Decision Making 2 of 6

LO 7-3

Goals — The broad, long-term accomplishments an organization wishes to attain.

Objectives — Specific, short-term statements detailing how to achieve the organization’s goals.

©McGraw-Hill Education.

Planning and Decision Making 3 of 6

LO 7-3

Planning Answers Fundamental Questions:

What is the situation now?

SWOT analysis — A planning tool used to analyze an organization’s strengths, weaknesses, opportunities, and threats.

How can we get to our goal from here?

Strategic planning

Tactical planning

Operational planning

Contingency planning

©McGraw-Hill Education.

Figure 7.2 SWOT Matrix

LO 7-3

©McGraw-Hill Education.

Figure 7.3 Planning Functions

LO 7-3

©McGraw-Hill Education.

Planning and Decision Making 4 of 6

LO 7-3

Strategic planning — Determining the major goals of the organization and the policies and strategies for obtaining and using resources to achieve those goals.

Tactical planning — Developing detailed, short-term statements about what is to be done, who is to do it, and how it is to be done.

Operational planning — Setting work standards and schedules necessary to implement the company’s tactical objectives.

Contingency planning — Preparing alternative courses of action that may be used if the primary plans don’t achieve the organization’s objectives.

©McGraw-Hill Education.

Planning and Decision Making 5 of 6

LO 7-3

Decision Making: Finding the Best Alternative

Decision making — Choosing among two or more alternatives.

Rational decision-making model

Define the situation.

Describe and collect needed information.

Develop alternatives.

Decide which alternative is best.

Do what is indicated.

Determine whether the decision was a good one, and follow up.

©McGraw-Hill Education.

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Planning and Decision Making 6 of 6

LO 7-3

Decision Making: Finding the Best Alternative continued

Problem solving — The process of solving the everyday problems that occur; less formal than decision making and usually calls for quicker action.

Problem-solving techniques include brainstorming and PMI — Listing all the pluses for a solution in one column, all the minuses in another, and the implications in a third column.

©McGraw-Hill Education.

Organizing: Creating a Unified System 1 of 4

LO 7-4

Management Levels

Top management — Highest level, consisting of the president and other key company executives who develop strategic plans

Middle management — Includes general managers, division managers, and branch and plant managers who are responsible for tactical planning and controlling

Supervisory management — Those directly responsible for supervising workers and evaluating their daily performance

©McGraw-Hill Education.

Figure 7.4 Levels of Management

LO 7-4

©McGraw-Hill Education.

Organizing: Creating a Unified System 2 of 4

LO 7-4

Top Management

Chief executive officer (CEO) — Introduces change into an organization.

Chief operating officer (COO) — Implements CEO’s changes.

Chief financial officer (CFO) — Obtains funds, plans budgets, collects funds, etc.

Chief information officer (CIO) — Gets the right information to the right people so decisions can be made.

©McGraw-Hill Education.

Organizing: Creating a Unified System 3 of 4

LO 7-4

Tasks and Skills at Different Levels of Management

Technical skills

The ability to perform tasks in a specific discipline or department.

Human relations skills

Communication and motivation; they enable managers to work through and with people.

Conceptual skills

The ability to picture the organization as a whole and the relationship among its various parts.

©McGraw-Hill Education.

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Figure 7.5 Skills Needed at Various Levels of Management

LO 7-4

©McGraw-Hill Education.

19

Organizing: Creating a Unified System 4 of 4

LO 7-4

Staffing: Getting and Keeping the Right People

Staffing — Hiring, motivating, and retaining the best people available to accomplish the company’s objectives.

Staffing is critical, especially in the Internet and high-tech areas.

Many people are not willing to work at companies unless they are treated well with fair pay.

©McGraw-Hill Education.

Leading: Providing Continuous Vision and Values 1 of 4

LO 7-5

Leaders must:

Communicate a vision and rally others around that vision.

Establish corporate values.

Promote corporate ethics.

Embrace change.

Stress accountability and responsibility.

Transparency — The presentation of the company’s facts and figures in a way that is clear and apparent to all stakeholders.

©McGraw-Hill Education.

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Leading: Providing Continuous Vision and Values 2 of 4

LO 7-5

Leadership Styles

Autocratic leadership

Make managerial decisions without consulting others.

Participative or democratic leadership

Managers and employees work together to make decisions.

Free-rein leadership

Managers set objectives and employees are relatively free to do whatever it takes to accomplish those objectives.

©McGraw-Hill Education.

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Figure 7.6 Various Leadership Styles

LO 7-5

Source: Robert Tannenbaum and Warren Schmidt, “How to Choose a Leadership Pattern,” Harvard Business Review, May/June 1973.

Jump to long description in appendix

©McGraw-Hill Education.

Leading: Providing Continuous Vision and Values 3 of 4

LO 7-5

Empowering Workers

Progressive leaders give employees the authority to make decisions on their own without consulting a manager.

Customer needs are handled quickly.

Manager’s role becomes less of a boss and more of a coach.

