G
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Business
A Changing World
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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
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PART 1
G
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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
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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
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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
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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.
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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
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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
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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
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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.
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Chapter 1
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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
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Part 1
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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.), www.infoplease.com/ipa/A0104575.html (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.
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Chapter 1
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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
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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 Broadcast.com and MicroSolutions; and Daymond
John, founder of clothing company FUBU.15
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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
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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
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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,” ftp://ftp.bls.gov/pub/special.requests/lf/aa2010/pdf/cpsaat1.pdf (accessed February 20, 2014); Bureau of Labor
Statistics, “Labor Force Statistics from the Current Population Survey, http://data.bls.gov/timeseries/LNS14000000 (accessed February 20, 2014).
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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
www.publicdebt.treas.gov/
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,” www.bea.gov/national/index.htm#gdp (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,” www.bea.gov/national/
index.htm#gdp (accessed February 20, 2014); The CIA, The World Fact Book, www.cia.gov/library/publications/the-world-factbook/
rankorder/rankorderguide.html (accessed February 20, 2014).
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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
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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
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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
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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
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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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