Bethel Concepts Of Business Mixed Economy Business Rights Discussion

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Business Finance

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Like the discussion, you will be asked for your opinion in some questions. Your opinions are important but scoring will depend more on the evidence you provide to support those opinions, than on what those opinions are.

Word count and source requirements are in the course policies, located in the Unit 1 Course Materials.

Each unit has five, equally weighted questions. Like the discussion, the answers are evaluated more on quality than length, but a minimum of 1200 words per unit is required per university policy. A minimum of three scholarly sources are also required. Use book as a source!

Q1 - Stakeholders: The first two parts of this question are straightforward. For the final part, whichever position you take, it’s important to describe the arguments for and against each position and describe how they balance out. Outside sources shouldn’t be needed, but the film assigned for the Unit 2 discussion question addresses both sides of this question clearly.

Writing Tip: For a three part question like this, it can be useful to address each part of the question in a separate paragraph.

Q2 – Mixed Economy: The first part of the question is simple and can be answered fully using information from the Read and Attend sections. Like Q1, for the final part of the question, it’s important to describe the arguments for and against each position and describe how they balance out. In other words, demonstrate familiarity with both sides of the issue and use that to show how you reached your own conclusion. Outside sources can be useful for this question.

Q3 – Free Enterprise: This question is looking at prerequisites to free enterprise, including the individual and business rights described on p. 12, and the legal and regulatory issues described in Appendix B (pp. 67-81). Outside sources shouldn’t be needed.

Q4 – Ethics: This is a fairly complex question. For the first part of the question, be sure to explain why you agree or disagree. In the final part, go beyond how you identify an issue that might be unethical, and look more broadly at how that sort of issue should be identified. This part of the question will definitely be stronger with outside sources.

Q5 – A Workplace Scenario: This is mostly an applied version of Q4. The discussion should go beyond what you would do, and include detail about why. Outside sources can be used to provide support and/or counterarguments for your own reasoning.


1.Define the term Stakeholder. What is the difference between a stakeholder and a stockholder? Does a business necessarily have obligations to anyone besides stockholders?

2.Define the term Mixed Economy. Do you agree with Adam Smith that “the invisible hand of competition” best regulates the economy and that there is no need for government intervention? Support your answer.

3.Your text identified basic individual and business rights that must be present in order for a free enterprise to exist. What obstacles to these rights might exist that would prevent a true free enterprise system?

4.It has been said by some that ethics are subjective to individual interpretation. Do you agree with this statement? How do you identify an issue that might be unethical?

5.Your supervisor informs you that he will allow you to complete your coursework during lunch from your office computer. However, you discover that your company policy specifically indicates that the use of technology for anything other than work is prohibited and could lead to termination. What would you do?