Enabling — Giving workers the education and tools they need to make decisions.

©McGraw-Hill Education.

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Leading: Providing Continuous Vision and Values 4 of 4

LO 7-5

Managing Knowledge

Knowledge management

Finding the right information, keeping the information in a readily accessible place, and making the information known to everyone in the firm.

This tries to keep people from reinventing the wheel.

©McGraw-Hill Education.

25

Controlling: Making Sure It Works

LO 7-6

Control Function

Measures performance relative to planned objectives

Rewards people for work well done

Takes necessary corrective action

A Key Criterion for Measurement: Customer Satisfaction

Traditional forms of measuring success are financial.

Pleasing employees, stakeholders, and customers is important.

External customers — Dealers, who buy products to sell to others, and ultimate customers (or end users), who buy products for their own use.

Internal customers — Individuals and units within the firm that receive services from other individuals or units.

©McGraw-Hill Education.

26

Figure 7.7 The Control Process

LO 7-6

©McGraw-Hill Education.

27

Appendix of Long Image Descriptions

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

28

Appendix 1 Figure 7.1 What Managers Do 1 of 2

Planning:

Setting organizational goals

Developing strategies to reach those goals

Determining resources needed

Setting precise standards

Leading:

Guiding and motivating employees to work effectively to accomplish organizational goals and objectives

Giving assignments

Explaining routines

Clarifying policies

Providing feedback on performance

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©McGraw-Hill Education.

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Appendix 2 Figure 7.1 What Managers Do 2 of 2

Organizing:

Allocating resources, assigning tasks, and establishing procedures for accomplishing goals

Preparing a structure (organization chart) showing lines of authority and responsibility

Recruiting, selecting, training, and developing employees

Placing employees where they’ll be most effective

Controlling:

Measuring results against corporate objectives

Monitoring performance relative to standards

Rewarding outstanding performance

Taking corrective action when necessary

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©McGraw-Hill Education.

30

Appendix 3 Figure 7.2 SWOT Matrix

Potential Internal Strengths:

Core competencies in key areas

An acknowledged market leader

Well-conceived functional area strategies

Proven management

Cost advantages

Better advertising campaigns

Potential Internal Weaknesses:

No clear strategic direction

Obsolete facilities

Subpar profitability

Lack of managerial depth and talent

Weak market image

Too narrow a product line

Potential External Opportunities:

Ability to serve additional customer groups

Expand product lines

Ability to transfer skills/technology to new products

Falling trade barriers in attractive foreign markets

Complacency among rival firms

Ability to grow due to increases in market demand

Potential External Threats:

Entry of lower-cost foreign competitors

Rising sales of substitute products

Slower market growth

Costly regulatory requirements

Vulnerability to recession and business cycles

Changing buyer needs and tastes

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Appendix 4 Figure 7.3 Planning Functions

Strategic planning: The setting of broad, long-range goals by top managers

Tactical planning: The identification of specific, short-range objectives by lower-level managers

Operational planning: The setting of work standards and schedules

Contingency planning: Backup plans in case primary plans fail

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©McGraw-Hill Education.

32

Appendix 5 Figure 7.4 Levels of Management

From top to bottom:

Top management includes the president and vice presidents

Middle management includes plant managers, division heads, and branch managers

Supervisory (first-line) management includes supervisors, foremen, department heads, and section leaders

Nonsupervisory includes employees

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Appendix 6 Figure 7.5 Skills Needed at Various Levels of Management

Top managers rely mostly on conceptual skills, then human relations skills, then technical skills.

Middle managers need a good mix of technical, human relations, and conceptual skills.

First-line managers rely mostly on technical skills, then human relations skills, then conceptual skills.

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Appendix 7 Figure 7.6 Various Leadership Styles

The continuum runs from boss-centered leadership to subordinate-centered leadership. Boss-centered leadership shows a large amount of authority used by managers, while subordinate-centered leadership shows a large area of freedom for employees. Along the continuum, a manager’s authority decreases as it moves toward subordinate-centered leadership, while an employee’s freedom increases.

From the most boss-centered to the most subordinate-centered, the leadership styles are as follows:

Autocratic leadership: A manager makes a decision and announces it, the manager then “sells” the decision, and then the manager presents ideas and invites questions.

Participative/democratic leadership: A manager presents tentative decisions subject to change; the manager presents a problem, gets suggestions, and makes a decision; and the manager defines limits and asks the group to make the decision.

Free rein leadership: A manager permits employees to function within limits defined by their superior.

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©McGraw-Hill Education.

35

Appendix 8 Figure 7.7 The Control Process

Step 1: Establish clear standards

Step 2: Monitor and record performance

Step 3: Compare results against standards

Step 4: Communicate results

Step 5: If needed, take corrective action

Feedback results in determining if standards are realistic, and the process may begin again at step 1.

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©McGraw-Hill Education.

©McGraw-Hill Education.

36

Chapter 8

Structuring Organizations for Today’s Challenges

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

1

Learning Objectives

LO 8-1 Outline the basic principles of organizational management.

