UNDERSTANDING Business TWELFTH EDITION William G. Nickels UNI VERSI TY O F M A RYL A ND James M. McHugh ST. LO UI S COM M UNIT Y C OL L EGE AT F OREST PA RK Susan M. McHugh APPLI E D LE ARNING SYST EM S UNDERSTANDING BUSINESS, TWELFTH EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2019 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2016, 2013, and 2010. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 LWI 21 20 19 18 ISBN 978-1-259-92943-4 MHID 1-259-92943-4 Director: Michael Ablassmeir Executive Portfolio Manager: Anke Braun Weekes Executive Marketing Manager: Gabe Fedota Senior Product Developer: Lai T. Moy Lead Content Project Manager: Christine Vaughan Senior Content Project Manager: Bruce Gin Lead Content Licensing Specialist: Carrie Burger Senior Designer: Matt Diamond Senior Buyer: Laura Fuller Cover image: ©McGraw-Hill Education Compositor: SPi Global All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. Library of Congress Cataloging-in-Publication Data Names: Nickels, William G., author. | McHugh, James M., author. | McHugh,    Susan M., author. Title: Understanding business / William Nickels, University of Maryland,    College Park, James M. McHugh, Saint Louis CC Forest Park, Susan M.    McHugh, Saint Louis CC Forest Park. Description: Twelfth edition. | New York, NY : McGraw-Hill Education, [2019] Identifiers: LCCN 2017047683 | ISBN 9781259929434 (alk. paper) Subjects: LCSH: Industrial management. | Business. | Business--Vocational    guidance. Classification: LCC HD31.2 .N53 2019 | DDC 650--dc23 LC record available at https://lccn.loc.gov/2017047683 The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites. mheducation.com/highered DEDICATION To our families—Marsha, Joel, Carrie, Claire, Casey, Dan, Molly, Michael, Patrick, and Quinn. Thank you for making everything worth doing and giving us the support to do it well! AND To the team that made this edition possible, especially the instructors and students who gave us such valuable guidance as we developed the text and package. ABOUT THE AUTHORS Bill Nickels is emeritus professor of business at the University of Maryland, College Park. He has over 30 years’ experience teaching graduate and undergraduate business courses, including introduction to business, marketing, and promotion. He has won the Outstanding Teacher on Campus Award four times and was nominated for the award many other times. He received his MBA degree from Western Reserve University and his PhD from Ohio State University. Bill has written a marketing communications text and two marketing principles texts in addition to many articles in business publications. He has taught many seminars to businesspeople on subjects such as power communications, marketing, nonbusiness marketing, and stress and life management. His son, Joel, is a professor of English at the University of Miami (Florida). Jim McHugh holds an MBA degree from Lindenwood University and has had broad experience in education, business, and government. As chair of the Business and Economics Department of St. Louis Community College–Forest Park, Jim coordinated and directed the development of the business curriculum. In addition to teaching several sections of Introduction to Business each semester for nearly 30 years, Jim taught in the marketing and management areas at both the undergraduate and graduate levels. Jim enjoys conducting business seminars and consulting with small and large businesses. He is actively involved in the public-service sector and served as chief of staff to the St. Louis County Executive. Susan McHugh is a learning specialist with extensive training and experience in adult learning and curriculum development. She holds an MEd degree from the University of Missouri and completed her course work for a PhD in education administration with a specialty in adult learning theory. As a professional curriculum developer, she has directed numerous curriculum projects and educator training programs. She has worked in the public and private sectors as a consultant in training and employee development. While Jim and Susan treasure their participation in writing projects, their greatest accomplishment is their collaboration on their three children. Casey is carrying on the family’s teaching tradition as an adjunct professor at Washington University. Molly and Michael are carrying on the family writing tradition by contributing to the development of several supplementary materials for this text. iv Photos: ©McGraw-Hill Education THE GOLD STANDARD IN PREPARING FUTURE-READY LEARNERS Congratulations. You’ve made an excellent selection. Welcome to the preeminent teaching and learning experience ever created for Introduction to Business classes. Our experienced and diverse authors and long-tenured editorial team have created a product that meets the needs of nearly all classrooms, no matter the size, teaching modality, or learning objectives. The content is unmatched in depth, breadth, currency, and relevancy, and is presented in an extremely readable format for students with all learning styles. A wealth of technology solutions engages students, enriches learning, furthers understanding, and simplifies instructors’ assessment processes. Course supplements tightly align with chapter concepts and enhance retention, making instructors of all experience levels Grade-A rock stars. And unparalleled support from our digital faculty consultants helps ensure you and your students benefit from the full experience of what is now the gold standard in Introduction to Business classes. Nickels/McHugh/ McHugh, Understanding Business, 12th Edition does more than teach—it prepares students to create real impact on the world. 1. THE GOLD STANDARD IN RELEVANCY AND CURRENCY Real-world case studies—across nearly all industries and company sizes—ensure your students are apprised of the most current challenges businesspeople face today. From Brexit and ransomware to 3D printing and robo-advisors, you have access to numerous relevant samples that tie directly into chapter lessons. Plus with the option to take advantage of the From the News to the Classroom blog, you can enrich the learning experience with content that is updated multiple times each week and includes abstracts of relevant news stories, videos tied to chapter topics, and critical thinking questions that streamline your prep time and help create an ultra-current course. 2. THE GOLD STANDARD IN RESULTS-DRIVEN TECHNOLOGY Interactive learning tools increase teaching effectiveness and learning efficiency by facilitating a stronger connection between the course material and the modern student. Where the Science of Learning Meets the Art of Teaching McGraw-Hill Connect is the leading online assignment and assessment solution that connects students with the tools and resources they need to achieve success. It also allows instructors to quickly and easily choose the content and assignments that will best emphasize the learning objectives they prefer to cover. The result is a customized course, rich with engaging presentations and activities that prepare students for the business world. The First and Only Adaptive Reading Experience SmartBook creates a dynamic reading experience and personalizes content for each student, helping students master and retain foundational concepts. Tracking each student’s progress, it automatically assesses comprehension levels and v delivers the content required to reinforce topics needing more attention. This continuously adaptive learning path is proven to accelerate learning and strengthen memory recall, all while providing instructors a turnkey tool that ensures students stay on track. Bridging the Gap between Theory and Real Life Having knowledge is the first step—and understanding how to apply that knowledge is what determines a person’s success in the working world. That’s why we provide an array of application exercises that are as educational as they are engaging. Click-and-Drag exercises reinforce key models and processes, and demonstrate application-level knowledge. Video Cases allow students to observe and analyze key concepts as they are utilized by companies and organizations they know and recognize. Case analyses expose students to real-world scenarios and engage their critical-thinking and analysis skills. And 20-minute Mini-Simulations put students in the role of business professionals, allowing them to make decisions and learn from the results. 3. THE GOLD STANDARD IN TEACHING RESOURCES Whether it’s your first or fortieth year teaching, you can benefit from a wealth of assessments and class-tested resources that simplify your evaluation process and enrich the learning experience. Assessment Tools: • SmartBook, which holds students accountable for class preparation and engagement. • Chapter quizzes that are prebuilt to cover all chapter learning objectives. • Test bank that is by far the largest and most accurate collection of questions on the market, with over 300 questions per chapter. • Application exercises reinforce concepts and facilitate application-level comprehension. • Video assignments help explain difficult concepts and show business concepts in action in companies large and small. • Mini-simulations allow students to immerse themselves in critical-thinking and problem-solving opportunities of realistic business scenarios. • Business Plan Prep assignments support students building their semester project. vi Additional Resources: • New teacher’s resource manual includes tools to improve retention and engagement, while helping save the instructor’s time. • From the News to the Classroom blog is updated multiple times each week, featuring abstracts of relevant news stories, video tied to chapter topics, and critical-thinking questions that streamline your prep time and help create an ultra-current course. • PowerPoint presentations include integrated polling questions that improve student engagement. • Test bank and quizzes are unparalleled in the number of test items provided and the depth and currency, and make testing student knowledge a simple and efficient process. • Video library with Video Teaching Guide includes:  Company case videos produced specifically to expound on chapter learning objectives via real-world business situations across a broad range of industries, sizes, and geographic locations, allowing students to contextualize the chapter’s content. ■  Hotseat videos offer short cases that show real business professionals confronting a variety of workplace challenges. ■  iSeeIt! animated video explanations clarify some of the most important topics and can be accessed within the e-book. ■  Current video clips on the From the News to the Classroom blog tie to chapter topics and keep your classroom current. ■ 4. THE GOLD STANDARD IN SUPPORT, SERVICE, AND SOLUTIONS We want you to get the most out of our products, and we do everything possible to help provide your students an exceptional learning experience. From the first to the last day of the semester, we support you with: • • • • • • • Learning technology representatives Digital faculty consultants Student ambassadors Implementation consultants Technical support Integration with your learning management system Content your way/customizable content/a robust library of cross-disciplinary content • Student progress-tracking • Accreditation and assurance of learning ready • Fully automated lecture capture via Tegrity® Our team of digital faculty consultants and extensive toolbox of support programs ensure you receive the full value of all this product has to offer. THE BOTTOM LINE The business world is constantly changing, and your classroom needs to keep up. With Nickels/McHugh/McHugh, Understanding Business, 12th Edition, both you and your students can experience the Gold Standard in Introduction to Business classes. vii CHANGES TO THE NEW EDITION Users of Understanding Business have always appreciated the currency of the material and the large number of examples from companies of all sizes and industries (e.g., service, manufacturing, nonprofit, and profit) in the United States and around the world. A glance at the Chapter Notes will show you that almost all of them are from 2016 or 2017. Accordingly, the latest business practices and other developments affecting business include: • • • • • • • • • • • • • • • • • • • • • • • • • Brexit Compassionate capitalism Gig economy Withdrawal from TPP Lifting of Cuba trade restrictions UN’s Sustainable Development Goals (SDGs) Social media advertising Social networking Benefit corporations Circular economy Products as services Human Resource Information Systems (HRISs) Market-based pay structure On-call scheduling Continuous performance reviews Bullying in the workplace Ban-the-box job application and initial interview rule Holocracy Drones 3D printing and additive manufacturing Wells Fargo and Volkswagen scandals 2016 Supreme Court decision on insider trading Robo-advisors Ransomware And much, much more McGraw-Hill Customer Experience Group Contact Information At McGraw-Hill Education, we understand that getting the most from new technology can be challenging. That’s why our services don’t stop after you purchase our products. You can e-mail our Product Specialists 24 hours a day to get product training online. Or you can search our knowledge bank of Frequently Asked Questions on our support website. For Customer Support, call 800-331-5094 or visit www.mhhe.com/support. One of our Technical Support Analysts will be able to assist you in a timely fashion. viii ACKNOWLEDGMENTS O ur executive portfolio manager Anke Weekes led the talented team at McGraw-Hill Education. We appreciate her dedication to the success of the project and her responsiveness to the demands of the market. Lai T. Moy served as our senior product developer and kept everyone on task and on schedule. Molly and Michael McHugh contributed the new boxes and profiles. Matt Diamond created the new fresh, open interior design and extraordinary cover. Carrie Burger and Jen Blankenship carried out the extensive research for photos that was necessary to effectively reflect the concepts presented in the text. Lead project manager, Christine Vaughan, did a splendid job of keeping the production of the text on schedule. Bruce Gin expertly supervised Connect production. Many dedicated educators and content experts made extraordinary contributions to the quality and utility of this teaching and learning package. For this edition, Molly McHugh did an exceptional job in preparing the Test Bank. Diana Murphy and her team at Editors Inc. did a superb job of creating a useful and current Teacher’s Resource Manual. We also recognize the efforts of those who contributed to the creation of Connect materials: Robin James at Harper College and Stacy Martin at Southwestern Illinois College. We are grateful to our SmartBook team, in particular to Judy Bulin at Monroe Community College, who tirelessly worked to review and perfect the probes and feedback, and respond to student queries. Thank you to Kelly Luchtman and team at Lightfellow for the fabulous new videos they produced. Thank you to the Digital Faculty Consultants who have helped train and support so many of their fellow instructors in the Introduction to Business course, as well as assist them in successfully implementing Connect into their courses: Chandra Arthur, Cuyahoga Community College; James Borden, Villanova University; Gay Lynn Brown, Northwest Florida State College; Tim Broxholm, Green River Community College; Cathleen Cogdill, Northern Virginia Community College; Chris Finnin, Drexel University; Frank Hatstat, Bellevue College; Robin James, William Rainer Harper College; Todd Korol, Monroe Community College; Stacey Lhuillier, Kansas State University; Stacy Martin, Southwestern Illinois College; Allison McGullion, KCTCS West Kentucky Community and Tech College; Susan Pope, University of Akron; Tim Rogers, Ozarks Technical Community College; Steven Sedky, Santa Monica College; Frank Sorokach, Penn State University; Melissa Wagner, Triton College; Brian Wilk, Northern Illinois University; and Gail Zwart, Riverside City College. Our outstanding marketing manager, Gabe Fedota, and marketing director, Robin Lucas, were up to the challenge of guiding the text to continued market leadership. With the assistance of the market’s finest sales professionals, they led the text to record highs. We want to thank the many instructors who contributed to the development of Understanding Business. REVIEWERS We would like to thank the following instructors for sharing with us their opinions, input, and advice—all of which contributed to the development of each edition: For previous editions we thank: Rebecca Adams, Kansas State University Ashraf Almurdaah, Los Angeles City College Lydia Anderson, Fresno City College Brenda T Anthony, Tallahassee Community College Chi Anyansi-Archibong, North Carolina A&T State University Maria Aria, Camden County College Michael Aubry, Cuyamaca College Frank Barber, Cuyahoga Community College Richard Bartlett, Columbus State Community College Denise Barton, Wake Technical Community College Lorraine P. Bassette, Prince George’s Community College Jim Beard, University of Arkansas–Fort Smith Amy Beattie, Champlain College Charles Beem, Bucks County Community College Robert Bennett, Delaware County Community College Michael Bento, Owens Community College George H. Bernard, Seminole State College of Florida Harry V. Bernstein, Essex County College, Newark, New Jersey Marilyn Besich, Montana State University–Great Falls Dennis Brode, Sinclair Community College Kathy Broneck, Pima Community College Harvey Bronstein, Oakland Community College Jerri Buiting, Baker College–Flint Bonnie Chavez, Santa Barbara City College Savannah Clay, Central Piedmont Community College Paul Coakley, Community College of Baltimore County Cathleen H. Cogdill, Northern Virginia Community College Patrick Conroy, Delgado Community College James Darling, Central New Mexico Community College Donna DeVault, Fayetteville Technical Community College ix x ACKNOW L EDG MEN TS Bob Dodd, College of Lake County Rosario (Bud) Drago, Villanova University Joseph Dutka, Ivy Tech Community College of Indiana Mary Ewanechko, Monroe Community College MaryBeth Furst, Howard Community College Wayne Gawlik, Joliet Junior College Ashley Geisewite, Southwest Tennessee Community College Ross Gittell, University of New Hampshire Constance Golden, Lakeland Community College Doug Greiner, University of Toledo–Scott Park John Guess, Delgado Community College Lisa E. Hadley, Southwest Tennessee Community College Peggy Hager, Winthrop University Britt Hastey, Los Angeles City College Karen H. Hawkins, Miami Dade College Nancy Hernandez, Howard College Linda Hoffman, Ivy Tech Community College–Fort Wayne Maryanne Holcomb, Oakland Community College Russell E. 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Zimmerman, The Community College of Baltimore County Narita Anderson, University of Central Oklahoma Roanne Angiello, Bergen Community College Chi Anyansi-Archibong, North Carolina A&T University Michael Atchison, University of Virginia–Charlottesville Andrea Bailey, Moraine Valley Community College Sandra Bailey, Ivy Tech Community College of Indiana Scott Bailey, Troy University Wayne Ballantine, Prairie View A&M University Ruby Barker, Tarleton State University Rosalia (Lia) Barone, Norwalk Community College Barbara Barrett, St. Louis Community College– Meramec Barry Barrett, University of Wisconsin–Milwaukee For this edition we thank: Nikolas Adamou, Borough of Manhattan Community College Cathy Adamson, Southern Union State Community College Gary Amundson, Montana State University–Billings Kenneth Anderson, Borough of Manhattan Community College Kenneth Anderson, Mott Community College Lydia Anderson, Fresno City College ACKN OW L E D GM E NTS Lorraine Bassette, Prince George’s Community College Robb Bay, College of Southern Nevada–West Charle Charles Beavin, Miami Dade College North Charles Beem, Bucks County Community College Cathleen Behan, Northern Virginia Community College Lori Bennett, Moorpark College Ellen Benowitz, Mercer Community College Patricia Bernson, County College of Morris William Bettencourt, Edmonds Community College Robert Blanchard, Salem State College Mary Jo Boehms, Jackson State Community College James Borden, Villanova University Michael Bravo, Bentley College Dennis Brode, Sinclair Community College Harvey Bronstein, Oakland Community College– Farmington Hills Deborah Brown, North Carolina State University–Raleigh Aaron A. 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Cloud, Phoenix College Doug Cobbs, JS Reynolds Community College Brooks Colin, University of New Orleans Debbie Collins, Anne Arundel Community College Andrew Cook, Limestone College Bob Cox, Salt Lake Community College Susan Cremins, Westchester Community College Julie Cross, Chippewa Valley Tech College Geoffrey Crosslin, Kalamazoo Valley Community College Douglas Crowe, Bradley University John David, Stark State College of Technology Peter Dawson, Collin County Community College Joseph Defilippe, Suffolk County Community College–Brentwood Tim DeGroot, Midwestern State University Len Denault, Bentley College Frances Depaul, Westmoreland County Community College Donna Devault, Fayetteville Tech Community College Sharon Dexter, Southeast Community College–Beatrice John Dilyard, St. Francis College Barbara Dinardo, Owens Community College George Dollar, St. Petersburg College Glenn Doolittle, Santa Ana College Ron Dougherty, Ivy Tech Community College of Indiana Michael Drafke, College of DuPage Karen Eboch, Bowling Green State University xi Brenda Eichelberger, Portland State University Kelvin Elston, Nashville State Tech Community College Robert Ettl, Stony Brook University Nancy Evans, Heartland Community College Michael Ewens, Ventura College Hyacinth Ezeka, Coppin State University Bob Farris, Mt. San Antonio College Karen Faulkner, Long Beach City College Gil Feiertag, Columbus State Community College Joseph Flack, Washtenaw Community College Lucinda Fleming, Orange County Community College Jackie Flom, University of Toledo Andrea Foster, John Tyler Community College Michael Foster, Bentley College Leatrice Freer, Pitt Community College Alan Friedenthal, Kingsborough Community College Charles Gaiser, Brunswick Community College Ashley Geisewite, Southwest Tennessee Community College Katie Ghahramani, Johnson County Community College Debora Gilliard, Metropolitan State College–Denver James Glover, Community College of Baltimore County–Essex Constance Golden, Lakeland Community College Toby Grodner, Union County College Clark Hallpike, Elgin Community College Geri Harper, Western Illinois University Frank Hatstat, Bellevue Community College Spedden Hause, University of Maryland–University College x ii ACKNOW L EDG MEN TS Karen Hawkins, Miami-Dade College–Kendall Travis Hayes, Chattanooga State Technical Community College Jack Heinsius, Modesto Junior College Charlane Held, Onondaga Community College James Hess, Ivy Tech Community College of Indiana Steve Hester, Southwest Tennessee Community College William Hill, Mississippi State University Nathan Himelstein, Essex County College Paula Hladik, Waubonsee Community College David Ho, Metropolitan Community College Douglas Hobbs, Sussex County Community College Maryanne Holcomb, Antelope Valley College Mary Carole Hollingsworth, Georgia Perimeter College Russell Holmes, Des Moines Area Community College Scott Homan, Purdue University– West Lafayette Stacy Horner, Southwestern Michigan College Dennis Hudson, University of Tulsa Jo Ann Hunter, Community College Allegheny County in Pittsburgh Kimberly Hurns, Washtenaw Community College Victor Isbell, University of Nevada–Las Vegas Deloris James, University of Maryland–University College Pam Janson, Stark State College of Technology William Jedlicka, Harper College Carol Johnson, University of Denver Gwendolyn Jones, University of Akron Kenneth Jones, Ivy Tech Community College of Indiana Marilyn Jones, Friends University Michael Jones, Delgado Community College Dmitriy Kalyagin, Chabot College Jack Kant, San Juan College Jimmy Kelsey, Seattle Central Community College Robert Kemp, University of Virginia–Charlottesville David Kendall, Fashion Institute of Technology Kristine Kinard, Shelton State Community College Sandra King, Minnesota State University–Mankato John Kurnik, Saint Petersburg College Jeff LaVake, University of Wisconsin–Oshkosh Robert Lewis, Davenport University Byron Lilly, DeAnza College Beverly Loach, Central Piedmont Community College Boone Londrigan, Mott Community College Ladonna Love, Fashion Institute of Technology Ivan Lowe, York Technical College Yvonne Lucas, Southwestern College Robert Lupton, Central Washington University Megan Luttenton, Grand Valley State University Elaine Madden, Anne Arundel Community College Lawrence Maes, Davenport University Niki Maglaris, Northwestern College James Maniki, Northwestern College Martin Markowitz, College of Charleston Fred Mayerson, Kingsborough Community College Stacy McCaskill, Rock Valley College Vershun L. 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Reynolds Community College Daniel Pacheco, Kansas City Kansas Community College Esther Page-Wood, Western Michigan University Lauren Paisley, Genesee Community College ACKN OW L E D GM E NTS John Pappalardo, Keene State College Ron Pardee, Riverside Community College Jack Partlow, Northern Virginia Community College Jeff Pepper, Chippewa Valley Tech College Sheila Petcavage, Cuyahoga Community College Western–Parma Roy Pipitone, Erie Community College Lana Powell, Valencia Community College–West Campus Dan Powroznik, Chesapeake College Litsa Press, College of Lake County Sally Proffitt, Tarrant County College–Northeast Michael Quinn, James Madison University Anthony Racka, Oakland Community College Larry Ramos, Miami-Dade Community College Greg Rapp, Portland Community College–Sylvania Robert Reese, Illinois Valley Community College David Reiman, Monroe County Community College Gloria Rembert, Mitchell Community College Levi Richard, Citrus College Clinton Richards, University of Nevada–Las Vegas Patricia Richards, Westchester Community College Susan Roach, Georgia Southern University Sandra Robertson, Thomas Nelson Community College Catherine Roche, Rockland Community College Tim Rogers, Ozark Technical College Sam Rohr, University of Northwestern Ohio Pamela Rouse, Butler University Carol Rowey, Community College of Rhode Island Jeri Rubin, University of Alaska–Anchorage Storm Russo, Valencia Community College Mark Ryan, Hawkeye Community College Richard Sarkisian, Camden County College Andy Saucedo, Dona Ana Community College–Las Cruces James Scott, Central Michigan University Janet Seggern, Lehigh Carbon Community College Sashi Sekhar, Purdue University–Calumet-Hammond Pat Setlik, Harper College Swannee Sexton, University of Tennessee–Knoxville Phyllis Shafer, Brookdale Community College Richard Shortridge, Glendale Community College Louise Stephens, Volunteer State Community College Desiree Stephens, Norwalk Community College Clifford Stalter, Chattanooga State Technical Community College Kurt Stanberry, University of Houston–Downtown Martin St. John, Westmoreland County Community College John Striebich, Monroe Community College David Stringer, DeAnza College x iii Ron Surmacz, Duquesne University William Syvertsen, Fresno City College Scott Taylor, Moberly Area Community College Jim Thomas, Indiana University Northwest Deborah Thompson, Bentley College Evelyn Thrasher, University of Massachusetts–Dartmouth Jon Tomlinson, University of Northwestern Ohio Bob Trewartha, Minnesota School of Business Bob Urell, Irvine Valley College Dan Vetter, Central Michigan University Andrea Vidrine, Baton Rouge Community College Daniel Viveiros, Johnson & Wales University Joann Warren, Community College of Rhode Island–Warwick R. Patrick Wehner, Everest University Sally Wells, Columbia College Mildred Wilson, Georgia Southern University Karen Wisniewski, County College of Morris Greg Witkowski, Northwestern College Colette Wolfson, Ivy Tech Community College of Indiana Deborah Yancey, Virginia Western Community College Mark Zarycki, Hillsborough Community College Lisa Zingaro, Oakton Community College Mark Zorn, Butler County Community College This edition continues to be the market’s gold standard due to the involvement of these committed instructors and students. We thank them all for their help, support, and friendship. Bill Nickels    Jim McHugh    Susan McHugh McGraw-Hill Connect® is a highly reliable, easy-touse homework and learning management solution that utilizes learning science and award-winning adaptive tools to improve student results. 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Our Digital Faculty Consultants and Student Ambassadors offer insight into how to achieve the results you want with Connect. www.mheducation.com/connect BRIEF CONTENTS Gold Standard v Prologue: Getting Ready for This Course and Your Career P PART 1 11 Human Resource Management: Finding and Keeping the Best Employees 266 Business Trends: Cultivating a Business in Diverse, Global Environments 1 Taking Risks and Making Profits within the Dynamic Business Environment 2 2 Understanding Economics and How It Affects Business 26 3 Doing Business in Global Markets 56 4 Demanding Ethical and Socially Responsible Behavior 86 12 Dealing with Employee–Management Issues 300 PART 5 Marketing: Developing and Implementing Customer-Oriented Marketing Plans 13 Marketing: Helping Buyers Buy 326 14 Developing and Pricing Goods and Services 352 15 Distributing Products 380 16 Using Effective Promotions 408 PART 2 Business Ownership: Starting a Small Business 5 How to Form a Business 110 PART 6 Managing Financial Resources 6 Entrepreneurship and Starting a Small Business 140 17 Understanding Accounting and Financial Information 434 18 Financial Management 462 PART 3 19 Using Securities Markets for Financing and Investing Opportunities 488 Business Management: Empowering Employees to Satisfy Customers 20 Money, Financial Institutions, and the Federal Reserve 518 7 Management and Leadership A Working within the Legal Environment 544 Bonus Chapters 168 8 Structuring Organizations for Today’s Challenges 190 9 Production and Operations Management B Using Technology to Manage Information 566 216 Management of Human Resources: Motivating Employees to Produce Quality Goods and Services xvi D Managing Personal Finances 606 EPILOGUE 628 PART 4 10 Motivating Employees C Managing Risk 592 240 Glossary 642 Name Index 661 Organization Index 669 Subject Index 673 CONTENTS Gold Standard v PROLOGUE Getting Ready for This Course and Your Career P Learning the Skills You Need to Succeed Today and Tomorrow P-1 Using This Course to Prepare for Your Career P-2 Assessing Your Skills and Personality P-3 Using Professional Business Strategies Right Now P-3 Learning to Behave Like a Professional P-4 Doing Your Best in College P-6 Study Hints P-6 Test-Taking Hints P-9 Making the Most of the Resources for This Course P-10 Getting the Most from This Text ADAPTING TO CHANGE UP, UP, AND AWAY 12 The Competitive Environment 13 The Social Environment 14 The Global Environment 15 REACHING BEYOND OUR BORDERS CLIMBS THE GREAT WALL 16 HOLLYWOOD The Evolution of U.S. Business 17 Progress in the Agricultural and Manufacturing Industries 17 Progress in Service Industries 18 ADAPTING TO CHANGE SERVICES EXPAND THE CIRCULAR ECONOMY 18 Your Future in Business 19 Summary 20 P-8 Time Management Hints The Economic and Legal Environment 9 The Technological Environment 11 P-11 Key Terms 22 Career Exploration 22 Critical Thinking 22 Developing Career Skills 23 PART 1 Business Trends: Cultivating a Business in Diverse, Global Environments 2 Putting Principles to Work 23 Video Case: Grubhub and the Dynamic Business Environment 24 Notes 24 CHAPTER 1 Taking Risks and Making Profits within the Dynamic Business Environment 2 CHAPTER 2 Understanding Economics and How It Affects Business 26 GETTING TO KNOW ANN-MARIE CAMPBELL OF HOME DEPOT 3 GETTING TO KNOW ECONOMIST 27 Business and Wealth Building 4 Revenues, Profits, and Losses 4 Matching Risk with Profit 4 Standard of Living and Quality of Life 5 Responding to the Various Business Stakeholders 5 Using Business Principles in Nonprofit Organizations 6 The Importance of Entrepreneurs to the Creation of Wealth 7 The Five Factors of Production 8 The Business Environment 9 THOMAS PIKETTY, How Economic Conditions Affect Businesses 28 What Is Economics? 29 The Secret to Creating a Wealthy Economy 29 Adam Smith and the Creation of Wealth 30 ADAPTING TO CHANGE POPPING 30 WORLD POPULATION IS How Businesses Benefit the Community 31 Understanding Free-Market Capitalism 32 How Free Markets Work 34 How Prices Are Determined 34 The Economic Concept of Supply 35 The Economic Concept of Demand 35 xvii x viii CONTEN TS The Equilibrium Point, or Market Price 35 Competition within Free Markets 36 Benefits and Limitations of Free Markets 37 MAKING ETHICAL DECISIONS FOR CONSUMERS? 37 BAD MEDICINE Understanding Socialism 38 The Benefits of Socialism 39 The Negative Consequences of Socialism 39 Understanding Communism 39 The Trend Toward Mixed Economies 40 Understanding the U.S. Economic System 41 Key Economic Indicators 42 Productivity in the United States 44 REACHING BEYOND OUR BORDERS AT THE SPEED OF SOUND 44 INFLATION Productivity in the Service Sector 45 The Business Cycle 45 Stabilizing the Economy through Fiscal Policy 46 Using Monetary Policy to Keep the Economy Growing 47 Summary 48 Key Terms 50 Career Exploration 50 Critical Thinking 50 Developing Career Skills 51 Putting Principles to Work 51 Video Case: Opportunity International: Giving the Poor a Working Chance 52 Notes 53 CHAPTER 3 Doing Business in Global Markets 56 GETTING TO KNOW INDRA KRISHNAMURTHY NOOYI, CEO OF PEPSICO 57 The Dynamic Global Market 58 Why Trade with Other Nations? 59 The Theories of Comparative and Absolute Advantage 60 Getting Involved in Global Trade 60 Importing Goods and Services 61 Exporting Goods and Services 61 Measuring Global Trade 61 CONNECTING THROUGH SOCIAL MEDIA MY HOME IS YOUR HOME 62 Strategies for Reaching Global Markets 64 Licensing 64 Exporting 65 Franchising 65 ADAPTING TO CHANGE GOLDEN ARCHES 66 MANY FLAGS FLY OVER THE Contract Manufacturing 67 International Joint Ventures and Strategic Alliances 67 Foreign Direct Investment 68 Forces Affecting Trading in Global Markets 69 Sociocultural Forces 69 Economic and Financial Forces 70 Legal and Regulatory Forces 72 Physical and Environmental Forces 73 Trade Protectionism 73 MAKING ETHICAL DECISIONS PROBLEMS AWAY 73 EXPORTING YOUR The World Trade Organization 74 Common Markets 75 The North American and Central American Free Trade Agreements 76 The Future of Global Trade 77 The Challenge of Offshore Outsourcing 78 Globalization and Your Future 79 Summary 80 Key Terms 81 Critical Exploration 82 Critical Thinking 82 Developing Career Skills 82 Putting Principles to Work 83 Video Case: Electra Bicycle Company 83 Notes 84 CHAPTER 4 Demanding Ethical and Socially Responsible Behavior 86 GETTING TO KNOW AARON AND EVAN STEED, CO-FOUNDER OF MEATHEAD MOVERS 87 Ethics Is More Than Legality 88 Ethical Standards Are Fundamental 90 Ethics Begins with Each of Us 90 Managing Businesses Ethically and Responsibly 91 MAKING ETHICAL DECISIONS WITH YOU 91 ETHICS BEGINS Setting Corporate Ethical Standards 92 Corporate Social Responsibility 94 Responsibility to Customers 96 Responsibility to Investors 98 Responsibility to Employees 98 C ONT E NTS Responsibility to Society and the Environment 99 Social Auditing 101 International Ethics and Social Responsibility 102 REACHING BEYOND OUR BORDERS CLASH 103 ETHICAL CULTURE x ix Home-Based Franchises 130 E-Commerce in Franchising 131 Using Technology in Franchising 131 Franchising in Global Markets 131 Cooperatives 132 Which Form of Ownership Is for You? 132 Summary 104 Key Terms 105 Summary 133 Career Exploration 105 Key Terms 135 Critical Thinking 106 Career Exploration 135 Developing Career Skills 106 Critical Thinking 135 Putting Principles to Work 106 Developing Career Skills 136 Video Case: Warby Parker/VisionSpring 107 Putting Principles to Work 136 Notes 107 Video Case: Domino’s Still Rolling in the Dough 137 Notes 137 PART 2 Business Ownership: Starting a Small Business 110 CHAPTER 6 Entrepreneurship and Starting a Small Business 140 CHAPTER 5 How to Form a Business 110 GETTING TO KNOW TRISTAN WALKER, FOUNDER OF WALKER AND COMPANY 141 GETTING TO KNOW PETER CANCRO, FOUNDER OF JERSEY MIKE’S SUBS 111 Basic Forms of Business Ownership 112 Sole Proprietorships 113 Advantages of Sole Proprietorships 113 Disadvantages of Sole Proprietorships 113 Partnerships 114 Advantages of Partnerships 115 Disadvantages of Partnerships 116 Corporations 118 Advantages of Corporations 118 MAKING ETHICAL DECISIONS KARMA? 118 GOOD BUSINESS, BAD Disadvantages of Corporations 120 Individuals Can Incorporate 121 ADAPTING TO CHANGE CORPORATION 121 KICKSTARTING A BENEFIT S Corporations 122 Limited Liability Companies 123 Corporate Expansion: Mergers and Acquisitions 125 Franchises 126 Advantages of Franchises 127 Disadvantages of Franchises 128 SPOTLIGHT ON SMALL BUSINESS GROWING FRANCHISE 129 Diversity in Franchising 130 UNLOCKING A The Job-Creating Power of Entrepreneurs in the United States 142 Why People Take the Entrepreneurial Challenge 143 SPOTLIGHT ON SMALL BUSINESS START-UPS 143 STUDENT What Does It Take to Be an Entrepreneur? 