1 BUSINESS Ferrell Hirt Ferrell A CHANGING WORLD part EIGHTH EDITION FHF McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

1 Business in a Changing World part In this first chapter we will examine the basic concepts of business, product and profit. We will identify the main participants and activities of business and explain why studying business is important. We will consider the four types of economic systems, and describe the role of supply, demand, and competition in the free enterprise system. Finally, we will explore the various ways that economists gauge the health of an economy. CHAPTER 1 The Dynamics of Business and Economics CHAPTER 2 Business Ethics and Social Responsibility CHAPTER 3 Business in a Borderless World FHF

What is a business? The Nature of Business Individuals or organizations trying to earn a profit by providing products that satisfy people's needs. https://www.youtube.com/watch?v=ygux2dyx_Mc FHF 1-3

What is a product? The Nature of Business A good or service with tangible and intangible characteristics that provide satisfaction and benefits. Most people, when they think of products, think of tangible goods. Products can be goods or services, which are intangible. FHF 1-4

Products: Tangible Goods & Services Loaf of bread Television Automobile Computer Services Dry cleaning Photo processing Checkup at doctor’s Musical concert FHF 1-5

The Primary Goal of Business Earn a profit The difference between what it costs to make and sell a product and what a customer pays for it. No matter how interested in social responsibility or environmentalism a business is, the primary goal of business is to make a profit. Without a profit, the business will not survive and will not be able to do any good for anyone. FHF 1-6

[ ] Profit Is: The difference between what it costs to make and sell a product and what a customer pays for it FHF 1-7

Non-Profit Organizations Not all organizations are for-profit businesses Nonprofit organizations Provide goods and services but Do not have the fundamental purpose of earning profits Founded by Bill Daniels, a pioneer in cable television Provides grants and scholarships to students, educational institutions and businesses in the Rockies region The Daniels Fund is a nonprofit that is dedicated to serving businesses, educational institutions and individuals primarily in Colorado, New Mexico, Utah and Wyoming. Although it was a nonprofit, the funding came from Bill Daniels, who became wealthy in the cable television and telecommunications industries. The profits from his businesses now help provide scholarships and other funding to students and businesses. FHF 1-8

Stakeholders [ ] Customers, employees, investors, government regulators, community and society. Those that have a stake in the success and outcomes of a business are considered stakeholders FHF 1-9

The People and Activities of Business FHF 1-10

The Activities of Business Management – Focus on employees Motivating employees toward business goals Coordinating employee’s actions Organizing people for efficiency FHF 1-11

Management: Production and Manufacturing Another element of management Plan activities Organize staff Control tasks of the organization Production and manufacturing is another area in which managers must be involved. Managers plan activities, organize staff and control the tasks required to carry out the organization’s work. FHF 1-12

Marketing Focus on satisfying customers Determine what products customers want Plan and develop products Determine: Distribution Place Promotion Price Marketing is more than just advertising. It involves all the activities required to develop and produce goods and services that satisfy consumers. Marketers conduct research, plan and develop products, and develop a marketing strategy and marketing mix for the products. FHF 1-13

Axe Target market is young men looking for a date Uses multimedia promotional approach YouTube Facebook Twitter Viral Marketing To promote the fragrance, Axe Music, Unilever staged concerts around the country featuring major music acts Click on the title hyperlink to access the brand’s website. Click on Axe Music to access a New York Times article about Axe’s promotional efforts. FHF 1-14

Finance Finance is the primary responsibility of owners Obtaining money Using money effectively Accountants, stockbrokers, bankers FHF 1-15

Why Study Business? Develop skills for career success Understand business activities Learn the importance of profitability Individual businesses Local and regional impact Global economic impact No matter where students’ careers lead them, a solid knowledge of business is helpful. Even in the nonprofit sector, many of the same concerns (such as marketing and accounting) play a role. FHF 1-16

Business Impact Purchase raw materials Hire employees Attract capital Create products Fuel the global economy Contribute to society Businesses can have positive impacts on local and global economies. They create jobs and stimulate the economy; they also provide the goods and services people and organizations need. FHF 1-17

The Economic Foundations of Business Economics Distribution of resources for the production of goods and services within a social system Resources (sometimes called factors of production) Natural resources (land, forests, minerals, water) Human resources (labor) Financial resources (capital) Intangible (good reputation, quality products) There are many different kinds of resources that are essential to different businesses. Resources are called factors of production because they are what is needed to produce goods and services. Intangible resources are not factors of production, but they can help in building a successful business. Intangible resources might be the goodwill stakeholders have toward an ethical company, or a positive reputation for producing quality products. FHF 1-18

Economic Systems How a society distributes its resources to produce goods and services Central issue of economics How to fulfill an unlimited demand for goods and services with a limited supply of resources The world has many different permutations of economic systems, as each society seeks to determine the best fit for them. FHF 1-19

Economic Systems Three Important Questions: What types and quantities of goods/services will satisfy consumer needs? How will goods/services be produced? By whom? With what resources? How are goods/services distributed to consumers? All economic systems, no matter how they handle the distribution of resources, are concerned with 3 central questions. FHF 1-20

Comparison of Communism, Socialism, and Capitalism FHF 1-21

Communism A society in which the people, without regard to class, own all the nation’s resources. China North Korea Cuba In Marxian Communism, everyone contributes what he/she is able and receives benefits according to need. In reality, Communist countries often struggle with shortages of basic goods, high prices, and low standards of living with little political freedom.. FHF 1-22