LO 8-2 Compare the organizational theories of Fayol and Weber.

LO 8-3 Evaluate the choices managers make in structuring organizations.

LO 8-4 Contrast the various organizational models.

LO 8-5 Identify the benefits of interfirm cooperation and coordination.

LO 8-6 Explain how organizational culture can help businesses adapt to change.

©McGraw-Hill Education.

2

Organizing for Success

LO 8-1

Building an Organization from the Bottom Up

Create a division of labor.

Divide tasks through job specialization.

Set up teams or departments (departmentalization).

Allocate resources.

Assign specific tasks.

Establish procedures.

Develop an organization chart.

Adjust to new realities.

©McGraw-Hill Education.

The Changing Organization 1 of 5

LO 8-2

Often change in organizations is due to evolving business environments:

More global competition, declining economy, faster technological change’ and pressure to protect the environment

Customer expectations have also changed

Consumers today want high-quality products with fast, friendly service, and all at low cost.

The Development of Organizational Design

Economies of scale — Companies can reduce their production costs by purchasing raw materials in bulk.

The average cost of goods decreases as production levels rise.

Mass production of goods led to complexities in organizing businesses.

©McGraw-Hill Education.

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The Changing Organization 2 of 5

LO 8-2

Fayol’s Principles of Organization

Unity of command

Hierarchy of authority

Division of labor

Subordination of individual interests to the general interest

Authority

Degree of centralization

Clear communication channels

Order

Equity

Esprit de corps

Characteristics of organizations based on the principles

Organizations in which employees have no more than one boss; lines of authority are clear.

Rigid organizations that often don’t respond to customers quickly.

©McGraw-Hill Education.

5

The Changing Organization 3 of 5

LO 8-2

Max Weber and Organizational Theory

Employees just need to do what they’re told.

In addition to Fayol’s principles, Weber emphasized:

Job descriptions

Written rules, decision guidelines, and detailed records

Consistent procedures, regulations, and policies

Staffing and promotion based on qualifications

©McGraw-Hill Education.

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The Changing Organization 4 of 5

LO 8-2

Turning Principles into Organizational Design

When following Fayol and Weber, managers control workers.

Hierarchy

A system in which one person is at the top of an organization and there is a ranked or sequential ordering from the top down.

Chain of command

The line of authority that moves from the top of the hierarchy to the lowest level.

Organization chart

A visual device that shows relationships among people and divides the organization’s work; it shows who reports to whom.

©McGraw-Hill Education.

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Figure 8.1 Typical Organization Chart

LO 8-2

©McGraw-Hill Education.

The Changing Organization 5 of 5

LO 8-2

Bureaucratic Organizations

Bureaucracy — An organization with many layers of managers who set rules and regulations and oversee all decisions.

It can take weeks or months to have information passed down to lower-level employees.

Bureaucracies can annoy customers.

©McGraw-Hill Education.

9

Decisions to Make in Structuring Organizations 1 of 5

LO 8-3

Choosing Centralized or Decentralized Authority

Centralized authority

When decision-making authority is maintained at the top level of management at the company’s headquarters.

Decentralized authority

When decision-making authority is delegated to lower-level managers more familiar with local conditions than headquarters management could be.

©McGraw-Hill Education.

10

Figure 8.2 Advantages and Disadvantages of Centralized versus Decentralized Authority

LO 8-3

©McGraw-Hill Education.

11

Decisions to Make in Structuring Organizations 2 of 5

LO 8-3

Choosing the Appropriate Span of Control

Span of control — The optimum number of subordinates a manager supervises or should supervise.

When work is standardized, broad spans of control are possible.

The appropriate span narrows at higher levels of the organization.

The trend today is to reduce middle managers and hire better low-level employees.

©McGraw-Hill Education.

Decisions to Make in Structuring Organizations 3 of 5

LO 8-3

Choosing between Tall and Flat Organizational Structures

Tall organization structure — An organizational structure in which the pyramidal organization chart would be quite tall because of the various levels of management.

Flat organization structure — An organizational structure that has few layers of management and a broad span of control.

©McGraw-Hill Education.

Figure 8.3 A Flat Organizational Structure

LO 8-3

©McGraw-Hill Education.

Figure 8.4 Advantages and Disadvantages of a Narrow versus a Broad Span of Control

LO 8-3

©McGraw-Hill Education.

Decisions to Make in Structuring Organizations 4 of 5

LO 8-3

Weighing the Advantages and Disadvantages of Departmentalization

Departmentalization — The dividing of organizational functions into separate units.

Workers are grouped by skills and expertise to specialize their skills.

©McGraw-Hill Education.

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Decisions to Make in Structuring Organizations 5 of 5

LO 8-3

Advantages:

Employees develop skills and progress within a department as they master skills.

The company can achieve economies of scale.

Employees can coordinate work within the function, and top management can easily direct activities.

Disadvantages:

Departments may not communicate well.