144 Turning Your Passions and Problems into Opportunities 144 Entrepreneurial Teams 145 Entrepreneurship within Firms 145 Micropreneurs and Home-Based Businesses 146 Online Businesses 147 Encouraging Entrepreneurship: What Government Can Do 148 Getting Started in Small Business 150 Small versus Big Business 150 Importance of Small Businesses 150 Small-Business Success and Failure 151 Learning About Small-Business Operations 152 Learn from Others 152 Get Some Experience 152 Take Over a Successful Firm 153 MAKING ETHICAL DECISIONS OR SHOULD YOU GO? 153 SHOULD YOU STAY Managing a Small Business 154 Planning Your Business 154 xx CONTEN TS Summary 185 Financing Your Small Business 156 Knowing Your Customers 158 Managing Your Employees 158 Keeping Records 159 Looking for Help 159 Key Terms 187 Career Exploration 187 Critical Thinking 188 Going Global: Small-Business Prospects 160 Developing Career Skills 188 Summary 162 Putting Principles to Work 188 Key Terms 163 Video Case: Zappos’s Team Approach 189 Career Exploration 163 Notes 189 Critical Thinking 164 Developing Career Skills 164 Putting Principles to Work 164 Video Case: Launching a Business: JCF Health and Fitness 165 Notes 165 CHAPTER 8 Structuring Organizations for Today’s Challenges 190 GETTING TO KNOW DENISE MORRISON, CEO OF CAMPBELL SOUP COMPANY 191 Organizing for Success 192 Building an Organization from the Bottom Up 192 PART 3 The Changing Organization 193 Business Management: Empowering Employees to Satisfy Customers 168 CHAPTER 7 Management and Leadership 168 GETTING TO KNOW KEVIN PLANK, FOUNDER OF UNDER ARMOUR 169 Managers’ Roles Are Evolving 170 The Four Functions of Management 171 Planning and Decision Making 172 ADAPTING TO CHANGE WILL STRATEGY ROBOTS REPLACE MANAGERS? 175 Decision Making: Finding the Best Alternative 176 Organizing: Creating a Unified System 177 Tasks and Skills at Different Levels of Management 178 Staffing: Getting and Keeping the Right People 179 CONNECTING THROUGH SOCIAL MEDIA A SOCIAL MEDIA MANAGER? 179 WANT TO BE Leading: Providing Continuous Vision and Values 180 Leadership Styles 181 MAKING ETHICAL DECISIONS TEAM? 181 WHAT DO YOU TELL THE Empowering Workers 182 Managing Knowledge 183 Controlling: Making Sure It Works 183 A Key Criterion for Measurement: Customer Satisfaction 184 MAKING ETHICAL DECISIONS SAFETY FOR PROFITS? 193 WOULD YOU SACRIFICE The Development of Organizational Design 194 Turning Principles into Organizational Design 195 Decisions to Make in Structuring Organizations 197 Choosing Centralized or Decentralized Authority 197 Choosing the Appropriate Span of Control 197 Choosing between Tall and Flat Organizational Structures 198 Weighing the Advantages and Disadvantages of Departmentalization 198 Organizational Models 201 Line Organizations 201 Line-and-Staff Organizations 202 Matrix-Style Organizations 202 Cross-Functional Self-Managed Teams 204 Going Beyond Organizational Boundaries 204 ADAPTING TO CHANGE GOING BOSSLESS 204 Managing the Interactions among Firms 205 Transparency and Virtual Organizations 205 Adapting to Change 207 Restructuring for Empowerment 207 CONNECTING THROUGH SOCIAL MEDIA THE CONNECTION 208 BREAKING Creating a Change-Oriented Organizational Culture 209 Managing the Informal Organization 209 Summary 210 Key Terms 212 Career Exploration 212 C ONT E NTS Critical Thinking 212 Key Terms 236 Developing Career Skills 213 Career Exploration 236 Putting Principles to Work 213 Critical Thinking 237 Video Case: Freshii’s Winning Organization 214 Developing Career Skills 237 Notes 214 Putting Principles to Work 237 xxi Video Case: Production in the 21st Century 238 CHAPTER 9 Production and Operations Management 216 GETTING TO KNOW SHAHID KHAN, CEO OF FLEX-N-GATE 217 Manufacturing and Services in Perspective 218 Manufacturers and Service Organizations Become More Competitive 219 REACHING BEYOND OUR BORDERS CREATING SKILLED WORKERS WITH GERMAN-STYLE APPRENTICESHIPS 219 From Production to Operations Management 220 Operations Management in the Service Sector 220 Production Processes 221 The Need to Improve Production Techniques and Cut Costs 222 Computer-Aided Design and Manufacturing 223 Flexible Manufacturing 223 Lean Manufacturing 223 Mass Customization 224 Robotics 224 3D Printing 224 Using Sensing, Measurement, and Process Control 225 ADAPTING TO CHANGE OF 3D PRINTING 225 THE VAST POSSIBILITIES Operations Management Planning 226 Facility Location 226 Facility Location for Manufacturers 226 Interfirm Operations Management 227 Facility Location in the Future 227 MAKING ETHICAL DECISIONS OR SHOULD WE GO? 227 SHOULD WE STAY Facility Layout 228 Materials Requirement Planning 228 Purchasing 230 Just-in-Time Inventory Control 230 Quality Control 230 The Baldrige Awards 231 ISO 9001 and ISO 14001 Standards 231 Control Procedures: PERT and Gantt Charts 232 Preparing for the Future 232 Summary 234 Notes 239 PART 4 Management of Human Resources: Motivating Employees to Produce Quality Goods and Services 240 CHAPTER 10 Motivating Employees 240 GETTING TO KNOW KIM JORDAN, CEO OF NEW BELGIUM BREWING COMPANY 241 The Value of Motivation 242 Frederick Taylor: The “Father” of Scientific Management 243 Elton Mayo and the Hawthorne Studies 244 Motivation and Maslow’s Hierarchy of Needs 245 Herzberg’s Motivating Factors 246 Mcgregor’s Theory X and Theory Y 248 Theory X 248 Theory Y 248 Ouchi’s Theory Z 249 Goal-Setting Theory and Management by Objectives 251 Meeting Employee Expectations: Expectancy Theory 251 Treating Employees Fairly: Equity Theory 252 Putting Theory into Action 253 Motivating through Job Enrichment 253 Motivating through Open Communication 253 Applying Open Communication in Self-Managed Teams 254 Recognizing a Job Well Done 255 ADAPTING TO CHANGE MOOD RING 255 EMPLOYEE ENGAGEMENT’S Personalizing Motivation 256 Motivating Employees across the Globe 256 Motivating Employees across Generations 257 CONNECTING THROUGH SOCIAL MEDIA CHEERS FOR PEERS! 258 THREE x x ii CONTEN TS Summary 259 Flextime Plans 288 Home-Based Work 289 Job-Sharing Plans 290 Key Terms 262 Career Exploration 262 Moving Employees Up, Over, and Out 291 Critical Thinking 262 Promoting and Reassigning Employees 291 Terminating Employees 291 Retiring Employees 291 Losing Valued Employees 292 Summary 293 Developing Career Skills 263 Putting Principles to Work 263 Video Case: Appletree Answers 263 Notes 264 Key Terms 295 CHAPTER 11 Human Resource Management: Finding and Keeping the Best Employees 266 Career Exploration 295 GETTING TO KNOW HAMDI ULUKAYA, FOUNDER AND CEO OF CHOBANI 267 Putting Principles to Work 296 Working with People Is Just the Beginning 268 Developing the Ultimate Resource 268 The Human Resource Challenge 269 Laws Affecting Human Resource Management 270 Laws Protecting Employees with Disabilities and Older Employees 272 Effects of Legislation 273 Determining a Firm’s Human Resource Needs 273 Recruiting Employees From a Diverse Population 275 CONNECTING THROUGH SOCIAL MEDIA JOB? 276 NEED A Selecting Employees Who Will Be Productive 277 Hiring Contingent Workers 278 CONNECTING THROUGH SOCIAL MEDIA IT 278 LET’S FACE Training and Developing Employees for Optimum Performance 280 MAKING ETHICAL DECISIONS SERVANT? 280 INTERN OR INDENTURED Management Development 282 Networking 282 Diversity in Management Development 283 Appraising Employee Performance to Get Optimum Results 283 Compensating Employees: Attracting and Keeping the Best 284 Pay Systems 285 Compensating Teams 285 Fringe Benefits 286 REACHING BEYOND OUR BORDERS GLOBAL WORKFORCE 287 Critical Thinking 295 Developing Career Skills 295 Video Case: Teach for America 296 Notes 297 CHAPTER 12 Dealing with Employee– Management Issues 300 GETTING TO KNOW LILY ESKELSEN GARCÍA, PRESIDENT OF THE NEA 301 Employee–Management Issues 302 Labor Unions Yesterday and Today 302 The History of Organized Labor 303 Labor Legislation and Collective Bargaining 304 SPOTLIGHT ON SMALL BUSINESS THE FIRE THAT SPARKED THE LABOR MOVEMENT 304 Union Organizing Campaigns 305 Objectives of Organized Labor over Time 306 Resolving Labor–Management Disagreements 307 Mediation and Arbitration 308 Tactics Used in Labor–Management Conflicts 309 Union Tactics 309 Management Tactics 310 The Future of Unions and Labor–Management Relations 310 MAKING ETHICAL DECISIONS LINE 311 WALKING A FINE Controversial Employee–Management Issues 312 Executive Compensation 312 Pay Equity 313 MANAGING A Scheduling Employees to Meet Organizational and Employee Needs 288 ADAPTING TO CHANGE PAYING FOR UNDERPERFORMING 314 Sexual Harassment 315 Child Care 315 Elder Care 316 C ONT E NTS Drug Abuse and Drug Testing 317 Violence and Bullying in the Workplace 318 Summary 319 Key Terms 320 x x iii Building Marketing Relationships 343 The Consumer Decision-Making Process 343 ADAPTING TO CHANGE BUILDING RELATIONSHIPS BY BUILDING SUBSCRIBERS 344 The Business-to-Business Market 345 Your Prospects in Marketing 345 Career Exploration 320 Critical Thinking 321 Summary 346 Developing Career Skills 321 Key Terms 348 Putting Principles to Work 321 Video Case: Working with Unions at Freeman 322 Notes 322 Career Exploration 348 Critical Thinking 348 Developing Career Skills 349 Putting Principles to Work 349 PART 5 Video Case: Dunkin’ Donuts and the 4 Ps Marketing: Developing and Implementing Customer-Oriented Marketing Plans CHAPTER 13 Marketing: Helping Buyers Buy 326 GETTING TO KNOW OF IPSY 327 MICHELLE PHAN, FOUNDER Notes 350 CHAPTER 14 Developing and Pricing Goods and Services 352 GETTING TO KNOW ANTHONY KATZ, FOUNDER OF HYPERICE 353 Product Development and the Total Product Offer 354 What Is Marketing? 328 The Evolution of Marketing 329 CONNECTING THROUGH SOCIAL MEDIA UP A CUSTOMER BASE 330 350 SNAPPING Nonprofit Organizations and Marketing 331 The Marketing Mix 332 Applying the Marketing Process 332 Designing a Product to Meet Consumer Needs 333 Setting an Appropriate Price 334 Getting the Product to the Right Place 334 Developing an Effective Promotional Strategy 334 Providing Marketers with Information 335 The Marketing Research Process 335 The Marketing Environment 338 Global Factors 338 Technological Factors 338 Sociocultural Factors 339 Competitive Factors 339 SPOTLIGHT ON SMALL BUSINESS CREATING MASS APPEAL FOR A CUSTOM PRODUCT 339 Economic Factors 340 Two Different Markets: Consumer and Businessto-Business (B2B) 340 The Consumer Market 341 CONNECTING THROUGH SOCIAL MEDIA WITH THE SOCIAL GAMING STARS 355 PLAYING Distributed Product Development 356 Product Lines and the Product Mix 356 Product Differentiation 357 Marketing Different Classes of Consumer Goods and Services 358 Marketing Industrial Goods and Services 359 Packaging Changes the Product 360 The Growing Importance of Packaging 361 Branding and Brand Equity 362 MAKING ETHICAL DECISIONS NATURAL GOODS: REALLY FROM NATURE? 362 Brand Categories 363 REACHING BEYOND OUR BORDERS NAME GAME 363 PLAYING THE Generating Brand Equity and Loyalty 364 Creating Brand Associations 364 Brand Management 365 The New-Product Development Process 365 Segmenting the Consumer Market 341 Generating New-Product Ideas 365 Product Screening 366 Product Analysis 366 Product Development and Testing 366 Reaching Smaller Market Segments 342 Commercialization 366 x x iv CONTEN TS The Product Life Cycle 367 Retail Intermediaries 390 Example of the Product Life Cycle 367 SPOTLIGHT ON SMALL BUSINESS MOMMY 367 Retail Distribution Strategy 391 MADE BY Online Retailing 391 Telemarketing 392 Vending Machines, Kiosks, Carts, and Pop-Ups 392 Direct Selling 393 Multilevel Marketing 393 Direct Marketing 393 Using the Product Life Cycle 368 Competitive Pricing 370 Pricing Objectives 370 Cost-Based Pricing 370 Demand-Based Pricing 371 Competition-Based Pricing 371 Break-Even Analysis 371 Other Pricing Strategies 371 How Market Forces Affect Pricing 372 Building Cooperation in Channel Systems 394 Corporate Distribution Systems 394 Contractual Distribution Systems 394 Administered Distribution Systems 394 Supply Chains 395 Nonprice Competition 372 Summary 373 Logistics: Getting Goods to Consumers Efficiently 396 Key Terms 375 Trains Are Great for Large Shipments 397 Career Exploration 375 ADAPTING TO CHANGE SHOPPING 397 Critical Thinking 375 Developing Career Skills 376 Video Case: Developing New Products at Domino’s 376 Notes 377 CHAPTER 15 Distributing Products 380 The Emergence of Marketing Intermediaries 382 Why Marketing Needs Intermediaries 383 WHAT WAS MINE The Utilities Created by Intermediaries 386 Form Utility 387 Time Utility 387 Place Utility 387 Merchant Wholesalers 389 Agents and Brokers 389 Key Terms 403 Career Exploration 403 Critical Thinking 404 Developing Career Skills 404 Video Case: FedEx 405 The Value versus the Cost of Intermediaries 385 CONNECTING THROUGH SOCIAL MEDIA ALL-DAY EGG MCMUFFINS 387 Summary 401 Putting Principles to Work 404 How Intermediaries Create Exchange Efficiency 384 Wholesale Intermediaries 389 Water Transportation Is Inexpensive but Slow 398 Pipelines Are Fast and Efficient 398 Air Transportation Is Fast but Expensive 399 Intermodal Shipping 399 The Storage Function 400 Tracking Goods 400 What All This Means to Your Career 400 GETTING TO KNOW TONY MCGEE, PRESIDENT AND CEO OF HNM GLOBAL LOGISTICS 381 Possession Utility 388 Information Utility 388 Service Utility 388 ONLINE GROCERY Trucks Are Good for Small Shipments to Remote Locations 398 Putting Principles to Work 376 SPOTLIGHT ON SMALL BUSINESS IS NOW YOURS 383 Online Retailing and other Nonstore Retailing 391 Notes 405 CHAPTER 16 Using Effective Promotions 408 I’M LOVIN’ GETTING TO KNOW MICHAEL DUBIN, COFOUNDER AND CEO OF DOLLAR SHAVE CLUB 409 Promotion and the Promotion Mix 410 Advertising: Informing, Persuading, and Reminding 411 Television Advertising 414 CONNECTING THROUGH SOCIAL MEDIA MEDIA MOVE TV RATINGS 414 HOW SOCIAL C ONT E NTS Understanding Key Financial Statements 439 Product Placement 415 Infomercials 415 Online Advertising 415 Social Media Advertising 416 Global Advertising 416 Personal Selling: Providing Personal Attention 417 REACHING BEYOND OUR BORDERS FAVORITE COOKIE? 417 OREO: WORLD’S Steps in the Selling Process 418 The Business-to-Consumer Sales Process 419 Public Relations: Building Relationships 420 Publicity: The Talking Arm of PR 421 Sales Promotion: Giving Buyers Incentives 422 Word of Mouth and Other Promotional Tools 423 Social Networking 424 Blogging 424 Podcasting 424 E-Mail Promotions 425 Mobile Marketing 425 Managing the Promotion Mix: Putting It all Together 425 Promotional Strategies 426 ADAPTING TO CHANGE PULLING YOU IN 426 OUTDOOR “EYES” ARE The Fundamental Accounting Equation 439 The Balance Sheet 440 Classifying Assets 440 Liabilities and Owners’ Equity Accounts 442 The Income Statement 443 Revenue 443 Cost of Goods Sold 444 SPOTLIGHT ON SMALL BUSINESS IN WITH THE NEW 445 Key Terms 428 Career Exploration 429 Critical Thinking 429 Developing Career Skills 429 Putting Principles to Work 430 Video Case: SXSW 430 Notes 431 OUT WITH THE OLD; Operating Expenses 445 Net Profit or Loss 446 The Statement of Cash Flows 446 The Need for Cash Flow Analysis 447 MAKING ETHICAL DECISIONS AND JURY! 448 WHEN YOU ARE JUDGE Analyzing Financial Performance Using Ratios 449 Liquidity Ratios 449 Leverage (Debt) Ratios 450 Profitability (Performance) Ratios 450 Activity Ratios 451 Accounting Disciplines 452 Financial Accounting 452 Managerial Accounting 453 Auditing 453 ADAPTING TO CHANGE Summary 427 ACCOUNTING: CSI 454 Tax Accounting 454 Government and Not-for-Profit Accounting 454 REACHING BEYOND OUR BORDERS WORLD OF ACCOUNTING 455 THE WIDE, WIDE Summary 456 Key Terms 457 Career Exploration 458 Critical Thinking 458 Developing Career Skills 458 PART 6 Putting Principles to Work 459 Managing Financial Resources CHAPTER 17 Understanding Accounting and Financial Information 434 GETTING TO KNOW BRIGHTSTAR CARE xxv SHELLY SUN, CEO OF 435 The Role of Accounting Information 436 What Is Accounting? 436 The Accounting Cycle 437 Using Technology in Accounting 438 Video Case: The Accounting Function at Goodwill Industries 459 Notes 460 CHAPTER 18 Financial Management 462 GETTING TO KNOW KATHY WALLER, EXECUTIVE VICE PRESIDENT AND CFO OF COCA-COLA 463 The Role of Finance and Financial Managers 464 The Value of Understanding Finance What Is Financial Management? 466 465 x x vi CONTEN TS Financial Planning 466 Forecasting Financial Needs 466 Working with the Budget Process 467 Establishing Financial Controls 468 The Need for Operating Funds 470 Managing Day-by-Day Needs of the Business 470 Controlling Credit Operations 470 Acquiring Needed Inventory 471 Making Capital Expenditures 471 MAKING ETHICAL DECISIONS ORDERED! 471 NOT WHAT THE DOCTOR Alternative Sources of Funds 472 Obtaining Short-Term Financing 472 Trade Credit 473 Family and Friends 473 Commercial Banks 473 Different Forms of Short-Term Loans 474 Factoring Accounts Receivable 475 ADAPTING TO CHANGE AWAY 475 FINANCING JUST A CLICK JOBS ACT Securities Regulations and the Securities and Exchange Commission 493 Foreign Stock Exchanges 494 How Businesses Raise Capital by Selling Stock 495 Advantages and Disadvantages of Issuing Stock 495 Issuing Shares of Common Stock 495 Issuing Shares of Preferred Stock 496 How Businesses Raise Capital by Issuing Bonds 497 Learning the Language of Bonds 497 Advantages and Disadvantages of Issuing Bonds 498 Different Classes of Bonds 498 Special Bond Features 499 How Investors Buy Securities 499 Investing through Online Brokers 500 ADAPTING TO CHANGE RESCUE 500 R2-D2 TO THE INVESTOR’S Choosing the Right Investment Strategy 501 Commercial Paper 476 Credit Cards 476 Obtaining Long-Term Financing 477 Debt Financing 477 Equity Financing 478 Comparing Debt and Equity Financing 479 SPOTLIGHT ON SMALL BUSINESS SLAM DUNK 480 CONNECTING THROUGH SOCIAL MEDIA RULES CROWDINVESTING 492 LOOKING FOR A Lessons Learned from the Financial Crisis and Great Recession 481 Summary 482 Key Terms 483 Career Exploration 483 MAKING ETHICAL DECISIONS IN SMOKE 501 MONEY GOING UP Reducing Risk by Diversifying Investments 502 Investing in Stocks 502 Stock Splits 503 Buying Stock on Margin 503 Understanding Stock Quotations 503 Investing in Bonds 504 Investing in High-Risk (Junk) Bonds 505 Investing in Mutual Funds and Exchange-Traded Funds 505 Understanding Stock Market Indicators 507 Critical Thinking 483 Riding the Market’s Roller Coaster 508 Summary 511 Developing Career Skills 484 Key Terms 513 Putting Principles to Work 484 Career Exploration 514 Video Case: Starting Up: Tom and Eddie’s 485 Critical Thinking 514 Notes 485 Developing Career Skills 514 Putting Principles to Work 515 CHAPTER 19 Using Securities Markets for Financing and Investing Opportunities 488 GETTING TO KNOW MAD MONEY 489 JIM CRAMER, HOST OF CNBC’S The Function of Securities Markets 490 The Role of Investment Bankers 491 Stock Exchanges 491 Video Case: Where Did All My Money Go? 515 Notes 516 CHAPTER 20 Money, Financial Institutions, and the Federal Reserve 518 GETTING TO KNOW JANET YELLEN, CHAIR OF THE FEDERAL RESERVE 519 C ONT E NTS x x v ii Bonus Chapters Why Money Is Important 520 What Is Money? 520 ADAPTING TO CHANGE FRANKLIN 522 SAYING GOODBYE TO BEN Managing Inflation and the Money Supply 523 The Global Exchange of Money 523 Control of the Money Supply 524 Basics about the Federal Reserve 524 The Reserve Requirement 524 Open-Market Operations 525 The Discount Rate 525 The Federal Reserve’s Check-Clearing Role 526 The History of Banking and the Need for the Fed 527 Banking and the Great Depression 528 The U.S. Banking System 528 Commercial Banks 529 Services Provided by Commercial Banks 529 Services to Borrowers 529 Savings and Loan Associations (S&Ls) 530 Credit Unions 530 Other Financial Institutions (Nonbanks) 530 MAKING ETHICAL DECISIONS OPTION 530 AN OPEN AND SHUT The Banking Crisis and How the Government Protects Your Money 531 SPOTLIGHT ON SMALL BUSINESS BEST FRIEND IN BANKING 532 BECOMING YOUR Protecting Your Funds 533 The Federal Deposit Insurance Corporation (FDIC) 533 The Savings Association Insurance Fund (SAIF) 533 The National Credit Union Administration (NCUA) 533 Using Technology to Make Banking More Efficient 534 Online Banking 535 International Banking and Banking Services 535 Leaders in International Banking 535 The World Bank and the International Monetary Fund 536 REACHING BEYOND OUR BORDERS ISSUES ACROSS THE GLOBE 536 NEW DAY, NEW A Working within the Legal Environment 544 GETTING TO KNOW ATTORNEY 545 ALANNA RUTHERFORD, The Case for Laws 546 Statutory and Common Law 546 Administrative Agencies 547 Tort Law 548 Product Liability 548 Legally Protecting Ideas: Patents, Copyrights, and Trademarks 550 Sales Law: The Uniform Commercial Code 551 Warranties 551 Negotiable Instruments 552 Contract Law 552 Breach of Contract 553 Promoting Fair and Competitive Business Practices 553 The History of Antitrust Legislation 554 Laws to Protect Consumers 555 Tax Laws 556 Bankruptcy Laws 557 Deregulation versus Regulation 560 Summary 561 Key Terms 563 Career Exploration 563 Critical Thinking 563 Developing Career Skills 564 Putting Principles to Work 564 Notes 564 B Using Technology to Manage Information 566 Summary 537 GETTING TO KNOW BEN FRIED, CIO OF GOOGLE 567 Key Terms 539 The Role of Information Technology 568 Career Exploration 539 Critical Thinking 540 Developing Career Skills 540 Putting Principles to Work 540 Video Case: The Financial Crisis 541 Notes 541 Evolution from Data Processing to Business Intelligence 568 How Information Technology Changes Business 569 Types of Information 571 Managing Information 572 Big Data and Data Analytics 573 Using Information from Social Media 574 x x viii CONTEN TS The Heart of Knowledge Management: The Internet 574 Intranets 574 Extranets 575 Virtual Private Networks 575 Broadband Technology 575 Social Media and Web 2.0 577 Web 3.0 577 Who’s the “Boss” of the Internet? 579 Virtual Networking and Cloud Computing 580 Effects of Information Technology on Management 581 Human Resource Issues 581 Security Issues 582 Privacy Issues 584 Stability Issues 585 TECHNOLOGY AND YOU 585 Summary 586 Liability Insurance 601 Life Insurance for Businesses 602 Insurance Coverage for Home-Based Businesses 602 The Risk of Damaging the Environment 602 Protection from Cyber Attacks 602 Summary 603 Key Terms 604 Career Exploration 604 Critical Thinking 604 Developing Career Skills 604 Putting Principles to Work 605 Notes 605 D Managing Personal Finances 606 Key Terms 587 GETTING TO KNOW ALEXA VON TOBEL, FOUNDER AND CEO OF LEARNVEST 607 Career Exploration 588 The Need for Personal Financial Planning 608 Critical Thinking 588 Financial Planning Begins with Making Money 608 Developing Career Skills 588 Six Steps to Controlling Your Assets 609 Putting Principles to Work 589 Notes 589 C Managing Risk 592 GETTING TO KNOW OLZA “TONY” NICELY, CEO OF GEICO 593 Understanding Business Risks 594 How Rapid Change Affects Risk Management 594 Managing Risk 595 Reducing Risk 595 Avoiding Risk 596 Self-Insuring 596 Buying Insurance to Cover Risk 596 What Risks Are Uninsurable? 597 What Risks Are Insurable? 597 Understanding Insurance Policies 598 Rule of Indemnity 598 Types of Insurance Companies 598 Insurance Coverage for Various Kinds of Risk 599 Health Insurance 599 Health Savings Accounts 599 Disability Insurance 601 Workers’ Compensation 601 Building Your Financial Base 612 Real Estate: Historically, a Relatively Secure Investment 612 Tax Deductions and Home Ownership 614 Where to Put Your Savings 614 Learning to Manage Credit 614 Protecting Your Financial Base: Buying Insurance 616 Health Insurance 617 Disability Insurance 617 Homeowner’s or Renter’s Insurance 618 Other Insurance 618 Planning Your Retirement 618 Social Security 618 Individual Retirement Accounts (IRAs) 619 Simple IRAs 620 401(k) Plans 620 Keogh Plans 621 Financial Planners 622 Estate Planning 622 Summary 623 Key Terms 624 Career Exploration 624 Critical Thinking 624 Developing Career Skills 625 C ONT E NTS Putting Principles to Work 625 Notes 625 EPILOGUE Getting the Job You Want 628 Job Search Strategy 629 Searching for Jobs Online 631 Job Search Resources 632 Writing Your Résumé 633 Putting Your Résumé Online 633 Writing a Cover Letter 635 Preparing for Job Interviews 638 Being Prepared to Change Careers 641 Glossary 642 Name Index 661 Organization Index 669 Subject Index 673 x x ix PROLOGUE Getting Ready for This Course and Your Career Top 10 Reasons to Read This Introduction (even if it isn’t assigned) 10 What the heck—you already bought the book, so you might as well get your money’s worth. 9 You don’t want the only reason you get a raise to be that the government has increased the minimum wage. 8 Getting off to a good start in the course can improve your chances of getting a higher grade, and your Uncle Ernie will send you a dollar for every A you get. 7 Your friends say that you’ve got the manners of a troll and you want to find out what the heck they’re talking about. 6 How else would you find out a spork isn’t usually one of the utensils used at a business dinner? 5 You don’t want to experience the irony of frantically reading the “time management” section at 3:00 a.m. 4 3 2 Like the Boy Scouts, you want to be prepared. It must be important because the authors spent so much time writing it. You want to run with the big dogs someday. And the number one reason for reading this introductory section is . . . 1 P It could be on a test. Learning the Skills You Need to Succeed Today and Tomorrow Your life is full. You’re starting a new semester, perhaps even beginning your college career, and you’re feeling pulled in many directions. Why take time to read this introduction? We have lightheartedly offered our top 10 reasons, but the real importance of this section is no joking matter. Its purpose, and that of the entire text, is to help you learn principles, strategies, and skills for success that will serve you not only in this course but also in your career and your life. Whether you learn them is up to you. Learning them won’t guarantee success, but not learning them—well, you get the picture. This is an exciting and challenging time. Success in any venture comes from understanding basic principles and knowing how to apply them effectively. What you learn now could help you be a success—for the rest of your life. Begin applying these skills now to gain an edge on the competition. READ THIS SECTION BEFORE YOUR FIRST CLASS and make a great first impression! Good luck. We wish you the best. Bill Nickels Jim McHugh Susan McHugh P-1 P -2 PROLOG U E Using this Course to Prepare for Your Career dumperina ©Mike Kemp/Getty Images RF The rewards of college are well worth the effort for graduates, who can expect to earn over 75 percent more than high school graduates over the course of their careers. Businesses like graduates too, because the growing needs of a global workplace require knowledgeable workers to fill the jobs of the future. What other benefits do you see from earning a college degree? FIGURE P.1 SALARY COMPARISON OF HIGH SCHOOL VERSUS COLLEGE GRADUATES $1,600,000.00 $1,400,000.00 $1,200,000.00 $1,000,000.00 $800,000.00 $600,000.00 $400,000.00 $200,000.00 $- Since you’ve signed up for this course, we’re guessing you already know the value of a college education. The holders of bachelor’s degrees make an average of about $51,000 per year compared to about $28,000 for high school graduates.1 That’s 75 percent more for college graduates than those with just a high school diploma. Compounded over the course of a 30-year career, the average college grad will make more than a halfmillion dollars more than the high school grad! Thus, what you invest in a college education is likely to pay you back many times. See Figure P.1 for more of an idea of how much salary difference a college degree makes by the end of a 30-year career. That doesn’t mean there aren’t good careers available to non–college graduates. It just means those with an education are more likely to have higher earnings over their lifetime. The value of a college education is more than just a larger paycheck. Other benefits include increasing your ability to think critically and communicate your ideas to others, improving your ability to use technology, and preparing yourself to live in a diverse and competitive world. Knowing you’ve met your goals and earned a college degree also gives you the self-confidence to work toward future goals. Many college graduates in the last generation held seven or eight different jobs (often in several different careers) in their lifetime. Today, Millennials are changing jobs just as rapidly; most jump jobs four times in the first decade after graduation.2 Many returning students are changing their careers and their plans for life. In fact, more than half of all parttime college students are older than 25.3 You too may want to change careers someday. It can be the path to long-term happiness and success. That means you’ll have to be flexible and adjust your strengths and talents to new opportunities. Today companies are looking for skills that machines lack, including creativity, interpersonal skills, and fine motor control. Learning has become a lifelong job. It’s not going to be just what you know now that counts, but what you learn in the future and how you adapt your skills to add value to yourself, your job, and your company.4 If you’re typical of many college students, you may not have any idea what career you’d like to pursue. That isn’t necessarily a big disadvantage in today’s fast-changing job market. After all, many of the best jobs of the future don’t even exist today. Figure P.2 lists 10 careers that didn’t exist 10 years ago. There are no perfect or certain ways to prepare for the most interesting and challenging jobs of tomorrow. Rather, you should continue your college education, develop strong technology skills, improve your verbal and written communication skills, and remain flexible and forward thinking while you explore the job market. 1 Year 5 Years 10 Years 30 Years 20 Years College Graduate $51,000.00 $255,000.00 $510,000.00 $1,020,000.00 $1,530,000.00 High School Graduate $28,000.00 $140,000.00 $280,000.00 $ 560,000.00 $ 840,000.00 College Graduate High School Graduate P R OLOGUE THESE CAREERS DIDN’T EXIST 10 YEARS AGO: • App Developer • Big Data Analyst/Data Scientist • Social Media Manager • Sustainability Manager • Uber Driver • YouTube Content Creator • Driverless Car Engineer • Drone Operator • Cloud Computing Specialist • Millennial Generational Expert Source: World Economic Forum, weforum.org, accessed December 2016. One of the objectives of this class, and this book, is to help you choose an area in which you might enjoy working and have a good chance to succeed. You’ll learn about economics, global business, ethics, entrepreneurship, management, marketing, accounting, finance, and more. At the end of the course, you should have a much better idea which careers would be best for you and which you would not enjoy. But you don’t have to be in business to use business principles. You can use marketing principles to get a job and to sell your ideas to others. You can use your knowledge of investments to make money in the stock market. You’ll use your management skills and general business knowledge wherever you go and in whatever career you pursue—including government agencies, charities, and social causes. Assessing Your Skills and Personality The earlier you can do a personal assessment of your interests, skills, and values, the better it can help you find career direction. Hundreds of schools use software exercises like the System for Interactive Guidance and Information (SIGI) and DISCOVER to offer selfassessment exercises, personalized lists of occupations based on your interests and skills, and information about different careers and the preparation each requires. Visit your college’s placement center, career lab, or library soon and learn what programs are available for you. Of course, there are career assessment tools online, but many are as accurate as a Magic 8 ball. You can find reviews of online assessments at www.livecareer.com/quintessential/ online-assessment-review. While no test can give you a definitive answer about what the perfect career for you is, the assessments can point you to career paths that you may not have considered before. Self-assessment will help you determine the kind of work environment you’d prefer (technical, social service, or business); what values you seek to fulfill in a career (security, variety, or independence); what abilities you have (creative/artistic, numerical, or sales); and what job characteristics matter to you (income, travel, or amount of job pressure versus free time). Using Professional Business Strategies Right Now Here are two secrets to success you can start practicing now: networking and keeping files on subjects important to you. Networking is building a personal array of people you’ve met, spoken to, or corresponded with who can offer you advice about and even help with your career options.5 Start with the names of your professors, both as employment references and as resources about fields of interest to you. Add additional contacts, mentors, and resource people, and keep the notes you make when talking with them about careers including salary information and courses you need to take. FIGURE P.2 NEW CAREERS P-3 P -4 PROLOG U E ©John Lund/Blend Images/Alamy RF Networking provides you with an array of personal contacts on whom you can call for career advice and help. Have you begun creating your network yet? Are you part of someone else’s? All students need a way to retain what they learn. An effective way to become an expert on almost any business subject is to set up your own information system. You can store data on your computer, tablet, and cell phone (back up these files!), or you can establish a comprehensive filing system on paper, or you can use a combination of the two. Few college students take the time to make this effort; those who don’t lose much of the information they read in college or thereafter. Keep as many of your textbooks and other assigned readings as you can, as well as your course notes. Read a national newspaper such as The Wall Street Journal, The New York Times, or USA Today. Read your local newspaper. Each time you read a story that interests you, save a paper copy or add a link to the story online in your electronic file, under a topic heading like careers, small business, marketing, economics, or management. Don’t rely on just one Internet site for information (and be wary of Wikipedia)! Get familiar with a variety of sources and use them. Start a file for your résumé. In it, keep a copy of your current résumé along with reference letters and other information about jobs you may have held, including projects accomplished and additions to your responsibilities over time, plus any awards or special recognition you may have received. Soon you’ll have a tremendous amount of information to help you prepare a polished résumé and answer challenging job interview questions with ease. Watching television shows about business, such as Nightly Business Report and Jim Cramer’s Mad Money, helps you learn the language of business and become more informed about current happenings in business and the economy. Try viewing some of these shows or listening to similar ones online, and see which ones you like best. Take notes and put them in your files. Keep up with business news in your area so that you know what jobs are available and where. You may also want to join a local business group to begin networking with people and learning the secrets of the local business scene. Many business groups and professional business societies accept student members. Learning to Behave Like a Professional There’s a reason good manners never go out of style. As the world becomes increasingly competitive, the gold goes to teams and individuals with that extra bit of polish. The person who makes a good impression will be the one who gets the job, wins the promotion, or clinches the deal. Good manners and professionalism are not difficult to acquire; they’re second nature to those who achieve and maintain a competitive edge. Not even a great résumé or designer suit can substitute for poor behavior, including verbal behavior, in an interview. Say “please” and “thank you” when you ask for something. Certainly make it a point to arrive on time, open doors for others, stand when an older person enters the room, and use a polite tone of voice. You may want to take a class in etiquette or read a book on etiquette to learn the proper way to eat in a nice restaurant, what to do at a formal party, when and how to text/e-mail business associates properly, and so on. Of course, it’s also critical to be honest, reliable, dependable, and ethical at all times. Some rules are not formally written anywhere; instead, every successful businessperson learns them through experience. If you follow these rules in college, you’ll have the skills for success when you start your career. Here are the basics: 1. Making a good first impression. An old saying goes, “You never get a second chance to make a good first impression.” You have just a few seconds to make an impression. Therefore, how you dress and how you look are important. Take your P R OLOGUE P-5 cue as to what is appropriate at any specific company by studying the people there who are most successful. What do they wear? How do they act? 2. Focusing on good grooming. Be aware of your appearance and its impact. Wear appropriate, clean clothing and a few simple accessories. Revealing shirts, nose rings, and tattoos may not be appropriate in a work setting. Be consistent, too; you can’t project a good image by dressing well a few times a week and then showing up looking like you’re getting ready to mow a lawn. Many organizations have adopted “business casual” guidelines, but others still require traditional attire, so find out what the organization’s policies are and choose your wardrobe accordingly. Casual doesn’t mean sloppy or shabby. Wrinkled clothing, shirttails hanging out, and hats worn indoors are not usually appropriate. For women, business casual attire includes simple skirts and slacks (no jeans), cotton shirts, sweaters (not too tight), blazers, and low-heeled shoes or boots. Men may wear khaki trousers, sport shirts with collars, sweaters or sport jackets, and casual loafers or lace-up shoes. 