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G U N N , Business A Changing World G E N N I S E 1 4 1 7 T S fer79397_fm_i-xxxvi.indd iii 07/11/14 5:42 PM G U N N , Business G E N N I S E 1 4 1 7 T S fer79397_fm_i-xxxvi.indd v A Changing World tenth edition O.C. Ferrell University of New Mexico Geoffrey A. Hirt DePaul University Linda Ferrell University of New Mexico 07/11/14 5:42 PM PART 1 G U N N , Business in a Changing World G Cha pter 1 App end ix A Cha pter 2 E N The Dynamics of Business and Economics N Guidelines for the IDevelopment of the Business Plan S Business Ethics and Social Responsibility E App end ix B The Legal and Regulatory Environment Cha pter 3 Business in a Borderless World 4 1 1 7 T S fer79397_ch01_001-033.indd 1 06/11/14 9:59 AM 1 The Dynamics of Business and Economics Learning Objectives After reading this chapter, you will be able to: LO 1-4 G U Identify the main participants and activities of business and explain N is important. why studying business Ncompare the four types of economic systems. Define economics and Describe the role of ,supply, demand, and competition in a free- LO 1-5 enterprise system. Specify why and how the health of the economy is measured. LO 1-1 LO 1-2 LO 1-3 LO 1-6 LO 1-7 Define basic concepts such as business, product, and profit. G Trace the evolution of E the American economy and discuss the role of the entrepreneur in the economy. N Evaluate a small-business owner’s situation and propose a course N of action. Chapter Outline Introduction The Nature of Business The Goal of Business The People and Activities of Business Why Study Business? The Economic Foundations of Business Economic Systems The Free-Enterprise System The Forces of Supply and Demand The Nature of Competition Economic Cycles and Productivity The American Economy A Brief History of the American Economy The Role of the Entrepreneur The Role of Government in the American Economy The Role of Ethics and Social Responsibility in Business Can You Learn Business in a Classroom? fer79397_ch01_001-033.indd 2 I S E 1 4 1 7 T S 06/11/14 9:59 AM Enter the World of Business Competition Is Good for Business Mattel vs. Hasbro, Microsoft vs. Apple, Walmart vs. Target—the battles between these competitors are well known. G Competition can be a strong motivator for business success. In a capitalist U society, competition leads businesses to innovate and take risks. It is not uncommon for two or three key players to N dominate an industry. These players often battle one another to provide the best N , product or experience for a customer, making it harder for new entrants to come in. It is essential that a business carefully monitor the progress of its primary competitor to maintain market share. However, sometimes the rivalry between G When this occurs, businesses can failE to consider the threat of newer entrants N of anticompetitive actions. and even face legal consequences because N rivalries is between Coca-Cola and Perhaps one of the largest business Pepsi. Seven years after Coca-Cola was I launched, Pepsi was released. The two companies quickly became rivals,Sbattling for shelf space and their quest to become the beverage of choice for E consumers. For years, these two players businesses is so strong that their entire focus is on destroying the competition. dominated the industry. However, as soda sales began to flatten, competitors emerged to take advantage of new trends. Red Bull, for instance, tapped into 1 4 Unlike Coca-Cola and Pepsi, Red Bull is not known for its good taste. Per1 haps for this reason, its threat to the two beverage makers appeared minimal. 7 Yet with its focus and branding on extreme sports, Red Bull surpassed Pepsi T most valuable brand in the industry, in brand value. The drink is now the third after Coca-Cola and Diet Coke. WhileS rivalry is a strong motivator, businesses the energy drink market. must not get distracted from the possibility of newer competitors.1 fer79397_ch01_001-033.indd 3 06/11/14 9:59 AM 4 Part 1 Business in a Changing World Introduction We begin our study of business in this chapter by examining the fundamentals of business and economics. First, we introduce the nature of business, including its goals, activities, and participants. Next, we describe the basics of economics and apply them to the United States economy. Finally, we establish a framework for studying business in this text. LO 1-1 The Nature of Business business individuals or organizations who try to earn a profit by providing products that satisfy people’s needs A business tries to earn a profit by providing products that satisfy people’s needs. The outcomes of its efforts are products that have both tangible and intangible characteristics that provide satisfaction and benefits. When you purchase a product, you are buying the benefits and satisfaction you think the product will provide. A Subway sandwich, for example, may beG purchased to satisfy hunger, while a Honda Accord may be purchased to satisfy theUneed for transportation and the desire to present a certain image. N product with tangible goods—an automobile, Most people associate the word computer, phone, coat, or someN other tangible item. However, a product can also be a service, which occurs when people or machines provide or process something of , value to customers. Dry cleaning, a checkup by a doctor, a performance by a basketball player—these are examples of services. Some services, such as Flickr, an online photo management and sharing application, do not charge a fee for use but obtain revG enue from ads on their sites. A product can also be an idea. Accountants and attorneys, E for example, generate ideas for solving problems. product a good or service with tangible and intangible characteristics that provide satisfaction and benefits N N The primary goal of all businesses is to earn a profit, the difference between what I and what a customer pays for it. If a company it costs to make and sell a product spends $8.00 to manufacture, fiS nance, promote, and distribute a product that it sells for $10.00, the business earns a profit of $2.00 on each product sold. Businesses have E ts as they choose—within legal limits—because the right to keep and use their profi The Goal of Business profit the difference between what it costs to make and sell a product and what a customer pays for it nonprofit organizations organizations that may provide goods or services but do not have the fundamental purpose of earning profits fer79397_ch01_001-033.indd 4 profit is the reward for the risks they take in providing products. Earning profits contributes to society by providing employment, which in turn provides money that is 1 reinvested in the economy. In addition, profits must be earned in a responsible manner. Not all organizations are businesses, however. Nonprofit organizations, such as 4 National Public Radio (NPR), Habitat for Humanity, and other charities and social 1 purpose of earning profits, although they may causes, do not have the fundamental provide goods or services and engage 7 in fund raising. To earn a profit, a person or organization needs management skills to plan, orgaT nize, and control the activities of the business and to find and develop employees so S will buy. A business also needs marketing exthat it can make products consumers pertise to learn what products consumers need and want and to develop, manufacture, price, promote, and distribute those products. Additionally, a business needs financial resources and skills to fund, maintain, and expand its operations. Other challenges for businesspeople include abiding by laws and government regulations; acting in an ethical and socially responsible manner; and adapting to economic, technological, political, and social changes. Even nonprofit organizations engage in management, marketing, and finance activities to help reach their goals. To achieve and maintain profitability, businesses have found that they must produce quality products, operate efficiently, and be socially responsible and ethical in dealing with customers, employees, investors, government regulators, and the community. 06/11/14 9:59 AM Chapter 1 The Dynamics of Business and Economics 5 Because these groups have a stake in the success and outcomes of a business, they are sometimes called stakeholders. Many businesses, for example, are concerned about how the production and distribution of their products affect the environment. Concerns about landfills becoming high-tech graveyards plague many electronics firms. Sprint became the first wireless company to institute a buyback program that encourages customers to turn in their used mobile devices in exchange for up to $300 in credit. The company cleans and updates the devices and sells them as refurbished phones at a lower cost. This initiative has reached developing G markets because these devices are in high demand for an affordable price. Those devices that are unus- U able are sent to a certified third party for recycling. N The Environmental Protection Agency has recognized the program as one of the best.2 Others are N concerned with promoting business careers among , African American, Hispanic, and Native American students. The Diversity Pipeline Alliance is a network of national organizations that work toward G preparing students and professionals of color for E Consumers are often willing to pay more for products they perceive as leadership and management in the 21st-century environmentally-friendly. workforce. The Pipeline assists individuals in gettingN into the appropriate college, pursuing a career in business, or earning an advanced stakeholders N degree in business.3 Other companies, such as Home Depot, have a long history of groups that have a stake in supporting natural disaster victims, relief efforts, andIrecovery. the success and outcomes of S E a business The People and Activities of Business Figure 1.1 shows the people and activities involved in business. At the center of the figure are owners, employees, and customers; the outer circle includes the primary business activities—management, marketing, and fi1 nance. Owners have to put up resources—money or credit—to start a business. Employees are responsible for the 4 work that goes on within a business. Owners can manage the business themselves or hire employees to accomplish this task. The president, CEO, and chairman of the 1 board of Procter & Gamble, A.G. Lafley, does not own P&G, but is an employee who is responsible for managing all the other employees7in a way that earns a profit for investors, who are the real owners. Finally, and mostTimportantly, a business’s major role is to satisfy the customers who buy its goods or services. Note also that people and forces beyond an organization’s control—such asSlegal and regulatory forces, the economy, competition, technology, the political environment, and ethical and social concerns—all have an impact on the daily operations of businesses. You will learn more about these participants in business activities throughout this book. Next, we will examine the major activities of business. LO 1-2 Management. Notice that in Figure 1.1 management and employees are in the same segment of the circle. This is because management involves coordinating employees’ actions to achieve the firm’s goals, organizing people to work efficiently, and motivating them to achieve the business’s goals. Yang Yuanqing, CEO of Lenovo, recognizes the importance of management to company success. Under his fer79397_ch01_001-033.indd 5 06/11/14 9:59 AM 6 Part 1 Business in a Changing World FIGURE 1.1 Economy Overview of the Business World Finance Owners Information Technology m er g tin en t ke e Cu ar loy ge m Social Responsibility and Ethics sto Emp M ana Ges U N N , s Competition M Legal, Political, and Regulatory Forces G E N one of the largest PC manufacturing businesses in management, Lenovo has become the world, in addition to havingNa strong presence in other markets, such as mobile devices and servers. Their success is largely due to unique and efficient operations. I All of the manufacturing activities are done in-house, allowing them to quickly adapt S to changes in the market and consumer preferences.4 Management is also concerned with acquiring, developing, and using resources (including people) effectively and E efficiently. Amazon enlists workers and suppliers through its Vendor Flex Program to make distribution more efficient.5 Production and manufacturing 1 is another element of management. Hershey, for example, invested $300 million in developing infrastructure and building a new man4 which is equipped with production technology unufacturing plant in Pennsylvania, precedented in the candy industry. 