Employees may identify with their department’s goals rather than the organization’s.

The company’s response to external changes may be slow.

People may not be trained to take different managerial responsibilities; instead they become specialists.

Department members may engage in groupthink and may need outside input.

©McGraw-Hill Education.

17

Figure 8.5 Ways to Departmentalize 1 of 5

LO 8-3

©McGraw-Hill Education.

Figure 8.5 Ways to Departmentalize 2 of 5

LO 8-3

©McGraw-Hill Education.

Figure 8.5 Ways to Departmentalize 3 of 5

LO 8-3

©McGraw-Hill Education.

Figure 8.5 Ways to Departmentalize 4 of 5

LO 8-3

©McGraw-Hill Education.

Figure 8.5 Ways to Departmentalize 5 of 5

LO 8-3

©McGraw-Hill Education.

Organizational Models 1 of 5

LO 8-4

Line Organizations

Line organization

Has direct two-way lines of responsibility, authority, and communication running from the top to the bottom, with all people reporting to only one supervisor.

There are no specialists or legal, accounting, human resource, or information technology departments.

Line managers issue orders, enforce discipline, and adjust the organization to changes.

©McGraw-Hill Education.

Organizational Models 2 of 5

LO 8-4

Line-and-Staff Organizations

Line personnel

Employees who are part of the chain of command that is responsible for achieving organizational goals.

Line personnel have authority to make policy decisions.

Staff personnel

Employees who advise and assist line personnel in meeting their goals.

Staff personnel includes marketing research, legal advising, IT, and human resource management.

©McGraw-Hill Education.

Figure 8.6 A Sample Line-and-Staff Organization

LO 8-4

©McGraw-Hill Education.

Organizational Models 3 of 5

LO 8-4

Matrix-Style Organizations

Matrix organization — Specialists from different parts of the organization are brought together to work on specific projects but still remain part of a line-and-staff structure. Emphasis is on product development, creativity, special projects, rapid communication, and interdepartmental teamwork.

Advantages

Managers have flexibility in assigning people to projects.

Interorganizational cooperation and teamwork is encouraged.

Creative solutions to product development problems are produced.

Organizational resources are used efficiently.

Disadvantages

It’s costly and complex.

Employees may be confused where their loyalty belongs.

Good interpersonal skills and cooperative employees are a must.

It may only be a temporary solution to a long-term problem.

©McGraw-Hill Education.

Figure 8.7 A Matrix Organization

LO 8-4

©McGraw-Hill Education.

Organizational Models 4 of 5

LO 8-4

Cross-Functional Self-Managed Teams

Cross-functional self-managed teams — Groups of employees from different departments who work together on a long-term basis.

A way to fix the problem of matrix-style teams is to establish long-lived teams.

Teams are empowered to make decisions without management approval.

©McGraw-Hill Education.

Organizational Models 5 of 5

LO 8-4

Going Beyond Organizational Boundaries

Cross-functional teams work best when the voice of the customer is heard.

Teams that include customers, suppliers, and distributors go beyond organizational boundaries.

Government coordinators may assist in sharing market information across national boundaries.

©McGraw-Hill Education.

Managing the Interactions among Firms 1 of 2

LO 8-5

Networking — Using communications technology and other means to link organizations and allow them to work together on common objectives.

Transparency and Virtual Organizations

Real time — The present moment or actual time in which something takes place.

Most companies are no longer self-sufficient; they’re part of a global business network.

©McGraw-Hill Education.

Managing the Interactions among Firms 2 of 2

LO 8-5

Transparency and Virtual Organizations continued

Transparency occurs when a company is so open to other companies that electronic information is shared as if the companies were one.

Virtual corporation

A temporary networked organization made up of replaceable firms that join and leave as needed.

Benchmarking

Compares an organization’s practices, processes, and products against the world’s best.

If a company can’t do as well as the best, they can try to outsource the function.

Core competencies —Functions that the organization can do as well as or better than any other organization in the world.

©McGraw-Hill Education.

Figure 8.8 A Virtual Corporation

LO 8-5

©McGraw-Hill Education.

Adapting to Change 1 of 4

LO 8-5

Change

Change isn’t easy; employees like to do things the way they always have.

Get rid of old, inefficient facilities and equipment.

Use the Internet to get to know your customers and sell directly to them.

Digital natives — Young people who have grown up using the Internet and social networking.

©McGraw-Hill Education.

Adapting to Change 2 of 4

LO 8-5

Restructuring for Empowerment

Restructuring

Redesigning an organization so that it can more effectively and efficiently serve its customers.

Inverted organization

An organization that has contact people at the top and the CEO at the bottom of the organization chart.

The manager’s job is to assist and support frontline people, not boss them around.

©McGraw-Hill Education.

Figure 8.9 Comparison of an Inverted Organizational Structure and a Traditional Organizational Structure

LO 8-5

©McGraw-Hill Education.

Adapting to Change 3 of 4

LO 8-6

Creating a Change-Oriented Organizational Culture

Organizational or corporate culture

Widely shared values within an organization that provide unity and cooperation to achieve common goals.