3. Being on time. When you don’t come to class or work on time, you’re sending this message to your teacher or boss: “My time is more important than your time. I have more important things to do than be here.” In addition to showing a lack of respect to your teacher or boss, lateness rudely disrupts the work of your colleagues. Pay attention to the corporate culture. Sometimes you have to come in earlier than others and leave later to get that promotion you desire. To develop good work habits and get good grades, arrive in class on time and avoid leaving (or packing up to leave) early. 4. Practicing considerate behavior. Listen when others are talking—for example, don’t check your cell phone for messages, read the newspaper, or eat in class. Don’t interrupt others when they are speaking; wait your turn. Eliminate profanity from your vocabulary. Use appropriate body language by sitting up attentively and not slouching. Sitting up has the added bonus of helping you stay awake! Professors and managers alike get a favorable impression from those who look and act alert. 5. Practicing good text/e-mail etiquette. The basic rules of courtesy in face-to-face communication also apply to text and e-mail exchanges. Introduce yourself at the beginning of your first e-mail message. Next, let your recipients know how you got their names and e-mail addresses. Then proceed with your clear but succinct message, and always be sure to type full words (ur is not the same thing as your). Finally, close the e-mail with a signature. Do not send an attachment unless your correspondent has indicated he or she will accept it. Ask first! You can find much more information about proper Internet etiquette, or netiquette, online—for example, at NetManners.com. 6. Practicing good cell phone manners. Your Introduction to Business class is not the place to be arranging a date for tonight. Turn off the phone during class or in a business meeting unless you are expecting a critical call. If you are expecting such a call, let your professor know before class. Turn off your ringer and put the phone on vibrate. Sit by the aisle and near the door. If you do receive a critical call, leave the room before answering it. Apologize to the professor after class and explain the situation. 7. Practicing safe posting on social media. Be careful what you post on your Facebook page or any other social media. Although it may be fun to share your latest adventures with your friends, your boss or future boss may not appreciate your latest party pictures. Be aware that those pictures may not go away even if you delete them from your page. If anyone else downloaded them, they are still out there waiting for a recruiter to discover. Make sure to update your privacy settings frequently. It’s a good idea to separate your list of work friends and limit what that group can view. Also be aware that some work colleagues aren’t interested in becoming your Facebook friends. To avoid awkwardness, wait for work associates to reach out to ©laflor/Getty Images RF Many businesses have adopted business casual as the proper work attire, but others still require traditional clothing styles. How does your appearance at work affect both you and your company? P -6 PROLOG U E ©stockstudioX/Getty Images RF Behavior that’s taken for granted in other countries might be unusual in the United States. In some cultures bowing is a form of greeting to show respect. How can you learn the appropriate business etiquette for the countries in which you do business? you first. Make sure you know your employer’s policy on using social media on company time. Obviously, they will probably frown on using it for personal use on company time, but there may be rules about sharing technical matter, company information, and so on. Be mindful that social media accounts time-stamp your comments. 8. Being prepared. A businessperson would never show up for a meeting without having read the appropriate materials and being prepared to discuss the topics on the agenda. For students, acting like a professional means reading assigned materials before class, having written assignments ready to be turned in, asking and responding to questions in class, and discussing the material with fellow students. 9. Learning local customs. Just as traffic laws enable people to drive more safely, business etiquette allows people to conduct business with the appropriate amount of consideration. Sharpen your competitive edge by becoming familiar with its rules. If you travel internationally, learn the proper business etiquette for each country you visit.6 Customs differ widely for such everyday activities as greeting people, eating, giving gifts, presenting and receiving business cards, and conducting business in general. In Japan, businesspeople typically bow instead of shaking hands, and in some Arab countries it is insulting to sit so as to show the soles of your shoes. Honesty, high ethical standards, and reliability and trustworthiness are important for success in any country. 10. Behaving ethically. Having a reputation for integrity will enable you to be proud of who you are and contribute a great deal to your business success. Unethical behavior can ruin your reputation; so think carefully before you act. When in doubt, don’t! Ethics is so important to success that we include discussions about it throughout the text. Doing Your Best in College The skills you need to succeed in life after college are the same ones that will serve you well in your studies. Career, family, and hobbies all benefit from organizational and time management skills you can apply right now. Here are some tips for improving your study habits, taking tests, and managing your time. Study Hints For the remainder of your college career, consider studying to be your business. Though you may hold another job while enrolled in this class, you’re in school because you want to advance yourself. So until you get out of school and into your desired occupation, studying is your business. And like any good businessperson, you aim for success. Follow these strategies: 1. Go to class. It’s tempting to cut a class on a nice day or when there are other things to do. But nothing is more important to doing well in school than going to class every time. If possible, sit in the front near the instructor. This will help you focus better and avoid distractions in the room. 2. Listen well. It’s not enough to show up for class if you use the time for a nap. Make eye contact with the instructor. In your mind, form a picture of what he or she is discussing. Include your existing knowledge and past experiences in your picture. This ties new knowledge to what you already know. P R OLOGUE 3. Take careful notes. Make two columns in your notebook, laptop, or tablet. On one side write down important concepts, and on the other examples or more detailed explanations. Use abbreviations and symbols whenever possible and wide spacing to make the notes easier to read. Edit your notes after class to make sure you fully understand what was discussed in class. Rereading and rewriting help store the information in your long-term memory. Learn the concepts in your courses the same way you learn the words to your favorite song: through repetition and review. 4. Find a good place to study. Find a place with good lighting and a quiet atmosphere. Some students do well with classical music or other music without lyrics playing in the background. Keep your study place equipped with extra supplies such as mobile devices, pens, pencils, calculator, folders, and paper so you don’t have to interrupt studying to hunt for them. 5. Read the text using a strategy such as “survey, question, read, recite, review” (SQ3R). a. Survey or scan the chapter first to see what it is all about. This means looking over the table of contents, learning objectives, headings, photo essays, and charts so you get a broad idea of the content. The summaries at the end of each chapter in this text provide a great overview of the concepts in the chapter. Scanning will provide an introduction and help get your mind in a learning mode. b. Write questions, first by changing the headings into questions. For example, you could change the heading of this section to “What hints can I use to study better?” Read the questions that appear throughout each chapter in the Test Prep sections to give yourself a chance to recall what you’ve read. c. Read the chapter to find the answers to your questions. Be sure to read the boxes in the chapter as well. They offer extended examples or discussions of the concepts in the text. You’ve probably asked, “Will the material in the boxes be on the tests?” Even if your instructor chooses not to test over them directly, they are often the most interesting parts of the chapter and will help you retain the chapter concepts better. d. Recite your answers to yourself or to others in a study group. Make sure you say the answers in your own words so that you clearly understand the concepts. Research has shown that saying things is a more effective way to learn them than seeing, hearing, or reading about them. While often used in study groups, recitation is also good practice for working in teams in the work world. e. Review by rereading and recapping the information. The chapter summaries are written in a question-and-answer form, much like a classroom dialogue. They’re also tied directly to the learning objectives so that you can see whether you’ve accomplished the chapter’s objectives. Cover the written answers and see whether you can answer the questions yourself first. 6. Use flash cards. You’ll master the course more easily if you know the language of business. To review the key terms in the book, write any terms you don’t know on index cards and go through your cards between classes and when you have other free time. 7. Use Connect Introduction to Business (if your professor has recommended it for your course). Connect’s online features include interactive presentations, LearnSmart (adaptive learning technology that identifies what you know and don’t know, and personalizes your learning experience, ensuring that every minute spent studying with LearnSmart is the most efficient and productive study time possible), SmartBook (creates a personalized reading experience by highlighting P-7 The SQ3R study system recommends that you “survey, question, read, recite, and review” to stay up-to-date with assignments and shine in class every day. Have you adopted this system? ©Greg Vote/Corbis RF P -8 PROLOG U E the most impactful concepts you need to learn at that moment in time), and interactive applications. 8. Go over old exams, if possible. If old exams are not available from your professor, ask how many multiple-choice, true/false, and essay questions will be on your test. It’s acceptable to ask your professor’s former students what kind of questions are given and what material is usually emphasized. It is unethical, though, to go over exams you obtain illegally. 9. Use as many of your senses in learning as possible. If you’re an auditory learner—that is, if you learn best by hearing—record yourself reading your notes and answering the questions you’ve written. Listen to the tape while you’re dressing in the morning. You can also benefit from reading or studying aloud. If you’re a visual learner, use pictures, charts, colors, and graphs. Your professor has a set of videos that illustrate the concepts in this text. If you’re a kinesthetic learner, you remember best by doing, touching, and experiencing. Doing the Developing Career Skills exercises at the end of each chapter will be a big help. Test-Taking Hints Often students will say, “I know this stuff, but I’m just not good at taking multiple-choice (or essay) tests.” Other students find test taking relatively easy. Here are a few test-taking hints: 1. Get plenty of sleep and have a good meal. It’s better to be alert and awake during an exam than to study all night and be groggy. If you keep up with your reading and your reviews on a regular basis, you won’t need to pull an all-nighter. Proper nutrition also plays an important part in your brain’s ability to function. 2. Bring all you need for the exam. Sometimes you’ll need No. 2 pencils, erasers, and a calculator. Ask beforehand. 3. Relax. At home before the test, take deep, slow breaths. Picture yourself in the testing session, relaxed and confident. Reread the chapter summaries. Get to class early to settle down. If you start to get nervous during the test, stop and take a few deep breaths. Turn the test over and write down information you remember. Sometimes this helps you connect the information you know to the questions on the test. 4. Read the directions on the exam carefully. You don’t want to miss anything or do something you’re not supposed to do. 5. Read all the answers in multiple-choice questions. Even if there is more than one correct-sounding answer to a multiple-choice question, one is clearly better. Read them all to be sure you pick the best. Try covering up the choices while reading the question. If the answer you think of is one of the choices, it is probably correct. If you are still unsure of the answer, start eliminating options you know are wrong. Narrowing the choices to two or three improves your odds. 6. Answer all the questions. Unless your instructor takes off more for an incorrect answer than for no answer, you have nothing to lose by guessing. Also, skipping a question can lead to inadvertently misaligning your answers on a scan sheet. You could end up with all your subsequent answers scored wrong! 7. Read true/false questions carefully. All parts of the statement must be true or else the entire statement is false. Watch out for absolutes such as never, always, and none. These often make a statement false. 8. Organize your thoughts before answering essay questions. Think about the sequence in which to present what you want to say. Use complete sentences with correct grammar and punctuation. Explain or defend your answers. 9. Go over the test at the end. Make sure you’ve answered all the questions, put your name on the exam, and followed all directions. P R OLOGUE P-9 Keeping a daily schedule is only one of the many strategies that will help you manage your time. You should also keep a running list of goals and things you need to do each week. In what other ways can you defend your study time? ©Rawpixel/Alamy RF Time Management Hints The most important management skill you can learn is how to manage your time. Now is as good an opportunity to practice as any. Here are some hints other students have learned— often the hard way: 1. Write weekly goals for yourself. Make certain your goals are realistic and attainable. Write the steps you’ll use to achieve each goal. Reward yourself when you reach a goal. 2. Keep a “to do” list. It’s easy to forget things unless you write them down. Jot down tasks as soon as you know of them. That gives you one less thing to do: remembering what you have to do. 3. Prepare a daily schedule. Use a commercial printed or electronic daily planner or create your own. Write the days of the week across the top of the page. Write the hours of the day from the time you get up until the time you go to bed down the left side. Draw lines to form columns and rows and fill in all the activities you have planned in each hour. Hopefully, you will be surprised to see how many slots of time you have available for studying. 4. Prepare for the next day the night before. Having everything ready to go will help you make a quick, stress-free start in the morning. 5. Prepare weekly and monthly schedules. Use a calendar to fill in activities and upcoming assignments. Include both academic and social activities so that you can balance your work and fun. 6. Space out your work. Don’t wait until the last week of the course to write all your papers and study for your exams. If you do a few pages a day, you can write a 20-page paper in a couple of weeks with little effort. It is really difficult to push out 20 pages in a day or two. 7. Defend your study time. Study every day. Use the time between classes to go over your flash cards and read the next day’s assignments. Make it a habit to defend your study time so you don’t slip. 8. Take time for fun. If you have some fun every day, life will be full. Schedule your fun times along with your studying so that you have balance. P -1 0 PROLOG U E “Time is money,” the saying goes. Some, however, would argue that time is more valuable than money. If your bank account balance falls, you might be able to build it back up by finding a better-paying job, taking a second job, or even selling something you own. But you have only a limited amount of time and there is no way to make more. Learn to manage your time well, because you can never get it back. Making the Most of the Resources for This Course College courses and textbooks are best at teaching you concepts and ways of thinking about business. However, to learn firsthand how to apply those ideas to real business situations, you need to explore and interact with other resources. Here are seven basic resources for the class in addition to the text: Your college professors are among the most valuable resources and contacts you’ll encounter as you develop your career path. How many of your professors have you gotten to know so far? ©Fuse/Corbis/Getty Images RF 1. The professor. One of the most valuable facets of college is the chance to study with experienced professors. Your instructor is a resource who’s there to answer some questions and guide you to answers for others. Many professors get job leads they can pass on to you and can provide letters of recommendation too. Thus it’s important to develop a friendly relationship with your professors. 2. The supplements that come with this text. Connect Introduction to Business online course material (if your professor has recommended it for your course) will help you review and interpret key material and give you practice answering test questions. Even if your professor does not assign these materials, you may want to use them anyhow. Doing so will improve your test scores and help you compete successfully with the other students. 3. Outside readings. One secret to success in business is staying current. Review and become familiar with the following magazines and newspapers during the course and throughout your career: The Wall Street Journal, Forbes, Barron’s, Bloomberg Businessweek, Fortune, Money, The Economist, Hispanic Business, Harvard Business Review, Black Enterprise, Fast Company, Inc., and Entrepreneur. You may also want to read your local newspaper’s business section and national news magazines such as Time and Newsweek. You can find them in your school’s learning resource center or the local public library. Some are also available online free. 4. Your own experience and that of your classmates. Many college students have had experience working in business or nonprofit organizations. Hearing and talking about those experiences exposes you to many real-life examples that are invaluable for understanding business. Don’t rely exclusively on the professor for all the answers and other exercises in this book. Often there is no single “right” answer, and your classmates may open up new ways of looking at things for you. Part of being a successful businessperson is learning how to work with others. Some professors encourage their students to work together and build teamwork as well as presentation and analytical skills. Students from other countries can help you learn about different cultures and different approaches to handling business problems. There is strength in diversity, so seek out people different from you to work with on teams. 5. Outside contacts. Who can tell you more about what it’s like to start a career in accounting than someone who’s doing it now? One of the best ways to learn about different businesses is to visit them in person. The world can be your classroom. P R OLOGUE When you go shopping, think about whether you would enjoy working in and managing a store. Think about owning or managing a restaurant, an auto body shop, a health club, or any other establishment you visit. If something looks interesting, talk to the employees and learn more about their jobs and the industry. Be constantly on the alert to find career possibilities, and don’t hesitate to talk with people about their careers. Many will be pleased to give you their time and honest opinions. 6. The Internet. The Internet offers more material than you could use in a lifetime. Throughout this text we present information and exercises that require you to use the Internet. Information changes rapidly, and it is up to you to stay current. 7. The library or learning resource center. The library is a great complement to the Internet and a valuable resource. Work with your librarian to learn how to best access the information you need. Getting the Most from This Text Many learning aids appear throughout this text to help you understand the concepts: 1. List of Learning Objectives at the beginning of each chapter. Reading through these objectives will help you set the framework and focus for the chapter material. Since every student at one time or other has found it difficult to get into studying, the Learning Objectives are there to provide an introduction and to get your mind into a learning mode. 2. Getting to Know and Name That Company features. The opening stories will help you get to know professionals who successfully use the concepts presented in the chapters. The Name That Company feature at the beginning of each chapter challenges you to identify a company discussed in the chapter. 3. Photo essays. The photos offer examples of the concepts in the chapter. Looking at the photos and reading the photo essays (captions) before you read the chapter will give you a good idea of what the chapter is all about. 4. Self-test questions. Periodically, within each chapter, you’ll encounter set-off lists of questions called Test Prep. These questions give you a chance to pause, think carefully about, and recall what you’ve just read. 5. Key terms. Developing a strong business vocabulary is one of the most important and useful aspects of this course. To assist you, all key terms in the book are highlighted in boldface type. Key terms are also defined in the margins, and page references to these terms are given at the end of each chapter. A full glossary is located in the back of the book. You should rely heavily on these learning aids in adding new terms to your vocabulary. 6. Boxes. Each chapter contains a number of boxed extended examples or discussions that cover major themes of the book: (a) ethics (Making Ethical Decisions); (b) small business (Spotlight on Small Business); (c) global business (Reaching Beyond Our Borders); (d) social media (Connecting through Social Media); and (e) contemporary business issues (Adapting to Change). They’re interesting to read and provide key insights into important business issues; we hope you enjoy and learn from them. 7. End-of-chapter summaries. The chapter summaries are directly tied to the chapter Learning Objectives so that you can see whether you’ve accomplished the chapter’s objectives. 8. Career Exploration exercise. At the end of each chapter, we offer a brief list of potential careers that deal with the concepts present in the chapter and encourage you to find out more about them in the Occupational Outlook Handbook. P-11 P -1 2 PROLOG U E 9. Critical Thinking questions. The end-of-chapter questions help you relate the material to your own experiences. 10. Developing Career Skills exercises. To really remember something, it’s best to do it. That’s why Developing Career Skills sections at the end of each chapter suggest small projects that help you use resources, develop interpersonal skills, manage information, understand systems, and sharpen technology skills. 11. Putting Principles to Work exercises. These exercises direct you to dynamic outside resources that reinforce the concepts introduced in the text. You might want to bookmark some of the websites you’ll discover. 12. Video cases. These cases feature companies, processes, practices, and managers that bring to life the key concepts in the chapter and give you real-world information to think over and discuss. If you use the suggestions we’ve presented here, you’ll actively participate in a learning experience that will help you greatly in this course and your chosen career. The most important secret to success may be to enjoy what you’re doing and do your best in everything. To do your best, take advantage of all the learning aids available to you. NOTES 1. “How to E-D-U,” howtoedu.org, accessed September 2017; Claire Groden, “A Millennial’s Field Guide to Mastering Your Career,” Fortune.com, January 1, 2016; Christopher S. Rugaber, “Pay Gap between College Grads and Everyone Else at a Record,” Associated Press, January 12, 2017. 2. Heather Long, “The New Normal: 4 Job Changes by the Time You’re 32,” CNN Money, money.cnn.com, accessed September 2017; Richard Fry, “Millennials Aren’t JobHopping Any Faster Than Generation X Did,” Pew Research Center, April 19, 2017. 3. U.S. Census Bureau, www.census.gov, accessed September 2017. 4. “Future Pursuits,” Geico Now, Spring/Summer 2016; Cybele Weisser, Kerri Anne Renzulli, and Megan Leonhardt, “The 21 Most Valuable Career Skills,” Money.com, June 2016; Max Opray, “Seventeen Jobs, Five Careers: Learning in the Age of Automation,” The Guardian, April 14, 2017. 5. John Rampton, “How to Network without Wasting Time,” Huffington Post, huffingtonpost.com, December 2016; Michael S. Solomon, “Networking for Introverts—7 Seven Simple Steps,” Huffington Post, huffingtonpost.com, accessed December 2016. 6. Ritu Kochar, “International Business Etiquette for Entrepreneurs,” Entrepreneur, February 8, 2016. Part 1 Business Trends: Cultivating a Business in Diverse, Global Environments 1 Taking Risks and Making Profits within the Dynamic Business Environment LEARNING OBJECTIVES 2 » After you have read and studied this chapter, you should be able to LO 1–1 Describe the relationship between profit and risk, and show how businesses and nonprofit organizations can raise the standard of living for all. LO 1–2 Explain how entrepreneurship and the other factors of production contribute to the creation of wealth. LO 1-3 Analyze the effects of the economic environment and taxes on businesses. LO 1–4 Describe the effects of technology on businesses. LO 1–5 Demonstrate how businesses can meet and beat competition. LO 1-6 Analyze the social changes affecting businesses. LO 1–7 Identify what businesses must do to meet global challenges, including war and terrorism. LO 1–8 Review how past trends are being repeated in the present and what those trends mean for tomorrow’s college graduates. GETTING TO KNOW Ann-Marie Campbell of Home Depot S tarting a new job isn’t easy. With many things to learn and people to meet, even experienced workers can get overwhelmed on their first day at work on a new job. So imagine how Ann-Marie Campbell must have felt more than 30 years ago, when as a new immigrant with a thick Jamaican accent, she walked into Home Depot for her first shift. But thanks to her hard work and committed attitude, Campbell rose up the ranks at Home Depot. Now as executive vice president of stores, she oversees the operation of more than 2,000 locations. Campbell was born in the Jamaican capital of Kingston to a successful couple with four children. But this happy childhood took a tragic turn when her father died in a car accident. Campbell and her siblings spent the rest of their youth being raised mainly by their grandmother, an intensely driven woman with no fear of hard work. “My grandmother was divorced and she had 10 children herself,” said Campbell. “She started selling lace on the side of the road and then grew that into a multimillion-dollar business—a retail store selling mostly furniture and appliances.” This store became Campbell’s second home when she had time off from the strict boarding school she attended. Helping her grandmother with day-to-day duties taught her many important lessons about how to do business. Her grandmother’s advice and the discipline she learned at school helped Campbell enormously when she made the move to Miami as a teenager and got a job as a part-time sales associate at Home Depot to help pay her college tuition. While Campbell’s experience and dedication helped her excel at the job quickly, she still faced a number of challenges in this new environment. “I was really the only woman on the sales floor back then, and when customers would come in with an issue, they’d demand to speak to, you know, a guy,” said Campbell. Rather than lose her temper, though, she developed a clever response to this demand. “I’d pick the guy who knew the least to come help. The man would always have to kick the question back to me.” A similarly bold move brought Campbell to the attention of Home Depot’s upper management. One day, a company executive visited the store and asked a big group of employees a question. None of her co-workers responded, but Campbell confidently answered the executive’s inquiry. “Later, when he was walking out of the store, he asked the manager who I was,” said Campbell. “That’s how I got on the radar.” This boost gave her the confidence and the connections to pursue promotions within the company. Her first advanced post was as head of the paint department, followed eventually by her appointment as manager of the entire store. Campbell earned a Master of Business Administration in 2005 that allowed her to climb even higher up the corporate ladder. By 2016 she became executive vice president of U.S. stores, a position that places her in charge of Home Depot’s more than 400,000 employees. Every day Campbell works to provide these employees with the same opportunities for advancement that she received, which is a duty she does not take lightly. “It’s only when you develop others that you permanently succeed,” said Campbell. “When I do have opportunities to speak to students, or even to my kids, that’s the type of value that I instill in them. It’s not just about you. The world is a community. Everyone has their part, so let’s go out and make sure everyone is able to do it successfully.” The business environment is constantly changing, and along with those changes come opportunities. The purpose of this chapter, and this textbook, is to introduce you to the dynamic world of business and to some of the people who thrive in it. Businesspeople like Ann-Marie Campbell contribute much to the communities they serve, and they also make a good living doing so. That’s what business is all about. Sources: Doug Gillett, “Ann-Marie Campbell’s American Dream,” Georgia State University Magazine, accessed September 2017; Ellen McGirt, “How Home Depot’s Ann-Marie Campbell Rose from Cashier to the C-Suite,” Fortune, September 13, 2016; Henry Unger, “‘If You Have a Seat at the Table, Speak Up,’” Atlanta Journal Constitution, March 26, 2015; Paul Ziobro, “Home Depot Replaces Head of U.S. Stores Business,” The Wall Street Journal, January 19, 2016; Boardroom Insiders, “Ann-Marie Campbell,” accessed September 2017. ©Melissa Golden/Redux 3 name that company EVEN THOUGH THIS COMPANY had not been hacked itself, in 2017 it reported that some customer accounts were breached when the customers secured their accounts with the same passwords they used on other sites that were hacked. Name that company. (You will find the answer in this chapter.) LO 1–1 Describe the relationship between profit and risk, and show how businesses and nonprofit organizations can raise the standard of living for all. Business and Wealth Building business Any activity that seeks to provide goods and services to others while operating at a profit. goods Tangible products such as computers, food, clothing, cars, and appliances. services Intangible products (i.e., products that can’t be held in your hand) such as education, health care, insurance, recreation, and travel and tourism. Success in business is based on constantly adapting to changes in the market. A business is any activity that seeks to provide goods and services to others while operating at a profit. To earn that profit, you provide desired goods, jobs, and services to people or other businesses. Goods are tangible products such as computers, food, clothing, cars, and appliances. Services are intangible products (i.e., products that can’t be held in your hand) such as education, health care, insurance, recreation, and travel and tourism. Once you have developed the right goods and services, based on consumer wants and needs, you need to reach those consumers using whatever media they prefer, including TV, social media, online advertising, and more. Although you don’t need to have wealth as a primary goal, one result of successfully filling a market need is that you can make money for yourself, sometimes a great deal, by giving customers what they want. Sam Walton of Walmart began by opening one store in Arkansas and, over time, became one of the richest people in the United States. Now his heirs are some of the richest people in the United States.1 There are over 13.5 million millionaires in the United States.2 Maybe you will be one of them someday if you start your own business. An entrepreneur is a person who risks time and money to start and manage a business. entrepreneur A person who risks time and money to start and manage a business. revenue The total amount of money a business takes in during a given period by selling goods and services. profit The amount of money a business earns above and beyond what it spends for salaries and other expenses. loss When a business’s expenses are more than its revenues. 4 Revenues, Profits, and Losses Revenue is the total amount of money a business takes in during a given period by selling goods and services. Profit is the amount of money a business earns above and beyond what it spends for salaries and other expenses needed to run the operation. A loss occurs when a business’s expenses are more than its revenues. If a business loses money over time, it will likely have to close, putting its employees out of work. Over 175,000 businesses in the United States close each year.3 As noted, the business environment is constantly changing. What seems like a great opportunity one day may become a huge failure when the economy changes. Starting a business may thus come with huge risks. But huge risks often result in huge profits. We’ll explore that concept next. Matching Risk with Profit Risk is the chance an entrepreneur takes of losing time and money on a business that may not prove profitable. Profit, remember, is the amount of money a business earns above and beyond what it pays out for salaries and other expenses. For example, if you were to start C H AP T E R 1 Ta k in g R i sks a n d M a ki n g Pr of i t s w i t h i n t h e Dy n a m i c B u si n ess En v i r on m ent a business selling hot dogs from a cart in the summer, you would have to pay for the cart rental. You would also have to pay for the hot dogs and other materials, and for someone to run the cart while you were away. After you paid your employee and yourself, paid for the food and materials you used, paid the rent on the cart, and paid your taxes, any money left over would be profit. Keep in mind that profit is over and above the money you pay yourself in salary. You could use any profit to rent or buy a second cart and hire other employees. After a few summers, you might have a dozen carts employing dozens of workers. Not all enterprises make the same amount of profit. Usually ©Tom Hauck/AP Images those who take the most risk may make the most profit. There is high risk, for example, in making a new kind of automobile. It’s also risky to open a business in an inner city, because insurance and rent are usually higher than in suburban areas, but reduced competition makes substantial profit possible. Big risk can mean big profits. Standard of Living and Quality of Life Entrepreneurs such as Sam Walton (Walmart), Bill Gates (Microsoft), Jeff Bezos (Amazon), and Sara Blakely (Spanx) not only became wealthy themselves; they also provided employment for many other people. Walmart is currently the nation’s largest private employer. Businesses and their employees pay taxes that the federal government and local communities use to build hospitals, schools, libraries, playgrounds, roads, and other public facilities. Taxes also help keep the environment clean, support people in need, and provide police and fire protection. Thus, the wealth business generate, and the taxes they pay, help everyone in their communities. A nation’s businesses are part of an economic system that contributes to the standard of living and quality of life for everyone in the country (and, potentially, the world). How has the slow economic recovery affected the standard of living and quality of life in your part of the world? The term standard of living refers to the amount of goods and services people can buy with the money they have. For example, the United States has one of the highest standards of living in the world, even though workers in some other countries, such as Germany and Japan, may on average make more money per hour. How can that be? Prices for goods and services in Germany and Japan are higher than in the United States, so a person in those countries can buy less than what a person in the United States can buy with the same amount of money. For example, a bottle of beer may cost $7 in Japan and $4 in the United States. Often, goods cost more in one country than in another because of higher taxes and stricter government regulations. Finding the right level of taxes and regulation is important in making a country or city prosperous. We’ll explore those issues in more depth in Chapter 2. At this point, it is enough to understand that the United States enjoys a high standard of living largely because of the wealth created by its businesses. The term quality of life refers to the general well-being of a society in terms of its political freedom, natural environment, education, health care, safety, amount of leisure, and rewards that add to the satisfaction and joy that other goods and services provide. Maintaining a high quality of life requires the combined efforts of businesses, nonprofit organizations, and government agencies. Remember, there is more to quality of life than simply making money. Responding to the Various Business Stakeholders Stakeholders are all the people who stand to gain or lose by the policies and activities of a business and whose concerns the business needs to address. They include customers, employees, stockholders, suppliers, dealers (retailers), bankers, people in the surrounding community, the media, environmentalists, competitors, unions, critics, and elected government leaders (see Figure 1.1).4 5 In 1979, Geral Fauss took 5,000 oversized foam fingers to the Sugar Bowl in New Orleans not knowing if he would sell a single one. The former high school shop teacher created the now-famous fingers a few years earlier and they became a big hit with his students. Fortunately, the Sugar Bowl crowd liked them, too. He sold every last finger and launched a company that is still going strong. What risks and rewards did Fauss face when starting his business? risk (1) The chance an entrepreneur takes of losing time and money on a business that may not prove profitable. (2) The chance of loss, the degree of probability of loss, and the amount of possible loss. standard of living The amount of goods and services people can buy with the money they have. iSee It! Need help understanding standard of living vs. quality of life? Visit your Connect e-book for a brief animated explanation. 