1 They are also extensively training 700 employees to manage the plant’s operations.6 In essence, managers plan, organize, staff, and con7 the work of the company or nonprofit organization. trol the tasks required to carry out We take a closer look at management T activities in Parts 3 and 4 of this text. Marketing. Marketing and S consumers are in the same segment of Figure 1.1 because the focus of all marketing activities is satisfying customers. Marketing includes all the activities designed to provide goods and services that satisfy consumers’ needs and wants. Marketers gather information and conduct research to determine what customers want. Using information gathered from marketing research, marketers plan and develop products and make decisions about how much to charge for their products and when and where to make them available. They also analyze the marketing environment to see if products need to be modified. In response to First Lady Michelle Obama’s campaign against childhood obesity, many companies announced they would begin offering products with reduced sugars, fats, and salts. Coca-Cola fer79397_ch01_001-033.indd 6 06/11/14 9:59 AM Chapter 1 The Dynamics of Business and Economics 7 The Aflac duck advertisement uses humor to demonstrate that Aflac focuses on the individual rather than the company. G U N N , G has launched an anti-obesity campaign with videos encouraging people to be more E active and promising to clearly label its products with calorie counts. Such a response N are often viewed as a main could be a smart move on Coca-Cola’s part because sodas contributor to obesity. Several companies, including ConAgra Foods, Bumble Bee N Foods, and General Mills, have all committed to reducing calories in their products. I grocery shelves since 2009.7 As a result, they have eliminated 6.4 trillion calories from Marketers use promotion—advertising, personal selling, S sales promotion (coupons, games, sweepstakes, movie tie-ins), and publicity—to communicate the benefits and E sales. Nonprofit organizaadvantages of their products to consumers and increase tions also use promotion. For example, the National Fluid Milk Processor Promotion Board’s “milk mustache” advertising campaign has featured Brooke Shields, Beyoncé 1 and even animated “celebKnowles, Sheryl Crow, Elizabeth Hurley, Serena Williams, 8 activities in Part 5 of this text. rities” such as Garfield. We will examine marketing 4 Finance. Owners and finance are in the same part1of Figure 1.1 because, although management and marketing have to deal with financial considerations, it is the pri7 mary responsibility of the owners to provide financial resources for the operation of T if the business fails to make the business. Moreover, the owners have the most to lose a profit. Finance refers to all activities concerned with S obtaining money and using it effectively. People who work as accountants, stockbrokers, investment advisors, or bankers are all part of the financial world. Owners sometimes have to borrow money from banks to get started or attract additional investors who become partners or stockholders. Owners of small businesses in particular often rely on bank loans for funding. Part 6 of this text discusses financial management. Why Study Business? Studying business can help you develop skills and acquire knowledge to prepare for your future career, regardless of whether you plan to work for a multinational Fortune fer79397_ch01_001-033.indd 7 06/11/14 9:59 AM 8 Part 1 Business in a Changing World 500 firm, start your own business, work for a government agency, or manage or volunteer at a nonprofit organization. The field of business offers a variety of interesting and challenging career opportunities throughout the world, such as marketing, human resources management, information technology, finance, production and operations, wholesaling and retailing, and many more. Studying business can also help you better understand the many business activities that are necessary to provide satisfying goods and services—and that these activities carry a price tag. For example, if you buy a new compact disk, about half of the price goes toward activities related to distribution and the retailer’s expenses and profit margins. The production (pressing) of the CD represents about $1, or a small percentage of its price. Most businesses charge a reasonable price for their products to ensure that they cover their production costs, pay their employees, provide their owners with a return on their investment, and perhapsG give something back to their local communities. Bill Daniels founded Cablevision, building his first cable TV system in Casper, Wyoming, U father of cable television.” Prior to Daniels’ passin 1953, and is now considered “the ing in 2000, he had established aNfoundation that currently has funding of $1.1 billion and supports a diversity of causes from education to business ethics. During his career, N Bank, where children could create bank accounts Daniels created the Young Americans and learn about financial responsibility, and this remains the world’s only charter bank , for young people. He created the Daniels College of Business through a donation of $20 million to the University of Denver. During his life, he affected many individuals G success has allowed his legacy to be one of giving and organizations, and his business and impacting communities throughout the United States.9 Thus, learning about busiE ness can help you become a well-informed consumer and member of society. N the profits that are essential not only to individual Business activities help generate businesses and local economies N but also to the health of the global economy. Without profits, businesses find it difficult, if not impossible, to buy more raw materials, hire I and create additional products that in turn make more employees, attract more capital, more profits and fuel the world economy. Understanding how our free-enterprise ecoS nomic system allocates resources and provides incentives for industry and the workplace is important to everyone. E LO 1-3 economics the study of how resources are distributed for the production of goods and services within a social system natural resources land, forests, minerals, water, and other things that are not made by people human resources the physical and mental abilities that people use to produce goods and services; also called labor fer79397_ch01_001-033.indd 8 1 The Economic Foundations of Business To continue our introduction to business, it is useful to explore the economic environ4 ment in which business is conducted. In this section, we examine economic systems, 1 the free-enterprise system, the concepts of supply and demand, and the role of competition. These concepts play important roles in determining how businesses operate 7 in a particular society. T Economics is the study of how resources are distributed for the production of goods and services within a social system. S You are already familiar with the types of resources available. Land, forests, minerals, water, and other things that are not made by people are natural resources. Human resources, or labor, refer to the physical and mental abilities that people use to produce goods and services. Financial resources, or capital, are the funds used to acquire the natural and human resources needed to provide products. Because natural, human, and financial resources are used to produce goods and services, they are sometimes called factors of production. The firm can also have intangible resources such as a good reputation for quality products or being socially responsible. The goal is to turn the factors of production and intangible resources into a competitive advantage. 06/11/14 9:59 AM Chapter 1 The Dynamics of Business and Economics 9 Economic Systems An economic system describes how a particular society distributes its resources to produce goods and services. A central issue of economics is how to fulfill an unlimited demand for goods and services in a world with a limited supply of resources. Different economic systems attempt to resolve this central issue in numerous ways, as we shall see. Although economic systems handle the distribution of resources in different ways, all economic systems must address three important issues: 1. What goods and services, and how much of each, will satisfy consumers’ needs? 2. How will goods and services be produced, who will produce them, and with what resources will they be produced? 3. How are the goods and services to be distributed to consumers? G U N N , Communism, socialism, and capitalism, the basic economic systems found in the world today (Table 1.1), have fundamental differences Gin the way they address these issues. The factors of production in command economies are controlled by governE or controls the production of ment planning. In many cases, the government owns goods and services. Communism and socialism are, N therefore, considered command economies. The Young Americans Bank in Denver was created by cable magnate Bill Daniels. It is the only chartered bank in the world that makes loans to children. N I Communism. Karl Marx (1818–1883) first described communism as a society in which the people, without regard to class, own all the nation’s resources. In S his ideal political-economic system, everyone contributes according to ability and receives benefits according to need. In a communistEeconomy, the people (through the government) own and operate all businesses and factors of production. Central government planning determines what goods and services satisfy citizens’ needs, how 1 distributed. However, no true the goods and services are produced, and how they are communist economy exists today that satisfies Marx’s 4ideal. On paper, communism appears to be efficient and equitable, producing less of a 1 gap between rich and poor. In practice, however, communist economies have been marked by low standards of living, critical shortages 7 of consumer goods, high prices, corruption, and little freedom. Russia, Poland, Hungary, and other eastern European T nations have turned away from communism and toward economic systems governed S However, their experiments by supply and demand rather than by central planning. with alternative economic systems have been fraught with difficulty and hardship. Cuba continues to apply communist principles to its economy, but Cuba is also experiencing economic and political change. Countries such as Venezuela have tried to incorporate communist economic principles. However, communism is declining and its future as an economic system is uncertain. When Fidel Castro stepped down as president of Cuba, his younger brother Raul formally assumed the role and eliminated many of the bans, including allowing the purchase of electric appliances, microwaves, computers, and cell phones. The communist country appears more open to free enterprise now.10 There is a plan to shift hundreds of thousands of Cuban fer79397_ch01_001-033.indd 9 financial resources the funds used to acquire the natural and human resources needed to provide products; also called capital economic system a description of how a particular society distributes its resources to produce goods and services communism first described by Karl Marx as a society in which the people, without regard to class, own all the nation’s resources 06/11/14 9:59 AM 10 Part 1 Business in a Changing World TABLE 1.1 Comparison of Communism, Socialism, and Capitalism Communism Socialism Capitalism Business ownership The government owns Most businesses are owned and operated by and operates major industries; individuals the government. own small businesses. Individuals own and operate all businesses. Competition None. The government owns and operates everything. Restricted in major industries; encouraged in small business. Encouraged by market forces and government regulations. Profits Excess income goes to the government. Profits earned by small businesses may be reinvested in the business; profits from government-owned industries go to the government. Individuals are free to keep profits and use them as they wish. Consumers have some choice of goods and services; prices are determined by supply and demand. Consumers have a wide choice of goods and services; prices are determined by supply and demand. Some choice of careers; many people work in government jobs. Unlimited choice of careers. Product availability and price G U N Consumers N have a limited choice of goods , prices and services; are usually high. Employment options G Little choice in choosing a career; E most people work for N government-owned industries orN farms. I S E Source: “Gross Domestic Product or Expenditure, 1930–2002,” InfoPlease (n.d.), (accessed February 16, 2004). ® Need help understanding Basic Economic Systems? Visit your Connect ebook video tab for a brief animated explanation. socialism an economic system in which the government owns and operates basic industries but individuals own most businesses fer79397_ch01_001-033.indd 10 workers from the public sector to the private sector. Similarly, China has become the first communist country to 1 make strong economic gains by adopting capitalist approaches to business. The Chinese state is the largest shareholder among China’s 150 largest companies and infl4 uences thousands of other businesses.11 Economic prosperity has advanced in China 1 with the government claiming to ensure market openness, equality, and fairness.12 7 Socialism. Socialism is an economic system in which the government owns and T operates basic industries—postal service, telephone, utilities, transportation, health S care, banking, and some manufacturing—but individuals own most businesses. For example, in France the postal service industry La Poste is fully owned by the French government and makes a profit. Central planning determines what basic goods and services are produced, how they are produced, and how they are distributed. Individuals and small businesses provide other goods and services based on consumer demand and the availability of resources. Citizens are dependent on the government for many goods and services. Most socialist nations, such as Sweden, India, and Israel, are democratic and recognize basic individual freedoms. Citizens can vote for political offices, but central government planners usually make decisions about what is best for the nation. 