This chapter addresses the reasons that one should study business and businesses to begin with. The authors make the point that they do not intend for this to be a narrow study that just focuses on particular examples of successive and failed businesses, although it will include case studies too.
But the major point of studying business, the authors write, is to provide a larger sense of what is needed to succeed in today’s working world. Unlike previous generous of workers, who could succeed by mastering a few specific skills, today’s workers have to be broadly educated, being able to exhibit: “honesty and integrity, willingness to work hard, dependability, time management skills, self-confidence, motivation, willingness to learn, communication skills, professionalism.”
The chapter also provides basic definitions that will be used throughout the books, including “business” (the organized work of individuals coming together) and providing a brief overview of how capitalism works. The authors also explain communism, fiscal and monetary policy, the concept of productivity, and the business cycle. It also addresses very briefly the ways in which American legal system both supports and restrains business activity. The chapter ends with a brief description of green business.
These are all basic concepts that must be understood to understand today’s competitive business climate and how it will change over the next decades.
This chapter addresses the complexities of business ethics, a part of the general category of ethics, which the authors define as “the study of right and wrong and of the morality of the choices individuals make.” Business ethics is “the application of moral standards to business situations.” The authors stress the fact that individuals (and businesses) can have different standards of ethical behavior that are all acceptable if they are all based on such concepts as fairness and honesty.
Among the key ethical concepts that businesses face are conflicts of interest and greenwashing, which is the practice of pretending to be more environmentally conscientiousness than one is. This practice falls under the rubric of social responsibility “is the recognition that business activities have an impact on society and the consideration of that impact in business decision making.”
Businesses are more highly regulated now than they were a hundred years ago. Among the regulations that have been added are worker safety protections, the end to child labor, fairer wages, protection of consumer rights, and requirements that companies behave with at least some measure of environmental care.
Government regulation and public pressure are the two most important external pressures for businesses to act ethically. However, there is also a key internal mechanism that creates a sense of business ethics and social responsibility, which is the attitude of the company’s management. When managers act ethically, their employees will follow their example.
This chapter takes up the issue of international trade, which is increasingly important in a globalized world. There are a number of legal issues involved in international trade that do not obtain in domestic business, and the chapter touches on these as well.
International trade, the writers argue, can be seen as an extreme form of specialization, in which different countries contribute what they can do so most cheaply, whether this be raw materials, intellectual capital, or labor. While nations have to trade in this day and age, each government also has to protect its own nation’s industries.
Nations restrict trade with other companies in different nations in legal ways with tariffs, which are essentially taxes on the products made in another nation. There are advantages to this in that domestic businesses can make more money and employ more people. However, tariffs can make other countries retaliate and given that all countries have to trade at some point this can be highly problematic.
This chapter also takes up the related issues of trade imbalance, which occurs when one country imports more from another than it exports (or vice versa). This places the country that imports more at a number of disadvantages. One way in which trade imbalances are regulated is through large trade coalitions such as NAFTA.
Finally, the chapter addresses ways in which businesses can enter the international market.
In this chapter the authors define a number of different forms of business, mostly that exist domestically but that can also do business internationally. Among the different types of businesses that they describe are a range of partnership agreements. Partnerships allow both risk and responsibility to be shared, along with aspirations and fears.
Among the types of partnerships are general partners who “are responsible for running the business and for all business debts” while limited partners “receive a share of the profit in return for investing in the business.”
The most important single definition that this chapter puts forward is that of a corporation, which is “an artificial person created by law.” Corporations as recently re-emphasized by the Supreme Court with almost all of legal rights of an actual person, including the “right to start and operate a business, and to own property.”
While (for small businesses) a partnership is the most common form and (for large businesses) a corporation is, the chapter also describes several other important business structures, including the cooperative, which is simply an “association of individuals or firms whose purpose is to perform some business function for its members.” Cooperatives can be quite specialized or quite general and can be formed for any period of time. In contrast to this, a joint venture is formed to meet a specific purpose for a limited period of time. Each of these business structure meets different needs.