6 PART 1 Bu s in e s s Tr e n d s : C u l ti v a ti n g a B u si n ess i n Di v er se, G l oba l En v i r on m en t s FIGURE 1.1 A BUSINESS AND ITS STAKEHOLDERS STAKEHOLDERS Often the needs of a firm’s various stakeholders will conflict. For example, paying employees more may cut into stockholders’ profits. Balancing such demands is a major role of business managers. Source: John Mackey and Raj Sisodia, Conscious Capitalism (Boston, MA: Harvard Business Review Press, 2013). quality of life The general well-being of a society in terms of its political freedom, natural environment, education, health care, safety, amount of leisure, and rewards that add to the satisfaction and joy that other goods and services provide. Stockholders Bankers Customers Media Suppliers Surrounding community TYPICAL U.S. BUSINESS Environmentalists Government leaders Employees Dealers (retailers) stakeholders All the people who stand to gain or lose by the policies and activities of a business and whose concerns the business needs to address. outsourcing Contracting with other companies (often in other countries) to do some or all of the functions of a firm, like its production or accounting tasks. A primary challenge for organizations of the 21st century will be to recognize and respond to the needs of their stakeholders. For example, the need for the business to make profits may be balanced against the needs of employees to earn sufficient income or the need to protect the environment. Ignore the media, and they might attack your business with articles that hurt sales. Oppose the local community, and it may stop you from expanding. Staying competitive may call for outsourcing. Outsourcing means contracting with other companies (often in other countries) to do some or all of the functions of a firm, like its production or accounting tasks. Outsourcing has had serious consequences in some states where jobs have been lost to overseas competitors. We discuss outsourcing in more detail in Chapter 3. The other side of the outsourcing coin is insourcing. Many foreign companies are setting up design and production facilities here in the United States. For example, Korea-based Hyundai operates design and engineering headquarters in Detroit, Michigan, and produces cars in Montgomery, Alabama.5 Japanese automaker Honda has been producing cars in the United States for years, and opened its 12th U.S. manufacturing plant in 2016.6 Charter brought back its Spanish-speaking call centers to the United States.7 Insourcing creates many new U.S. jobs and helps offset those jobs being outsourced. It may be legal and profitable to outsource, but is it best for all the stakeholders? Business leaders must make outsourcing decisions based on all factors. Pleasing stakeholders is not easy and often calls for trade-offs. Using Business Principles in Nonprofit Organizations nonprofit organization An organization whose goals do not include making a personal profit for its owners or organizers. Despite their efforts to satisfy their stakeholders, businesses cannot do everything needed to make a community all it can be. Nonprofit organizations—such as public schools, civic associations, charities like the United Way and the Salvation Army, and groups devoted to social causes—also make a major contribution to the welfare of society. A nonprofit organization is an organization whose goals do not include making a personal profit for its owners or organizers. Nonprofit organizations often do strive for financial gains, but they use them to meet their social or educational goals rather than for personal profit. C H AP T E R 1 Ta k in g R i sks a n d M a ki n g Pr of i t s w i t h i n t h e Dy n a m i c B u si n ess En v i r on m ent 7 The goals of nonprofit organizations are social and educational, not profit oriented. The Red Cross, for example, provides assistance to around 30 million people annually, from refugees to victims of natural disasters. Why do good management principles apply equally to profitseeking businesses and nonprofit organizations? ©Jorge Guerrero/AFP/Getty Images Your interests may lead you to work for a nonprofit organization. That doesn’t mean, however, that you shouldn’t study business in college. You’ll still need to learn business skills such as information management, leadership, marketing, and financial management. The knowledge and skills you acquire in this and other business courses are useful for careers in any organization, including nonprofits. We’ll explore entrepreneurship right after the Test Prep. TEST PREP What is the difference between revenue and profit? What is the difference between standard of living and quality of life? What is risk, and how is it related to profit? What do the terms stakeholders, outsourcing, and insourcing mean? LO 1–2 Explain how entrepreneurship and the other factors of production contribute to the creation of wealth. The Importance of Entrepreneurs to the Creation of Wealth There are two ways to succeed in business. One is to rise through the ranks of a large company. The advantage of working for others is that somebody else assumes the company’s entrepreneurial risk and provides you with benefits like paid vacation time and health insurance. It’s a good option, and many people choose it. Use SmartBook to help retain what you have learned. Access your instructor’s Connect course and look for the SB/LS logo. 8 PART 1 Bu s in e s s Tr e n d s : C u l ti v a ti n g a B u si n ess i n Di v er se, G l oba l En v i r on m en t s The other, riskier, but often more exciting, path is to become an entrepreneur. The national anthem, “The Star Spangled Banner,” says that the United States is the “land of the free and the home of the brave.” Part of being free is being able to own your own business and reap the profits from it. But freedom to succeed also means freedom to fail, and many small businesses fail each year. It takes a brave person to start one. As an entrepreneur, you don’t receive any benefits such as paid vacation time, day care, a company car, or health insurance. You have to provide them for yourself! But what you gain—freedom to make your own decisions, opportunity, and possible wealth—is often worth the effort. Before you take on the challenge, you should study successful entrepreneurs to learn the process. You can talk to them personally and read about them in Chapter 6, as well as in other books, magazines (e.g., Entrepreneur, Fast Company, and Inc.), and at websites (e.g., Small Business Administration at www.sba.gov). ©Rosemarie Gearhart/Getty Images RF To create wealth for its citizens, a country requires more than natural resources. It needs the efforts of entrepreneurs and the skill and knowledge to produce goods and services. How can government support entrepreneurship and the spread of knowledge? factors of production The resources used to create wealth: land, labor, capital, entrepreneurship, and knowledge. The Five Factors of Production Have you ever wondered why some countries are relatively wealthy and others poor? Economists have been studying the issue of wealth creation for many years. They began by identifying five factors of production that seemed to contribute to wealth (see Figure 1.2): 1. Land (or natural resources). Land and other natural resources are used to make homes, cars, and other products. 2. Labor (workers). People have always been an important resource in producing goods and services, but many people are now being replaced by technology. 3. Capital. This includes machines, tools, buildings, or whatever else is used in the production of goods. It might not include money; money is used to buy factors of production but is not always considered a factor by itself. 4. Entrepreneurship. All the resources in the world have little value unless entrepreneurs are willing to take the risk of starting businesses to use those resources. 5. Knowledge. Information technology has revolutionized business, making it possible to quickly determine wants and needs and to respond with desired goods and services. Source: Drucker Institute, druckerinstitute.com, April 2017. led ge ow Kn pr en eu rs hi p En tre l pi ta Ca r bo La La nd FIGURE 1.2 THE FIVE FACTORS OF PRODUCTION C H AP T E R 1 Ta k in g R i sks a n d M a ki n g Pr of i t s w i t h i n t h e Dy n a m i c B u si n ess En v i r on m ent 9 Traditionally, business and economics textbooks emphasized only four factors of production: land, labor, capital, and entrepreneurship. But the late management expert and business consultant Peter Drucker said the most important factor of production in our economy is and always will be knowledge.8 What do we find when we compare the factors of production in rich and poor countries? Some poor countries have plenty of land and natural resources. Russia, for example, has vast areas of land with many resources such as timber and oil, but it is not considered a rich country (yet). Therefore, land isn’t the critical element for wealth creation. Most poor countries, such as Mexico, have many laborers, so it’s not labor that’s the primary source of wealth today. Laborers need to find work to make a contribution; that is, they need entrepreneurs to create jobs for them. Furthermore, capital—machinery and tools—is now fairly easy for firms to find in world markets, so capital isn’t the missing ingredient either. Capital is not productive without entrepreneurs to put it to use. What makes rich countries rich today is a combination of entrepreneurship and the effective use of knowledge. Entrepreneurs use what they’ve learned (knowledge) to grow their businesses and increase wealth. Economic and political freedom also matter. The business environment either encourages or discourages entrepreneurship. That helps explain why some states and cities in the United States grow rich while others remain relatively poor. In the following section, we’ll explore what makes up the business environment and how to build an environment that encourages growth and job creation. TEST PREP What are some of the advantages of working for others? What benefits do you lose by being an entrepreneur, and what do you gain? What are the five factors of production? Which ones seem to be the most important for creating wealth? Use SmartBook to help retain what you have learned. Access your instructor’s Connect course and look for the SB/LS logo. The Business Environment The business environment consists of the surrounding factors that either help or hinder the development of businesses. Figure 1.3 shows the five elements in the business environment: 1. 2. 3. 4. 5. The economic and legal environment. The technological environment. The competitive environment. The social environment. The global business environment. Businesses that create wealth and jobs grow and prosper in a healthy environment. Thus, creating the right business environment is the foundation for social benefits of all kinds, including good schools, clean air and water, good health care, and low rates of crime. Businesses normally can’t control their environment, but they need to monitor it carefully and do what they can to adapt as it changes. LO 1–3 Analyze the effects of the economic environment and taxes on businesses. The Economic and Legal Environment People are willing to start new businesses if they believe the risk of losing their money isn’t too great. The economic system and the way government works with or against businesses can have a strong impact on that level of risk. For example, a government can minimize business environment The surrounding factors that either help or hinder the development of businesses. PART 1 Bu s in e s s Tr e n d s : C u l ti v a ti n g a B u si n ess i n Di v er se, G l oba l En v i r on m en t s USINESS ENVIRONME B L NT A OB L G FIGURE 1.3 TODAY’S DYNAMIC BUSINESS ENVIRONMENT The Economic and Legal Environment The Technological Environment MP ET ITI ON 1. Customer service 2. Stakeholder recognition 3. Employee service 4. Concern for the environment FR E E TR ADE The Social Environment 1. Diversity 2. Demographic changes 3. Family changes E L CO The Competitive Environment RA TIV GLOBA 1. Information technology 1. Freedom of ownership 2. Databases 2. Contract laws 3. Bar codes 3. Elimination of 4. The Internet corruption 4. Tradable currency 5. Minimum taxes and regulation BUSINESS MANAGEMENT AND JOB CREATION PE 10 Q THE UA Y LIT IM spending and keep taxes and regulations to a minimum—policies that tend to favor business. Much of the debate in recent elections has focused on whether or not to raise taxes, how to lower government spending, and whether to cut regulations. One way for government to actively promote entrepreneurship is to allow private ownership of businesses. In some countries, the government owns most businesses, and there’s little incentive for people to work hard or create profit. Around the world today, however, some governments are selling those businesses to private individuals to create more wealth. One of the best things the governments of developing countries can do is to minimize interference with the free exchange of goods and services. (You can read more about the various economic systems in different countries in Chapter 2.) The government can further lessen the risks of entrepreneurship by passing laws that enable businesspeople to write enforceable contracts. In the United States, the Uniform Commercial Code, for example, regulates business agreements such as contracts and warranties so that firms know they can rely on one another. In countries that don’t yet have such laws, the risks of starting a business are that much greater. (You can read more about business laws in Bonus Chapter A.) The government can also establish a currency that’s tradable in world markets. That is, the currency lets you buy and sell goods and services anywhere in the world when it is easily exchanged for that of the other countries where you do business. If the Chinese did not want to trade their yuan for the U.S. dollar, for instance, it’s hard to imagine how Coca-Cola or Disney would have been able to sell their products and services there. (You can read more about currency in Chapter 20). C H AP T E R 1 Ta k in g R i sks a n d M a ki n g Pr of i t s w i t h i n t h e Dy n a m i c B u si n ess En v i r on m ent 11 Starting a business is more difficult in some countries than in others. In India, for example, it takes a time-consuming and bureaucratic process to obtain government permission. Nonetheless, new businesses can become a major source of wealth and employment. This sari shop is one small example. What do you think would be the effect of a little more freedom to create business opportunities in this country of over a billion people? ©Partha Pal/The Image Bank/Getty Images Finally, the government can help minimize corruption in business and in its own ranks. Where governments are corrupt, it’s difficult to build a factory or open a store without a government permit, which is obtained largely through bribery of public officials. Among businesses themselves, unscrupulous leaders can threaten their competitors and unlawfully minimize competition. Many laws in the United States attempt to minimize corruption. Nonetheless, corrupt and illegal activities at some companies do negatively affect the business community and the economy as a whole. The news media widely report these scandals. Ethics is so important to the success of businesses and the economy as a whole that we feature stories about ethics in most chapters and devote Chapter 4 to the subject. Governments from different countries can work together to create an environment that allows entrepreneurship to thrive. For example, in 2015 the United Nations adopted what it calls Sustainable Development Goals (SDGs) that list specific targets for ending poverty and improving the lives of the disadvantaged in the next 15 years. The ultimate goal is to move toward prosperity by partnering governments, businesses, and nonprofits in order to solve problems at the ground level in developing countries. LO 1–4 Describe the effects of technology on businesses. The Technological Environment Since prehistoric times, humans have felt the need to create tools that make work easier. Few technological changes have had a more comprehensive and lasting impact on businesses, however, than information technology (IT). IT has completely changed the way people communicate with one another. Advertisers and other businesspeople have created ways of using these tools to reach their suppliers and customers. Even politicians have harnessed the power of the Internet to advance their causes.9 IT is such a major force in business today that we discuss its impact on businesses throughout the entire text. How Technology Benefits Workers and You Technology means everything from phones to computers, mobile devices, medical imaging machines, robots, the Internet, social media, and the various software programs and apps that make business processes more effective, efficient, and productive.10 Effectiveness means producing the desired result. technology Everything from phones and copiers to computers, medical imaging devices, personal digital assistants, and the various software programs that make business processes more effective, efficient, and productive. ADAPTING TO CHANGE S ure drones can deliver a wide variety of things—everything from your Amazon order to a precisely targeted bomb. But they can also help businesses be more productive and efficient. Drones can scan, map, and gather data, tasks that used to require satellites, planes, and helicopters that only the deepest-pocketed companies could afford. Today even small businesses can pick up a drone for a few hundred dollars. Construction companies can use drones to collect data far more frequently and accurately than they can with manned aircraft and human surveyors. Farmers can survey their fields of crops. Communication companies can inspect lofty cell towers. Property inspectors can inspect buildings. And this can all be done at much lower costs than productivity The amount of output you generate given the amount of input (e.g., hours worked). e-commerce The buying and selling of goods over the Internet. 12 Up, Up, and Away traditional methods. For example, building inspectors usually charge $200–$300 for a typical home roof inspection that can take six hours. However, if the inspector uses a planes, endanger military aircraft, and spy on neighbors’ property with tiny video cameras. To combat these threats, Congress has proposed giving the Federal Aviation Administration (FAA) more authority to regulate the use of drones. The drone industry is concerned that the lawmakers will inhibit the development and use of drones in their effort to rein in the people who misuse them. What do you think the government should do to regulate drones? ©Jochen Tack/Alamy drone, the cost is $10 and takes only an hour. And piloting a drone is much less risky than climbing ladders or cell towers. Of course, there are many concerns about the use of drones. Drones have been used to buzz Sources: Mark Sundeen, “Welcome to DroneKota,” Popular Science, May/June 2016; Ashley Halsey III, “Senate Considers Ramping Up FAA Oversight of Drone Use,” The Washington Post, March 16, 2016; Christ Anderson, “How Will Drones Change My Business?” Entrepreneur, April 16, 2016; Clay Dillow, “A Drone for Every Job Site,” Fortune, September 15, 2016; Chris Anderson, “Drones Go to Work,” Harvard Business Review, May 2017. Efficiency means producing goods and services using the least amount of resources. The Adapting to Change box discusses how one form of technology, drones, can make businesses more effective and efficient. Productivity is the amount of output you generate given the amount of input, such as the number of hours you work. The more you can produce in any given period, the more money you are worth to companies. The problem with productivity today is that workers are so productive that fewer are needed.11 Technology affects people in all industries. For example, a farmer can use his computer to compare data from the previous year’s harvest with drone or satellite photos of his farm that show which crops are flourishing. He can check the latest grain prices and use the website www.newAgTalk.com to converse with other farmers from all over the world. He can also save money on chemicals by bidding for bulk fertilizer on FarmTrade.com, an online agricultural exchange. High-tech equipment tells him how and where to spread fertilizer and seed, tracks yields yard by yard, and allows him to maintain high profit margins.12 Of course, more tech often means fewer workers. Is that a good or bad thing for farmers? The Growth of E-Commerce E-commerce is the buying and selling of goods online. There are two major types of e-commerce transactions: business-to-consumer (B2C) and business-to-business (B2B). As important as the Internet has been to online retailers in the consumer market, it has become even more important in the B2B market, where businesses sell goods and services to one another, such as IBM selling consulting services to a local bank. E-commerce has become so important that we discuss it in many chapters throughout the text. C H AP T E R 1 Ta k in g R i sks a n d M a ki n g Pr of i t s w i t h i n t h e Dy n a m i c B u si n ess En v i r on m ent Using Technology to Be Responsive to Customers A major theme of this text is that those businesses most responsive to customer wants and needs will succeed. Technology can help businesses respond to customer needs in many ways. For example, businesses use bar codes to identify products you buy and their size, quantity, and color. The scanner at the checkout counter identifies the price but can also put all your purchase information into a database, an electronic storage file for information. Databases enable stores to carry only the merchandise their local customers want. But because companies routinely trade database information, many retailers know what you buy and from whom you buy it. Thus they can send you online ads or catalogs and other direct mail advertising offering the kind of products you might want based on your past purchases. We discuss many of the other ways businesses use technology to be responsive to consumers throughout the text. Unfortunately, the legitimate collection of personal customer information also opens the door to identity theft. Identity theft is the obtaining of individuals’ personal information, such as Social Security and credit card numbers, for illegal purposes. For example, in 2017 even though Apple itself was not hacked, it reported that some Apple customers who secured their iCloud accounts with the same passwords they use on other sites that were hacked (especially accounts on LinkedIn, Yahoo!, and Dropbox) suffered breaches to their Apple accounts as well.13 Experts advise us to create new passwords for each account so that if the password on one account is stolen, the hackers can’t access the rest of your accounts too. They also recommend storing them in a password manager, and activating two-factor authentication, which is an additional layer of security, when possible.14 The Federal Trade Commission says millions of U.S. consumers are victims of identity theft each year. Cybersecurity will continue to be a major concern of governments, business, and consumers.15 Many people are concerned about how technology might be used to invade the privacy of their phone or e-mail conversations or even to track their movement through facial recognition technology used in stores, casinos, cruise ships, and other public places.16 You can read more about security and privacy issues and how businesses use technology to manage information in Bonus Chapter B. LO 1–5 Demonstrate how businesses can meet and beat competition. 13 Walt Disney World introduced MyMagic+, a convenient way for guests to create their ideal vacation experience. The key element is the MagicBand, providing an all-in-one way to effortlessly connect all the vacation choices guests make online. The MagicBand uses RF technology and serves as park ticket, hotel room key, access to FastPass+ advance reservation of attraction times, and Disney’s PhotoPass. Disney hotel guests may use the bands to charge meals and merchandise to their hotel account. ©Jennifer Blankenship RF The Competitive Environment Competition among businesses has never been greater. Some have found a competitive edge by focusing on quality. The goal for many companies is zero defects—no mistakes in making the product. However, even achieving a rate of zero defects isn’t enough to stay competitive in world markets. Companies now have to offer both high-quality products and good value— that is, outstanding service at competitive prices. Competing by Exceeding Customer Expectations Today’s customers want not only good quality at low prices but great service as well. Every manufacturing and service organization in the world should have a sign over its door telling its workers that the customer is king. Business has become more customer-driven, not management-driven as often occurred in the past. Successful organizations must now listen more closely to customers to determine their wants and needs, and then adjust the firm’s products, policies, and practices accordingly. We will explore these ideas in more depth in Chapter 13. Competing by Restructuring and Empowerment To meet the needs of cus- tomers, firms must give their frontline workers—for example, office clerks, front-desk people at hotels, and salespeople—the responsibility, authority, freedom, training, and equipment they need to respond quickly to customer requests. They also must allow workers to make other decisions essential to producing high-quality goods and services. The process is called empowerment, and we’ll be talking about it throughout this book. database An electronic storage file for information. identity theft The obtaining of individuals’ personal information, such as Social Security and credit card numbers, for illegal purposes. empowerment Giving frontline workers the responsibility, authority, freedom, training, and equipment they need to respond quickly to customer requests. 14 PART 1 Bu s in e s s Tr e n d s : C u l ti v a ti n g a B u si n ess i n Di v er se, G l oba l En v i r on m en t s As many companies have discovered, it sometimes takes years to restructure an organization so that managers can and will give up some of their authority and employees will assume more responsibility. We’ll discuss such organizational changes in Chapter 8. LO 1–6 Analyze the social changes affecting businesses. The Social Environment demography The statistical study of the human population with regard to its size, density, and other characteristics such as age, race, gender, and income. The United States boasts enormous ethnic and racial diversity. Its workforce is also widely diverse in terms of age, which means that managers must adapt to the generational demographics of the workplace. What are some challenges of working with someone much younger or much older than you? ©Cathy Yeulet/123RF Demography is the statistical study of the human population with regard to its size, density, and other characteristics such as age, race, gender, and income. In this text, we’re particularly interested in the demographic trends that most affect businesses and career choices. The U.S. population is going through major changes that are dramatically affecting how people live, where they live, what they buy, and how they spend their time. Furthermore, tremendous population shifts are leading to new opportunities for some firms and to declining opportunities for others. For example, there are many more retired workers than in the past, creating new markets for all kinds of goods and services. Managing Diversity Diversity has come to mean much more than recruiting and keeping minority and female employees. Diversity efforts now include older adults, people with disabilities, people with different sexual orientations, atheists, religious, extroverts, introverts, married people, and singles. It also means dealing sensitively with workers and cultures around the world.17 Legal and illegal immigrants have had a dramatic effect on many regions, and will continue to do so as the government debates immigration reform. Businesses, schools, and hospitals have been especially affected.18 Some local governments are making efforts to adapt, including changing signs, brochures, websites, and forms to include other languages. Has your city experienced such changes? What are some of the impacts you’ve noticed? How has the debate about changing immigration policies affected your community? The Increase in the Number of Older Citizens People aged 65 to 74 are currently the richest demographic group in the United States.19 Therefore they represent a lucrative market for companies involved with food service, transportation, entertainment, education, lodging, and so on. By 2030 the percentage of the population 65 or older will be over 20 percent, by 2050 it will more than double.20 What do these changes mean for you and for businesses in the future? Think of the products and services that middle-aged and elderly people will need—medicine, nursing homes, assisted-living facilities, adult day care, home health care, transportation, recreation, and the like—and you’ll see opportunities for successful businesses of the 21st century. Don’t rule out computer games and online services. Businesses that cater to older consumers will have the opportunity for exceptional growth in the near future. The market is huge. On the other hand, retired people will be draining the economy of wealth. Social Security has become a major issue. The pay-as-you-go system (in which workers today pay the retirement benefits for today’s retirees) operated just fine in 1940, when 42 workers supported each retiree; but by 1960, there were only 5 workers per retiree, and today, as members of the baby-boom generation (born between 1946 and 1964) retire, that number is under 3 and is projected to drop to 2 by 2030.21 In addition, the government has been spending the accumulated Social Security money instead of leaving it in a Social Security account. Soon, less money will be coming into Social Security than will be going out. The government will have to do something to make up for the shortfall: raise taxes, reduce C H AP T E R 1 Ta k in g R i sks a n d M a ki n g Pr of i t s w i t h i n t h e Dy n a m i c B u si n ess En v i r on m ent 15 Social Security benefits (e.g., raise the retirement age at which people qualify for payments), reduce spending elsewhere (e.g., in other social programs like Medicare or Medicaid), or borrow on the world market. In short, paying Social Security to senior citizens in the future will draw huge amounts of money from the working population. That is why there is so much discussion in the media today about what to do with Social Security. The Increase in the Number of Single-Parent Families It is a tremendous task to work full-time and raise a family. Thus, the rapid growth of single-parent households has also had a major effect on businesses. Single parents, including those forced by welfare rules to return to work after a certain benefit period, have encouraged businesses to implement programs such as family leave (giving workers time off to attend to a sick child or elder relative) and flextime (allowing workers to arrive or leave at selected times). You will read about such programs in more detail in Chapter 11. LO 1–7 Identify what businesses must do to meet global challenges, including war and terrorism. ©Julie Toy/Photographer’s Choice/Getty Images The Global Environment The global environment of business is so important that we show it as surrounding all other environmental influences (see again Figure 1.3). Two important changes here are the growth of global competition and the increase of free trade among nations. World trade, or globalization, has grown thanks to the development of efficient distribution systems (we’ll talk about these in Chapter 15) and communication advances such as the Internet. Globalization has greatly improved living standards around the world. China and India have become major U.S. competitors. Shop at Walmart and most other U.S. retail stores, and you can’t help but notice the number of “Made in China” stickers you see. Call for computer help, and you are as likely to be talking with someone in India as someone in the United States. As the Reaching Beyond our Borders box on the next page discusses, China has become a key to success for even Hollywood and the movie business. World trade has its benefits and costs. You’ll read much more about its importance in Chapter 3 and in the other Reaching Beyond Our Borders boxes throughout the text. War and Terrorism War and terrorism have drained trillions of dollars from the U.S. economy.22 Some companies—like those that make bullets, tanks, and uniforms—have benefited greatly. Others, however, lost workers to the armed forces, and still others (e.g., tourism) have grown more slowly as money was diverted to the war effort. The threat of more wars and terrorism leads the government to spend even more money on spying and the military. Such expenditures are subject to much debate. The increased unrest in the world adds great uncertainty. This uncertainty is considered by some to be the biggest risk in business. It is difficult to plan when there are so many unknown factors such as how changes in military policy will affect the economy.23 The threat of terrorism also adds greatly to organizational costs, including the cost of insurance. In fact, some firms are finding it difficult to get insurance against terrorist attacks. Security, too, is costly. Airlines, for example, have had to install stronger cockpit doors and add more passenger screening devices. Like all citizens, businesspeople benefit from a peaceful and prosperous world. One way to lessen international tensions is to foster global economic growth among both profitmaking and nonprofit organizations. How Global Changes Affect You As businesses expand to serve global markets, new jobs will be created in both manufacturing and service industries. Global trade also More and more working families consist of single parents who must juggle the demands of a job and the responsibilities of raising children. What can managers do to try to retain valued employees who face such challenges? REACHING BEYOND OUR BORDERS Hollywood Climbs the Great Wall www.amctheatres.com I n late 2016, the producers of the remake of the movie Jumanji put out a casting call to talent agencies across Hollywood. Their quest was to find a Chinese actor to play a major role in the film. Like many others, this casting of Chinese actors in U.S. films was an obvious effort to appeal to audiences in China. Today, China is the world’s secondlargest movie market, with over $5 billion in ticket sales in 2016. It is expected to surpass the world leader, the United States, in the next few years. Studios also note that even though China limits the number of foreign films that can be shown in the country, more than half of the top 10 grossing films in China are from Hollywood. Chinese investors today are not just interested in distributing Hollywood films in their country. They intend to become major players in the entire film industry. For example, Wang Jianlin, the wealthiest man in China, is a major buyer in Hollywood. His Dalian Wanda Group has interests in every stage of the entertainment industry including ownership of the theater chain AMC Entertainment Holdings, which he purchased in 2012 for $1 billion. He intends to make AMC the largest theater chain in the United States. Wang also actively sought to buy a stake in Paramount Pictures until the company decided not to sell. Wang promises to pursue his goal of being a key part of the movie business and has a personal goal to make China a moviemaking power in its own right. Sources: Jacky Wong, “WandaSony Pictures: China Coming to Theater Near You,” The Wall Street Journal, September 24, 2016; Erich Schwartzel, Kathy Chu, and Wayne Ma, “China’s Play for Hollywood,” The Wall Street Journal, October 2, 2016; Michal Lev-Ram, “Can China Save Hollywood?,” Fortune, May 22, 2017. ©Photo 12/Alamy climate change The movement of the temperature of the planet up or down over time. greening The trend toward saving energy and producing products that cause less harm to the environment. 