06/11/14 9:59 AM Chapter 1 The Dynamics of Business and Economics People are free to go into the occupation of their choice, but they often work in government-operated organizations. Socialists believe their system permits a higher standard of living than other economic systems, but the difference often applies to the nation as a whole rather than to its individual citizens. Socialist economies profess egalitarianism— equal distribution of income and social services. They believe their economies are more stable than those of other nations. Although this may be true, taxes and unemployment are generally higher in socialist countries. Perhaps as a result, many socialist countries have also experienced economic difficulties. G U N N Capitalism, or free enterprise, is an , economic system in which in- Capitalism. dividuals own and operate the majority of businesses that provide goods and services. Competition, supply, and demand determine which goods and services are produced, G The United States, Canada, how they are produced, and how they are distributed. Japan, and Australia are examples of economic systems based on capitalism. E There are two forms of capitalism: pure capitalism and modified capitalism. In Neconomic decisions are made pure capitalism, also called a free-market system, all without government intervention. This economic system N was first described by Adam Smith in The Wealth of Nations (1776). Smith, often called the father of capitalism, believed that the “invisible hand of competition” bestI regulates the economy. He argued that competition should determine what goods and S services people need. Smith’s system is also called laissez-faire (“let it be”) capitalism because the government does E not interfere in business. Modified capitalism differs from pure capitalism in that the government intervenes and regulates business to some extent. One of the ways in which the United States and Canadian governments regulate business is through 1 laws. Laws such as the Federal Trade Commission Act, which created the Federal Trade 4 Commission to enforce antitrust laws, illustrate the importance of the government’s role in the economy. In the 1 and took ownership positions most recent recession, the government provided loans in banks such as Citigroup, AIG (an insurance company), 7 and General Motors. These actions were thought necessary to keep these firms from going out of business and T creating a financial disaster for the economy. 11 The Federal Trade Commission enforces antitrust laws and monitors businesses to ensure fair competition. capitalism (free enterprise) an economic system in which individuals own and operate the majority of businesses that provide goods and services free-market system pure capitalism, in which all economic decisions are made without government intervention S Mixed Economies. No country practices a pure form of communism, socialism, or capitalism, although most tend to favor one system over the others. Most nations operate as mixed economies, which have elements from more than one economic system. In socialist Sweden, most businesses are owned and operated by private individuals. In capitalist United States, an independent federal agency operates the postal service and another independent agency operates the Tennessee Valley Authority, an electric utility. In Great Britain and Mexico, the governments are attempting to sell many state-run businesses to private individuals and companies. In Germany, the Deutsche Post is privatized and trades on the stock market. In once-communist fer79397_ch01_001-033.indd 11 mixed economies economies made up of elements from more than one economic system 06/11/14 9:59 AM 12 Part 1 Business in a Changing World Russia, Hungary, Poland, and other eastern European nations, capitalist ideas have been implemented, including private ownership of businesses. Countries such as China and Russia have used state capitalism to advance the economy. State capitalism tries to integrate the powers of the state with the advantages of capitalism. It is led by the government but uses capitalistic tools such as listing stateowned companies on the stock market and embracing globalization.13 State capitalism includes some of the world’s largest companies such as Russia’s Gazprom, which is the largest natural gas company. China’s ability to make huge investments to the point of creating entirely new industries puts many private industries at a disadavantage.14 The Free-Enterprise System Many economies—including those of the United States, Canada, and Japan—are based on free enterprise, and many G communist and socialist countries, such as China and Russia, are applying more principles of free enterprise to their own economic U an opportunity for a business to succeed or fail systems. Free enterprise provides on the basis of market demand.NIn a free-enterprise system, companies that can efficiently manufacture and sell products that consumers desire will probably succeed. N Inefficient businesses and those that sell products that do not offer needed benefits , their business to firms that have more competitive will likely fail as consumers take products. A number of basic individual and business rights must exist for free enterprise to work. These rights are the goalsG of many countries that have recently embraced free enterprise. E 1. Individuals must have the N right to own property and to pass this property on to their heirs. This right motivates people to work hard and save to buy property. 2. Individuals and businessesN must have the right to earn profits and to use the profits as they wish, withinI the constraints of their society’s laws, principles, and values. S 3. Individuals and businesses must have the right to make decisions that E operates. Although there is government determine the way the business regulation, the philosophy in countries like the United States and Australia is to permit maximum freedom within a set of rules of fairness. 4. Individuals must have the 1 right to choose what career to pursue, where to live, what goods and services to4purchase, and more. Businesses must have the right to choose where to locate, what goods and services to produce, what resources 1 to use in the production process, and so on. 7 Without these rights, businesses cannot function effectively because they are not T rights make possible the open exchange of goods motivated to succeed. Thus, these and services. In the countries that S favor free enterprise, such as the United States, citizens have the freedom to make many decisions about the employment they choose and create their own productivity systems. Many entrepreneurs are more productive in free-enterprise societies because personal and financial incentives are available that can aid in entrepreneurial success. For many entrepreneurs, their work becomes a part of their system of goals, values, and lifestyle. Consider the panelists (“sharks”) on the ABC program Shark Tank. Panelists on Shark Tank give entrepreneurs a chance to receive funding to realize their dreams by deciding whether to invest in their projects. They include Barbara Corcoran, who built one of New York’s largest real estate companies; Mark Cuban, founder of and MicroSolutions; and Daymond John, founder of clothing company FUBU.15 fer79397_ch01_001-033.indd 12 06/11/14 9:59 AM Chapter 1 The Dynamics of Business and Economics 13 The Forces of Supply and Demand In the United States and in other free-enterprise systems, the distribution of resources and products is determined by supply and demand. Demand is the number of goods LO 1-4 and services that consumers are willing to buy at different prices at a specific time. From your own experience, you probably recognize that consumers are usually will- demand ing to buy more of an item as its price falls because they want to save money. Consider the number of goods and handmade rugs, for example. Consumers may be willing to buy six rugs at $350 each, services that consumers are willing to buy at different four at $500 each, but only two at $650 each. The relationship between the price and prices at a specific time the number of rugs consumers are willing to buy can be shown graphically with a demand curve (see Figure 1.2). supply Supply is the number of products that businesses are willing to sell at different prices the number of products— at a specific time. In general, because the potential for profits is higher, businesses are goods and services—that willing to supply more of a good or service at higher G prices. For example, a company businesses are willing to sell that sells rugs may be willing to sell six at $650 each, U four at $500 each, but just two at at different prices at a specific $350 each. The relationship between the price of rugs and the quantity the company is time N curve (see Figure 1.2). willing to supply can be shown graphically with a supply In Figure 1.2, the supply and demand curves intersect N at the point where supply and demand are equal. The price at which the number of products that businesses are willing to supply equals the amount of products that ,consumers are willing to buy at a specific point in time is the equilibrium price. In our rug example, the company is equilibrium price willing to supply four rugs at $500 each, and consumers are willing to buy four rugs the price at which the number Gfor a rug at that point in time, of products that businesses at $500 each. Therefore, $500 is the equilibrium price are willing to supply equals and most rug companies will price their rugs at $500.EAs you might imagine, a busi- the amount of products that ness that charges more than $500 (or whatever the current equilibrium price is) for consumers are willing to buy N its rugs will not sell many and might not earn a profit. On the other hand, a business at a specific point in time that charges less than $500 accepts a lower profit perNrug than could be made at the equilibrium price. I If the cost of making rugs goes up, businesses will not offer as many at the old price. Changing the price alters the supply curve, andS a new equilibrium price results. This is an ongoing process, with supply and demand E constantly changing in response to changes in economic conditions, availability of resources, and degree of competition. For example, the price of 1 oil can change rapidly and has been be4 tween $35 and $145 a barrel over the last five years. Prices for goods and ser1 vices vary according to these changes in 7 supply and demand. This concept is the force that drives the distribution of reT sources (goods and services, labor, and S money) in a free-enterprise economy. Critics of supply and demand say the system does not distribute resources equally. The forces of supply and demand prevent sellers who have to sell at higher prices (because their costs are high) and buyers who cannot afford to buy goods at the equilibrium price from participating in the market. An entrepreneur presents his idea for a new product. Entrepreneurs are more productive in free-enterprise systems. According to critics, the wealthy can fer79397_ch01_001-033.indd 13 06/11/14 9:59 AM 14 Part 1 FIGURE 1.2 Equilibrium Price of Handmade Rugs Business in a Changing World Prices of Rugs (dollars) $800 Equilibrium Price 650 500 350 Supply Curve 200 0 ® Need help understanding Supply and Demand? Visit your Connect ebook video tab for a brief animated explanation. competition the rivalry among businesses for consumers’ dollars pure competition the market structure that exists when there are many small businesses selling one standardized product monopolistic competition the market structure that exists when there are fewer businesses than in a purecompetition environment and the differences among the goods they sell are small fer79397_ch01_001-033.indd 14 1 G U 2 N N , Demand Curve 3 4 5 6 7 Handmade Rugs afford to buy more than they need, but the poor may be unable to buy enough of what they need to survive. G E The Nature of Competition Competition, the rivalry amongNbusinesses for consumers’ dollars, is another vital element in free enterprise. According N to Adam Smith, competition fosters efficiency and low prices by forcing producers to offer the best products at the most reasonable price; those who fail to do so areInot able to stay in business. Thus, competition should improve the quality of the goods S and services available or reduce prices. Consider Marriott International, for example. It went from a small root beer stand in 1927 to E its current status of 3,900 high-quality hotels in 72 countries. Marriott believed that if it treated its employees well, they in turn would provide good service to customers. Marriott has garnered a reputation as a high-quality hotel chain. It is now competing to attract younger travelers with1reinvented lobbies filled with amenities and convenient ways to check in and out of4a hotel, among other changes. It is also significantly expanding in Africa and Asia to capitalize on new market opportunities. The Marriott 1 has been ranked as one of the leading hotel groups across the world. Competition and its drive to succeed have helped 7 the firm achieve its current high status.16 Within a free-enterprise system, there are four types of competitive environments: T pure competition, monopolistic competition, oligopoly, and monopoly. S there are many small businesses selling one Pure competition exists when standardized product, such as agricultural commodities like wheat, corn, and cotton. No one business sells enough of the product to influence the product’s price. And, because there is no difference in the products, prices are determined solely by the forces of supply and demand. Monopolistic competition exists when there are fewer businesses than in a purecompetition environment and the differences among the goods they sell is small. Aspirin, soft drinks, and vacuum cleaners are examples of such goods. These products differ slightly in packaging, warranty, name, and other characteristics, but all satisfy the same consumer need. Businesses have some power over the price they charge in 06/11/14 9:59 AM Responding to Business Challenges Swatch Works to Restructure Company, Supply Less Parts to Competition The Swatch Group SA is known for its beautifully elegant watches as well as its high-quality and precisely made internal movements and components. These internal parts have generated many sales for the company. At the same time, it has also generated a number of challenges. For several years, Swatch has been appealing to the Swiss Competition Commission to change regulation under the Swiss Cartel Act. The act mandates that Swatch supply movements and comG ponents of watches to other watchmakers. In other words, Swatch must provide supplies to its competitors in the watch U industry. Swatch wants to stop supplying components to its N rivals. Being the main supplier increases Swatch’s expenses while allowing its competition to invest more money in adN vertising, thus stifling Swatch’s sales. Repeatedly, the com, pany’s requests have been delayed or declined by the Swiss government because of the large market share that Swatch has in the industry. Swatch and its subsidiaries provide approximately 70 percent of the movements and 90 percent of components to other domestic and foreign brands. Stopping the supply will have a tremendous effect on the entire industry. While the Swiss government has agreed to minimal reductions in Swatch’s supplying of movements, cuts to the supply of components cannot be reduced.17 Discussion Questions 1. Why does Swatch want to stop selling watch components? 