This chapter focuses on the nature of small businesses and examines the fields and functions at which small businesses are the optimal structure.
A small business is simply one that is “independently owned” (as opposed to a franchise, for example). Small businesses are never the “dominant” player in their field and yet are run on a for-profit basis. While they are small — often employing just a few people, small businesses constitute over 90% of the country’s 23 million businesses and employ more than half of American workers.
Most small businesses are in retail and services and are started by people who are defined by “independence, desire to create a new enterprise, and willingness to accept a challenge.” Many specific factors can compel an individual to start her or his own business. Because many small-business owners have little or no business or management experience and may be under-capitalized as well, many new small businesses fail.
Nevertheless, small businesses (often helped by the federal government through the Small Business Administration) are being opened all of the time. With the advantage of the potential for personalized relationships with customers and the ability to change and adapt quickly, small companies can compete effectively with large firms and succeed because they “provide things that society needs, act as suppliers to larger firms, and serve as customers of other businesses, both large and small.”
This chapter examines the structure and role of management, which is Management is “the process of coordinating people and other resources to achieve the goals of an organization.” While management is generally thought of as the management of people, managers are also responsible for ensuring that the material, financial and informational resources and needs of a company are carefully considered and apportioned in the most effective and profitable ways.
Key characteristics of a good manager are the ability to plan both for the short-term and the long-term. This might seem like an , but it is true that many businesses fail because managers are good at one but not the other. The authors note that a key element of good management is the ability to create a good contingency plan. A contingency plan is one that tries to predict the unpredicted, such as the effect of a supplier’s going bankrupt, bad weather that disrupts transportation, or a new competitor muscling in on the market. All of these things can happen, and the successful manager is one who can help her company through such shoals.
In addition to the ability to plan well, the successful manager must be able to motivate and inspire his/her workers. Managers at different levels of power and authority have different requirements placed on them, but in general they must have good conceptual and creative skills and vision, good analytic and technical skills, and excellent interpersonal and communication Skills. Managers can deploy their skills through both formal and informal styles of leadership depending on their specific situation.
This chapter focuses on the idea of an organization and different possible organizational structures since all businesses, no matter what size, are organizations. The authors define the basic organization as “a group of two or more people working together to achieve a common set of goals.” It should be noted that this is true only when organizations work well: Certainly there are many organizations (including many businesses) that do not work well precisely because that are not sharing a common set of goals.
The central part of sharing a common set of goals is having a joint understanding of what the goals of the organization are and the best ways to achieve these goals. This does not mean that there has to be absolute agreement on every detail of every aspect of the organization, because a well-run organization will allow for open discussions when they are designed to improve the way an organization works.
One of the key ways in which organizations can be organized is along the lines of how specialized they are: Does each employee do only one job or does each one wear a number of different hats? The same question must be asked of each department, and even of the company as a whole. In addition to organizing a company by the type of labor, it can also be organized by product, by the geographic location, or by type of customer. Organizations can also be defined by how centralized their management structure is.
The authors also list a number of organizational structures, including the line structure, in which each person simply reports to the manager directly above her/him; the line-and-staff structure, in which there are vertical lines of authority with nodes along the way; and the matrix structure, which has both vertical and horizontal lines of authority.
This chapter examines one of the other major spheres of understanding how business works: The idea of production. Production is in some ways a very straightforward concept, referring to anything that is made by a person. However in an information age, the concept of “production” can refer to things that previous generations would not have recognized as products — as Facebook’s IPO demonstrated. However, this chapter looks at what operations divisions and operations managers do, which is to turn resources into products, or “are responsible for producing tangible products or services that customers want.”
The skills needed to do this are 1) being able to lead, motivate, and inspire workers; 2) understand both current and potential future technologies and how they can work along or in combination with each other to make a production process more efficient or better in other ways; 3) understand and be able to about quality control processes; 4) and “Understand the relationship between the customer, the marketing of a product, and the production of a product.”