16 means global competition. The students who will prosper will be those prepared for the markets of tomorrow. Rapid changes create a need for continuous learning, so be prepared to continue your education throughout your career. You’ll have every reason to be optimistic about job opportunities in the future if you prepare yourself well. The Ecological Environment Few issues have captured the attention of the interna- tional business community more than climate change. Climate change is the movement of the temperature of the planet up or down over time. There are some who remain unconvinced of the dangers of global warming.24 However, most scientists and many of the world’s largest firms—including General Electric, Coca-Cola, Shell, Nestlé, DuPont, Johnson & Johnson, British Airways, and Shanghai Electric—say the evidence for climate change is overwhelming. Saving energy and producing products that cause less harm to the environment, such as solar energy, is called greening.25 C H AP T E R 1 Ta k in g R i sks a n d M a ki n g Pr of i t s w i t h i n t h e Dy n a m i c B u si n ess En v i r on m ent 17 TEST PREP What are four ways the government can foster entrepreneurship? What’s the difference between effectiveness, efficiency, and productivity? What is empowerment? What are some of the major issues affecting the economy today? LO 1–8 Use SmartBook to help retain what you have learned. Access your instructor’s Connect course and look for the SB/LS logo. Review how past trends are being repeated in the present and what those trends mean for tomorrow’s college graduates. The Evolution of U.S. Business Businesses in the United States have become so productive that they need fewer workers than ever before to produce goods. If global competition and improved technology are putting skilled people out of work, should we be concerned about the prospect of high unemployment rates and low incomes? Where will the jobs be when you graduate? These important questions force us all to look briefly at the U.S. economy and its future. Progress in the Agricultural and Manufacturing Industries The United States has experienced strong economic development since the 1800s. The agricultural industry led the way, providing food for the United States and much of the world. Cyrus McCormick’s invention of the harvester in 1834, other inventions such as Eli Whitney’s cotton gin, and modern improvements on such equipment did much to make large-scale farming successful. Technology has made modern farming so efficient that the number of farmers has dropped from about 33 percent of the popula- ©Richard Hamilton Smith/Newscom tion to less than 1 percent today. However, average farm size is now about 430 acres versus 150 acres in the past.26 Agriculture is still a major industry in the United States. What has changed is that the millions of small farms that existed previously have been replaced by some huge farms, some merely large farms, and some small but highly specialized farms. The loss of farmworkers over the past century is not a negative sign. It is instead an indication that U.S. agricultural workers are the most productive in the world. Most farmers who lost their jobs during the 19th and 20th centuries went to work in factories springing up around the country. Manufacturers, like farms, began using new technology, new tools, and machines to become more productive. Eventually the consequence in manufacturing, as in farming, was the elimination of many jobs. Again, the loss to society is minimized if the wealth created by increased productivity and efficiency creates new jobs elsewhere—and that’s exactly what has happened over the past 50 years. Many workers in the industrial sector found jobs in the growing service sector. Most of those who can’t find work today are people who need retraining and education to become qualified for jobs that now exist or will exist in the near future, such as building wind farms or making electric automobiles. We’ll discuss the manufacturing sector and production in more detail in Chapter 9. Agriculture is one of the largest and most important industries in the United States. Technology has increased productivity and made farmers more efficient, allowing for larger farms. This trend has helped reduce the increase in price of some foods for consumers, but has also reduced the number of small, familyrun farms. Does the new technology also help smaller farms compete? If so, how? ADAPTING TO CHANGE Services Expand the Circular Economy W hen is the last time you bought a movie on DVD? Today most of us watch movies on Netflix or some other on-demand service. Same with music—why store stacks of CDs when you can use services like Spotify? All sorts of products are becoming services. For example, you store files in the cloud instead of your computer. ©Brian Snyder/Reuters/Alamy You can take Ubers or Lyfts to provide “mobility services” instead of owning a car. Busi(such as BMW’s ReachNow, Gennesses can rent office carpets by eral Motor’s Maven, and Zipcar’s the month, rent lighting, or print by car-sharing services). Some ridethe page. sharing services are beginning to Technology enables a large use technology called telematics variety of products to be offered to track drivers’ performance. Senas services. The Internet of Things sors in the drivers’ cell phones can (IoT, see Bonus Chapter B) put sensors on all sorts of things that allow track when they speed, cut corners, brake suddenly, or send texts companies to track usage, meawhile driving. sure performance, and develop The product-as-service model new business models. For examis one way to move away from ple, GPS enables car companies a “take-make-dispose” economy (i.e., take raw materials, make a product, and dispose of it when you’re finished with it) toward a more circular economy that reduces waste. Companies that retain ownership of their products maintain them and extend their life cycles. Instead of planning for obsolescence so we buy new versions of the products more often, companies that provide products as services have an incentive to make products that last as long as possible and that can be repaired easily and cheaply. Think of all the landfill space that would save. Sources: Greg Gardner, “GM Launches SharedRide Service Called Maven,” USA Today, January 22, 2016; Douglas MacMillian, “Car Apps Test Tracking of Drivers,” The Wall Street Journal, January 27, 2016; Ben Schiller, “How Netflixication Can Deliver a Waste-Free Circular Economy,” Fast Company, March 13, 2017. Progress in Service Industries In the past, the fastest-growing industries in the United States produced goods like steel, automobiles, and machine tools. Today, the fastest-growing firms provide services in areas such as law, health, telecommunications, entertainment, and finance. Together, services make up nearly 80 percent of the value of the U.S. economy.27 Since the mid-1980s, the service industry has generated almost all the increases in employment. Although service-sector growth has slowed, it remains the largest area of growth. Chances are very high that you’ll work in a service job at some point in your career. Figure 1.4 lists many service-sector jobs; look it over to see where the careers of the future are likely to be. Retailers like Nordstrom Rack are part of the service sector. Each new retail store can create managerial jobs for college graduates. Another bit of good news is that there are more high-paying jobs in the service sector than in the goods-producing sector. High-paying service-sector jobs abound in health care, accounting, finance, entertainment, telecommunications, architecture, law, software engineering, and more.28 Projections are that some areas of the service sector will grow rapidly, while others may have much slower growth (see the Adapting to Change box). The strategy for college graduates is to remain flexible, find out where jobs are being created, and move when appropriate. 18 C H AP T E R 1 Ta k in g R i sks a n d M a ki n g Pr of i t s w i t h i n t h e Dy n a m i c B u si n ess En v i r on m ent FIGURE 1.4 WHAT IS THE SERVICE SECTOR? There’s much talk about the service sector, but few discussions actually list what it includes. Here are examples of businesses in the service sector. Examples of Businesses in the Service Sector Amusement and Recreation Services Amusement parks Ice skating rinks Bowling alleys Pool halls Botanical gardens Infotainment Carnivals Restaurants Fairs Video rentals Research & development labs Race tracks Circuses Golf courses Symphony orchestras Collection agencies Management services Equipment rental Trash collection Computer programming Exterminating Window cleaning Tax preparation Web design Commercial photography Accounting Commercial art Public relations Consulting Detective agencies Interior design Stenographic services Employment agencies Legal Services Lawyers Paralegals Notary public Educational Services Schools Libraries Online schools Computer schools Chiropractors Nursery care Dentists Physicians Medical labs Dental labs Motion Picture Industry Production Distribution Theaters Drive-ins Social Services Job training Elder care Family services Child care Transmission repair Tire retreading Exhaust system shops Auto rental Paint shops Real estate agencies Investment firms (brokers) Photographic studios Shoe repair Tax preparation Laundries Funeral homes Linen supply Beauty shops Child care Health clubs Diaper service Carpet cleaning Business Services Health Services Automotive Repair Services and Garages Financial Services Personal Services Lodging Services Truck rental Ad agencies Parking lots Car washes Banking Hotels, rooming houses, and other Sporting and lodging places recreation camps Insurance Trailer parks and campsites for transients Cultural Institutions Noncommercial museums Art galleries Selected Membership Organizations Civic associations Business associations Tele communications Architectural Engineering Utilities Lawn care Vending Delivery Septic tank cleaning Radio and television Sharpening Reuphoistery Watch Welding Miscellaneous Services Surveying Botanical and zoological gardens Your Future in Business Despite the growth in the service sector we’ve described above, the service era now seems to be coming to a close as a new era is beginning. We’re in the midst of an information-based 19 20 PART 1 Bu s in e s s Tr e n d s : C u l ti v a ti n g a B u si n ess i n Di v er se, G l oba l En v i r on m en t s global and technical revolution that will alter all sectors of the economy: agricultural, industrial, and service. It’s exciting to think about the role you’ll play in that revolution. You may be a leader who will implement the changes and accept the challenges of world competition based on world quality standards. This book will introduce you to some of the concepts that make such leadership possible, not just in business but also in government agencies and nonprofit organizations. Business can’t prosper in the future without the cooperation of government and social leaders throughout the world. TEST PREP Use SmartBook to help retain what you have learned. Access your instructor’s Connect course and look for the SB/LS logo. Access your instructor’s Connect course to check out SmartBook or go to mheducation.com/ smartbook for more info. What major factor caused people to move from farming to manufacturing and from manufacturing to the service sector? What does the future look like for tomorrow’s college graduates? SUMMARY LO 1–1 Describe the relationship between profit and risk, and show how businesses and nonprofit organizations can raise the standard of living for all. What is the relationship of businesses’ profit to risk assumption? Profit is money a business earns above and beyond the money that it spends for salaries and other expenses. Businesspeople make profits by taking risks. Risk is the chance an entrepreneur takes of losing time and money on a business that may not prove profitable. A loss occurs when a business’s costs and expenses are higher than its revenues. Who are stakeholders, and which stakeholders are most important to a business? Stakeholders include customers, employees, stockholders, suppliers, dealers, bankers, the media, people in the local community, environmentalists, and elected government leaders. The goal of business leaders is to try to recognize and respond to the needs of these stakeholders and still make a profit. LO 1–2 Explain how entrepreneurship and the other factors of production contribute to the creation of wealth. What are the advantages and disadvantages of entrepreneurship? Working for others means getting benefits like paid vacations and health insurance. Entrepreneurs take more risks and lose those benefits. They gain the freedom to make their own decisions, more opportunity, and possible wealth. What are the five factors of production? The five factors of production are land, labor, capital, entrepreneurship, and knowledge. Of these, the most important are entrepreneurship and knowledge. Entrepreneurs are people who risk time and money to start and manage a business. What makes rich countries rich today is a combination of entrepreneurship and the effective use of knowledge. C H AP T E R 1 Ta k in g R i sks a n d M a ki n g Pr of i t s w i t h i n t h e Dy n a m i c B u si n ess En v i r on m ent LO 1–3 Analyze the effects of the economic environment and taxes on businesses. What can governments in developing countries do to reduce the risk of starting businesses and thus help entrepreneurs? The government may allow private ownership of businesses, pass laws that enable businesspeople to write contracts that are enforceable in court, establish a currency that’s tradable in world markets, help lessen corruption in business and government, and keep taxes and regulations to a minimum. From a business perspective, lower taxes mean lower risks, more growth, and thus more money for workers and the government. LO 1–4 Describe the effects of technology on businesses. How has technology benefited workers, businesses, and consumers? Technology enables workers to be more effective, efficient, and productive. Effectiveness means doing the right thing in the right way. Efficiency means producing items using the least amount of resources. Productivity is the amount of output you generate given the amount of input (e.g., hours worked). LO 1–5 Demonstrate how businesses can meet and beat competition. What are some ways in which businesses meet and beat competition? Some companies have found a competitive edge by focusing on making high-quality products, all the way to zero defects. Companies also aim to exceed customer expectations. Often that means empowering frontline workers by giving them more training and more responsibility and authority. LO 1–6 Analyze the social changes affecting businesses. How have social changes affected businesses? Diversity has come to mean much more than recruiting and keeping minority and female employees. Diversity efforts now include older adults, people with disabilities, people with different sexual orientations, atheists, extroverts, introverts, married people, and singles. Managing diversity means dealing sensitively with workers and cultures around the world. Providing Social Security benefits to senior citizens in the future will draw huge amounts of money from the working population. That is why there is so much discussion about Social Security in the media today. LO 1–7 Identify what businesses must do to meet global challenges, including war and terrorism. Which countries are creating the greatest challenges? China and India are two major competitors. What will be the impacts of future wars and terrorism? Some businesses, such as those in the defense industry, may prosper. Others, such as tourism, may suffer. One way to minimize world tensions is to help less developed countries become more prosperous. LO 1–8 Review how past trends are being repeated in the present and what those trends mean for tomorrow’s college graduates. What is the history of our economic development in the United States, and what does it tell us about the future? Agricultural workers displaced by improved farm technology went to work in factories. Improved manufacturing productivity and increased competition from foreign firms 21 22 PART 1 Bu s in e s s Tr e n d s : C u l ti v a ti n g a B u si n ess i n Di v er se, G l oba l En v i r on m en t s contributed to the development of a service economy in the United States. The service era is now giving way to an information-based global revolution that will affect all sectors of the economy. The secret to long-term success in such an economy is flexibility and continuing education to be prepared for the opportunities that are sure to arise. What job opportunities for college graduates exist in the service sector? Check over Figure 1.4, which outlines the service sector. That is where you are most likely to find the fast-growing firms of the future. KEY TERMS business 4 business environment 9 climate change 16 database 13 demography 14 e-commerce 12 empowerment 13 entrepreneur 4 factors of production 8 goods 4 greening 16 identity theft 13 loss 4 nonprofit organization 6 outsourcing 6 productivity 12 profit 4 quality of life 5 revenue 4 risk 4 services 4 stakeholders 5 standard of living 5 technology 11 CAREER EXPLORATION At the end of each chapter, we offer a brief list of potential careers that deal with the concepts present in the chapter. Since this first chapter is an overview of all the different fields of business, we thought we’d concentrate on identifying a few careers in the sector with the most jobs: services. Find out about the tasks performed, skills needed, pay, and opportunity outlook in these careers in the Occupational Outlook Handbook (OOH) at www.bls.gov. Lodging manager—ensures that guests on vacation or business travel have a pleasant experience at a hotel, motel, or other type of establishment with CRITICAL THINKING accommodations and that the business is run efficiently and profitably. Meeting and event planner—coordinate all aspects of events and professional meetings, including arranging meeting locations, transportation, and other details. Interior designer—select and specify colors, furniture, and other materials to create useful and stylish interiors for buildings. Network and computer systems administrator— responsible for the day-to-day operation of computer networks. Imagine you are thinking of starting a restaurant in your community. Answer the following questions: 1. Who will be the various stakeholders of your business? 2. What are some of the things you can do to benefit your community other than providing jobs and tax revenue? 3. How will you establish good relationships with your suppliers? With your employees? 4. Do you see any conflict between your desire to be as profitable as possible and your desire to pay employees a living wage? 5. Which of the environmental factors outlined in this chapter might have the biggest impact on your business? How? C H AP T E R 1 Ta k in g R i sks a n d M a ki n g Pr of i t s w i t h i n t h e Dy n a m i c B u si n ess En v i r on m ent KEY: Team   Analytic   Communication   Technology 1. Poll the class and determine which students believe that climate change is primarily caused by humans and which believe that other factors, such as climate cycles or sun spots, are the primary cause. Discuss what students can do to minimize human effects on the environment regardless of the primary causes of climate change. Are there any negative consequences to trying to minimize humans’ impact on the environment? 23 DEVELOPING CAREER SKILLS 2. Imagine you are a local businessperson who has to deal with the issue of outsourcing. You want to begin with the facts. How many, if any, jobs have been lost to outsourcing in your area? Are there any foreign firms in your area that are creating jobs (insourcing)? You will need to go online to find the data you need. 3. What indicates that you and other people in the United States have a high standard of living? What are some signs that maintaining such a high standard of living may have a negative impact on quality of life? Does everyone in the United States enjoy a high standard of living? If not, how does this impact their quality of life? 4. Use Yelp to find five businesses that provide services in your area. List those businesses and, for each, describe how social trends might affect them in both positive and negative ways. Be prepared to explain your descriptions to your team or the whole class, as your instructor directs. 5. Form into teams of four or five and discuss the technological and e-commerce revolutions. How many students shop for goods and services online? What have been their experiences? What other technology do they use (smartphones, tablets, laptops, etc.)? Discuss what life, school, and work would be like without these devices. PURPOSE To learn what changes are occurring in the business environment today and how those changes are affecting businesses. EXERCISE 1. Go to the National Taxpayers Union website (www.ntu.org). Search for “Who Pays Income Taxes?” Study the tables showing what percentage of taxes the various income groups pay. Do you think that everyone pays their fair share? What percentage of taxes does the top 1 percent of earners pay? What about the top 5 percent? The lowest 50 percent? How do such tax rates affect incentives to become a successful entrepreneur? 2. Go to the Census Bureau’s website (www.census.gov) and learn what the population of the United States is at this moment. While at the site, you may want to look up the population in your town or city. Explore what other data are available at this site. What trends seem most important to you and to businesspeople in general? 3. Do a Google search for “business blogs” and check out some of the available results. Go to one of the blogs that seems interesting to you and write a brief paragraph about it—including such things as who sponsors it, who contributes the posts, and what other features it has—and how it may help a student in an introductory business course. PUTTING PRINCIPLES TO WORK 24 PART 1 Bu s in e s s Tr e n d s : C u l ti v a ti n g a B u si n ess i n Di v er se, G l oba l En v i r on m en t s VIDEO CASE Grubhub and the Dynamic Business Environment Every night, people all across America ask the same thing: “What’s for dinner?” Entrepreneurs Matt Maloney and Mike Evans realized how common this question can be and decided to do something about it. The pair developed and founded Grubhub, an online and mobile takeout food ordering company. Today, hungry customers can use the company’s digital platform to order meals directly from more than 50,000 takeout restaurants in 1,100 cities throughout the United States. Like other successful entrepreneurs, Matt and Mike were able to start Grubhub and expand it rapidly thanks to the business environment in the United States. To be successful, businesses must navigate factors that impact the five key business environments: the economic and legal environment, technological environment, competitive environment, social environment, and global environment. Even though businesses cannot control these environments, they must be quick to adapt to changes that affect them. For instance, the social environment in the United States has undergone many changes since Grubhub’s launch in 2004. At first the company focused on serving students and young professionals. But in response to demographic changes and other trends, Grubhub soon expanded its target market beyond students toward families, working moms, and people in smaller cities and suburbs. Grubhub’s restaurant network has grown to provide a vast array of food options beyond traditional takeout foods like pizza and burgers. Customers today can order low-fat or vegan food as easy as ordering a pepperoni pizza. Businesses can cater a lunch or order donuts for a morning meeting with just a few clicks. The economic and legal environment in the United States is very favorable for businesses. The government supports private ownership of businesses by providing a stable currency and a legal system that enforces contracts, keeps regulations to a minimum, and avoids bureaucratic roadblocks that hinder businesses. However, companies like Grubhub must follow any laws and regulations that apply to their industry. The expanding technological environment has been a key reason for the success of Grubhub. The vibrant mobile platform developed by Grubhub allows customers to place orders or schedule future deliveries with ease. When the company first entered the market, competition was very slim. That’s not the case today, with competitors such as Postmates and DoorDash providing daily challenges to Grubhub. The competitive environment in the United States has also opened the door to giant firms such as Amazon and Uber to enter the food delivery business. Even though Grubhub holds the advantage of being in business the longest, the company must still work hard every day to keep its 50,000 restaurant customers. The company’s policy of “no menu markup” helps keep it unique among competitors. In business today, every company needs to consider the global environment. Advances in communication and the Internet make it possible for companies like Grubhub to build a business overseas. In the years since its founding, Grubhub has had a tremendous impact on the restaurant industry and has been very profitable. For example, the company was responsible for $3 billion in restaurant food sales in 2016. Further research showed that revenue growth in restaurants that used the firm’s platform was six times greater than restaurants that didn’t use it. Going forward, the company will remain committed to connecting diners and restaurants. By responding to the challenges of the business environment and improving the experience for diners, drivers, and restaurants, Grubhub plans to be part of the U.S. business landscape for the long term. THINKING IT OVER 1. What are the risks and benefits of becoming an entrepreneur as opposed to working for others? 2. What is the major challenge presented by Amazon and Uber to Grubhub’s business? 3. Does the restaurant industry seem like a stable option for aspiring entrepreneurs to pursue? NOTES 1. www.forbes.com, accessed September 2017. 2. Michael Douglass, “Here’s How Many American Millionaires There Are,” The Motley Fool, January 23, 2017. 3. U.S. Bureau of Labor Statistics, www.bls.gov, accessed September 2017. 4. John Mackey and Raj Sisodia, Conscious Capitalism, Boston, MA: Harvard Business Review Press, 2013; Ruth Mayhew, “Different Types of Stakeholders,” Houston Chronicle, accessed September 2017. 5. www.hyundai.com, accessed September 2017. 6. www.hondainamerica.com/manufacturing/, accessed September 2017. 7. “Charter to Bring Back Its Spanish-Language Call Centers to the U.S.,” Portada, March 28, 2017. 8. Drucker Institute, www.drucker.institute, accessed September 2017. 9. Olivia Solon, “Tim Berners-Lee Calls for Tighter Regulation of Online Political Advertising,” The Guardian, March 11, 2017. C H AP T E R 1 Ta k in g R i sks a n d M a ki n g Pr of i t s w i t h i n t h e Dy n a m i c B u si n ess En v i r on m ent 10. Melinda Beck, “How Telemedicine Is Transforming Health Care,” The Wall Street Journal, June 27, 2016; Shira Ovide, “Another Golden Age for Corporate Technology,” Bloomberg, July 20, 2017. 11. Jon Hilsenrath and Bob Davis, “Tech Boom Creates Too Few Jobs,” The Wall Street Journal, October 13, 2016; Drew Desilver, “Most Americans Unaware That as U.S. Manufacturing Jobs Have Disappeared, Output Has Grown,” Pew Research Center, July 25, 2017. 12. Jennifer Alsever, “The E-Harvest,” Fortune, August 1, 2016; Andrew Tangel, “Driverless Tractor Steals Farm Show,” The Wall Street Journal, September 2, 2016; David Nicklaus, “Drone Startup Flies High,” St. Louis Post-Dispatch, April 3, 2016; Jacob Bunge, “Farmers Harvest Homegrown Tech,” The Wall Street Journal, April 19, 2016; Tim Sparapani, “How Big Data and Tech Will Improve Agriculture, from Farm to Table,” Forbes, March 23, 2017. 13. Robert Hackett, “Apple Responds to Hacker’s Threat to Wipe Hundreds of Millions of iPhones,” Fortune, March 22, 2017. 14. Martha C. White, “This Year’s Spike in Online Fraud,” Money, November 2016; Lo Bénichou, “How to Protect Your Digital Self,” Wired, July 6, 2017. 15. Jay Greene, “Microsoft Bolsters Cybersecurity,” The Wall Street Journal, February 29, 2016; Verne Harnish, “5 Immediate Ways to Fight Cybercrime,” Fortune, March 15, 2016; Jeff John Roberts and Adam Lashinsky, “Hacked,” Fortune, July 1, 2017. 16. “Who’s Tracking You in Public?” Consumer Reports, February 2016; Adrienne LaFrance, “Who Owns Your Face?” The Atlantic, March 24, 2017. 17. Lisa Burrell, “We Just Can’t Handle Diversity,” Harvard Business Review, July–August 2016; Laura Sherbin and Ripa Rashid, “Diversity Doesn’t Stick without Inclusion,” Harvard Business Review, February 1, 2017. 25 18. American Immigration Council, Immigration Impact, accessed September 2017. 19. Federal Reserve, www.federalreserve.gov, accessed September 2017. 20. U.S. Census Bureau, www.census.gov, accessed September 2017; Eillie Anzilotti, “Our Aging Population Can Be an Economic Powerhouse—If We Let It,” Fast Company, March 13, 2017. 21. Brian Stoffel, “One Chart Explains Why You May Not Get Your Full Social Security Benefit,” Motley Fool, July 2, 2016; Donna Borak, “Social Security Trust Fund Projected to Tap Out in 17 Years,” CNN, July 13, 2017. 22. Andrew Soergel, “War on Terror Could Be Costliest Yet,” U.S. News & World Report, September 9, 2016; Jeanne Sahadi, “The Financial Cost of 16 Years in Afghanistan,” CNN, August 22, 2017. 23. Jeremy Siegel, Patrick Harker, and Jeremy Schwartz, “The U.S. Economy in 2017: Why Uncertainty Is the ‘Biggest Risk,’” Knowledge@Wharton, January 6, 2017. 24. Coral Davenport, “E.P.A. Chief Doubts Consensus View of Climate Change,” The New York Times, March 9, 2017. 25. Trevor Hughes, “It’s a New Dawn for Solar Industry— Mostly,” USA Today, January 14, 2016; Cassandra Sweet, “Firms Go Green on Their Own Steam,” The Wall Street Journal, March 9, 2016; Saksham Khandelwal, “How Going Green Can Help the Planet and Your Profits,” World Economic Forum, March 9, 2017. 26. U.S. Department of Agriculture, “Immigration and the Rural Workforce,” accessed September 2017. 27. International Trade Administration, “The Service Sector: How to Measure It,” accessed September 2017. 28. Melanie Evans, “The Hottest Job in Health Care: Nursing,” The Wall Street Journal, November 8, 2016; “Best Job Rankings,” U.S. News and World Report, January 11, 2017. 2 Understanding Economics and How It Affects Business LEARNING OBJECTIVES 26 » After you have read and studied this chapter, you should be able to LO 2–1 Explain basic economics. LO 2–2 Explain what capitalism is and how free markets work. LO 2–3 Compare socialism and communism. LO 2–4 Analyze the trend toward mixed economies. LO 2–5 Describe the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle. LO 2–6 Contrast fiscal policy and monetary policy, and explain how each affects the economy. GETTING TO KNOW Thomas Piketty, Economist A t nearly 700 pages, Thomas Piketty’s book Capital in the Twenty-First Century is an unlikely blockbuster to say the least. Despite its length and scholarly subject matter, the book climbed to the top of the New York Times Best Seller list in 2014 and became an instant classic among academics and casual readers alike. Thomas Piketty (pronounced Tome-ah Peek-et-ee) went from being a respected but little-known economist to an internationally renowned scholar on income inequality. As the years go by, his insights could have a major effect on economic policies around the globe. Piketty was born in 1971 to politically minded parents living in the suburbs of Paris. His parents participated in the massive socialist protests of 1968 that nearly brought France’s economy to a standstill. By the time Thomas was born, his parents had left their radical days behind them. Politics were never discussed in their household. Instead, they taught their son to trust his judgment and form his own opinions. These lessons gave Piketty the confidence to become a top student. His academic success gained him admittance to one of the most prestigious higher education institutions in France, the École Normale Supérieure, when he was just 18. Piketty earned his PhD four years later with a dissertation that focused on wealth redistribution. During these years Piketty took a trip that would shape his view of the world. Traveling to Romania shortly after the nation had gained independence from the Soviet Union in 1990, he was shocked by the sorry state of the former communist republic. “This sort of vaccinated me for life against lazy, anticapitalist rhetoric, because when you see these empty shops, you see these people queuing for nothing in the street,” Piketty said, “it became clear to me that we need private property and market institutions, not just for economic efficiency but for personal freedom.” Still, not every aspect of the capitalist free market pleased Piketty. After earning his doctorate, he became a professor and researcher at the Massachusetts Institute of Technology. He went back to France two years later, however, disillusioned with American economists. In his mind, the economists had failed to address one of the major issues of the modern age: income inequality. Piketty set out to correct this when he returned to Paris in the mid-1990s. He spent the next two decades at various French institutions researching the accumulation of private wealth and how it related to overall income growth. But unlike many scholars, Piketty didn’t want his findings to be accessible only to the academic elite. He chose instead to write an absorbing book that uses data to paint a vivid picture of the last 100 years of economic activity. According to his analysis, the richest 1 percent of Americans now earn almost a quarter of the nation’s income, the highest total since 1928. What’s more, while gains on capital currently increase by about 5 percent annually, the overall rate of economic growth rests at just 1.5 percent per year. Piketty concludes that this everexpanding concentration of wealth is unsustainable for a healthy world economy. This message resonated across the globe, pushing sales of Capital past 1.5 million copies so far. And while some of Piketty’s proposals for solving income inequality have been disputed, few professionals can argue with the power of his data. As you’ll find out in this chapter, economics is all about data. You will also learn about different economic systems, especially the free-market structure that the United States depends on. And you will learn more about what makes some countries rich and others poor. By the end of the chapter, you should understand the direct effect economic systems have on the wealth and happiness of communities throughout the world. Sources: Patricia Cohen, “A Bigger Economic Pie, but a Smaller Slice for Half of the U.S.,” The New York Times, December 6, 2016; Steven Erlanger, “Taking on Adam Smith (and Karl Marx),” The New York Times, April 19, 2014; John Cassidy, “Forces of Divergence,” The New Yorker, March 31, 2014; Anne-Sylvaine Chassany, “Lunch with the FT: Thomas Piketty,” Financial Times, June 26, 2015; Thomas Piketty, “We Must Rethink Globalization, or Trumpism Will Prevail,” The Guardian, November 16, 2016; Peter Coy, “Piketty’s Capital Was So Popular There’s a Sequel,” Bloomberg Businessweek, May 8, 2017. ©Eric Fougere/ Corbis/Getty Images 27 name that company THIS PHILANTHROPIC ORGANIZATION was started by two of the wealthiest men in the world. Its purpose is to encourage the world’s richest individuals and families to donate the majority of their wealth to fight poverty and support health issues and education. What is the name of this organization? (Find the answer in the chapter.) LO 2–1 Explain basic economics. How Economic Conditions Affect Businesses Compared to, say, Mexico, the United States is a relatively wealthy country. Why? Why is South Korea comparatively wealthy while North Korea continues to suffer economically, with power outages still a part of daily life?1 Such questions are part of the subject of economics. In this chapter, we explore the various economic systems of the world and how they