Culture is shown in stories, traditions and myths.

Some of the best organizational cultures emphasize service.

Managing the Informal Organization

Formal organization

Details lines of responsibility, authority, and position.

The formal system is often slow and bureaucratic, but it helps guide the lines of authority.

No organization can be effective without formal and informal organization.

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Adapting to Change 4 of 4

LO 8-6

Managing the Informal Organization continued

Informal organization

The system that develops spontaneously as employees meet and form cliques, relationships, and lines of authority outside the formal organization.

The informal organization helps foster camaraderie and teamwork among employees.

The informal system is too unstructured and emotional on its own.

The informal organization may also be powerful in resisting management directives.

©McGraw-Hill Education.

37

Appendix of Long Image Descriptions

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

38

Appendix 1 Figure 8.1 Typical Organization Chart

The chart has four levels. At the bottom level are the employees who report to the first-line supervisors. The first-line supervisors report to a specific manager such as a production manager, a marketing manager, or a finance manager. These managers, in turn, report to the president, who is the top level of the organization.

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©McGraw-Hill Education.

39

Appendix 2 Figure 8.2 Advantages and Disadvantages of Centralized versus Decentralized Authority

Advantages of centralized authority:

Greater top-management control

More efficiency

Simpler distribution system

Stronger brand/corporate image

Disadvantages of centralized authority:

Less responsiveness to customers

Less empowerment

Interorganizational conflict

Lower morale away from headquarters

Advantages of decentralized authority:

Better adaptation to customer wants

More empowerment of workers

Faster decision making

Higher morale

Disadvantages of decentralized authority:

Less efficiency

Complex distribution system

Less top-management control

Weakened corporate image

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©McGraw-Hill Education.

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Appendix 3 Figure 8.4 Advantages and Disadvantages of a Narrow versus a Broad Span of Control

Advantages of a broad span of control:

Reduced costs

More responsiveness to customers

Faster decision making

More empowerment

Disadvantages of a broad span of control:

Fewer chances for advancement

Overworked managers

Loss of control

Less management expertise

Advantages of a narrow span of control:

More control by top management

More chances for advancement

Greater specialization

Closer supervision

Disadvantages of a narrow span of control:

Less empowerment

Higher costs

Delayed decision making

Less responsiveness to customers

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©McGraw-Hill Education.

©McGraw-Hill Education.

41

Appendix 4 Figure 8.5 Ways to Departmentalize 4 of 5

A vice president of international operations oversees the Canadian division, the Japanese division, the European division, and the Korean division.

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Appendix 5 Figure 8.6 A Sample Line-and-Staff Organization

The chief executive officer is at the top. Directly reporting to the CEO is the plant manager. Three supervisors report directly to the plant manager, and each of the three supervisors have assembly line workers reporting to them. All of these employees are considered line personnel. Three staff personnel departments (human resources, legal, and marketing research) are shown on the chart between the CEO and plant manager but without directly reporting to any one individual.

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Appendix 6 Figure 8.7 A Matrix Organization

The president is at the top. Directly reporting to the president are the vice presidents of project management, manufacturing, marketing, finance, and engineering.

Each vice president has employees that report directly to them in a line structure. Three project managers report directly to the vice president of project management but are also shown as staff personnel to the other departments.

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©McGraw-Hill Education.

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Appendix 7 Figure 8.8 A Virtual Corporation

In the center is the core firm. Surrounding the core firm are the production firm, distribution firm, advertising agency, design firm, legal firm, and accounting firm.

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©McGraw-Hill Education.

©McGraw-Hill Education.

45

Appendix 8 Figure 8.9 Comparison of an Inverted Organizational Structure and a Traditional Organizational Structure

The organization chart in a traditional organization is shown as a pyramid sectioned from top to bottom in the following order:

Top management

Middle management

Supervisory management

Frontline workers

The organization chart in an inverted organization chart is shown as an upside-down pyramid sectioned from top to bottom in the following order:

Empowered frontline workers (often in teams)

Support personnel

Top management

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Chapter 3

Doing Business in Global Markets

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom.  No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

1

Learning Objectives

LO 3-1 Discuss the importance of the global market and the roles of comparative advantage and absolute advantage in global trade.

LO 3-2 Explain the importance of importing and exporting, and understand key terms used in global business.

LO 3-3 Illustrate the strategies used in reaching global markets and explain the role of multinational corporations.

LO 3-4 Evaluate the forces that affect trading in global markets.

LO 3-5 Debate the advantages and disadvantages of trade protectionism.

LO 3-6 Discuss the changing landscape of the global market and the issue of offshore outsourcing.

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The Dynamic Global Market

LO 3-1

Business in the Global Market

Over 90% of companies doing business globally believe it is important for employees to have international experience.

U.S. organizations are also expanding abroad.

Importing — Buying products from another country.

Exporting — Selling products to another country.