Many forms of production are resource-intensive, meaning that they can take a significant toll on the environment. Because of this many companies are shifting or planning to shift to “greener” production. Such a shift may result because of the social responsibility of the company or because such a shift saves them regulatory fines, brings in money in terms of grants. Offering more environmentally conscientious services or products is also a way to attract new customers to a company.
Any company that has at least one employee has to deal with human resources concerns, although many of those small companies are much less aware of their responsibilities than are larger companies. But human resources management (which used to be called “human relations” and before that “personnel” — a shift of terms that reflects the ever-increasing responsibilities that this department has taken on) covers far more than just hiring and firing. While human resources managers are involved in the hiring and firing process, they also oversee the company’s compliance with a number of important laws.
In addition to the hiring and firing of individuals, human resources managers are also involved in working with other managers to assess the company’s mid-range and long-term employment needs. So, for example, if a company is planning to automate a number of its processes, the human resources department might design a policy offering buy-outs for long-term employees to show them their loyalty, or institute a training program to help some employees make the shift to the new kinds of jobs that the company will have.
Alternatively, if a company is planning to expand in an innovative direction, the human resources department might design an internship program to bring in high school and college students so that they could be integrated into the company’s future vision.
Human resources departments also oversee recruiting and training efforts and the implementation of laws such as the National Labor Relations Act and Labor, the Fair Labor Standards Act, the Equal Pay Act, Civil Rights Acts, and the Americans with Disabilities Act.
In Chapter Ten the authors examine the idea of motivation. Motivation is what makes people do something: It is the “the individual internal process that energizes, directs, and sustains behavior.” Motivation exists in all aspects of our lives, but not in equal measure. It is often hard for people to get motivated at work because employees do not feel sufficiently enfranchised in the organization as a whole to be motivated to do anything but the most minimal effort.
The chapter summarizes a number of theories and models of motivation, many of which are no longer central to business models. These include Herzberg’s Motivation — Hygiene Theory, which posits that satisfaction and dissatisfaction lie along different vectors; and Theory X and Theory Y, the former of which is the model that people are naturally lazy and try to avoid work as much as possible, and the latter of which posits that people are not naturally inclined to be shirkers but that they will respond with reduced motivation in a toxic work environment.
Among the contemporary theories on motivation is the idea that employees who are empowered are more likely to be positively motivated, that when good behavior is noted and reinforced motivation will increase, and that clearly articulated goals and policies will also help motivate employees because in such an environment they will believe that they are more likely to be treated fairly.
The chapter ends with a discussion of teams and the ways in which they can be highly productive if the inevitable conflict can be contained.
Chapter Eleven describes the development of unions in the United States. Unions can be seen as a counterbalance to the power that companies and managers have: The fact that unions provide “collective rights” refers to the fact that the power of unions is not what each individual has but the power that they have when they join together in support of each other. Unions arose historically during the period of time when companies were untrammeled in their power and governments let companies treat workers with inhumane abandon.
The fact that there are fewer unionized workers today speaks far less to the usefulness of unions and far more to the ways in which they have already been successful in changing the ways in which all workers are treated. The largest area of union growth today is in the service industries. This is not surprising since historically unions have gotten larger and stronger wherever workers are badly treated, an aspect of service work that is all too common today.
Some companies have attempted management-union cooperation, but such agreements tend to benefit management more than labor.
The final sections of the chapter describe how labor unions organize companies and whole industries. Nearly all American workers have the right to unionize, and a number of federal and state laws protect union organizers and members.
Chapter Twelve takes on the next step of the business process: The customers. No matter how good the service or product that a company offers, it will fail if it cannot attract enough customers. Marketing is the overall process of selling the company’s good. The authors define “relationship marketing” as “marketing decisions and activities focused on achieving long-term, satisfying relationships with customers.”
Especially for small businesses, success depends on return business. Unlike the street vendor who sells someone a fake Rolex and then disappears, a successful business cultivates a relationship based on respect and trust. This kind of relationship deepens over years, with trust building loyalty in an endless cycle. Marketing done badly will feel like exploitation to the customer and is unlikely to induce respect; marketing when it is well done is attentive to the customer’s needs, and uses feedback from the customer to make changes in the products or services.