either promote or hinder business growth, the creation of wealth, and a higher quality of life for all. A major part of the United States’ business success is due to an economic and social climate that allows most businesses to operate freely. People are free to start a business anywhere, and just as free to fail and start again. That freedom motivates people to try until they succeed because the rewards are often so great. Any change in the U.S. economic or political system has an influence on business success. For example, an increase or decrease in government regulations has an economic effect due to the costs of adhering to the regulations. Some experts believe that less regulation is better for businesses; others believe more The economic contrast shown here is remarkable. Business is booming in Seoul, South Korea (as shown in the photo on the right). But North Korea, a communist country, is not doing well, as the picture on the left shows. What do you think accounts for the dramatic differences in the economies of these two neighboring countries? ©World Food Programme/AFP/Getty Images 28 ©Joshua Davenport/Alamy CH A P T E R 2 U n der st a n di n g Econ om i cs a n d How I t Af f ect s B usi n ess regulations are necessary. The optimal level of government regulation is a constant topic of debate.2 Global economics and global politics also have a major influence on businesses in the United States. For example, the sales of major U.S. industrial companies such as Caterpillar and Deere depend heavily on the global market, especially China.3 Clearly, to understand business you must also understand basic economics and politics.4 This is especially true of new college graduates looking for jobs. What Is Economics? Economics is the study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals. There are two major branches of economics: macroeconomics looks at the operation of a nation’s economy as a whole (the whole United States), and microeconomics looks at the behavior of people and organizations in markets for particular products or services. A question in macroeconomics might be: What should the United States do to lower its national debt?5 Macroeconomic topics in this chapter include gross domestic product (GDP), the unemployment rate, and price indexes. A question in microeconomics might be: Why do people buy smaller cars when gas prices go up? Such questions seem easier to answer. Some economists define economics as the study of the allocation of scarce resources. They believe resources need to be carefully divided among people, usually by the government. However, there’s no way to maintain peace and prosperity in the world by merely dividing the resources we have today among the existing nations. There aren’t enough known resources to do that. Resource development is the study of how to increase resources (say, by getting oil and gas from shale and tar sands) and create conditions that will make better use of them (like recycling and conservation). Businesses can contribute to an economic system by inventing products that greatly increase available resources. For example, they can discover new energy sources (natural gas for autos); new ways of growing food (hydroponics); and new ways of creating needed goods and services such as nanotechnology, 3D printing, and 4D technology (moving 3D, with time as the fourth dimension). Mariculture, or raising fish in pens out in the ocean, could lead to more food for everyone and more employment. In fact, many believe that aquaculture is the only way we can stop the overfishing that is depleting the world’s fish population.6 29 economics The study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals. macroeconomics The part of economics study that looks at the operation of a nation’s economy as a whole. microeconomics The part of economics study that looks at the behavior of people and organizations in particular markets. resource development The study of how to increase resources and to create the conditions that will make better use of those resources. The Secret to Creating a Wealthy Economy Imagine the world when kings and other rich landowners had most of the wealth, and the majority of the people were peasants. The peasants had many children, and it may have seemed a natural conclusion that if things went on as usual there would soon be too many people and not enough food and other resources. Economist Thomas Malthus made ©Mark Conlin/Getty Images this argument in the late 1700s and early 1800s, leading the writer Thomas Carlyle to call economics “the dismal science.” The latest world statistics, however, show population growing more slowly than expected.7 In some industrial countries—such as Japan, Germany, Italy, Russia, and the United States— population growth may be so slow that eventually there will be too many older people and too few young people to care for them.8 In the developing world—India, South Africa—on the other hand, population is climbing steadily and may lead to greater poverty and more economic unrest.9 The Adapting to Change box on the next page discusses significant global population shifts that are expected over the next 25 years. Such studies about the effects of population growth on the economy are part of macroeconomics. New ways of producing goods and services add resources to the economy and create more employment. Fish farms, for instance, create both food and jobs. Can you think of other innovations that can help increase economic development? ADAPTING TO CHANGE P opulation forecasts from the United Nations estimate that by the year 2050, global population will increase to 9.7 billion people. Understanding where this number comes from may be surprising. More than half of the world’s population growth will come from Africa, where the continent’s population will double to 2.5 billion. Nigeria will experience the world’s fastest-growing population. It is expected to grow to 413 million World Population Is Popping people by 2050, making it the third-largest country in the world, surpassing the United States. China and India will remain the most populated countries, with almost 38 percent of the world’s people. India will be the world’s most populated nation by 2022. The largest decline in population will be in Europe, which will see a decrease of 4.3 percent. Over onethird of the population in Europe will be over age 60 by 2050. The predicted increase in population in what are some of the world’s poorest countries will present significant economic challenges. Combatting hunger and malnutrition, expanding education, providing adequate health care, and eradicating poverty will not be easy tasks. Fortunately, the 21st century has been good for Africa. The continent boasts three of the fastest-growing economies in the world and has the world’s fastest-growing middle class. India has also made significant strides in growing its economy and is expected to be a strong global competitor. With an expanding population, economic development is the key to prosperity. Sources: Rishi Iyengar, “India No Longer the World’s Fastest Growing Economy,” CNNMoney, January 16, 2017; United Nations Department of Economics and Social Affairs, World Population Projected to Reach 9.7 Billion by 2050, July 29, 2015; Raymond Zhong, “India Is No Longer the World’s Fastest Growing Large Economy, IMF Says,” The Wall Street Journal, January 16, 2017. ©AF Archive/Alamy Some macroeconomists believe that a large population, especially an educated one, can be a valuable resource. You’ve probably heard the saying “Give a man a fish and you feed him for a day, but teach a man to fish and you feed him for a lifetime.” You can add to that: “Teach a person to start a fish farm, and he or she will be able to feed a village for a lifetime.” The secret to economic development is contained in this last statement. Business owners provide jobs and economic growth for their employees and communities as well as for themselves. The challenge for macroeconomists is to determine what makes some countries relatively wealthy and other countries relatively poor, and then to implement policies and programs that lead to increased prosperity for everyone in all countries. One way to begin understanding this challenge is to consider the theories of Adam Smith. Adam Smith and the Creation of Wealth Rather than believing fixed resources had to be divided among competing groups and individuals, Scottish economist Adam Smith envisioned creating more resources so that 30 CH A P T E R 2 U n der st a n di n g Econ om i cs a n d How I t Af f ect s B usi n ess 31 everyone could become wealthier. Smith’s book An Inquiry into the Nature and Causes of the Wealth of Nations (often called simply The Wealth of Nations) was published in 1776. Smith believed freedom was vital to the survival of any economy, especially the freedom to own land or property and to keep the profits that result from working the land or running a business. He believed people will work long and hard if they have incentives for doing so—that is, if they know they’ll be rewarded.10 As a result of those efforts, the economy will prosper, with plenty of food and all kinds of products available to everyone. Smith’s ideas were later challenged by Malthus and others who believed economic conditions would only get worse, but Smith, not Malthus, is considered the father of modern economics. How Businesses Benefit the Community In Adam Smith’s view, businesspeople don’t necessarily deliberately set out to help others. They work primarily for their own prosperity and growth. Yet as people try to improve their own situation in life, Smith said, their efforts serve as an “invisible hand” that helps the economy grow and prosper through the production of needed goods, services, and ideas. Thus, the phrase invisible hand is used to describe the process that turns self-directed gain into social and economic benefits for all. How do people working in their own self-interest produce goods, services, and wealth for others? The only way farmers can become wealthy is to sell some of their crops to others. To become even wealthier, they have to hire workers to produce more food. So the farmers’ self-centered efforts to become wealthy lead to jobs for some and food for almost all. Think about that process for a minute, because it is critical to understanding economic growth in the United States and other free countries. The same principles apply to everything from clothing to houses to iPhones. Smith assumed that as people became wealthier, they would naturally reach out to help the less fortunate in the community.11 That has not always happened. In fact, today the poverty rate in the United States remains high and there is a great disparity between the amount of money the wealthy have and the amount of money poor people have. This “inequality” is the central concern of many political, religious, and social leaders today. Many businesspeople are becoming more concerned about social issues and their obligation to return to society some of what they’ve earned. The Giving Pledge, a philanthropic initiative started by billionaires Bill Gates and Warren Buffett, encourages the world’s wealthiest invisible hand A phrase coined by Adam Smith to describe the process that turns selfdirected gain into social and economic benefits for all. According to Adam Smith’s theory, business owners are motivated to work hard because they know they will earn, and keep, the rewards of their labor. When they prosper, as the owner of this restaurant has, they are able to add employees and grow, indirectly helping the community and the larger economy grow in the process. What might motivate you to start your own business? ©Kim Karpeles/Alamy 32 PART 1 Bu s in e s s Tr e n d s : C u l ti v a ti n g a B u si n ess i n Di v er se, G l oba l En v i r on m en t s individuals and families to donate the majority of their wealth to fight poverty, health issues, and education.12 Still, the economic question remains: What can and should we do about poverty and unemployment in the United States and around the world? As we mentioned in Chapter 1, it is important for businesses to be ethical as well as generous. Unethical practices undermine the whole economic system. TEST PREP Use SmartBook to help retain what you have learned. Access your instructor’s Connect course and look for the SB/LS logo. What is the difference between macroeconomics and microeconomics? What is better for an economy than teaching a man to fish? What does Adam Smith’s term invisible hand mean? How does the invisible hand create wealth for a country? LO 2–2 Explain what capitalism is and how free markets work. Understanding Free-Market Capitalism capitalism An economic system in which all or most of the factors of production and distribution are privately owned and operated for profit. state capitalism A combination of freer markets and some government control. Basing their ideas on free-market principles such as those of Adam Smith, businesspeople in the United States, Europe, Japan, Canada, and other countries began to create more wealth than ever before. They hired others to work on their farms and in their factories, and their nations began to prosper as a result. Businesspeople soon became the wealthiest people in society. However, great disparities in wealth remained or even increased. Many businesspeople owned large homes and fancy carriages while most workers lived in humble surroundings. Nonetheless, there was always the promise of better times. One way to gain wealth was to start a successful business of your own. Of course, it wasn’t that easy—it never has been. Then and now, you have to accumulate some money to buy or start a business, and you have to work long hours to make it grow. But the opportunities are there. The economic system that has led to wealth creation in much of the world is known as capitalism. Under capitalism all or most of the factors of production and distribution— such as land, factories, railroads, and stores—are owned by individuals. They are operated for profit, and businesspeople, not government officials, decide what to produce and how much, what to charge, and how much to pay workers. They also decide whether to produce goods in their own countries or have them made in other countries. No country is purely capitalist, however. Often the government gets involved in issues such as determining minimum wages, setting farm prices, and lending money to some failing businesses—as it does in the United States. But capitalism is the foundation of the U.S. economic system, and of the economies of England, Australia, Canada, and most other industrialized nations. Capitalism, like all economic systems, has its faults.13 For example, income inequality is a major issue that concerns many today.14 However, John Mackey, CEO of Whole Foods, believes that “conscious capitalism,” that is, capitalism based on businesses that serve all major stakeholders, is the best system in the world. He believes, “In the long arc of history, no human creation has had a greater positive impact on more people more rapidly than free-enterprise capitalism.” Mark Benioff, CEO of Salesforce, concurs and uses the term compassionate capitalism. He believes that not just businesses but also stakeholders–from customers to environmentalists-- should share in the benefits of capitalism.”15 Some countries have noticed the advantages of capitalism and have instituted what has become known as state capitalism. State capitalism is a combination of freer markets and some government control. China, for example, has had rapid growth as a result of state capitalism—that is, freer markets and less government control even though the country is controlled by the Communist Party.16 CH A P T E R 2 U n der st a n di n g Econ om i cs a n d How I t Af f ect s B usi n ess 33 Under free-market capitalism, people have four basic rights: 1. The right to own private property. This is the most fundamental of all rights under capitalism. Private ownership means that individuals can buy, sell, and use land, buildings, machinery, inventions, and other forms of property. They can also pass on property to their children. Would farmers work as hard if they didn’t own the land and couldn’t keep the profits from what they earned? 2. The right to own a business and keep all that business’s profits. Recall from Chapter 1 that profits equal revenues minus expenses (salaries, materials, taxes). Profits act as important incentives for business owners. 3. The right to freedom of competition. Within certain guidelines established by the government, individuals are free to compete with other individuals or businesses in selling and promoting goods and services. 4. The right to freedom of choice. People are free to choose where they want to work and what career they want to follow. Other choices people are free to make include where to live and what to buy or sell. One benefit of the four basic rights of capitalism is that people are willing to take more risks than they might otherwise. President Franklin Roosevelt believed four additional freedoms were essential to economic success: freedom of speech and expression, freedom to worship in your own way, freedom from want, and freedom from fear. Do you see the benefits of these additional freedoms? After years of planning and saving, Jessica Douglass purchased a building with plenty of room to grow and started a business called Flowers and Weeds. The right to own private property and the right to own a business and keep its profits are two of the fundamental rights that exist in the economic system called free-market capitalism. Would either of these rights be viable without the other? Courtesy of Annie Janssen 34 PART 1 Bu s in e s s Tr e n d s : C u l ti v a ti n g a B u si n ess i n Di v er se, G l oba l En v i r on m en t s Now let’s explore how the free market works. What role do consumers play in the process? How do businesses learn what consumers need and want? These questions and more are answered next. How Free Markets Work A free market is one in which decisions about what and how much to produce are made by the market—by buyers and sellers negotiating prices for goods and services. You and I and other consumers send signals to tell producers what to make, how many, in what color, and so on. We do that by choosing to buy (or not to buy) certain products and services. For example, if all of us decided we wanted T-shirts supporting our favorite baseball team, the clothing industry would respond in certain ways. Manufacturers and retailers would increase the price of those T-shirts, because they know people are willing to pay more for the shirts they want. They would also realize they could make more money by making more of those T-shirts. Thus, they have an incentive to pay workers to start earlier and end later. Further, the number of companies making T-shirts would increase. How many T-shirts they make depends on how many we request or buy in the stores. Prices and quantities will continue to change as the number of T-shirts we buy changes. The same process occurs with most other products. The price tells producers how much to produce. If something is wanted but isn’t available, the price tends to go up until someone begins making more of that product, sells the ones already on hand, or makes a substitute. As a consequence, there’s rarely a long-term shortage of goods in the United States. How Prices Are Determined In a free market, prices are not determined by sellers; they are determined by buyers and sellers negotiating in the marketplace. For example, a seller may want to receive $50 for a T-shirt, but the quantity buyers demand at that high price may be quite low. If the seller lowers the price, the quantity demanded is likely to increase. How is a price determined that is acceptable to both buyers and sellers? The answer is found in the microeconomic concepts of supply and demand. We shall explore both next. The economic concept of demand measures the quantities of goods and services that people are willing to buy at a given price. All else equal, the lower the price, the higher the demand will be. Do you think there would be this many customers rushing to shop on Black Friday if it wasn’t for those low-price/lowquantity deals? ©Peter Foley/Bloomberg/Getty Images CH A P T E R 2 U n der st a n di n g Econ om i cs a n d How I t Af f ect s B usi n ess 35 The Economic Concept of Supply Supply refers to the quantities of products manufacturers or owners are willing to sell at different prices at a specific time. Generally speaking, the amount supplied will increase as the price increases because sellers can make more money with a higher price. Economists show this relationship between quantity supplied and price on a graph. Figure 2.1 shows a simple supply curve for T-shirts. The price of the shirts in dollars is shown vertically on the left of the graph. The quantity of shirts sellers are willing to supply is shown horizontally at the bottom of the graph. The various points on the curve indicate how many T-shirts sellers would provide at different prices. For example, at a price of $5 a shirt, a T-shirt vendor would provide only 5 shirts, but at $50 a shirt the vendor would supply 50 shirts. The supply curve indicates the relationship between the price and the quantity supplied. All things being equal, the higher the price, the more the vendor will be willing to supply. supply The quantity of products that manufacturers or owners are willing to sell at different prices at a specific time. iSee It! Need help understanding supply and demand? Visit your Connect e-book for a brief animated explanation. The Economic Concept of Demand Demand refers to the quantity of products that people are willing to buy at different prices at a specific time. Generally speaking, the quantity demanded will increase as the price decreases. Again, we can show the relationship between price and quantity demanded in a graph. Figure 2.2 shows a simple demand curve for T-shirts. The various points on the graph indicate the quantity demanded at various prices. For example, at $45, buyers demand just 5 shirts, but at $5, the quantity demanded would increase to 35 shirts. All things being equal, the lower the price, the more buyers are willing to buy. demand The quantity of products that people are willing to buy at different prices at a specific time. The Equilibrium Point, or Market Price You might realize from Figures 2.1 and 2.2 that the key factor in determining the quantities supplied and demanded is price. If you were to lay the two graphs one on top of the other, the supply curve and the demand curve would cross where quantity demanded and quantity supplied are equal. Figure 2.3 illustrates that point. At a price of $15, the quantity of T-shirts demanded and the quantity supplied are equal (25 shirts). That crossing point FIGURE 2.1 THE SUPPLY CURVE AT VARIOUS PRICES The supply curve rises from left to right. Think it through. The higher the price of T-shirts goes (the vertical axis), the more sellers will be willing to supply. This is a simple demand curve showing the quantity of T-shirts demanded at different prices. The demand curve falls from left to right. It is easy to understand why. The lower the price of T-shirts, the higher the quantity demanded. 50 50 45 45 40 35 40 Supply curve 30 35 Price ($) Price ($) FIGURE 2.2 THE DEMAND CURVE AT VARIOUS PRICES 25 20 30 25 20 15 15 10 10 5 5 0 5 10 15 20 25 30 35 40 45 50 Quantity of T-Shirts Demand curve 0 5 10 15 20 25 30 35 40 45 50 Quantity of T-Shirts 36 PART 1 Bu s in e s s Tr e n d s : C u l ti v a ti n g a B u si n ess i n Di v er se, G l oba l En v i r on m en t s FIGURE 2.3 THE EQUILIBRIUM POINT The place where quantity demanded and quantity supplied meet is called the equilibrium point. When we put both the supply and demand curves on the same graph, we find that they intersect at a price where the quantity supplied and the quantity demanded are equal. In the long run, the market price will tend toward the equilibrium point. 50 45 40 Demand curve Supply curve Price ($) 35 30 25 20 15 10 Equilibrium point 5 0 5 10 15 20 25 30 35 40 45 50 Quantity of T-Shirts is known as the equilibrium point or equilibrium price. In the long run, that price will become the market price. Market price, then, is determined by supply and demand. It is the price toward which the market will trend. Proponents of a free market argue that, because supply and demand interactions determine prices, there is no need for the government to set prices. If quantity supplied exceeds quantity demanded, the resulting surplus signals sellers to lower the price. If shortages develop because the quantity supplied is less than quantity demanded, it signals sellers to increase the price. Eventually, supply will again equal demand if nothing interferes with market forces. The Making Ethical Decisions box raises an interesting question about when pricing may be a bit out of control and what to do about it. In countries without a free market, there is no mechanism to reveal to businesses (via price) what to produce and in what amounts, so there are often shortages (not enough products) or surpluses (too many products). In such countries, the government decides what to produce and in what quantity, but without price signals it has no way of knowing what the proper quantities are. Furthermore, when the government interferes in otherwise free markets, such as when it subsidizes farm goods, surpluses and shortages may develop. Competition differs in free markets, too. We shall explore that concept next. Competition within Free Markets market price The price determined by supply and demand. perfect competition The degree of competition in which there are many sellers in a market and none is large enough to dictate the price of a product. monopolistic competition The degree of competition in which a large number of sellers produce very similar products that buyers nevertheless perceive as different. oligopoly A degree of competition in which just a few sellers dominate the market. Economists generally agree there are four different degrees of competition: (1) perfect competition, (2) monopolistic competition, (3) oligopoly, and (4) monopoly. Perfect competition exists when there are many sellers in a market and none is large enough to dictate the price of a product. Sellers’ products appear to be identical, such as agricultural products like apples, corn, and potatoes. However, there are no true examples of perfect competition. Today, government price supports and drastic reductions in the number of farms make it hard to argue that even farming represents perfect competition. Under monopolistic competition a large number of sellers produce very similar products that buyers nevertheless perceive as different, such as hot dogs, sodas, personal computers, and T-shirts. Product differentiation—the attempt to make buyers think similar products are different in some way—is a key to success. Think about what that means. Through advertising, branding, and packaging, sellers try to convince buyers that their products are different from competitors’, though they may be very similar or even interchangeable. The fast-food industry, with its pricing battles among hamburger offerings and the like, offers a good example of monopolistic competition. An oligopoly is a degree of competition in which just a few sellers dominate a market, as we see in tobacco, gasoline, automobiles, aluminum, and aircraft. One reason some industries remain in the hands of a few sellers is that the initial investment required to enter the business often is tremendous. Think, for example, of how much it would cost to start a new airplane manufacturing facility. In an oligopoly, products from different companies tend to be priced about the same. The reason is simple: Intense price competition would lower profits for everyone, since a price cut by one producer would most likely be matched by the others. As in monopolistic competition, product differentiation, rather than price, is usually the major factor in market success in an oligopoly. Note, for example, that most cereals are priced about the same, as are soft drinks. Thus, advertising is a major factor determining which of the few available brands consumers buy, because often it is advertising that creates the perceived differences. MAKING ETHICAL DECISIONS Y Bad Medicine for Consumers? Currently, your company has our company, a large pharmamany new drugs in development ceutical firm, acquired a drug costing the company millions in called Relivoform when it bought a research and testing. It may be generic drugmaker. The purchased years before the Food and Drug company was the market’s leadAdministration approves ing supplier of the drug, and it was the new drugs and by far its most profitable product. you can get them into Relivoform is a major chemothe market. Your therapy drug important in finance committhe treatment of liver tee has recomcancer. It cost $300 mended increasing per treatment, and the price of Relivoform many patients rely to $3,000 per treaton it to control the ©fluxfoto/Getty Images RF ment to help alleviate the spread of their cancer. development costs of new drugs. Since your company now controls the distribution of the drug (even though it’s a generic), you doubt any competitors could immediately impact your market. When word leaked out that Relivoform’s price may increase 10-fold, the public reacted with a rage, accusing your firm of favoring profits over patients’ needs. Will you follow your committee’s recommendation and raise the price? What are your alternatives? What might be the consequences of each? A monopoly occurs when one seller controls the total supply of a product or service, and sets the price. In the United States, laws prohibit the creation of monopolies. Nonetheless, the U.S. legal system has permitted monopolies in the markets for public utilities that sell natural gas, water, and electric power. These companies’ prices and profits are usually controlled by public service commissions to protect the interest of buyers. For example, the Florida Public Service Commission is the administering agency over the Florida Power and Light utility company. Legislation ended the monopoly status of utilities in some areas, letting consumers choose among different providers. The intention of such deregulation is to increase competition among utility companies and, ultimately, lower prices for consumers. monopoly A degree of competition in which only one seller controls the total supply of a product or service, and sets the price. Benefits and Limitations of Free Markets One benefit of the free market is that it allows open competition among companies. Businesses must provide customers with high-quality products at fair prices with good service. If they don’t, they lose customers to businesses that do. Do government services have the same incentives? The free market—with its competition and incentives—was a major factor in creating the wealth that industrialized countries now enjoy. Some people even talk of the free market as an economic miracle. Free-market capitalism, more than any other economic system, provides opportunities for poor people to work their way out of poverty. Capitalism also encourages businesses to be more efficient so they can successfully compete on price and quality. Would you say that the United States is increasing or decreasing the emphasis on capitalism? Why? Yet, even as free-market capitalism has brought prosperity to the United States and to much of the rest of the world, it has brought inequality as well. Business owners and managers usually make more money and have more wealth than lower-level workers. Yet people who are older, disabled, or sick may not be able to start and manage a business, and others may not have the talent or the drive. What should society do about such inequality? Unfortunately, one of the dangers of free markets is that some people let greed dictate how they act. Criminal and ethics charges brought against some big businesses in banking, accounting, telecommunications, and pharmaceuticals indicate the scope of the potential problem. Some businesspeople have deceived the public about their products; others have deceived stockholders about the value of their stock, all in order to increase executives’ personal assets. Clearly, some government laws and regulations are necessary to protect businesses’ stakeholders and make sure people who cannot work get the basic care they need. To overcome some of capitalism’s limitations, some countries have adopted an economic system 37 38 PART 1 Bu s in e s s Tr e n d s : C u l ti v a ti n g a B u si n ess i n Di v er se, G l oba l En v i r on m en t s called socialism. It, too, has its good and bad points. We explore these after you review the following Test Prep questions. TEST PREP Use SmartBook to help retain what you have learned. Access your instructor’s Connect course and look for the SB/LS logo. What are the four basic rights that people have under free-market capitalism? How do businesspeople know what to produce and in what quantity? How are prices determined? What are the four degrees of competition, and what are some examples of each? LO 2–3 Compare socialism and communism. Understanding Socialism socialism An economic system based on the premise that some, if not most, basic businesses should be owned by the government so that profits can be more evenly distributed among the people. Socialism is an economic system based on the premise that some, if not most, basic businesses (e.g., steel mills, coal mines, and utilities) should be owned by the government so that profits can be more evenly distributed among the people. Entrepreneurs often own and run smaller businesses, and individuals are often taxed relatively steeply to pay for social programs. The top federal personal income tax rate in the United States, for example, was 39.6 percent recently, but in some socialist countries the top proposed rate can be as much as 75 percent. Whereas U.S. shoppers pay sales taxes ranging from over 10 percent in Chicago to zero in Delaware, some socialist countries charge a similar value-added tax of 15 to 20 percent or more. Socialists acknowledge the major benefit Socialism has been more successful in some countries than in others. This photo shows Denmark’s clean and modern public transportation system. In Greece, overspending caused a debt crisis that forced the government to impose austerity measures that many Greeks oppose. What other factors might lead to slower growth in socialist countries? ©Kathy deWitt/Alamy CH A P T E R 2 U n der st a n di n g Econ om i cs a n d How I t Af f ect s B usi n ess 39 of capitalism—wealth creation—but believe that wealth should be more evenly distributed than occurs in free-market capitalism. They believe the government should carry out the distribution and be much more involved in protecting the environment and providing for the poor. The Benefits of Socialism The major benefit of socialism is supposed to be social equality. Ideally it comes about because the government takes income from wealthier people, in the form of taxes, and redistributes it to poorer people through various government programs. Free education through college, free health care, and free child care are some of the benefits socialist governments, using the money from taxes, may provide to their people. Workers in socialist countries usually get longer vacations, work fewer hours per week, and have more employee benefits (e.g., generous sick leave) than those in countries where free-market capitalism prevails. The Negative Consequences of Socialism brain drain The loss of the best and brightest people to other countries. communism Socialism promises to create more equality than capitalism, but it takes away some of businesspeople’s incentives. For example, when socialist Francois Hollande became president of France, the top tax rate reached 75 percent, with many citizens paying over 70 percent. This caused many innovators, creative thinkers, doctors, lawyers, business owners, and others who earned a lot of money to leave France. This loss of the best and brightest people to other countries is called a brain drain. Imagine an experiment in socialism in your own class. Imagine that after the first exam, those with grades of 90 and above have to give some of their points to those who make 70 and below so that everyone ends up with grades in the 80s. Would those who got 90s study as hard for the second exam? What about those who got 70s? Can you see why workers may not work as hard or as well if they all get the same benefits regardless of how hard they work? Socialism also tends to result in fewer inventions and less innovation, because those who come up with new ideas usually don’t receive as much reward as they would in a capitalist system. Communism may be considered a more intensive version of socialism. We shall explore that system next. ©Dmitry Lovetsky/AP Images Understanding Communism Communism is an economic and political system in which the government makes almost all economic decisions and owns almost all the major factors of production. It intrudes further into the lives of people than socialism does. For example, some communist countries have not allowed their citizens to practice certain religions, change jobs, or move to the town of their choice. One problem with communism is that the government has no way of knowing what to produce, because prices don’t reflect supply and demand as they do in free markets. The government must guess what the people need. As a result, shortages of many items, including food and clothing, may develop. Another problem is that communism doesn’t inspire businesspeople to work hard because the incentives are not there. Communist countries such as North Korea and Cuba are suffering severe economic depression.17 People in North Korea suffer continued economic hardships, with food shortage common. In Cuba, people suffer a lack of goods and services readily available in most other countries. Therefore, An economic and political system in which the government makes almost all economic decisions and owns almost all the major factors of production. Russia has been moving away from communism toward a viable market economy. As poverty begins to decline, a middle class is emerging, but many of the country’s vast natural resources are difficult to tap. Laws that help promote business are few, and there is an active black market for many goods. Still, many observers are optimistic that Russia can prosper. What do you think? 