2. Why is the Swiss government reluctant to allow Swatch to stop supplying components to its competitors? 3. Based on the large share of the watch movements and components industry that Swatch controls, which competitive environment do you think it operates in: pure competition, monopolistic competition, oligopoly, or monopoly? G E N monopolistic competition because they can make consumers aware of product differences through advertising. Jawbone, for example, differentiates its Jambox portable N speakers through product design and quality. Consumers value some features more than others and are often willing to pay higher pricesI for a product with the features they want. For example, many consumers are willing S to pay a higher price for organic fruits and vegetables rather than receive a bargain on nonorganic foods. The same E holds true for non-genetically modified foods. An oligopoly exists when there are very few businesses selling a product. In an oligopoly, individual businesses have control over their products’ price because each 1 the marketplace. Nonetheless, business supplies a large portion of the products sold in the prices charged by different firms stay fairly close4because a price cut or increase by one company will trigger a similar response from another company. In the airline 1 industry, for example, when one airline cuts fares to boost sales, other airlines quickly follow with rate decreases to remain competitive. On 7 the other hand, airlines often raise prices at the same time. Oligopolies exist when it is expensive for new firms to T enter the marketplace. Not just anyone can acquire enough financial capital to build an automobile production facility or purchase enoughSairplanes and related resources to build an airline. When there is one business providing a product in a given market, a monopoly exists. Utility companies that supply electricity, natural gas, and water are monopolies. The government permits such monopolies because the cost of creating the good or supplying the service is so great that new producers cannot compete for sales. Government-granted monopolies are subject to government-regulated prices. Some monopolies exist because of technological developments that are protected by patent laws. Patent laws grant the developer of new technology a period of time (usually 20 years) during which no other producer can use the same technology without the oligopoly the market structure that exists when there are very few businesses selling a product monopoly the market structure that exists when there is only one business providing a product in a given market 15 fer79397_ch01_001-033.indd 15 06/11/14 9:59 AM 16 Part 1 economic expansion the situation that occurs when an economy is growing and people are spending more money; their purchases stimulate the production of goods and services, which in turn stimulates employment inflation a condition characterized by a continuing rise in prices economic contraction a slowdown of the economy characterized by a decline in spending and during which businesses cut back on production and lay off workers recession a decline in production, employment, and income unemployment the condition in which a percentage of the population wants to work but is unable to find jobs FIGURE 1.3 Business in a Changing World agreement of the original developer. The United States granted its first patent in 1790. Now its patent office receives hundreds of thousands of patent applications a year, although Asian countries—including Japan, China, and South Korea—are not far behind.18 This monopoly allows the developer to recover research, development, and production expenses and to earn a reasonable profit. An example of this type of monopoly is the dry-copier process developed by Xerox. Xerox’s patents have expired, however, and many imitators have forced market prices to decline. Economic Cycles and Productivity Expansion and Contraction. Economies are not stagnant; they expand and contract. Economic expansion occurs when an economy is growing and people are spending more money. Their purchases stimulate the production of goods and serG vices, which in turn stimulates employment. The standard of living rises because more people are employed and have U money to spend. Rapid expansions of the economy, a continuing rise in prices. Inflation can be harmful if however, may result in inflation,N individuals’ incomes do not increase at the same pace as rising prices, reducing their N buying power. The worst case of hyperinflation occurred in Hungary in 1946. At one point, prices were doubling every, 15.6 hours. One of the most recent cases of hyperinflation occurred in Zimbabwe.19 Zimbabwe suffered from hyperinflation so severe that its inflation percentage rate rose into the hundreds of millions. With the elimination of G price controls, the inflation rate began to decrease, the Zimbabwean dollar and certain 20 but not before the country’s economy E was virtually decimated. Economic contraction occurs when spending declines. Businesses cut back on production and lay off workers,N and the economy as a whole slows down. Contrac—a decline in production, employment, and tions of the economy lead to recession N income. Recessions are often characterized by rising levels of unemployment, which is measured as the percentage Iof the population that wants to work but is unable to find jobs. Figure 1.3 shows S the overall unemployment rate in the civilian labor force over the past 80 years. Rising unemployment levels tend to stifle demand for E Annual Average Unemployment Rate, Civilian Labor Force, 16 Years and Over 1 4 1 7 T S Percent Unemployed 16 14 12 10 8 6 4 2 0 1940 1950 1960 1970 1980 1990 2000 2006 Year 2007 2008 2009 2010 2011 2012 2013 Sources: Bureau of Labor Statistics, “Household Data Annual Averages,” (accessed February 20, 2014); Bureau of Labor Statistics, “Labor Force Statistics from the Current Population Survey, (accessed February 20, 2014). fer79397_ch01_001-033.indd 16 06/11/14 9:59 AM Chapter 1 The Dynamics of Business and Economics 17 G U You can see what the U.S. government currently owes—down to the penny—by going to the website for the Bureau of the Public Debt, N N , goods and services, which can have the effect of forcing prices downward, a condition known as deflation. The United States has experienced numerous recessions, the most G 2008–2011. The most recent recent ones occurring in 1990–1991, 2002–2003, and recession (or economic slowdown) was caused by theEcollapse in housing prices and consumers’ inability to stay current on their mortgage and credit card payments. This N caused a crisis in the banking industry, with the government bailing out banks to keep them from failing. This in turn caused a slowdown in N spending on consumer goods and an increase in employment. Unemployment reached 10 percent of the labor force. I Don’t forget that personal consumption makes up almost 70 percent of gross domestic product, so consumer behavior is extremely importantSfor economic activity. A severe is very high, consumer recession may turn into a depression, in which unemployment E spending is low, and business output is sharply reduced, such as what occurred in the United States in the early 1930s. The most recent recession is often called the Great Recession because it was the longest and most severe 1 economic decline since the Great Depression. 4 in consumer, business, and Economies expand and contract in response to changes government spending. War also can affect an economy, 1 sometimes stimulating it (as in the United States during World Wars I and II) and sometimes stifling it (as dur7 ing the Vietnam, Persian Gulf, and Iraq wars). Although fluctuations in the economy are inevitable and to a certain extent predictable, T their effects—inflation and unemployment—disrupt lives and thus governments try to minimize them. depression a condition of the economy in which unemployment is very high, consumer spending is low, and business output is sharply reduced S Measuring the Economy. Countries measure the state of their economies to determine whether they are expanding or contracting and whether corrective action is necessary to minimize the fluctuations. One commonly used measure is gross domestic product (GDP)—the sum of all goods and services produced in a country during a year. GDP measures only those goods and services made within a country and therefore does not include profits from companies’ overseas operations; it does include profits earned by foreign companies within the country being measured. However, it does not take into account the concept of GDP in relation to population (GDP per capita). Figure 1.4 shows the increase in GDP over several years, while Table 1.2 compares a number of economic statistics for a sampling of countries. fer79397_ch01_001-033.indd 17 LO 1-5 gross domestic product (GDP) the sum of all goods and services produced in a country during a year 06/11/14 9:59 AM 18 Business in a Changing World Part 1 FIGURE 1.4 Growth in U.S. Gross Domestic Product Billions of Dollars 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1950 1960 1970 1980 1990 2000 G U N 2005 2006 N Year , 2007 2008 2009 2010 2011 2012 2013 Source: U.S. Department of Commerce Bureau of Economic Analysis, “National Economic Accounts,” (accessed February 20, 2014). TABLE 1.2 Economic Indicators of Different Countries Country Argentina Australia Brazil Canada China France G E GDP (in billions N of dollars) 735.1N 961 I 2,330 S 1,474 E GDP per Capita Unemployment Rate (%) Inflation Rate (%) 17,900 7.20 25.3 42,000 5.2 1.8 11,700 5.5 5.4 42,300 7.3 1.5 9,100 6.5 2.6 35,300 9.8 2.2 38,700 5.5 2.1 3,800 8.5 9.7 33,900 6.9 1.7 35,900 4.4 0.0 15,400 5.0 4.1 17,500 5.50 5.1 11,300 25.1 5.7 2,313 36,600 8.0 2.8 16,803 51,700 7.4 2.1 12,260 2,238 1 Mexico 3,167 4 4,716 1 260.97 4,576 T 1,798 S Russia 2,486 Germany India Israel Japan South Africa United Kingdom United States 576.1 Source: U.S. Department of Commerce Bureau of Economic Analysis, “National Economic Accounts,” index.htm#gdp (accessed February 20, 2014); The CIA, The World Fact Book, rankorder/rankorderguide.html (accessed February 20, 2014). fer79397_ch01_001-033.indd 18 06/11/14 9:59 AM Chapter 1 The Dynamics of Business and Economics 19 TABLE 1.3 Unit of Measure Description Trade balance The difference between our exports and our imports. If the balance is negative, as it has been since the mid-1980s, it is called a trade deficit and is generally viewed as unhealthy for our economy. Consumer Price Index Measures changes in prices of goods and services purchased for consumption by typical urban households. Per capita income Indicates the income level of “average” Americans. Useful in determining how much “average” consumers spend and how much money Americans are earning. Unemployment rate Indicates how many working-age Americans are not working who otherwise want to work.* Inflation Monitors price increases in consumer goods and services over specified periods of time. Used to determine if costs of goods U and services are exceeding worker compensation over time. N Worker productivity The amount of goods and services producedN for each hour worked. How Do We Evaluate Our Nation’s Economy? G , *Americans who do not work in a traditional sense, such as househusbands/housewives, are not counted as unemployed. G health is the relationship beAnother important indicator of a nation’s economic tween its spending and income (from taxes). When a E nation spends more than it takes in from taxes, it has a budget deficit. In the 1990s, the U.S. government eliminated N spent for social, defense, and its long-standing budget deficit by balancing the money other programs with the amount of money taken in from N taxes. In recent years, however, the budget deficit has reemerged and grown to record levI els, partly due to defense spending in the aftermath of the terrorist attacks of September 11, 2001. Massive government stimulus spending during S the most recent recession also increased the national debt. Because many Americans do not want their taxes increased E and Congress has difficulty agreeing on appropriate tax rates, it is difficult to increase taxes and reduce the deficit. Like consumers and businesses, when the government needs money, it borrows from the public, banks, and even 1 foreign investors. In 2013, the national debt (the amount of money the nation owes its lenders) exceeded $16 trillion, 4 to reduce the debt to a mana new high.21 This figure is especially worrisome because, ageable level, the government either has to increase its1revenues (raise taxes) or reduce spending on social, defense, and legal programs, neither of which is politically popular. 