The marketing of a product has several phases. The first phase is the introductory phase: when “customer awareness and acceptance of the product are low.” During the growth phase, if the company has a successful product sales increase. While this is good for the company, this phase is generally also one in which competition becomes more of an issues as other companies “have probably begun to market competing products.” Competition drives down prices (almost always). Both company and industry profits tend to decline at this point of the process. As the needs of the market shift, “the originating firm offers modified versions of its product and expands its distribution.” This introduces a new product into the pipeline.
There are a number of different types of products, such as products sold to other businesses as opposed to those for individuals. There are also a range of products for the public, from convenience products to specialty products. Business success arises from matching customers with particular needs with whatever fulfills those needs.
The chapter examines the idea of both products and brands and looks at the product lifecycle. A product line is a “group of similar products that differ only in relatively minor characteristics.” These differences can arise in terms of production, marketing, or use. (The text gives the example of Procter & Gamble’s line of shampoos.) New products can be introduced into a product line as a way of combining innovation and familiarity. A business’s ‘product mix’ comprises every product or service that the company sells.
A product mix is defined by its “width,” which is the number of product lines and its depth, which covers the variety. A number of issues must be considered for each product, including price and how well it fits into the company’s overall “brand.”
Products and product lines must be constantly managed to reflect changes in needs and preferences of consumers as well as new technologies and raw materials. And just as new products are constantly being added, products that have begun to sell less well can be dropped, although dropping an established product may well reduce customer loyalty.
An essential aspect of every business is that it can efficiently and effectively get its products to market. This process is called distribution and is almost always made up of several steps. A “channel of distribution” (also known as a marketing channel) is series of “marketing organizations” directing “a product from the producer to the ultimate user.” This is a key fact: Every distribution channel starts with the producer and ends with the consumer.
The chapter outlines the various types of marketing organizations. A marketing mechanism that connects a producer to a user within a single marketing channel is called “a middleman or marketing intermediary.” In general, the intermediary is “concerned with the transfer of ownership of products.” A merchant actually holds the title of products and then sells them.
The other key concept in this chapter is that of the wholesaler, which is an intermediary that sells products to “retailers, industrial users, or other wholesalers” Wholesalers are essential to producers who have numerous retailers to deal with. A producer would have to waste to many resources (including time as well as the costs associated with shipping) if she had to do all of the work of the wholesalers in terms of getting her product out to everyone of the retailers that carries her product.
This chapter considers marketing and promotional activities, including which are effective and which are ethical. The chapter asks whether promotional practices that we run into every day are deceptive, which many critics believe them to be, and if they promote other harmful social behaviors such as encouraging consumer consumption beyond the level which the planet can bear and individuals can afford.
The chapter also covers a number of different advertising forms. These include “newspapers, magazines, direct mail, , television, radio, the Internet, and social media.” Newspapers have the advantage of being relatively cheap but have poor reproduction quality and a limited geographically. Newspapers are also losing circulation and they have a short duration. Magazines are better printed and have a larger geographic circulation, and have a longer lifespan, but are more expensive.
Direct mail can be precisely targeted, but tends to be tossed in the recycling right away, and its effectiveness is limited because of this. Television remains the largest locus for advertising dollars, but commercial placement is less targeted because a number of different types of viewers watch every show. Web and other forms of virtual advertising promise to be the next important frontier in terms of promotion, but the field is changing too rapidly now for any one format or approach to have triumphed.
This chapter examines some of the information needs of the modern business. One key to success business is the fact that the more accurate information is available to less risk there is in acting. The most important ways in which individuals in all fields gain information today is through various computer applications. This means that businesses rely heavily on IT departments. IT departments “distribute timely and useful information from both internal and external sources to the decision makers” of a company.
The size and complexity of IT operations depends on the size and type of the company. Overall, company computer systems must perform five functions: “Collecting data, storing data, updating data, process-ing data into information, and presenting information.”