40 PART 1 Bu s in e s s Tr e n d s : C u l ti v a ti n g a B u si n ess i n Di v er se, G l oba l En v i r on m en t s communism is slowly disappearing as an economic form. Today, only China, North Korea, Vietnam, Laos, and Cuba are communist countries. LO 2–4 Analyze the trend toward mixed economies. The Trend Toward Mixed Economies The nations of the world have largely been divided between those that followed the concepts of capitalism and those that adopted the concepts of communism or socialism. We can now further contrast the two major economic systems as follows: free-market economies Economic systems in which the market largely determines what goods and services get produced, who gets them, and how the economy grows. command economies Economic systems in which the government largely decides what goods and services will be produced, who will get them, and how the economy will grow. iSee It! Need help understanding basic economic systems? Visit your Connect e-book for a brief animated explanation. mixed economies Economic systems in which some allocation of resources is made by the market and some by the government. 1. Free-market economies exist when the market largely determines what goods and services get produced, who gets them, and how the economy grows. Capitalism is the popular term for this economic system. 2. Command economies exist when the government largely decides what goods and services will be produced, who gets them, and how the economy will grow. Socialism and communism are variations on this economic system. Although all countries actually have some mix of the two systems, neither freemarket nor command economies have resulted in optimal economic conditions. Freemarket mechanisms don’t seem to respond enough to the needs of those who are poor, elderly, or disabled. Some people also believe that businesses in free-market economies have not done enough to protect the environment. Over time, free-market countries, such as the United States, have adopted many social and environmental programs such as Social Security, welfare, unemployment compensation, and various clean air and water acts. Socialism and communism haven’t always created enough jobs or wealth to keep economies growing fast enough. Thus, communist governments are disappearing, and some socialist governments have been cutting back on social programs and lowering taxes on businesses and workers to generate more business growth and more revenue. The trend, then, has been for mostly capitalist countries (like the United States) to move toward socialism (e.g., more government involvement in health care), and for some socialist countries to move toward capitalism (more private businesses, lower taxes). All countries, therefore, have some mix of the two systems. Thus, the long-term global trend is toward a blend of capitalism and socialism. The net effect is the emergence throughout the world of mixed economies. Mixed economies exist where some allocation of resources is made by the market and some by the government. Most countries don’t have a name for such a system. If free-market mechanisms allocate most resources, the leaders call their system capitalism. If the government allocates most resources, the leaders call it socialism. Figure 2.4 compares the various economic systems. Like most other nations of the world, the United States has a mixed economy. The U.S. government is the largest employer in the country, which means there are more workers in the public sector (government) than in any of the major businesses (i.e., Walmart, General Electric) in the United States.18 Do you think the government will continue to grow or decline in the coming years? TEST PREP Use SmartBook to help retain what you have learned. Access your instructor’s Connect course and look for the SB/LS logo. What led to the emergence of socialism? What are the benefits and drawbacks of socialism? What countries still practice communism? What are the characteristics of a mixed economy? CH A P T E R 2 U n der st a n di n g Econ om i cs a n d How I t Af f ect s B usi n ess FIGURE 2.4 COMPARISONS OF KEY ECONOMIC SYSTEMS CAPITALISM* (United States) SOCIALISM (Sweden) COMMUNISM (North Korea) MIXED ECONOMY (Germany) Social and Economic Goals Private ownership of land and business. Liberty and the pursuit of happiness. Free trade. Emphasis on freedom and the profit motive for economic growth. Public ownership of major businesses. Some private ownership of smaller businesses and shops. Government control of education, health care, utilities, mining, transportation, and media. Very high taxation. Emphasis on equality. Public ownership of all businesses. Governmentrun education and health care. Emphasis on equality. Many limitations on freedom, including freedom to own businesses and to assemble to protest government actions. Private ownership of land and business with government regulation. Government control of some institutions (e.g., mail). High taxation for defense and the common welfare. Emphasis on a balance between freedom and equality. Motivation of Workers Much incentive to work efficiently and hard because profits are retained by owners. Workers are rewarded for high productivity. Capitalist incentives exist in private businesses. Government control of wages in public institutions limits incentives. Very little incentive to work hard or to produce quality goods or services. Incentives are similar to capitalism except in governmentowned enterprises, which may have fewer incentives. Control over Markets Complete freedom of trade within and among nations. Some government control of markets. Some markets are controlled by the government and some are free. Trade restrictions among nations vary and include some freetrade agreements. Total government control over markets except for illegal transactions. Some government control of trade within and among nations (trade protectionism). Choices in the Market A wide variety of goods and services is available. Almost no scarcity or oversupply exists for long because supply and demand control the market. Variety in the marketplace varies considerably from country to country. Choice is directly related to government involvement in markets. Very little choice among competing goods. Similar to capitalism, but scarcity and oversupply may be caused by government involvement in the market (e.g., subsidies for farms). Social Freedoms Freedom of speech, press, assembly, religion, job choice, movement, and elections. Similar to mixed economy. Governments may restrict job choice, movement among countries, and who may attend upperlevel schools (i.e., college). Very limited freedom to protest the government, practice religion, or change houses or jobs. Some restrictions on freedoms of assembly and speech. Separation of church and state may limit religious practices in schools. *The United States is a mixed economy based on a foundation of capitalism. LO 2–5 Describe the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle. Understanding the U.S. Economic System The following sections will introduce the terms and concepts that you, as an informed student and citizen, will need to understand in order to grasp the issues facing government and business leaders in the United States. 41 42 PART 1 Bu s in e s s Tr e n d s : C u l ti v a ti n g a B u si n ess i n Di v er se, G l oba l En v i r on m en t s Key Economic Indicators Three major indicators of economic conditions are (1) the gross domestic product (GDP), (2) the unemployment rate, and (3) price indexes. Another important economic indicator is the increase or decrease in productivity. When you read business literature, you’ll see these terms used again and again. Let’s explore what they mean. gross domestic product (GDP) The total value of final goods and services produced in a country in a given year. gross output (GO) A measure of total sales volume at all stages of production. unemployment rate The number of civilians at least 16 years old who are unemployed and tried to find a job within the prior four weeks. Gross Domestic Product Gross domestic product (GDP), which we mentioned briefly in Chapter 1, is the total value of final goods and services produced in a country in a given year. Both domestic and foreign-owned companies can produce the goods and services included in GDP, as long as the companies are located within the country’s boundaries. For example, production values from Japanese automaker Honda’s factory in Ohio are included in U.S. GDP. Revenue generated by Ford’s factory in Mexico is included in Mexico’s GDP, even though Ford is a U.S. company. Almost every discussion about a nation’s economy is based on GDP. If growth in GDP slows or declines, businesses may feel many negative effects. A major influence on the growth of GDP is the productivity of the workforce—that is, how much output workers create with a given amount of input. The level of U.S. economic activity is actually larger than the GDP figures show, because those figures don’t take into account illicit activities in the underground economy such as sales of illegal drugs, off-the-books transactions, and gambling. The high GDP in the United States is what enables its citizens to enjoy a high standard of living. Although the country relies on GDP data, the accuracy of the data (at least in the short run) is questionable. Starting in the spring of 2014, the United States Bureau of Economic Analysis at the Commerce Department reports a statistic called gross output (GO). Gross output (GO) is a measure of total sales volume at all stages of production. GO is almost twice the size of GDP and is considered a better indicator of the business cycle and more consistent with economic growth theory.19 It shows that consumer spending is the effect, not the cause, of prosperity. The Unemployment Rate The unemployment rate refers to the percentage of civilians at least 16 years old who are unemployed and tried to find a job within the prior four weeks. The unemployment rate was over 7 percent in 2013 and went down below 5 percent in 2017 (see Figure 2.5). Most economists consider a rate of 4 percent or 5 percent to be functionally full employment. However, many argue that the unemployment statistics don’t accurately measure the pain being felt by those who have been unemployed for a long time or those who have simply given up looking for a job.20 This is particularly true of prime-age men between 25 and 54 who neither have jobs nor have looked for one recently.21 Some believe that government benefits (i.e., unemployment benefits) may lead to more unemployment. Do you agree? FIGURE 2.5 U.S. UNEMPLOYMENT RATE 1989–2017 10.0 9.0 8.0 7.5 Percent 7.0 6.5 6.0 5.5 5.0 4.5 4.0 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 CH A P T E R 2 U n der st a n di n g Econ om i cs a n d How I t Af f ect s B usi n ess Frictional unemployment 43 FIGURE 2.6 FOUR TYPES OF UNEMPLOYMENT Frictional unemployment refers to those people who have quit work because they didn’t like the job, the boss, or the working conditions and who haven’t yet found a new job. It also refers to those people who are entering the labor force for the first time (e.g., new graduates) or are returning to the labor force after significant time away (e.g., parents who reared children). There will always be some frictional unemployment because it takes some time to find a first job or a new job. Structural unemployment Structural unemployment refers to unemployment caused by the restructuring of firms or by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs (e.g., coal miners in an area where mines have been closed). Cyclical unemployment Cyclical unemployment occurs because of a recession or a similar downturn in the business cycle (the ups and downs of business growth and decline over time). This type of unemployment is the most serious. Seasonal unemployment Seasonal unemployment occurs where demand for labor varies over the year, as with the harvesting of crops. Figure 2.6 describes the four types of unemployment: frictional, structural, cyclical, and seasonal. The United States tries to protect those who are unemployed because of recessions (defined later in the chapter), industry shifts, and other cyclical factors. Which types of unemployment seems to be the most serious to the economy? Inflation and Price Indexes Price indexes help gauge the health of the economy by mea- suring the levels of inflation, disinflation, deflation, and stagflation. Inflation is a general rise in the prices of goods and services over time. The official definition is “a persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of goods and services.” Thus, it is also described as “too many dollars chasing too few goods.” Go back and review the laws of supply and demand to see how that works. Rapid inflation is scary. If the prices of goods and services go up by just 7 percent a year, they will double in about 10 years. The Reaching Beyond Our Borders box on the next page highlights several examples of inflation out of control. In fact, way out of control. Disinflation occurs when price increases are slowing (the inflation rate is declining). That was the situation in the United States throughout the 1990s. Deflation means that prices are declining. It occurs when countries produce so many goods that people cannot afford to buy them all (too few dollars are chasing too many goods). While declining prices might sound good, it’s an indication that economic conditions are deteriorating.22 Stagflation occurs when the economy is slowing but prices are going up anyhow. The consumer price index (CPI) consists of monthly statistics that measure the pace of inflation or deflation. The government can compute the cost of goods and services, including housing, food, apparel, and medical care, to see whether or not they are going up or down.23 Today, however, the government is relying more on the measure of core inflation. That means the CPI minus food and energy costs. Since the cost of food and energy can have temporary price shocks, the inflation measures reported (core inflation) are actually lower than real costs. The CPI is important to you because some wages and salaries, rents and leases, tax brackets, government benefits, and interest rates are based on these data. The producer price index (PPI) measures the change in prices at the wholesale level. It tracks price changes in nearly all industries in the goods-producing sectors of the U.S. economy.24 Other indicators of the economy’s condition include housing starts, retail sales, inflation A general rise in the prices of goods and services over time. disinflation A situation in which price increases are slowing (the inflation rate is declining). deflation A situation in which prices are declining. stagflation A situation when the economy is slowing but prices are going up anyhow. consumer price index (CPI) Monthly statistics that measure the pace of inflation or deflation. core inflation CPI minus food and energy costs. producer price index (PPI) An index that measures the change in prices at the wholesale level. REACHING BEYOND OUR BORDERS I f you are familiar with the Rule of 72, you know it’s a simple way to measure how long it would take for prices to double at a given rate of inflation. For example, if inflation is growing at 6 percent a year, prices would double in 12 years (6 divided into 72). This would be an unacceptable inflation rate in the United States, where the Federal Reserve targets keeping price increases at 2 percent (or less) a year. Well, what if prices went up 221 percent in one month? Impossible? Unfortunately, not in Venezuela, Inflation at the Speed of Sound which is the most recent example of hyperinflation. Hyperinflation is when the price of goods and services rises by 50 percent a month. It often starts when a country’s government prints more money to pay for excess spending. In Venezuela, prices increased by 63 percent in 2014, 121 percent in 2015, and 481 percent in 2016. Expectations are that prices will increase by 1,600 percent in 2017. In fact, things got so bad that Venezuela’s currency, the Bolivar, collapsed so low that cash to pay for goods and services was being weighed instead of counted. The country is now facing shortages of food and medicine, with children being affected harshly. Venezuela is not the first country to suffer the ravages of hyperinflation. German hyperinflation was a classic example after World War I, when prices were doubling every three days. Pictures of Germans pushing wheelbarrows full of marks (German currency) to buy a loaf of bread were common. Zimbabwe had hyperinflation from 2004 to 2009. Its economy faced an inflation rate of 98 percent a day, with prices doubling every 24 hours. The price of a Big Mac or cup of Starbucks coffee doubling every day doesn’t sound great to us. Let’s hope the Federal Reserve stays vigilant against inflation and keeps our rate at or below 2 percent. Sources: Luke Graham, “Inflation in Venezuela Seen Hitting 1,500% in 2017 as Crisis Goes from Bad to Worse,” CNBC, accessed September 2017; Ben Bartenstein and Mark Glassman, “Hyperinflation,” Bloomberg Businessweek, January 8, 2017; Kimberly Amadeo, “What Is Hyperinflation: Its Causes, Effects, and Examples,” The Balance, accessed September 2017; Guillermo Garcia Montenegro, “The Case for Currency Substitution in Venezuela,” Forbes, January 11, 2017. ©Manaure Quintero/Bloomberg/Getty Images and changes in personal income. You can learn more about such indicators by reading business periodicals, listening to business broadcasts on radio and television, and exploring business sites online. Productivity in the United States An increase in productivity means a worker can produce more goods and services than before in the same time period, usually thanks to machinery, technology, or other equipment. Productivity in the United States has risen because computers and other technology have made production faster and easier. The higher productivity is, the lower the costs are of producing goods and services, and the lower prices can be. Therefore, businesspeople are eager to increase productivity. Remember, however, that high productivity through computers and robots can lead to high unemployment, especially in factory and clerical jobs.25 Certainly, that is what the United States in now experiencing. 44 CH A P T E R 2 U n der st a n di n g Econ om i cs a n d How I t Af f ect s B usi n ess 45 Now that the U.S. economy is a service economy, productivity is an issue because service firms are so labor-intensive. Spurred by foreign competition, productivity in the manufacturing sector is rising rapidly. In the service sector, productivity is growing more slowly because service workers— like teachers, dentists, lawyers, and barbers—have fewer new technologies available than there are for factory workers. Productivity in the Service Sector One problem with the service industry is that an influx of machinery and technology may add to ©logoboom/Getty Images RF the quality of the service provided but not to the output per worker. For example, you’ve probably noticed how many computers there are on college campuses. They add to the quality of education but don’t necessarily boost professors’ productivity. The same is true of some equipment in hospitals, such as CAT scanners, PET scanners, and MRI scanners. They improve patient care but don’t necessarily increase the number of patients doctors can see. In other words, today’s productivity measures in the service industry fail to capture the increase in quality created by new technology. Clearly, the United States and other countries need to develop new measures of productivity for the service economy that include quality as well as quantity of output. Despite growing productivity improvement, the economy is likely to go through a series of ups and downs, much as it has over the past several years. We’ll explore that process next. The Business Cycle Business cycles are the periodic rises and falls that occur in economies over time. Economists look at a number of business cycles, from seasonal cycles that occur within a year to cycles that occur every 48–60 years. Economist Joseph Schumpeter identified the four phases of long-term business cycles as boom–recession–depression–recovery: 1. An economic boom is just what it sounds like—business is booming. 2. Recession is two or more consecutive quarters of decline in the GDP. In a recession prices fall, people purchase fewer products, and businesses fail. A recession brings high unemployment, increased business failures, and an overall drop in living standards. 3. A depression is a severe recession, usually accompanied by deflation. Business cycles rarely go through a depression phase. In fact, while there were many business cycles during the 20th century, there was only one severe depression (1930s). 4. A recovery occurs when the economy stabilizes and starts to grow. This eventually leads to an economic boom, starting the cycle all over again. One goal of economists is to predict such ups and downs. That is very difficult to do. Business cycles are identified according to facts, but we can explain those facts only by using theories. Therefore, we cannot predict with certainty. But one thing is certain: over time, the economy will rise and fall as it has done lately. Since dramatic swings up and down in the economy cause all kinds of disruptions to businesses, the government tries to minimize such changes. It uses fiscal policy and monetary policy to try to keep the economy from slowing too much or growing too rapidly. It can be difficult to measure productivity in the service sector. New technology can improve the quality of services without necessarily increasing the number of people served. A doctor can make more-accurate diagnoses with scans, for instance, but still can see only so many patients in a day. How can productivity measures capture improvements in the quality of service? business cycles The periodic rises and falls that occur in economies over time. recession Two or more consecutive quarters of decline in the GDP. depression A severe recession, usually accompanied by deflation. 46 PART 1 Bu s in e s s Tr e n d s : C u l ti v a ti n g a B u si n ess i n Di v er se, G l oba l En v i r on m en t s LO 2–6 Contrast fiscal policy and monetary policy, and explain how each affects the economy. Stabilizing the Economy through Fiscal Policy fiscal policy The federal government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending. Keynesian economic theory The theory that a government policy of increasing spending and cutting taxes could stimulate the economy in a recession. national debt The sum of government deficits over time. Fiscal policy refers to the federal government’s efforts to keep the economy stable by increasing or decreasing taxes or government spending. When the government employs fiscal policy it is following the basic economic theory of John Maynard Keynes.26 Keynesian economic theory is the theory that a government policy of increasing spending and cutting taxes could stimulate the economy in a recession.27 The first fiscal policy tool is taxation. Theoretically, high tax rates tend to slow the economy because they draw money away from the private sector and put it into the government. High tax rates may discourage small-business ownership because they decrease the profits businesses can earn and make the effort less rewarding. It follows, then, that low tax rates will theoretically give the economy a boost. When you count all fees, sales taxes, state taxes, and more, taxes on the highest-earning U.S. citizens could exceed 50 percent. Is that figure too high or not high enough in your opinion? Why? The second fiscal policy tool is government spending on highways, social programs, education, infrastructure (e.g., roads, bridges, and utilities), defense, and so on. Such spending, however, can increase the national deficit.28 The national deficit is the amount of money the federal government spends beyond what it collects in taxes for a given fiscal year.29 The deficit ballooned to more than $1 trillion for four straight years from 2009 to 2012. An improved economy lowered the deficit to approximately $450 billion in 2015. It then rose to almost $600 billion in 2016. Economists expect the deficit to decrease in 2017–2018 before increasing again due to retiring baby boomers and health care costs.30 Such deficits increase the national debt. The national debt is the sum of government deficits over time. The national debt is now over $20 trillion (see Figure 2.7).31 If the government takes in FIGURE 2.7 THE NATIONAL DEBT $20 $20+ trillion 19 18 17 $17+ trillion 16 $16+ trillion 15 $15 trillion 14 $14.4 trillion Trillions of dollars 13 12 11 10 9 $9.6 trillion 8 7 6 5 4 3 2 1 $5.2 trillion $5.4 trillion $8.4 trillion $4.96 trillion $4.6 trillion $5.5 trillion $5.7 trillion $3.6 trillion $5.6 trillion $2.9 trillion $2.3 trillion $6.4 trillion $1.8 trillion $1.4 trillion $994 billion 0 1980 ’81 ’82 ’83 ’84 ’85 ’86 ’87 ’88 ’89 ’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 CH A P T E R 2 U n der st a n di n g Econ om i cs a n d How I t Af f ect s B usi n ess 47 more revenue than it spends (i.e., tax revenues exceed expenditures), there is a national surplus. That is not likely to happen soon. One way to lessen deficits is to cut government spending. Many presidents and those in Congress have promised to make the government “smaller,” that is, to reduce government spending—unfortunately, that doesn’t happen very often. Entitlements such as Social Security, Medicare, and Medicaid take a large portion of the federal budget and there always seems to be a need for new social programs each year. Thus the deficits continue and add to the national debt. Some people believe that government spending helps the economy grow. Others believe that the money the government spends comes out of the pockets of consumers and businesspeople, and thus slows growth. What do you think? Using Monetary Policy to Keep the Economy Growing Have you ever wondered what organization adds money to or subtracts money from the economy? The answer is the Federal Reserve Bank (the Fed). The Fed is a semiprivate organization that is not under the ©Spencer M. Green/AP Images direct control of the government but does have members appointed by the president. We will discuss the Fed in detail when we look at bankThe financial crisis ing in Chapter 20. Now we simply introduce monetary policy and the role of the Fed in beginning in 2008 caused controlling the economy. Monetary policy is the management of the money supply and much anguish among interest rates by the Federal Reserve Bank. The Fed’s most visible role is the raising Wall Street workers and lowering of interest rates. When the economy is booming, the Fed tends to raise and people in general. How effective was the interest rates. This makes money more expensive to borrow. Businesses thus borrow government’s response? less, and the economy slows as businesspeople spend less money on everything they need to grow, including labor and machinery. The opposite is true when the Fed lowers interest rates. Businesses tend to borrow more, and the economy is expected to grow. Raising and lowering interest rates should help control the rapid ups and downs of the monetary policy economy. After the financial crisis in 2008, the Fed kept interest rates near zero for The management of the money supply and interest seven years.32 rates by the Federal Reserve The Fed also controls the money supply. A simple explanation of this function is that Bank. the more money the Fed makes available to businesspeople and others, the faster the economy is supposed to grow. To slow the economy (and prevent inflation), the Fed lowers the money supply. The Fed also poured money into the economy from 2008 to 2015 in addition to keeping interest rates low. To sum up, there are two major tools for managing the economy of the United States: fiscal policy (using government taxes and spending) and monetary policy (the Fed’s control over interest rates and the money supply). The goal is to keep the economy growing so that more people can rise up the economic ladder and enjoy a higher standard of living and quality of life. TEST PREP Name the three economic indicators and describe how well the United States is doing based on each indicator. What’s the difference between a recession and a depression? How does the government manage the economy using fiscal policy? What does the term monetary policy mean? What organization is responsible for monetary policy? Use SmartBook to help retain what you have learned. Access your instructor’s Connect course and look for the SB/LS logo. 48 PART 1 Bu s in e s s Tr e n d s : C u l ti v a ti n g a B u si n ess i n Di v er se, G l oba l En v i r on m en t s Access your instructor’s Connect course to check out SmartBook or go to mheducation.com/ smartbook for more info. SUMMARY LO 2–1 Explain basic economics. What is economics? Economics is the study of how society chooses to employ resources to produce goods and services and distribute them for consumption among various competing groups and individuals. What are the two branches of economics? There are two major branches of economics: macroeconomics studies the operation of a nation’s economy as a whole, and microeconomics studies the behavior of people and organizations in particular markets (e.g., why people buy smaller cars when gas prices go up). How can we be assured of having enough resources? Resource development is the study of how to increase resources and create the conditions that will make better use of them. How does capitalism create a climate for economic growth? Under capitalism, businesspeople don’t often deliberately set out to help others; they work mostly for their own prosperity and growth. Yet people’s efforts to improve their own situation in life act like an invisible hand to help the economy grow and prosper through the production of needed goods, services, and ideas. LO 2–2 Explain what capitalism is and how free markets work. What is capitalism? Capitalism is an economic system in which all or most of the means of production and distribution are privately owned and operated for profit. Who decides what to produce under capitalism? In capitalist countries, businesspeople decide what to produce, how much to pay workers, and how much to charge for goods and services. They also decide whether to produce certain goods in their own countries, import those goods, or have them made in other countries. What is state capitalism? State capitalism is a combination of freer markets and some government control. What are the basic rights people have under capitalism? The four basic rights under capitalism are (1) the right to own private property, (2) the right to own a business and to keep all of that business’s profits after taxes, (3) the right to freedom of competition, and (4) the right to freedom of choice. President Franklin D. Roosevelt felt that other freedoms were also important: the right to freedom of speech and expression, the right to worship in your own way, and freedom from want and fear. How does the free market work? The free market is one in which buyers and sellers negotiating prices for goods and services influence the decisions about what gets produced and in what quantities. Buyers’ decisions in the marketplace tell sellers what to produce and in what quantity. When buyers demand more goods, the price goes up, signaling suppliers to produce more. The higher the price, the more goods and services suppliers are willing to produce. Price is the mechanism that allows free markets to work. CH A P T E R 2 U n der st a n di n g Econ om i cs a n d How I t Af f ect s B usi n ess LO 2–3 Compare socialism and communism. What is socialism? Socialism is an economic system based on the premise that some businesses should be owned by the government. What are the advantages and disadvantages of socialism? Socialism intends to create more social equity. Workers in socialist countries usually receive more education, health care, and other benefits and also work fewer hours, with longer vacations. The major disadvantage of socialism is that because of high taxes, it lowers the incentive to start a business or to work hard. Socialist economies tend to have a higher unemployment rate and a slower growth rate than capitalist economies. How does socialism differ from communism? Under communism, the government owns almost all major production facilities and dictates what gets produced and by whom. Communism is also more restrictive when it comes to personal freedoms, such as religious freedom. LO 2–4 Analyze the trend toward mixed economies. What is a mixed economy? A mixed economy is part capitalist and part socialist. Some businesses are privately owned, but taxes tend to be high to distribute income more evenly among the population. What countries have mixed economies? The United States has a mixed economy, as do most other industrialized countries. What are the benefits of mixed economies? A mixed economy has most of the benefits of wealth creation that free markets bring plus the benefits of greater social equality and concern for the environment that socialism promises. LO 2–5 Describe the economic system of the United States, including the significance of key economic indicators (especially GDP), productivity, and the business cycle. What are the key economic indicators in the United States? Gross domestic product (GDP) is the total value of final goods and services produced in a country in a given year. The unemployment rate refers to the percentage of civilians at least 16 years old who are unemployed and tried to find a job within the most recent four weeks. The consumer price index (CPI) measures changes in the prices of about 400 goods and services that consumers buy. What is gross output? Gross output (GO) is a measure of total sales volume at all stages of production. What are the four phases of business cycles? In an economic boom, businesses do well. A recession occurs when two or more quarters show declines in the GDP, prices fall, people purchase fewer products, and businesses fail. A depression is a severe recession. Recovery occurs when the economy stabilizes and starts to grow. LO 2–6 Contrast fiscal policy and monetary policy, and explain how each affects the economy. What is fiscal policy? Fiscal policy consists of government efforts to keep the economy stable by increasing or decreasing taxes or government spending. 49 50 PART 1 Bu s in e s s Tr e n d s : C u l ti v a ti n g a B u si n ess i n Di v er se, G l oba l En v i r on m en t s What is the importance of monetary policy to the economy? Monetary policy is the management of the money supply and interest rates. When unemployment gets too high, the Federal Reserve Bank (the Fed) may put more money into the economy and lower interest rates. That is supposed to provide a boost to the economy as businesses borrow and spend more money and hire more people. KEY TERMS brain drain 39 business cycles 45 capitalism 32 command economies 40 communism 39 consumer price index (CPI) 43 core inflation 43 deflation 43 demand 35 depression 45 disinflation 43 economics 29 fiscal policy 46 free-market economies 40 gross domestic product (GDP) 42 gross output (GO) 42 inflation 43 invisible hand 31 Keynesian economic theory 46 macroeconomics 29 market price 36 microeconomics 29 mixed economies 40 monetary policy 47 monopolistic competition 36 monopoly 37 national debt 46 oligopoly 36 perfect competition 36 producer price index (PPI) 43 recession 45 resource development 29 socialism 38 stagflation 43 state capitalism 32 supply 35 unemployment rate 42 CAREER EXPLORATION If you are interested in pursuing a major in economics, here are a few careers to consider after graduation. Find out about the tasks performed, skills needed, pay, and opportunity outlook in these fields in the Occupational Outlook Handbook (OOH) at www.bls.gov. Economist—studies the production and distribution of resources, goods, and services by collecting and analyzing data, researching trends, and evaluating economic issues. Statistican—applies mathematical or statistical theory and methods to collect, organize, interpret, CRITICAL THINKING and summarize numerical data to provide useful information. Marketing research analyst—studies market conditions and helps companies understand what products people want, who will buy them, and at what price. Actuary—analyzes the financial costs of risk and uncertainty and uses mathematics, statistics, and financial theory to assess the risk that an event will occur. In 2002, the U.S. Supreme Court ruled that cities could have school voucher programs that give money directly to parents, who could then choose among competing schools, public or private. The idea was to create competition among schools. Like businesses, schools were expected to improve their services (how effectively they teach) to win students from competitors. The result would be improvement in all schools, private and public, to benefit many students. 