The United States is the largest importing and the third-largest exporting nation in the world.

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Figure 3.1 World Population by Continent

LO 3-1

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Why Trade with Other Nations? 1 of 2

LO 3-1

Countries with abundant natural resources (like Venezuela or Iraq) need technological resources from other countries (like Japan).

Global trade allows countries to produce what they make best and buy what they need from others.

Free trade—The movement of goods and services among nations without political or economic barriers.

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Figure 3.2 The Pros and Cons of Free Trade

LO 3-1

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Why Trade with Other Nations? 2 of 2

LO 3-1

The Theories of Comparative and Absolute Advantage

Comparative advantage — A country should sell to other countries those products that it produces most efficiently, and buy from other countries those products that it cannot produce as effectively or efficiently.

Absolute advantage — A country has a monopoly on producing a specific product or is able to produce it more efficiently than all other countries.

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Getting Involved in Global Trade 1 of 3

LO 3-2

Importing Goods and Services

Students attending schools abroad tend to notice products that they’re used to are unavailable in their new country.

By working with producers in their native country, some become importers while still in school.

Exporting Goods and Services

Exporting provides a great boost to the U.S. economy.

It’s estimated every $1 billion in U.S. exports generates over 7,000 U.S. jobs.

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Getting Involved in Global Trade 2 of 3

LO 3-2

Measuring Global Trade

Balance of trade — The total value of a nation’s exports compared to its imports over a particular period.

Trade surplus (favorable) — Occurs when the value of a country’s exports exceeds that of its imports.

Trade deficit (unfavorable) — Occurs when the value of a country’s imports exceeds that of its exports.

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Getting Involved in Global Trade 3 of 3

LO 3-2

Measuring Global Trade continued

Balance of payments — The difference between money coming into a country (from exports) and money leaving the country (from imports) plus money flows from other factors such as tourism, foreign aid, military expenditures, and foreign investment.

The goal is to have more money flowing into a country than out—a favorable balance.

An unfavorable balance is when more money flows out of a country.

Dumping — Selling products in a foreign country at lower prices than those charged in the producing country.

Dumping is prohibited.

China and Brazil have been penalized for dumping steel in the United States.

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Figure 3.3 Largest Exporting Nations in the World and the Largest U.S. Trade Partners

LO 3-2

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Figure 3.4 Strategies for Reaching Global Markets

LO 3-3

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Strategies for Reaching Global Markets 1 of 9

LO 3-3

Licensing

Licensing — A global strategy in which a firm (the licensor) allows a foreign company (the licensee) to produce its product in exchange for a fee (a royalty).

Licensing can benefit a firm by:

Gaining revenues it wouldn’t have otherwise generated

Spending little or no money to produce or market their products

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Strategies for Reaching Global Markets 2 of 9

LO 3-3

Exporting

EACs provide hands-on exporting assistance and trade-finance support for small and medium-sized businesses that wish to directly export goods and services.

ETCs help companies engage in indirect exporting by:

Matching buyers and sellers

Dealing with foreign customs offices, documentation, and conversions

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Strategies for Reaching Global Markets 3 of 9

LO 3-3

Franchising

Franchising — A contractual agreement whereby someone with a good idea for a business sells others the rights to use the name and sell a product or service in a given territory in a specified manner.

Franchisors need to be careful to adapt their product to the countries they serve.

Domino’s Pizza and Dunkin Donuts all adapted their products to different tastes in different countries.

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Strategies for Reaching Global Markets 4 of 9

LO 3-3

Contract Manufacturing

Contract manufacturing — A foreign company’s production of private-label goods to which a domestic company then attaches its own brand name or trademark; part of the broad category of outsourcing.

Contract manufacturing can be used to:

Allow a company to experiment in a new market without incurring heavy start-up costs such as building a manufacturing plant

Temporarily meet an unexpected increase in orders

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Strategies for Reaching Global Markets 5 of 9

LO 3-3

International Joint Ventures and Strategic Alliances

Joint venture — A partnership in which two or more companies (often from different countries) join to undertake a major project.

The benefits of joint ventures:

Shared technology and risk

Shared marketing and management expertise

Entry into markets where foreign companies are often not allowed unless goods are produced locally

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Strategies for Reaching Global Markets 6 of 9

LO 3-3

International Joint Ventures and Strategic Alliances continued

Strategic alliance — A long-term partnership between two or more companies established to help each company build competitive market advantages.

They don’t typically share costs, risks, management or profits.

Strategic alliances provide broad access to markets, capital, and technical expertise.

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Strategies for Reaching Global Markets 7 of 9

LO 3-3

Foreign Direct Investment

Foreign direct investment (FDI) — The buying of permanent property and businesses in foreign nations.

Foreign subsidiary — A company owned in a foreign country by another company, called the parent company.

Primary advantage: Parent company maintains complete control over its technology or expertise.

Primary disadvantage: Must commit funds and technology within foreign boundaries.