Finally, the chapter summarizes e-commerce, which the authors describe as “the organized effort of individuals to produce and sell, for a profit, the goods and services that satisfy society’s needs through the facilities available on the Internet.” While there are a number of dynamics and needs that are common to all businesses, there are especially targeted needs that e-commerce requires. Because of these special needs, a number of some of the more technical needs.
This chapter provides a basic glimpse into accounting processes. Accurate and ethical accounting is fundamental necessity of good business practice — and something that the recent business and bank failures have reminded us of.
All accounting is based on the equation: “Assets ? liabilities ? owners’ equity.” What is known as “double-entry bookkeeping” helps managers understand the exact relationship between out-going and in-coming amounts. Accounting allows a company to know how it is doing.
Accounting includes five steps. First, “source documents” are analyzed. These can include receipts, cash register tapes, invoices, etc. Second, each of these transaction is written down in a centralized place. This allows the accountant and other company officials to assess how the business is doing at any given time. Third, each separate entry is posted in the official general ledger. This may not seem to be an important step, but keeping “one set of books” means that every transaction is being recorded honestly and that the businesses is not trying to cheat anyone. Fourth, the accountant does an initial calculation and then another one to check the arithmetic. Finally, the books for that business period are signed off, and an honest account has been made.
The banking system affects everyone, not just businesses, but it affects businesses too, of course. This has been especially clear in the last several years. The authors note: “Now that the nation’s economy shows signs of improvement, there is a movement in Washington to reform the banking and financial industry and increase government regulation.”
There are different types of banks. A commercial bank is “a profit-making organization that accepts deposits, makes loans, and provides related services to customers.” It is what most of us probably mean when we use the term “bank.” Money put into a commercial bank is safe because they are backed by state and federal governments. Also common are savings and loan associations and credit unions. These are also what people refer to as “banks” although they are generally smaller, offering fewer services but more personal service.
Other kinds of institutions also serve as repositories of money: These include pension funds, 401Ks, insurance companies. While many of the services that people go to banks for are very traditional ones — “checking accounts, savings accounts, short- and long-term loans, and credit-card and debit-card transactionsfinancial advice, payroll services, certified checks, trust services, and safe-deposit boxes — they also offer many virtual services as well.
Financial planning is essential for the long-term success of any business. There is no single correct way to design a financial plan because each financial plan is rooted in the goals of a specific organization. There is, however, a general process by which financial planning is effected. After the initial rough sketch has been accomplished, the goals are translated “into departmental budgets that detail expected income and expenses.” The next step is an assessment of how these different departmental budgets can be combined, prioritized, and reassessed.
This step will also include a plan as to where money for each budget item will be obtained: From government loans, for example, or selling stock, or venture capitalists?
Financial planning is keyed to the long-term rather than the financial short-term. This is not to say that financial planning is better than short-term planning, for both are needed to run a successful business. A capital budget, or a long-term financial plan can be “used to estimate a firm’s expenditures for major assets and its long-term financing needs.”
There are four different types of monies that a business can count on, and these must all be considered in long-term financing: “sales revenues, equity capital, debt capital, and proceeds from the sale of assets.”
In general, businesses as well as individuals like to reduce risk because, well because this is how humans respond to risk. However, sometimes engaging in risky behaviors is worth it because risk tends to increase with potential profit. A number of business decisions are really gambles, entailing a high level of risk but having the potential for a high return. They are the equivalent of betting everything on the worst horse in the race. Generally, that’s a bad idea. But just sometimes it pays off. As the authors write: “High-risk investment techniques can provide greater returns, but they also entail greater risk of loss.”
There are some mechanisms that reduce risk, such as government agencies like the Securities and Exchange Commission, which is tasked with ensuring that companies do not manipulate their books or in other ways lie to their investors. While stock purchases have no guarantee in the way that bank accounts do, it is far less risky to invest when the company is not lying to people.
The other way to decrease risk is to increase knowledge, as the authors summarize: “Today, there is a wealth of information on stocks, bonds, and other securities and the firms that issue them. There is also a wealth of investment information on other types of investments, including mutual funds, real estate, and high-risk investment alternatives.”