1. Do you believe economic principles, like competition, apply in both private and public organizations? Be prepared to defend your answer. 2. Are there other public functions that might benefit from more competition, including competition from private firms? 3. Many people say that businesspeople do not do enough for society. Some students choose to go into the public sector instead of business because they want to help others. CH A P T E R 2 U n der st a n di n g Econ om i cs a n d How I t Af f ect s B usi n ess 51 However, businesspeople say that they do more to help others than nonprofit groups do because they provide jobs for people rather than giving them charity. Furthermore, they believe businesses create all the wealth that nonprofit groups distribute. a. How can you find some middle ground in this debate to show that both businesspeople and those who work for nonprofit organizations contribute to society and need to work together more closely to help people? b. How could you use the concepts of Adam Smith to help illustrate your position? KEY: Team   Analytic   Communication   Technology 1. In teams, develop a list of the advantages of living in a capitalist society. Then develop lists headed “What are the disadvantages?” and “How could such disadvantages be minimized?” Describe why a person who is poor in a socialist country might reject capitalism and prefer a socialist state. DEVELOPING CAREER SKILLS 2. Show your understanding of the principles of supply and demand by looking at the oil market today. Go online and search for a chart of oil prices for the last few years. Why does the price of oil fluctuate so greatly? What will happen as more and more people in China and India decide to buy automobiles? What would happen if most U.S consumers decided to drive electric cars? 3. This exercise will help you understand socialism from different perspectives. Form three groups. Each group should adopt a different role in a socialist economy: one group will be the business owners, another group will be workers, and another will be government leaders. Within your group discuss and list the advantages and disadvantages to you of lowering taxes on businesses. Then have each group choose a representative to go to the front of the class and debate the tax issue with the representatives from the other groups. 4. Draw a line and mark one end “Free-Market Capitalism” and the other end “Central Planning.” Mark where on the line the United States is now. Explain why you marked the spot you chose. Students from other countries may want to do this exercise for their own countries and explain the differences to the class. 5. Break into small groups. In your group discuss how the following changes have affected people’s purchasing behavior and attitudes toward the United States and its economy: the wars in Iraq and Afghanistan, the increased amount spent on homeland security, the government involvement in banking and other industries, and the growth of the Internet. Have a group member prepare a short summary for the class. PURPOSE To familiarize you with the sources of economic information that are important to business decision makers. EXERCISE Imagine that your boss asked you to help her to prepare the company’s sales forecast for the coming two years. In the past, she felt that trends in the nation’s GDP, U.S. manufacturing, and employment in Illinois were especially helpful in forecasting sales. She would like you to do the following: 1. Go to the Bureau of Economic Analysis website (www.bea.gov) and locate the gross domestic product data. Compare the annual figure for the last four years. What do the figures indicate for the next couple of years? PUTTING PRINCIPLES TO WORK 52 PART 1 Bu s in e s s Tr e n d s : C u l ti v a ti n g a B u si n ess i n Di v er se, G l oba l En v i r on m en t s 2. At the Bureau of Labor Statistics website (www.bls.gov) under “Industries” in the “Topics” box, click on “Industries at a Glance” to find the information about the manufacturing industry. What is the employment trend in manufacturing over the last four years? 3. Return to the Bureau of Labor Statistics home page (www.bls.gov) and use the Search feature to find trends in employment for the state of Illinois. Look around the website to see what other information is available. Plot the trend in employment in Illinois over the last four years. On your own, discuss what economic changes may have influenced that trend. 4. Based on the information you have gathered, write a brief summary of what may happen to company sales over the next couple of years. VIDEO CASE Opportunity International: Giving the Poor a Working Chance Billions of people in the world make $2 a day or less. In fact, a billion people make less than $1 a day. In such places, a loan of $100 or $200 makes a huge difference. That’s where microloans from organizations such as Opportunity International come in. Opportunity International is an organization that grants microloans to people, mostly women, in developing countries so they can invest in a business. Those investments often lead to community growth and employment, and help the owners themselves to prosper on a moderate scale. The borrowers must pay back the money with interest—when they do, they can borrow more and keep growing. Opportunity International, unlike some other microlending organizations, also provides a banking function where entrepreneurs can safely put their money. They can also buy some insurance to protect themselves against loss. Opportunity International helps over a million people in over 28 countries, giving them the opportunity to change their lives for the better. This video introduces you to some of those people, but primarily explains how freedom and a little money can combine to create huge differences in people’s lives. Adam Smith was one of the first people to point out that wealth comes from freedom, the ability to own land, and the ability to keep the profits from what you do on that land. When people try to maximize profits, they have to hire other people to help them do the work. This provides jobs for others and wealth for the entrepreneur. And, like an invisible hand, the whole community benefits from the entrepreneurs’ desire to earn a profit. In the video, you can see a woman in Uganda who has applied those principles to benefit her family, provide employment, and help her community. Free-market capitalism is the system where people can own their own land and businesses and keep the profits they earn. Such a system demands that people can (1) own their own property (not a reality in many developing nations); (2) keep the profits from any ­business they start; (3) compete with other businesses (it is difficult to compete with the government); and (4) work wherever and whenever they want. The key word in capitalism is freedom—freedom of religion, freedom to own land, and freedom to prosper and grow. Opportunity International is making an attempt to show people how freedom plus a few dollars can make a huge difference in an economy. In a free-market economy, price is determined by buyers and sellers negotiating over the price of a good or service. The equilibrium point is the place where buyers and sellers agree to an exchange; it is also called the market price. Without free markets, there is no way of knowing what buyers need and what sellers need to produce. Thus, in command economies, where there is no supply-anddemand mechanism in operation, there can be shortages or surpluses in food, clothing, and other necessities. Socialism and communism are alternatives to a freemarket economy. Under such systems, people are more likely to have a bit of equality, but there are fewer incentives to work hard, and entrepreneurs are often lured to countries where they can make more money by working harder. The result is called a brain drain, where the best and the brightest often move to free-market countries. There are advantages to socialism and communism, such as free schools, free health care, free day care, etc. But the taxes are higher, and there is usually less innovation and higher unemployment. The trend in the world is toward mixed economies, where most of the economy is based on free-market principles, but the government gets involved in things such as education, health care, and welfare. The United States has been basically a free-market economy, but it is clear that there is a movement toward more government involvement. On the other hand, some countries are reducing the role of government in society and moving toward freer markets. Thus the world is moving toward mixed economies. CH A P T E R 2 U n der st a n di n g Econ om i cs a n d How I t Af f ect s B usi n ess The United States government tries to control the money supply through the Federal Reserve and fiscal policy. Fiscal policy has to do with taxes and spending. The less the government spends, the more that is available for businesses to invest. And the lower the tax rates on entrepreneurs, the more they will invest in businesses and the faster the economy will grow. Opportunity International shows the poorest of the poor how important entrepreneurs, freedom, opportunity, and a little bit of money are to economic growth and prosperity. You are encouraged in this video to participate in helping poor people around the world. You can do this by contributing time and money to organizations like 53 Opportunity International. You can join the Peace Corps or other groups designed to assist less-developed countries. THINKING IT OVER 1. Why is there a need for organizations like Opportunity International? Can’t poor people get loans from banks and other sources? 2. Identify the four major requirements necessary for a free-market system to operate. 3. What is the main difference between capitalism and a mixed economy? Which model is used in the United States? BONUS VIDEO CASE A bonus end-of-chapter video case is available in McGraw-Hill Connect. NOTES 1. Julie Makinen, “North Korean Leader Unveils 5-Year Plan for Economy, but No Radical Reforms,” Los Angeles Times, May 8, 2016; Jethro Mullen, “How North Korea Makes Its Money: Coal, Forced Labor and Hacking,” CNN, April 5, 2017. 2. Jesse Millsap, “Are Federal Regulations Hurting Your State’s Economy?” Forbes, May 4, 2016; Alana Semuels, “Do Regulations Really Kill Jobs?” The Atlantic, January 19, 2017. 3. Antoine Gara, “Donald Trump Rally Makes Deere, Caterpillar, and Mining Stocks Great Again,” Forbes, November 23, 2016; Alain Sherter, “Global Clouds Darken U.S. Economic Outlook,” CBS MoneyWatch, February 22, 2016; Patti Waldmeir and Pan Kwan Yuk, “Recovery in Construction Lifts Caterpillar Outlook,” Financial Times, July 25, 2017. 4. Benjamin Auslin, “Economics Shouldn’t Be an Elective,” The Wall Street Journal, March 3, 2017. 5. Zoe Thomas, “U.S. Election Could Trump Really Cut the U.S. 19tn Debt in Eight Years?,” April 8, 2016; Taylor Tepper, “5 Things Most People Don’t Know about the National Debt,” Time, April 22, 2016; Anzish Mirza, “What Are the National Debt, Debt Ceiling and Budget Deficit?” U.S. News and World Report, April 13, 2017. 6. Lucinda Stern, “U.N. Warns That 90% of the World’s Fish Stock Is At or Near Unsustainable Levels,” Fortune, July 8, 2016; Ben Paynter, “Replacing Farms with Fish Farms: The Odd Solution to Both Hunger and Climate Change,” Fast Company, March 13, 2017. 7. Greg Ip, “For Economy, Aging Population Poses Double Whammy,” The Wall Street Journal, August 3, 2016; John Authers, “Demographics and Market: The Effects of Ageing,” Financial Times, October 25, 2016; Prashanth 8. 9. 10. 11. 12. 13. 14. Perumal, “Robots Might Be Saving the World From a Demographic Disaster,” Business Insider, March 8, 2017. Kana Inagaki, “World Watches How Japan Manages Its Ageing Citizens,” Financial Times, April 6, 2015; Janet Ademy, “Who’s Aging More Rapidly Than U.S.? Parts of Asia, Europe,” The Wall Street Journal, Marcy 29, 2016; Joel Kotkin, “Death Spiral Demographics: The Countries Shrinking the Fastest,” Forbes, February 1, 2017. Jessica Ferger, “Population Growth Will Exacerbate Problems in Some Developing Countries,” Newsweek, June 16, 2015; Liz Ford, “2017: the Year We Lost Control of World Population Surge?” The Guardian, July 9, 2017. Dennis Rasmussen, “The Problem with Inequality, According to Adam Smith,” The Atlantic, June 9, 2016. Dennis Rasmussen, “The Problem with Inequality, According to Adam Smith,” The Atlantic, June 9, 2016. Chase Peterson-Withorn, “Buffett Just Donated Nearly $2.9 Billion to Charity,” Forbes, July 14, 2016; Laura Lorenzetti, “17 More Billionaires Join Buffett and Gates Giving Pledge This Year,” Fortune, June 1, 2016; Kerry A. Dolan, “Big Philanthropy Gets a Boost: 14 Titans from 7 Countries Join the Gates-Buffett Giving Pledge,” Forbes, May 30, 2017. Rana Foroohar, “American Capitalism’s Great Crisis,” Time, May 12, 2016; Jason Zweig, “The Disturbing New Facts about American Capitalism,” The Wall Street Journal, March 3, 2017. Jeff Kehoe, “Can Capitalism Be Redeemed?” Harvard Business Review, July–August 2016; Lauren Gensler, “Rising Income Inequality Is Throwing the Future of Capitalism into Question, Says World Economic Forum,” Forbes, January 11, 2017. 54 PART 1 Bu s in e s s Tr e n d s : C u l ti v a ti n g a B u si n ess i n Di v er se, G l oba l En v i r on m en t s 15. Mark Benioff, “Salesforce CEO Mark Benioff: How Business Leaders Can Help Narrow Income Inequality,” Fortune, January 17, 2017. 16. Joshua Kurlantzick, “State Capitalism and the Return of Intervention,” Council on Foreign Relations, accessed September 2017. 17. “A Kim in His Counting House,” The Economist, January 16, 2016; Amanda Mattingly, “Cuba’s Economy is Stagnating, But it Could Get Worse,” World Policy Blog, February 14, 2017. 18. U.S. Department of Labor, www.dol.gov, accessed September 2017. 19. Mark Skousen, “Gross Output (GO) a Major Discovery as a Top Line in National Income Accounting,” LinkedIn, October 12, 2016. 20. Jo Chaven McGinty, “What the Unemployment Rate Really Shows,” The Wall Street Journal, March 5, 2016; Nick Wells, “Here’s the Real Unemployment Rate,” CNBC, May 5, 2017. 21. Micholas Eberstadt, “The Idle Army: America’s Unworking Men,” The Wall Street Journal, September 2, 2016; Justin Fox, “What’s Really Wrong with the Unemployment Rate,” Bloomberg, August 10, 2016; Alison Burke, “Why Are So Many American Men Not Working?” Brookings Now, March 6, 2017. 22. Kalen Smith, “What Is Deflation—Definitions, Causes, and Effects,” Money Crashers, accessed September 2017; George Melloan, “Rising Global Debt and the Deflation Threat,” The Wall Street Journal, March 8, 2016; David Nicklaus, “Stagflation? Probably Not Now,” St. Louis PostDispatch, August 18, 2017. 23. U.S. Bureau of Labor Statistics, www.bls.gov, accessed September 2017. 24. Alice Gomstyn, “Key Economic Indicators Every Investor Should Know,” Motley Fool, April 9, 2016; Wolf Richter, “A Key Inflation Measure Just Gave the Fed Cover to Keep Raising Rates,” Business Insider, May 13, 2017. 25. David Nicklaus, “Blame Tech, Not Trade,” St. Louis PostDispatch, July 3, 2016; Mira Rojanasakul and Peter Coy, “More Robots, Fewer Jobs,” Bloomberg, May 8, 2017. 26. Randall W. Forsyth, “Return of the Keynesians,” Barron’s, August 15, 2016; Noah Smith, “Keynesian Economics Is Hot Again,” Bloomberg, April 10, 2017. 27. Brenden Greeley, “John Maynard Trump,” Bloomberg Businessweek, November 28, 2016; Bradley W. Bateman, “What Would Keynes Think of Trump’s Infrastructure Plan?” The Atlantic, April 7, 2017. 28. Justin Fox, “A Cautious Return to Fiscal Stimulus,” Bloomberg Businessweek, August 28, 2016; Drew DeSilver, “What Does the Federal Government Spend Your Tax Dollars On? Social Insurance Programs, Mostly,” Pew Research Center, April 4, 2017. 29. “Deficit vs. Debt: What’s the Difference?” On Investing, Charles Schwab, Summer 2016; Patricia Cohen, “What’s the Difference between the National Debt and the Federal Deficit?” The New York Times, January 11, 2017. 30. George Melloan, “Inattention-to-the-Deficit Disorder,” The Wall Street Journal, May 27, 2016; Tim Worstall, “CEO Sees Federal Deficit Rising from Here—It Really Shouldn’t Be This Way,” Forbes, January 24, 2017. 31. Taylor Tepper, “5 Things Most People Don’t Understand about the National Debt,” Money, April 22, 2016; James Grant, “The United States of Insolvency,” Time, April 25, 2016; Lucinda Shen, “Here’s How Much Barack Obama Added to the National Debt,” Fortune, January 20, 2017; Jeff Cox, “With Dow 20K Passed, $20 Trillion on the National Debt Is Next,” CNBC, accessed September 2017. 32. Jamie McGeever, “Markets Betting on Near Zero Interest Rates for Another Decade,” Reuters, March 9, 2016; Binyamin Appelbaum and Kevin Granville, “Why the Fed Is about to Raise Interest Rates,” The New York Times, December 2, 2016; Binyamin Appelbaum, “Fed, Leaving Rates Unchanged, Expects to Wind Down Stimulus ‘Relatively Soon’,” The New York Times, July 26, 2017. 3 Doing Business in Global Markets LEARNING OBJECTIVES 56 » After you have read and studied this chapter, you should be able to LO 3–1 Discuss the importance of the global market and the roles of comparative advantage and absolute advantage in global trade. LO 3–2 Explain the importance of importing and exporting, and understand key terms used in global business. LO 3–3 Illustrate the strategies used in reaching global markets, and explain the role of multinational corporations. LO 3–4 Evaluate the forces that affect trading in global markets. LO 3–5 Debate the advantages and disadvantages of trade protectionism. LO 3–6 Discuss the changing landscape of the global market and the issue of offshore outsourcing. GETTING TO KNOW Indra Krishnamurthy Nooyi, CEO of PepsiCo I ndra Nooyi grew up in southeast India, the daughter of an accountant and a stay-at-home mother. Every night at dinner her mom would present a world problem to Indra and her sister, and they would compete to solve it as if they were prime minister or president. As a schoolgirl, she was on the debate team, played cricket, and was part of an all-girl rock band in which she played guitar (an instrument she still enjoys.) She earned a bachelor’s degree in physics, chemistry, and mathematics before receiving master’s degrees in business from the Indian School of Management in Calcutta and the Yale School of Management in Connecticut. After completing graduate school, Nooyi worked for the Boston Consulting Group before moving on to a strategic-planning position at Motorola. She was prepared to move on to a management position with General Electric in 1994 when PepsiCo was able to lure her away. By 1996, Pepsi’s sales had slowed and the company was losing the global market to competitor Coca-Cola big time. Coca-Cola was earning over 70 percent of its revenue from global sales while Pepsi generated only 29 percent. As strategy chief and head of mergers and acquisitions, Nooyi advised the company to buy Tropicana and Quaker Oats (which would bring Gatorade to Pepsi) and to sell company restaurant subsidiaries Pizza Hut, Taco Bell, and KFC. Her goal was to increase global sales . In 2001, Nooyi became CFO of PepsiCo. Five years later she became PepsiCo’s first female CEO, as well as its first CEO not born in the United States. As CEO, she proclaimed a new theme of “Performance with purpose,” Pepsi’s promise to do what’s right for the business by doing what’s right for people and the planet. She reclassified the company’s products into three categories: “fun for you” (such as potato chips and regular sodas), “better for you” (diet or low-fat versions of snacks and sodas), and “good for you” (products such as oatmeal). She put a good deal of Pepsi’s money behind the effort to help global customers develop healthier lifestyles. The company has made some progress in making unhealthy products less so by removing 400,000 tons of sugar from its drinks over the past 10 years and reducing salt and saturated fats from Lay’s and Ruffles chips. PepsiCo has grown substantially under Nooyi’s leadership. Today, PepsiCo is a $66 billion global company that boasts 22 brands that generate over $1 billion each. The company has over 264,000 employees worldwide and is sold in more than 200 countries and territories around the globe. Nooyi recently announced the company would expand the corporate global agenda she promised, emphasizing health and social accountability. She pledged PepsiCo would continue to focus on making its products healthier, empowering the company’s global employees, and encouraging environmental responsibility. Indra Nooyi is an example of a successful global businessperson who’s proved it doesn’t matter who you are or where you came from if you have the will and determination to succeed. She understands cultural and economic differences, and knows how to adapt her company to global changes successfully. This chapter explains the opportunities and challenges businesspeople like Indra Nooyi face every day in dealing with the dynamic environment of global business. Sources: Lyndon Driver, “How Indra Nooyi Changed the Face of PepsiCo,” World Finance, October 14, 2016; Jennifer Reingold, “Indra Nooyi Was Right. Now What?” Fortune, June 15, 2015; Robert Safian, “How PepsiCo CEO Indra Nooyi Is Steering the Company to a Purpose-Driven Future,” Fast Company, January 19, 2017; www. pepsico.com, accessed September 2017. ©Monica Schipper/ Getty Images 57 name that company THIS COMPANY STARTED as a community marketplace where people can book and list accommodations. It has grown to 2 million listings in 34,000 cities worldwide. The company believes people don’t just want to rent a room to sleep in; they want to experience the people and the culture of the place they are visiting. Name that company. (Find the answer in the chapter.) LO 3–1 Discuss the importance of the global market and the roles of comparative advantage and absolute advantage in global trade. The Dynamic Global Market Have you dreamed of traveling to cities like Paris, London, Rio de Janeiro, or Moscow? Today, over 90 percent of the companies doing business globally believe it’s important for their employees to have experience working in other countries.1 The reason is not surprising—although the United States is a market of over 325 million people, there are over 7.4 billion potential customers in the 196 countries that make up the global market.2 That’s too many people to ignore! (See Figure 3.1 for a map of the world and important statistics about world population.) Today U.S. consumers buy hundreds of billions of dollars’ worth of goods from China.3 United Parcel Service (UPS) has experienced solid market growth in its global operations and Walmart and Starbucks have opened stores in South Africa.4 Major League Baseball is broadcast in hundreds of countries in 17 languages.5 The National Basketball Association (NBA) and the National Football League (NFL) played regular season games in London FIGURE 3.1 WORLD POPULATION BY CONTINENT As shown on this map, 60.2 percent of the world’s population lives in Asia while only 7.4 percent lives in North America. Asia 60.2% North America 7.4% Europe 10.7% Africa 14.9% South America 6.3% 58 Australia 0.5% CH A P T E R 3 Doi n g B u si n ess i n G l oba l M a r ket s 59 It may not be what the rest of the world calls “football,” but American football is attracting an audience outside the United States. London’s Wembley Stadium has been home to the NFL’s International Series since 2007. What cultural factors must U.S. sports franchises overcome in order to increase popularity abroad? ©Gerry Penny/EPA/Newscom and Mexico in 2017.6 NBC paid $1 billion to telecast six full seasons of England’s Barclays Premier Soccer League in the United States.7 U.S. film stars Matt Damon, Tom Cruise, and Meryl Streep draw crowds to movie theaters around the globe. Because the global market is so large, it is important to understand the language used in global trade. For example, importing is buying products from another country. Exporting is selling products to another country. As you might suspect, competition among exporting nations is intense. The United States is the largest importing nation in the world and is the third-largest exporting nation, behind China and Germany. This chapter will familiarize you with global business and its many challenges. As competition in global markets intensifies, the demand for students with training in global business is almost certain to keep growing.8 importing Buying products from another country. exporting Selling products to another country. Why Trade With Other Nations? No nation, not even a technologically advanced one like the United States, can produce all the products its people want and need. Even if a country did become self-sufficient, other nations would seek to trade with it to meet the needs of their own people. Some nations, like Venezuela and Iraq, have an abundance of natural resources but limited technological know-how. Other countries, such as Japan and Switzerland, have sophisticated technology but few natural resources. Global trade enables a nation to produce what it is most capable of producing and buy what it needs from others in a mutually beneficial exchange relationship. This happens through the process called free trade. Free trade is the movement of goods and services among nations without political or economic barriers. It has become a hotly debated concept.9 In fact, many in the United States take the position “fair trade, not free trade.”10 Figure 3.2 offers some of the pros and cons of free trade. free trade The movement of goods and services among nations without political or economic barriers. 60 PART 1 Bu s in e s s Tr e n d s : C u l ti v a ti n g a B u si n ess i n Di v er se, G l oba l En v i r on m en t s FIGURE 3.2 THE PROS AND CONS OF FREE TRADE PROS • The global market contains over 7 billion potential customers for goods and services. • Productivity grows when countries produce goods and services in which they have a comparative advantage. • Global competition and less-costly imports keep prices down, so inflation does not curtail economic growth. • Free trade inspires innovation for new products and keeps firms competitively challenged. • Uninterrupted flow of capital gives countries access to foreign investments, which help keep interest rates low. comparative advantage theory Theory that states that a country should sell to other countries those products that it produces most effectively and efficiently, and buy from other countries those products that it cannot produce as effectively or efficiently. absolute advantage The advantage that exists when a country has a monopoly on producing a specific product or is able to produce it more efficiently than all other countries. CONS • Domestic workers (particularly in manufacturing-based jobs) can lose their jobs due to increased imports or production shifts to low-wage global markets. • Workers may be forced to accept pay cuts from employers, who can threaten to move their jobs to lower-cost global markets. • Moving operations overseas because of intense competitive pressure often means the loss of service jobs and growing numbers of white-collar jobs. • Domestic companies can lose their comparative advantage when competitors build advanced production operations in low-wage countries. The Theories of Comparative and Absolute Advantage Countries exchange more than goods and services, however. They also exchange art, sports, cultural events, medical advances, space exploration, and labor. Comparative advantage theory, suggested in the early 19th century by English economist David Ricardo, was the guiding principle that supported the idea of free economic exchange.11 Comparative advantage theory states that a country should sell to other countries those products it produces most effectively and efficiently, and buy from other countries those products it cannot produce as effectively or efficiently. The United States has a comparative advantage in producing goods and services, such as software development and engineering services. In contrast, it lacks a comparative advantage in growing coffee or making shoes; thus, we import most of the shoes and coffee we consume. By specializing and trading, the United States and its trading partners can realize mutually beneficial exchanges. A country has an absolute advantage if it can produce a specific product more efficiently than all other countries. Absolute advantage does not last forever; global competition causes absolute advantages to fade. Today there are very few instances of absolute advantage in global markets. LO 3–2 Explain the importance of importing and exporting, and understand key terms used in global business. Getting Involved in Global Trade People interested in a job in global business often think they are limited to firms like Boeing, Caterpillar, or IBM, which have large multinational accounts. However, real global job potential may be with small businesses. In the United States, only 1 percent of the 30 million small businesses export, yet they account for about 30 percent of the total U.S. exports. With the support of the U.S. Department of Commerce, U.S. small business exporting has increased significantly in the past decade, but not quite to the level many would like. Getting started globally is often a matter of observing, being determined, and taking risks. In a classic story, several years ago a U.S. traveler in an African country noticed there was no ice available for drinks or for keeping foods fresh. Research showed there was no CH A P T E R 3 Doi n g B u si n ess i n G l oba l M a r ket s 61 ice factory for hundreds of miles, yet the market seemed huge. The man returned to the United States, found some investors, and returned to Africa to build an ice-making plant. The job was tough; much negotiation was necessary with local authorities (much of which was done by local citizens and businesspeople who knew the system). But the plant was eventually built, and this forward-thinking entrepreneur gained a considerable return on his idea, while the people gained a needed product. Importing Goods and Services Students attending colleges and universities abroad often notice that some products widely available in their countries are unavailable or more expensive elsewhere. By working with producers in their native countries, finding some start-up financing, and putting in long hours of hard work, many have become major importers while still in school. Howard Schultz, former CEO of Starbucks, found his opportunity while traveling in Milan, Italy.12 Schultz was enthralled with the ambience, the aroma, and especially the sense of community in the Italian neighborhood coffee and espresso bars that stretched across the country.13 He felt such gathering places would be great in the United States. Schultz bought the original Starbucks coffee shop in Seattle and transformed it according to his vision. Because the Italian coffee bars caught his attention, U.S. coffee lovers now know what a grande latte is. Exporting Goods and Services Who would think U.S. firms could sell beer in Germany, home of the first state “beer purity” law (called the Reinheitsgebot) and maker of so many classic beers? Well, some of Munich’s most famous beer halls and store shelves now offer U.S. beers like Samuel Adams Boston Lager and Sierra Nevada.14 American craft brewer Stone Brewing has even opened up a brewery in Berlin.15 If this surprises you, imagine selling sand in the Middle East. Meridian Group exports a special kind of sand used in swimming pool filters that sells well there. The fact is, you can sell just about any good or service used in the United States to other countries—and sometimes the competition is not nearly so intense as it is at home. For example, you can sell snowplows to Saudi Arabians, who use them to clear sand off their driveways. Airbnb started in San Francisco as a community marketplace for people looking to book and list accommodations. The company has grown to 2 million listings in 34,000 cities worldwide. Company founder Brian Chesky believed that people wanted to connect with the people and the culture where they were staying, not just have a room to sleep in. The Connecting through Social Media box on the next page highlights how Airbnb shook up the hospitality industry with the help of social media. Many economists feel exporting also provides a terrific boost to the U.S. economy. C. Fred Bergsten, director emeritus of the Peterson Institute for International Economics, states that the U.S. economy was $1 trillion a year richer because of its integration with the world economy.16 He also estimates that every $1 billion in additional U.S. exports generates over 7,000 jobs at home. But selling in global markets and adapting products to global customers are by no means easy tasks. We discuss key forces that affect global trading later in this chapter. If you are interested in learning more about exporting, go to the International Trade Administration (www.export.gov) and search for the document “A Basic Guide to Exporting.” More advice is available at websites such as those sponsored by the U.S. Department of Commerce (www.doc.gov), the Bureau of Export Administration (www.bea.gov), the Small Business Administration (www.sba.gov), and the Small Business Exporters Association (www.sbea.org). Measuring Global Trade In measuring global trade, nations rely on two key indicators: balance of trade and balance of payments. The balance of trade is the total value of a nation’s exports compared to its ©Ollie Millington/WireImage/Getty Images Although Funko’s Pop! line of toys aren’t very lifelike, that hasn’t stopped these big-headed figurines from becoming a global sensation. Funko’s toys usually take on the appearance of famous fictional characters or pop culture icons, giving them widespread appeal to collectors around the world. As a result, each year Funko earns tens of millions from sales of its Pop! toys. Does a career in the global collectibles market seem appealing to you? balance of trade The total value of a nation’s exports compared to its imports over a particular period. iSee It! Need help understanding balance of trade? Visit your Connect e-book for a brief animated explanation. CONNECTING THROUGH SOCIAL MEDIA My Home Is Your Home www.airbnb.com “ Share your homes, but also share your world.” This short statement formed the mission statement of Airbnb’s founder Brian Chesky. He started Airbnb in San Francisco, targeting customers wanting to list or book accommodations as part of the growing sharing economy that allows owners to rent their homes or rooms to strangers. He believed his competitors in the travel industry had lost touch with their customers by providing only “cookie cutter” rooms in downtown areas. He felt such accommodations didn’t allow travelers a real chance to “experience” the cities they visited. Today, Airbnb has 2 million listings across the globe with a company valuation of $25.5 billion, making it (on paper) the largest hotel chain in the world. The company initially did extensive research to test if its “don’t just go there, live there” message would resonate with potential users. The “live there” campaign focused on encouraging travelers to live like locals and experience the cities they visit like local residents. A social media marketing campaign using 3D technology delivered a new style of visual advertising. The video received 11 million views on Facebook, 56,000 “likes” and 5,200 comments. The company also made effective use of Instagram by partnering with professional photographers to create images that had a smart design and message that clearly spoke to its target customers. This year, Airbnb is on track to book almost $1 billion in revenue, with projections rising to $10 billion per year by 2020. If you haven’t already, check out Airbnb promotions and offers on its website. Sources: Max Chafkin, “Airbnb Opens Up the World,” Fast Company, February 2016; Katie Richards, “Put Away the Selfie-Stick and Act Like a Local, Urges Airbnb’s New Campaign,” Ad Week, April 19, 2016; Thales Teixeira and Michael Blanding, “How Uber, Airbnb, and Etsy Turned 1,000 Customers into a $1 Million,” Forbes, November 16, 2016; www.airbnb.com, accessed September 2017. ©digitallife/Alamy trade surplus A favorable balance of trade; occurs when the value of a country’s exports exceeds that of its imports. trade deficit An unfavorable balance of trade; occurs when the value of a country’s imports exceeds that of its exports. balance of payments The difference between money coming into a country (from exports) and money leaving the country (for imports) plus money flows from other factors such as tourism, foreign aid, military expenditures, and foreign investment. 62 imports measured over a particular period. A favorable balance of trade, or trade surplus, occurs when the value of a country’s exports exceeds that of its imports. An unfavorable balance of trade, or trade deficit, occurs when the value of a country’s exports is less than its imports. It’s easy to understand why countries prefer to export more than they import. If I sell you $200 worth of goods and buy only $100 worth, I have an extra $100 available to buy other things. However, I’m in an unfavorable position if I buy $200 worth of goods from you and sell you only $100. The balance of payments is the difference between money coming into a country (from exports) and money leaving the country (for imports) plu