7 to reduce the deficit caused the The size of the national debt and little agreement on how credit rating of the U.S. debt to go down in 2011. The national debt figure changes daily T and can be seen at the Department of the Treasury, Bureau of the Public Debt, website. Sour nation’s economy. Table 1.3 describes some of the other ways we evaluate budget deficit the condition in which a nation spends more than it takes in from taxes The American Economy As we said previously, the United States is a mixed economy with a foundation based on capitalism. The answers to the three basic economic issues are determined primarily by competition and the forces of supply and demand, although the federal government does intervene in economic decisions to a certain extent. To understand the current state of the American economy and its effect on business practices, it is helpful to examine its history and the roles of the entrepreneur and the government. fer79397_ch01_001-033.indd 19 LO 1-6 06/11/14 9:59 AM Going Green Luxury Automakers Embracing Eco-Friendly Interiors What type of car uses bamboo, eucalyptus, reclaimed logs, or old fence posts in its interior? The answer is luxury cars. Consumers of luxury cars prefer natural wood interiors rather than plastic or fiberglass. While exotic wood increases the luxury of the vehicle, the most valuable wood comes from old-growth forests and other vulnerable areas. Instead, automakers are turning to wood from reclaimed logs and bamboo. Using these woods allows luxury car makers to differentiate themselves from competitors and appeal to the eco-conscious consumer. Electric vehicle company Fisker has incorporated three types of reclaimed wood into its Karma sedans, including wood collected from areas damaged by forest fires, wood fallen to the bottom of lakes, and wood that fell during storms. BMW announced that its electric vehicle, the i3 plug-in, will have a eucalyptus interior, a plant that grows back quickly. Ford is using the tropical kenaf plant to replace oil-based materials in its Ford Escape. With more consumers desiring sustainable products, using plant-based materials can increase perceptions of brand value. There might also be another reason for using plant-based materials in car construction. In addition to being more sustainable, some of these materials are lighter than traditional materials. For instance, Ford states that using kenaf plants to replace oil-based resins inside its doors reduces door by 25 percent. Lighter cars are more fuel-efficient, Gbolsters which saves consumers money on gasoline.22 U NDiscussion Questions might eco-friendly wood interior appeal to luxury car N1. Why buyers? , 2. What impact could using these plant-based materials have on the reputations of luxury automakers? 3. What are some benefits in using plant-based materials G besides appealing to the luxury car buyer? E N A Brief History of the American Economy N The Early Economy. BeforeI the colonization of North America, Native Americans lived as hunter/gatherers and farmers, with some trade among tribes. The colonists who came later operated primarily asS an agricultural economy. People were self-sufficient and produced everything they needed E at home, including food, clothing, and furniture. Abundant natural resources and a moderate climate nourished industries such as farming, fishing, shipping, and fur trading. A few manufactured goods and money for the colonies’ burgeoning industries 1 came from England and other countries. As the nation expanded slowly toward the West, people found natural resources 4 such as coal, copper, and iron ore and used them to produce goods such as horse1 utensils. Farm families who produced surplus shoes, farm implements, and kitchen goods sold or traded them for things 7 they could not produce themselves, such as fine furniture and window glass. Some families also spent time turning raw materials into T clothes and household goods. Because these goods were produced at home, this system was called the domestic system. S The Industrial Revolution. The 19th century and the Industrial Revolution brought the development of new technology and factories. The factory brought together all the resources needed to make a product—materials, machines, and workers. Work in factories became specialized as workers focused on one or two tasks. As work became more efficient, productivity increased, making more goods available at lower prices. Railroads brought major changes, allowing farmers to send their surplus crops and goods all over the nation for barter or for sale. Factories began to spring up along the railways to manufacture farm equipment and a variety of other goods to be shipped by rail. Samuel Slater set up the first 20 fer79397_ch01_001-033.indd 20 06/11/14 9:59 AM Chapter 1 The Dynamics of Business and Economics 21 American textile factory after he memorized the plans for an English factory and emigrated to the United States. Eli Whitney revolutionized the cotton industry with his cotton gin. Francis Cabot Lowell’s factory organized all the steps in manufacturing cotton cloth for maximum efficiency and productivity. John Deere’s farm equipment increased farm production and reduced the number of farmers required to feed the young nation. Farmers began to move to cities to find jobs in factories and a higher standard of living. Henry Ford developed the assembly-line system to produce automobiles. Workers focused on one part of an automobile and then pushed it to the next stage until it rolled off the assembly line as a finished automobile. Ford’s assembly line could manufacture many automobiles efficiently, and the price of his cars was $200, making them affordable to many Americans. The Manufacturing and Marketing Economies. Industrialization brought increased prosperity, and the United StatesGgradually became a manufacturing economy—one devoted to manufacturing goods U and providing services rather than producing agricultural products. The assembly line was applied to more indusN tries, increasing the variety of goods available to the consumer. Businesses became more concerned with the needs of the consumer and N entered the marketing economy. Expensive goods such as cars and appliances could be , purchased on a time-payment plan. Companies conducted research to find out what products consumers needed and wanted. Advertising made consumers aware of products and important information about features, prices, and other competitive advantages. G Because these developments occurred in a free-enterprise system, consumers deE did this by purchasing the termined what goods and services were produced. They products they liked at prices they were willing to pay. N The United States prospered, and American citizens had one of the highest standards of living in the world. N The Service and New Digital Economy. After World War II, with the inI creased standard of living, Americans had more money and more time. They began to S Beginning in the 1960s, more pay others to perform services that made their lives easier. and more women entered the workforce. The United E States began experiencing major shifts in the population. The U.S. population grew 9.7 percent in the past decade to about 316 million. This is the slowest pace of growth since the Great Depression, with the South leading the population gains. While the birth rate in the 1 United States is declining, new immigrants help with population gains.23 The profile of the family is also changing: Today 4 alone, and in two-parent famithere are more single-parent families and individuals living lies, both parents often work. 1 One result of this trend is that time-pressed Americans are increasingly paying others to do tasks they used7to DID YOU KNOW? Approximately 59 percent of adult do at home, like cooking, laundry, landscaping, and child T women are engaged in the workforce.24 care. These trends have gradually changed the United S of services that make life States to a service economy—one devoted to the production easier for busy consumers. Businesses increased their demand for services, especially in the areas of finance and information technology. Service industries such as restaurants, banking, health care, child care, auto repair, leisure-related industries, and even education are growing rapidly and may account for as much as 80 percent of the U.S. economy. These trends continue with advanced technology contributing to new service products based on technology and digital media that provide smart phones, social networking, and virtual worlds. Table 1.4 provides evidence that the new digital economy is changing how we use information and the service industry. More about the digital world, business, and new online social media can be found in Chapter 13. fer79397_ch01_001-033.indd 21 06/11/14 9:59 AM 22 TABLE 1.4 Cell Phone Activities Part 1 Business in a Changing World The % of cell phone owners who use their cell phone to . . . 81 send or receive text messages 60 access the Internet 52 send or receive email 50 download apps 49 get directions, recommendations, or other location-based information 48 listen to music 21 participate in a video call or video chat 8 “check in” or share G your location U N N , Source: Pew Research Center’s Internet & American Life Project Spring Tracking Survey, April 17–May 19, 2013. N 5 2,076 cell phone owners. Interviews were conducted in English and Spanish and on landline and cell phones. The margin of error for results based on all cell phone owners is 1/22.4 percentage points. The Role of the Entrepreneur entrepreneur an individual who risks his or her wealth, time, and effort to develop for profit an innovative product or way of doing something fer79397_ch01_001-033.indd 22 An entrepreneur is an individual who risks his or her wealth, time, and effort to develop for profit an innovative product G or way of doing something. Nick Woodman is a true American entrepreneur. At 26, Woodman—who was an avid surfer—identified E the need to film events from the athlete’s perspective. He developed GoPro Inc., which makes wearable camerasN that are easily attachable to surfboards, ski helmets, and other equipment. Consumers N who used a GoPro camera inundated YouTube with their own amateur videos, leading to strong word-of-mouth marketing. GoPro I and the company’s backers want to take the firm became so popular that Woodman 25 public—at a valuation of more than S $2.3 billion. The free-enterprise system provides the conditions necessary for entrepreneurs E to succeed. In the past, entrepreneurs were often inventors who brought all the factors of production together to produce a new product. Thomas Edison, whose inventions include the record player and lightbulb, was an early American entre1 the first persons to develop mass assembly methpreneur. Henry Ford was one of ods in the automobile industry. 4 Other entrepreneurs, so-called captains of industry, invested in the country’s growth. John D. Rockefeller built Standard Oil out of the 1 Carnegie invested in railroads and founded the fledgling oil industry, and Andrew United States Steel Corporation. 7 Andrew Mellon built the Aluminum Company of America and Gulf Oil. J.P. Morgan started financial institutions to fund the busiT ness activities of other entrepreneurs. Although these entrepreneurs were born in another century, their legacy toSthe American economy lives on in the companies they started, many of which still operate today. Colonel Eli Lilly in Indianapolis, Indiana, was continually frustrated with the quality of pharmaceutical products sold at the time. As a pharmaceutical chemist, he decided to start his own firm that would offer the highest-quality medicines. His firm, Eli Lilly and Company, would go on to make landmark achievements, including being one of the first pharmaceutical firms to mass-produce penicillin. Today, Eli Lilly is the 10th largest pharmaceutical firm in the world.26 Entrepreneurs are constantly changing American business practices with new technology and innovative management techniques. Bill Gates, for example, built 06/11/14 9:59 AM Entrepreneurship in Action Emeco Makes Indestructible Chairs Electric Machine and Equipment Company (Emeco) Founder: Wilton Carlyle Dinges Founded: 1944, in Hanover, Pennsylannia Success: Although it started out with the Navy as its only customer, Emeco’s chair products are now common in businesses across the world. Emeco was founded to make chairs for the Navy during World War II. The chairs had to meet certain specifications, such as the ability to withstand water, salt air, and sailors. The G result was the virtually indestructible 1006, or the Navy Chair. It was made from aluminum and underwent a proprietary U 77-step handmade process still used today. N After the war, however, Emeco faced difficulties. The indestructible nature of the chairs reduced the need for replacement N orders. Then Emeco discovered that a designer named Philippe Starck was incorporating the chairs into his redesign of New York’s Paramount Hotel. Emeco partnered with Starck to create redesigns that would appeal to more customers. This marked the beginning of a new personality for Emeco. Over the years, Emeco has increased its clientele. Its chairs are commonly found in restaurants and airports and are even featured in movies. Coca-Cola has approached Emeco to create a version of the 1006 chair made from 111 recycled plastic bottles. Business markets appreciate the chairs’ ability to withstand extreme pressure, while others enjoy the beautiful designs suitable for art gallery exhibits. Collaborating with designers has allowed Emeco to continue for more than 70 years.27 , G Word and WinMicrosoft, a software company whose products include dows, into a multibillion-dollar enterprise. Frederick ESmith had an idea to deliver packages overnight, and now his FedEx Company plays an N important role in getting documents and packages delivered all over the world for businesses and individuals. Steve JobsNco-founded Apple and turned the company into a successful consumer electronics firm I that revolutionized many different industries, with products such as the S went from near iPod, iPhone, Mac computers, and iPad. The company bankruptcy in the 1990s to become one of the mostEvaluable brands in the entire world. Entrepreneurs have been associated with such uniquely American concepts as Dell Computers, Ben & Jerry’s, Levi’s, McDonald’s, Dr Pepper, Apple, Google, Facebook, and 1 Walmart. Walmart, founded by entrepreneur Sam Walton, was the first retailer to reach 4 passes that mark, $100 billion in sales in one year and now routinely 28 with more than $466 billion in 2013. We will examine 1 the importance of entrepreneurship further in Chapter 5. 