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Strategies for Reaching Global Markets 8 of 9

LO 3-3

Foreign Direct Investment continued

Multinational corporation — An organization that manufactures and markets products in many different countries and has multinational stock ownership and multinational management.

Not all large global businesses are multinational.

Only firms that have manufacturing capacity or some other physical presence in different nations can truly be multinational.

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Strategies for Reaching Global Markets 9 of 9

LO 3-3

Foreign Direct Investment continued

Sovereign wealth funds (SWFs) — Investment funds controlled by governments holding large stakes in foreign companies.

The size of the funds and the fact that they are government-owned make some fear they might be used for:

Geopolitical objectives

Gaining control of strategic natural resources

Obtaining sensitive technologies

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Figure 3.5 The Largest Multinational Corporations in the World

LO 3-3

Rank Company Country
1 Walmart United States
2 State Grid China
3 China National Petroleum China
4 Sinopec Group China
5 Royal Dutch Shell Netherlands
6 Exxon Mobil United States
7 Volkswagen Germany
8 Toyota Motor Japan
9 Apple United States
10 BP Great Britain

Source: Fortune, www.fortune.com, accessed June 2017.

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Forces Affecting Trading in Global Markets 1 of 5

LO 3-4

Sociocultural Forces

To be involved in global trade, you must be aware of the cultural differences among nations, including:

Social structures

Religion

Manners and customs

Values and attitudes

Language

Personal communication

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Figure 3.6 Oops, Did We Say That?

LO 3-4

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Forces Affecting Trading in Global Markets 2 of 5

LO 3-4

Economic and Financial Forces

Exchange rate — The value of one nation’s currency relative to the currencies of other countries.

High value of the dollar — Dollar is trading for more foreign currency; foreign products become cheaper.

Low value of the dollar — Dollar is trading for less foreign currency; foreign goods become more expensive.

Floating exchange rates — Currencies float in value depending on the supply and demand for them in the global market.

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Forces Affecting Trading in Global Markets 3 of 5

LO 3-4

Economic and Financial Forces continued

Devaluation — Lowering the value of a nation’s currency relative to others currencies.

Countertrading — A complex form of bartering in which several countries may be involved, each trading goods for goods or services for services.

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Forces Affecting Trading in Global Markets 4 of 5

LO 3-4

Legal and Regulatory Forces

There’s no global system of laws.

Laws may be inconsistent.

U.S. businesses must follow U.S. laws while conducting global business.

Organization for Economic Cooperation and Development (OECD) and Transparency International fight to end corruption and bribery in foreign markets and have had limited success.

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Figure 3.7 Countries Rated Highest on Corrupt Business

LO 3-4

Somalia

South Sudan

North Korea

Syria

Yemen

Sudan

Libya

Afghanistan

Venezuela

Iraq

Source: Transparency International, 2017.

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Forces Affecting Trading in Global Markets 5 of 5

LO 3-4

Physical and Environmental Forces

Developing countries have transportation and storage systems that make international distribution difficult or impossible.

Often, technological capabilities are far from those in the U.S., which makes for a tough business environment.

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Trade Protectionism 1 of 6

LO 3-5

Trade protectionism — The use of government regulations to limit the import of goods and services.

Advocates of protectionism believe it allows domestic producers to survive, grow, and produce jobs.

Tariffs — A tax imposed on imports.

Protective tariffs

Revenue tariffs

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Trade Protectionism 2 of 6

LO 3-5

Import quota — A limit on the number of products in certain categories that a nation can import.

Embargo — A complete ban on the import or export of a certain product, or the stopping of all trade with a particular country.

Political disagreements can lead to embargos, like the U.S. embargo against Cuba.

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Trade Protectionism 3 of 6

LO 3-5

The World Trade Organization

General Agreement on Tariffs and Trade (GATT) — A 1948 agreement that established an international forum for negotiating mutual reductions in trade restrictions.

World Trade Organization (WTO) — An independent entity of 164 member nations whose purpose is to oversee cross-border trade issues and global business practices; headquartered in Geneva.

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Trade Protectionism 4 of 6

LO 3-5

Common Markets

Common market — A regional group of countries that have a common external tariff, no internal tariffs, and a coordination of laws to facilitate exchange; also called a trading bloc.

Some common markets are:

European Union (EU)

Mercosur

ASEAN

COMESA

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Figure 3.8 Members of the European Union

LO 3-5

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Trade Protectionism 5 of 6

LO 3-5

The North American and Central American Free Trade Agreements

North American Free Trade Agreement (NAFTA) — Agreement that created a free-trade area among the United States, Canada, and Mexico; ratified in 1994.

Central American Free Trade Agreement (CAFTA) — Agreement that created a free-trade zone with Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua; signed into law in 2005.

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Trade Protectionism 6 of 6

LO 3-5

The North American and Central American Free Trade Agreements continued

NAFTA Objectives

Eliminate trade barriers and facilitate cross-border movement of goods and services.

Promote conditions of fair competition.

Increase investment opportunities.

Provide effective protection and enforcement of intellectual property rights (patents and copyrights).