7 T The Role of Government in the American Economy S The American economic system is best described as modified capitalism because the government regulates business to preserve competition and protect consumers and employees. Federal, state, and local governments intervene in the economy with laws and regulations designed to promote competition and to protect consumers, employees, and the environment. Many of these laws are discussed in Appendix B. Additionally, government agencies such as the U.S. Department of Commerce measure the health of the economy (GDP, productivity, etc.) and, when necessary, take steps to minimize the disruptive effects of Google Wallet is a mobile payments system that allows users to store their credit card or debit card information. When checking out at stores, users can bring up the app and use the information to pay for their purchases. 23 fer79397_ch01_001-033.indd 23 06/11/14 9:59 AM 24 Many companies engage in socially responsible behavior to give back to their communities. Home Depot partners with Habitat for Humanity to build homes for disadvantaged families. Part 1 Business in a Changing World economic fluctuations and reduce unemployment. When the economy is contracting and unemployment is rising, the federal government through the Federal Reserve Board (see Chapter 15) tries to spur growth so that consumers will spend more money and businesses will hire more employees. To accomplish this, it may reduce interest rates or increase its own spending for goods and services. When the economy expands so fast that inflation results, the government may intervene to reduce inflation by slowing down economic growth. This can be accomplished by raising interest rates to discourage spending by businesses and consumers. Techniques used to control G the economy are discussed in Chapter 15. U The Role of Ethics andNSocial Responsibility in Business In the past few years, you mayN have read about a number of scandals at a number of well-known corporations, including Enron, Countrywide Financial, BP, and even , leading banks such as Bank of America and Citigroup. In many cases, misconduct by individuals within these firms had an adverse effect on current and retired employees, investors, and others associated with these firms. In some cases, individuals went to G like Enron’s Jeffrey Skilling and Tyco’s Dennis jail for their actions. Top executives Kozlowski received long prisonEsentences for their roles in corporate misconduct. These scandals undermined public confidence in corporate America and sparked a N new debate about ethics in business. Business ethics generally refers to the standards and principles used by society toNdefine appropriate and inappropriate conduct in the workplace. In many cases, these I standards have been codified as laws prohibiting actions deemed unacceptable. S that businesspeople behave ethically and soSociety is increasingly demanding cially responsibly toward not only E their customers but also employees, investors, government regulators, communities, and the natural environment. No area is more debated as online piracy. Software, music, and film executives want to defend their intellectual property. On the other 1 hand, companies such as Google are concerned that strict laws would stifle innovation and enable censorship.29 When actions are heavily 4 criticized, a balance is usually required to support and protect various stakeholders. While one view is that ethics1and social responsibility are a good supplement to business activities, there is an alternative viewpoint. Research has shown that ethical behavior can not only enhance 7 a company’s reputation but can also drive profits.30 The ethical and socially responsible T conduct of companies such as Whole Foods, Starbucks, and the hotel chain Marriott provides evidence that good ethics is good S business. There is growing recognition that the long-term value of conducting business in an ethical and socially responsible manner that considers the interests of all stakeholders creates superior financial performance.31 To promote socially responsible and ethical behavior while achieving organizational goals, businesses can monitor changes and trends in society’s values. Businesses should determine what society wants and attempt to predict the long-term effects of their decisions. While it requires an effort to address the interests of all stakeholders, businesses can prioritize and attempt to balance conflicting demands. The goal is to develop a solid reputation of trust and avoid misconduct to develop effective workplace ethics. fer79397_ch01_001-033.indd 24 06/11/14 9:59 AM Chapter 1 The Dynamics of Business and Economics 25 Can You Learn Business in a Classroom? Obviously, the answer is yes, or there would be no purpose for this textbook! To be successful in business, you need knowledge, skills, experience, and good judgment. The topics covered in this chapter and throughout this book provide some of the knowledge you need to understand the world of business. The opening vignette at the beginning of each chapter, boxes, examples within each chapter, and the case at the end of each chapter describe experiences to help you develop good business judgment. The “Build Your Skills” exercise at the end of each chapter and the “Solve the Dilemma” box will help you develop skills that may be useful in your future career. However, good judgment is based on knowledge and experience plus personal insight and understanding. Therefore, you need more courses in business, along with some practical experience in the business world, to help you develop the special insight necessary to put your personal stamp on knowledge as you apply it. The challenge in businessGis in the area of judgment, and judgment does not develop from memorizing an introductory business textbook. If you U are observant in your daily experiences as an employee, as a student, and as a consumer, N you will improve your ability to make good business judgments. Figure 1.5 is an overview of how the chapters in this N book are linked together and how the chapters relate to the participants, the activities, and the environmental factors found , in the business world. The topics presented in the chapters that follow are those that will give you the best opportunity to begin the process of understanding the world of business. G E N N I S E Economy (Chapter 1) Finance s 14, 15, 16) r e t p a (Ch 12 1 4 1 7p a Ch M (T S ) Legal, Political, and Regulatory Forces (Chapter 2 Appendix) m er Cu The Organization of This Book Digital Marketing (Chapter 13) te r ar s 11 ke , 12 , 13) ti n g e es sto loy 1, Emp 1 0, ,1 8, 9 t ( C h a p t e r s 6, 7, e m e n g M ana Competition (Chapter 1) s Owners FIGURE 1.5 Business Ethics and Social Responsibility (Chapter 2) Special Topics: Global Business (Chapter 3) Forms of Ownership (Chapter 4) Small Business, Entrepreneurship, and Franchising (Chapter 5) fer79397_ch01_001-033.indd 25 06/11/14 9:59 AM So You Want a Job in the Business World When most people think of a career in business, they see themselves entering the door to large companies and multinationals that they read about in the news and that are discussed in class. In a national survey, students indicated they would like to work for Google, Walt Disney, Apple, and Ernst & Young. In fact, most jobs are not with large corporations, but are in small companies, nonprofit organizations, government, and even selfemployed individuals. There are nearly 22 million individuals who own their own businesses and have no employees. With more than 75 percent of the economy based on services, there are jobs available in industries, such as health care, finance, education, hospitality, entertainment, and transportation. The world is changing quickly and large corporations replace the equivalent of their entire workforce every four years. The fast pace of technology today means that you have to be prepared to take advantage of emerging job opportunities and markets. You must also become adaptive and recognize that business is becoming more global, with job opportunities around the world. If you want to obtain such a job, you shouldn’t miss a chance to spend some time overseas. To get you started on the path to thinking about job opportunities, Review Your Understanding Define basic concepts such as business, product, and profit. A business is an organization or individual that seeks a profit by providing products that satisfy people’s needs. A product is a good, service, or idea that has both tangible and intangible characteristics that provide satisfaction and benefits. Profit, the basic goal of business, is the difference between what it costs to make and sell a product and what a customer pays for it. Identify the main participants and activities of business and explain why studying business is important. The three main participants in business are owners, employees, and customers, but others—government regulators, suppliers, social groups, etc.—are also important. Management involves planning, organizing, and controlling the tasks required to carry out the work of the company. Marketing refers to those activities—research, product development, promotion, pricing, and distribution—designed to provide goods and services that satisfy customers. Finance refers to activities concerned with funding a business and using its funds effectively. Studying business can help you prepare for a career and become a better consumer. consider all of the changes in business today that might affect your possible long-term track and that could bring you lots of success. You may want to stay completely out of large organizations and corporations and put yourself in a position for an entrepreneurial role as a self-employed contractor or smallbusiness owner. However, there are many who feel that experience in larger businesses is helpful to your success later as an entrepreneur. You’re on the road to learning the key knowledge, skills, and trends that you can use to be a star in business. Business’s impact on our society, especially in the area of sustainability and improvement of the environment, is a growing challenge and G opportunity. Green businesses and green jobs in the business world are provided to give you a glimpse at the possiU Along the way, we will introduce you to some specific bilities. careers N and offer advice on developing your own job opportunities. Research indicates that you won’t be that happy with your N unless you enjoy your work and feel that it has a purpose. job Since , you spend most of your waking hours every day at work, you need to seriously think about what is important to you in a job.32 G E N N I S Defi E ne economics and compare the four types of economic systems. Economics is the study of how resources are distributed for the production of goods and services within a social system; an 1 economic system describes how a particular society distributes its4resources. Communism is an economic system in which the people, 1 without regard to class, own all the nation’s resources. In a socialist system, the government owns and operates basic 7 industries, but individuals own most businesses. Under capitalism, individuals own and operate the majority of businesses that T provide goods and services. Mixed economies have elements from S more than one economic system; most countries have mixed economies. Describe the role of supply, demand, and competition in a free-enterprise system. In a free-enterprise system, individuals own and operate the majority of businesses, and the distribution of resources is determined by competition, supply, and demand. Demand is the number of goods and services that consumers are willing to buy at different prices at a specific time. Supply is the number of goods or services that businesses are willing to 26 fer79397_ch01_001-033.indd 26 06/11/14 9:59 AM Chapter 1 The Dynamics of Business and Economics sell at different prices at a specific time. The price at which the supply of a product equals demand at a specific point in time is the equilibrium price. Competition is the rivalry among businesses to convince consumers to buy goods or services. Four types of competitive environments are pure competition, monopolistic competition, oligopoly, and monopoly. These economic concepts determine how businesses may operate in a particular society and, often, how much they can charge for their products. Specify why and how the health of the economy is measured. A country measures the state of its economy to determine whether it is expanding or contracting and whether the country G needs to take steps to minimize fluctuations. One commonly U used measure is gross domestic product (GDP), the sum of all goods and services produced in a country during a year. A budN get deficit occurs when a nation spends more than it takes in from taxes. N 27 Trace the evolution of the American economy and discuss the role of the entrepreneur in the economy. The American economy has evolved through several stages: the early economy, the Industrial Revolution, the manufacturing economy, the marketing economy, and the service and Internetbased economy of today. Entrepreneurs play an important role because they risk their time, wealth, and efforts to develop new goods, services, and ideas that fuel the growth of the American economy. Evaluate a small-business owner’s situation and propose a course of action. “Solve the Dilemma” on page 29 presents a problem for the owner of the firm. Should you, as the owner, raise prices, expand operations, or form a venture with a larger company to deal with demand? You should be able to apply your newfound understanding of the relationship between supply and demand to assess the situation and reach a decision about how to proceed. , Revisit the World of Business G • Why is competition important in a capitalist economy? E N • Why do businesses need to focus on both primary competitors and newer entrants? N I Learn the Terms S entrepreneur 22 E budget deficit 19 Revisit the World of Business Questions business 4 capitalism (free enterprise) 11 communism 9 competition 14 demand 13 depression 17 economic contraction 16 economic expansion 16 economic system 9 economics 8 • How was Red Bull able to become a major competitor in an industry dominated by two main players? equilibrium price 13 financial resources 9 1 11 free-market system gross domestic product 4 (GDP) 17 human resources 8 1 inflation 16 mixed economies711 monopolistic competition 14 T monopoly 15 S natural resources 8 nonprofit organizations 4 oligopoly 15 product 4 profit 4 pure competition 14 recession 16 socialism 10 stakeholders 5 supply 13 unemployment 16 Check Your Progress 1. What is the fundamental goal of business? Do all 3. Who are the main participants of business? What are the organizations share this goal? 2. Name the forms a product may take and give some examples of each. main activities? What other factors have an impact on the conduct of business in the United States? 