Establish a framework for further regional trade cooperation.

Improve working conditions in North America.

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The Future of Global Trade 1 of 2

LO 3-6

China

With over 1.38 billion people, has transformed the world economic map. Over 400 of the Fortune 500 companies have invested in China.

India

Has seen huge growth in information technology, biotechnology, and pharmaceuticals.

Russia

Projected to be a wealthy global economy by 2025, but declining oil prices have slowed the economy. It is also plagued by political, currency, and social problems.

Brazil

Seventh-largest economy in the world with well-developed agriculture, mining, manufacturing, and service sectors.

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The Future of Global Trade 2 of 2

LO 3-6

The Challenge of Offshore Outsourcing

Outsourcing — Process whereby one firm contracts with other companies to do some or all of its functions.

U.S. firms have outsourced payroll functions, accounting, and manufacturing for years.

With the growth of global markets, companies have been shifting to offshore outsourcing — outsourcing with other countries.

Globalization and Your Future

Study foreign languages.

Learn about foreign cultures.

Take global business courses.

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Figure 3.9 The Pros and Cons of Offshore Outsourcing

LO 3-6

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Appendix of Long Image Descriptions

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Appendix 1 Figure 3.2 The Pros and Cons of Free Trade

Pros of free trade:

The global market contains over 7 billion potential customers for goods and services.

Productivity grows when countries produce goods and services in which they have a comparative advantage.

Global competition and less-costly imports keep prices down, so inflation does not curtail economic growth.

Free trade inspires innovation for new products and keeps firms competitively challenged.

Uninterrupted flow of capital gives countries access to foreign investments, which help keeps interest rates low.

Cons of free trade:

Domestic workers (particularly in manufacturing-based jobs) can lose their jobs due to increased imports or production shifts to low-wage global markets.

Workers may be forced to accept pay cuts from employers, who can threaten to move their jobs to lower-cost global markets.

Moving operations overseas because of intense competitive pressure often means the loss of service jobs and growing numbers of white-collar jobs.

Domestic companies can lose their comparative advantage when competitors build advanced production operations in low-wage countries.

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Appendix 2 Figure 3.3 Largest Exporting Nations in the World and the Largest U.S. Trade Partners

World’s Largest Exporting Nations: United States and Italy

Top U.S. Trading Partners: India and Taiwan

Both: Canada, Mexico, Netherlands, United Kingdom, France, Germany, China, Japan, and South Korea

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Appendix 3 Figure 3.4 Strategies for Reaching Global Markets

From least to most amount of commitment, control, risk, and profit potential, the strategies are:

Licensing

Exporting

Franchising

Contract manufacturing

International joint ventures and strategic alliances

Foreign direct investment

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Appendix 4 Figure 3.6 Oops, Did We Say That?

KFC’s patented slogan “Finger-Lickin’ Good” was understood in Japanese as “Bite Your Fingers Off.”

PepsiCo attempted a Chinese translation of “Come Alive, You’re in the Pepsi Generation” that read to Chinese customers as “Pepsi Brings Your Ancestors Back from the Dead.”

Coors Brewing Company put its slogan “Turn It Loose” into Spanish and found it translated as “Suffer from Diarrhea.”

Perdue Chicken used the slogan “It Takes a Strong Man to Make a Chicken Tender,” which was interpreted in Spanish as “It takes an Aroused Man to Make a Chicken Affectionate.”

On the other side of the translation glitch, Electrolux, a Scandinavian vacuum manufacturer, tried to sell its products in the U.S. market with the slogan “Nothing Sucks Like an Electrolux.”

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Appendix 5 Figure 3.8 Members of the European Union

Members of the European Union: Ireland, Portugal, Spain, France, Luxembourg, Belgium, Netherlands, Denmark, Germany, Liechtenstein, San Marino, Monaco, Italy, Vatican City, Malta, Sweden, Finland, Estonia, Latvia, Lithuania, Poland, Czech Republic, Austria, Slovakia, Hungary, Slovenia, Croatia, Romania, Bulgaria, Greece, Cyprus, Azores, Madeira, Canary Islands, Guiana, Réunion, Martinique, and Guadeloupe.

Applicants of the European Union: Iceland, Serbia, Kosovo, Macedonia, Albania, and Turkey.

Exiting the European Union: United Kingdom

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Appendix 6 Figure 3.9 The Pros and Cons of Offshore Outsourcing

Pros of offshore outsourcing:

Less-strategic tasks can be outsourced globally so that companies can focus on areas in which they can excel and grow.

Outsourced work allows companies to create efficiencies that in fact let them hire more workers.

Consumers benefit from lower prices generated by effective use of global resources and developing nations grow, thus fueling global economic growth.

Cons of offshore outsourcing:

Jobs may be lost permanently and wages fall due to low-cost competition offshore.

Offshore outsourcing may reduce product quality and can therefore cause permanent damage to a company’s reputation.

Communication among company members, with suppliers, and with customers becomes much more difficult.

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