4. What are four types of economic systems? Can you provide an example of a country using each type? fer79397_ch01_001-033.indd 27 06/11/14 9:59 AM 28 Part 1 Business in a Changing World 5. Explain the terms supply, demand, equilibrium price, and 8. Why are fluctuations in the economy harmful? competition. How do these forces interact in the American economy? 6. List the four types of competitive environments and provide an example of a product of each environment. 7. List and define the various measures governments may use to gauge the state of their economies. If unemployment is high, will the growth of GDP be great or small? 9. How did the Industrial Revolution influence the growth of the American economy? Why do we apply the term service economy to the United States today? 10. Explain the federal government’s role in the American economy. Get Involved 1. Discuss the economic changes occurring in Russia and 3. Is the American economy currently expanding or Gcontracting? Defend your answer with the latest statistics Uon GDP, inflation, unemployment, and so on. How is the federal government responding? N N , eastern European countries, which once operated as communist economic systems. Why are these changes occurring? What do you think the result will be? 2. Why is it important for the government to measure the economy? What kinds of actions might it take to control the economy’s growth? Build Your Skills The Forces of Supply and Demand Background WagWumps are a new children’s toy with the potential to be a highly successful product. WagWumps are cute and furry, and their eyes glow in the dark. Each family set consists of a mother, a father, and two children. Wee-Toys’ manufacturing costs are about $6 per set, with $3 representing marketing and FIGURE 1.6 Equilibrium Price of WagWumps G E N distribution costs. The wholesale price of a WagWump family for aN retailer is $15.75, and the toy carries a suggested retail price ofI $26.99. S Task Assume E you are a decision maker at a retailer, such as Target or Walmart, that must determine the price the stores in your district 1 Prices of WagWumps $31.99 4 1 7 T S 26.99 21.99 16.99 11.99 6.99 1.99 1 fer79397_ch01_001-033.indd 28 2 3 4 5 6 7 8 9 Quantity of WagWumps (in thousands) 10 11 12 06/11/14 9:59 AM Chapter 1 The Dynamics of Business and Economics should charge customers for the WagWump family set. From the information provided, you know that the SRP (suggested retail price) is $26.99 per set and that your company can purchase the toy set from your wholesaler for $15.75 each. Based on the following assumptions, plot your company’s supply curve on the graph provided in Figure 1.6 and label it “supply curve.” Quantity 3,000 5,000 7,000 Price Using the following assumptions, plot your customers’ demand curve on Figure 1.6 and label it “demand curve.” Quantity Price 10,000 6,000 2,000 $16.99 21.99 26.99 For this specific time, determine the point at which the quantity of toys your company is willing to supply equals the quantity of toys the customers in your sales district are willing to buy and label that point “equilibrium price.” $16.99 21.99 26.99 G U Mrs. Acres Homemade Pies N Shelly Acres, whose grandmother gave her N a family recipe for making pies, loved to cook, and , she decided to start a business she called Solve the Dilemma 29 LO 1-7 Mrs. Acres Homemade Pies. The company produces specialty pies and sells them in local G supermarkets and select family restaurants. In each of the first six months, Shelly and three part-time employees sold E 2,000 pies for $4.50 each, netting $1.50 profit per pie. The pies were quite successful and Shelly could not keep up with deN mand. The company’s success results from a quality product N and productive employees who are motivated by incentives and who enjoy being part of a successful new business. I To meet demand, Shelly expanded operations, borrowing S money and increasing staff to four full-time employees. Production and sales increased to 8,000 pies per month, and profits soared to $12,000 per month. However, demand for Mrs. Acres Homemade Pies continues to accelerate beyond what Shelly can supply. She has several options: (1) maintain current production levels and raise prices; (2) expand the facility and staff while maintaining the current price; or (3) contract the production of the pies to a national restaurant chain, giving Shelly a percentage of profits with minimal involvement. Discussion Questions 1. Explain and demonstrate the relationship between supply and demand for Mrs. Acres Homemade Pies. 2. What challenges does Shelly face as she considers the three options? 3. What would you do in Shelly’s position? E 1 4 The Dynamics of Business and Economics 1 Have you ever thought about owning your busi7 ness? If you have, how did your idea come about? Is it your experience with this particular T field? Or might it be an idea that evolved from your desires for a particular good or service not S Build Your Business Plan being offered in your community? For example, perhaps you and your friends have yearned for a place to go have coffee, relax, and talk. Now is an opportunity to create the café bar you have been thinking of! Whether you consider yourself a visionary or a practical thinker, think about your community. What needs are not being fer79397_ch01_001-033.indd 29 met? While it is tempting to suggest a new restaurant (maybe even one near campus), easier-to-implement business plans can range from a lawn care business or a designated driver business to a placement service agency for teenagers. Once you have an idea for a business plan, think about how profitable this idea might be. Is there sufficient demand for this business? How large is the market for this particular business? What about competitors? How many are there? To learn about your industry, you should do a thorough search of your initial ideas of a product on the Internet. 06/11/14 9:59 AM 30 Part 1 Business in a Changing World See for Yourself Videocase Redbox Succeeds by Identifying Market Need Redbox’s tell-tale bright red kiosks in stores and fast-food restaurants across the country have become an image of what a great business model can accomplish. The company’s ability to offer customers a convenient and inexpensive DVD rental option has allowed them to grow despite the widespread growth of streaming services such as Netflix and Amazon. In addition, Redbox has responded competitively by partnering with Verizon to offer their own streaming service in conjunction with DVD rentals. As one of the top rental companies in the United States, Redbox is a true entrepreneurial success story. Building Redbox into a successful firm was not easy, however. It was fraught with challenges. Like most successful companies, Redbox started out by identifying a need. It recognized that consumers could not often find the movies they wanted in convenient locations. Like all good ideas, Redbox required funding to get started. This proved to be a major difficulty. Realizing that customers did not want to pay much for renting movies, Redbox decided to charge only one dollar. Yet the kiosks, which contain over 800 components, required a large amount of capital. The combination of the capital-intensive nature of the business and the low prices was not an attractive recipe for venture capital funding. However, Redbox was certain that demand for its product offerings would exceed the costs. The company finally found a partner in the more established Outerwall, formerly known as Coinstar, which already had partnerships with many different retailers. The alliance opened the way for Redbox to begin installing kiosks at the front of stores. Redbox did not immediately expand across the country. Instead, it took a cautious approach toward its business model. It began by focusing its efforts on making one kiosk profitable, then replicating this way of thinking regionally and nationally. In this way, Redbox was able to test its concept without taking the risk of widespread failure. Even though it was expanding, it was some time before Redbox was able to earn a profit. Like all entrepreneurs, the founders of Redbox had to take many risks if they wanted the company to succeed. “The risks for starting Redbox were significant,” said Marc Achler, vice president of new business, strategy, and innovation. “The first couple years we had some red ink. It took us a while before we turned profitable.” Yet with persistence and continual relationship building with retailers, Redbox has been able to secure more than 50 percent of the DVD-rental market. One way that Redbox has been able to secure such a large share of the market is by meeting the needs of a variety of stakeholders. Redbox views its customers as its first priority and has developed its kiosks and database to meet their needs. For instance, customers can reserve movies online and pick them up at their nearest kiosk. If a kiosk happens to be out of a particular movie, customers can search the Redbox database toG locate the movie at a nearby kiosk. This combination of convenience and low prices has attracted customers who desire a U ed process to renting movies. The same is true for their simplifi streaming service, Redbox Instant by Verizon, which offers unN limited streaming for the same price as competitors and the option N to purchase DVDs from the site. Additionally, Redbox has created a process that also benefi,ts the needs of its retail partners. Redbox kiosks help attract consumers to the store, where they may purchase additional products. Customers must come back the next day to return G movie, where they may once again purchase more prodtheir ucts from the retailer. In this way, Redbox creates a win-win E situation for both itself and its partners. NThis is not to say that everything is easy for Redbox. For instance, it must continually safeguard against allowing underage N to rent inappropriate (rated-R) movies. And while Redchildren box I has approached this changing and dynamic marketplace proactively, it must continue to do so in order to maintain its S competitive position. The company’s ability to price rentals and streaming services at 70 percent of the price of competitors E and still make a 6 percent return is impressive, but this can easily change as competitors find ways to lower their prices or consumers’ desires change.33 1 Discussion Questions 4 1. Why are consumers so willing to rent from Redbox? 2.1 How was Redbox able to overcome some of its earliest 7 challenges? 3. What are some recommendations for ways that Redbox T can maintain its high market share? S You can find the related video in the Video Library in Connect. Ask your instructor how you can access Connect. Team Exercise Major economic systems, including capitalism, socialism, and communism, as well as mixed economies, were discussed in this chapter. Assuming that you want an economic system that is best for the majority, not just a few members fer79397_ch01_001-033.indd 30 of society, defend one of the economic systems as the best system. Form groups and try to reach agreement on one economic system. Defend why you support the system that you advance. 06/11/14 9:59 AM Appendix A Guidelines for the Development of the Business Plan These guidelines are for students to create a hypothetiPhase 2: Final Written cal business plan for a good/service/business of their Business Plan choice. Students should assume to have $25,000 to start this new business in their community. At the end of every chapter, there will be a section Executive Summary. The executive summary entitled “Build Your Business Plan” to assist you in theG appears first but should be written last. development of the business plan. U N Business Description. This section requires fleshing out the body of the business plan, including Phase 1: Development of the N material from your revised preliminary proposal with Business Proposal , more data, charts, and appendices. Include a descripYou are encouraged to submit your idea for approval tion of the proposed form of organization, either a partto your instructor as soon as possible. This will eliminership or corporation, and the rationalization of the nate wasted effort on an idea that is not feasible in theG form chosen. instructor’s view. Business plan proposals will be evaluated based on their thoroughness and your ability toE Industry and Market Analysis. An analysis provide support for the idea. N of the industry including the growth rate of the industry The business proposal consists of the following number of new entrants into this field is necessary. N and elements. Identify uncontrollable variables within the industry. I Determine an estimate of the proposed realistic size Business Description. This consists of an of the potential market. This will require interpretation overview of the existing good/service or the good/S...
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