Socialism System in which the government owns and operates basic industries but individuals own most businesses. Sweden Israel India Central planning determines the amount of basic goods to be produced and how they are distributed. Small businesses and individuals produce other goods and services based on quantity demanded and availability of resources. FHF 1-23

Capitalism Free Enterprise Individuals own and operate majority of businesses providing goods and services Competition and the forces of supply and demand determine which goods are produced, the quantity, distribution and price. Australia Japan United States FHF 1-24

Pure Capitalism vs Modified Capitalism Free Market All economic decisions made without government intervention Modified Capitalism Government intervenes and regulates business to some extent Even the United States has a modified capitalism system FHF 1-25

Mixed Economies [ ] No economic system in its pure form is practical. Therefore, most nations have developed a mix of economic systems that suits their needs. No country practices pure capitalism, socialism, or communism. Economic systems can be mixtures and often contain various elements of government intervention FHF 1-26

The Free-Enterprise System Many large economies are free-enterprise – Even China applies free-enterprise principles Basic individual and business rights Right to own property Right to earn profits and use them as one wishes (within constraints of law) Right to make business decisions Right to choose (careers, what goods/services to purchase, etc.) Without these rights, businesses cannot function effectively because they will not be sufficiently motivated to succeed. FHF 1-27

Supply and Demand Distribution of resources and products is determined by supply and demand Demand Number of goods/services consumers buy at a given price at a specific time Supply Number of products businesses will sell at different prices at a specific time Free-enterprise systems are most concerned with the forces of supply and demand. A communist system, for example, would not be concerned with this concept because most prices are set artificially, regardless of supply. FHF 1-28

Forces of Supply & Demand Equilibrium Price = Price at which number of products supplied equal amount of products consumers are willing to buy at a specific time FHF 1-29

Nature of Competition Competition Pure Competition Rivalry among businesses for consumers’ dollars Pure Competition Many small businesses in same product market (MILK) Monopolistic Competition Small number of businesses Little difference in products, no dominator (LANDSCSAPING) Oligopoly Dominated by a small number of sellers (CELL PHONES) Competition takes different forms depending on the industry and the type of product being sold. FHF 1-30

Economic Cycles & Productivity Economic Expansion Economy is growing and consumers are spending money Economic Contraction Spending declines, layoffs, economy slows down Inflation (a continuing rise in prices) is a risk of rapid economic expansion. Recessions often characterized by rising unemployment levels– something that can make recover slower and more difficult. FHF 1-31

Overall Unemployment Rate During recessionary times, such as in 2008-2009, unemployment rates tend to go up. When the economy is growing rapidly, unemployment generally falls. Unemployment can reduce spending on consumer goods as consumers have less disposable income, which can set off a spiral of economic contraction. FHF 1-32

Economic Cycles Inflation Recession Depression Unemployment Condition characterized by continuing rise in prices Recession Decline in production, employment, and income Depression Unemployment very high; consumer spending low; business output sharply reduced Unemployment % of population that wants to work but unable to find jobs Economies expand and contract in response to numerous factors– changes in consumer, business and government spending, wars or political instability, natural disasters, etc. FHF 1-33

The 2008-2010 Recession The worst recession since the Great Depression Collapse of many financial institutions AIG Bear Stearns Washington Mutual Merrill Lynch Stock market dropped 50% Highest mortgage default rate in history Unemployment exceeded10% Personal savings rates increased Government spent $750 billion on financial institutions, and $789 billion on an economic stimulus package FHF 1-34

Evaluating the U.S. Economy This table (Table 1.3 in the text) shows some of the ways by which analysts evaluate the U.S. economy FHF 1-36

A Brief History of the U.S. Economy The early economy The Industrial Revolution The manufacturing economy The marketing economy The service economy The new digital economy Early economy: Mostly an agricultural economy Industrial Revolution: Machines and job specialization increased speed and efficiency of production Manufacturing economy: Industrialization brought it about; devoted to producing goods and services Marketing economy: Emerged as businesses became more concerned with the needs and wants of consumers Service economy: Quality of life improved in 20th century and people hired others to perform services that made their lives easier New digital economy: Advanced technology and the Internet have changed the pace of life and how we conduct business FHF 1-37

Entrepreneurship Entrepreneur: An individual who risks his/her wealth, time and effort to develop for profit an innovative product or way of doing something. Entrepreneurship requires: Risk Innovation Creativity Reward Bill Gates and Warren Buffett are highly successful entrepreneurs. Can you think of others? Why are entrepreneurs important to the economy? FHF 1-38

The Role of Government in the U.S. Economy Modified Capitalism The government regulates industry to encourage competition and protect stakeholders like consumers, employees, or the environment Laws force businesses to adhere to government standards Government agencies like the U.S. Federal Reserve Board or the Department of Commerce occasionally intervene to regulate the economy and spur growth As mentioned earlier, the U.S. does not practice a pure form of free market capitalism. Some elements (such as the financial system) are monitored and modified though regulation and intervention. FHF 1-39

Ethics & Social Responsibility in Business Business ethics refers to standards and principles used by society to define appropriate behavior at work Stakeholders increasingly demand that businesspeople behave ethically and socially responsibly Business reputation depends on profit and ethical conduct and social responsibility It is increasingly important that businesses engage in social responsibility initiatives, and that they be concerned with ethics. Ethical misconduct and the ensuing loss of sales and reputation can be a death blow to a company. FHF 1-40

Ethical Business Certifications Only natural ingredients Cradle to Cradle certified Means products are designed with materials that can be infinitely reused Every product is inspected by the Environmental Protection and Encouragement Agency Reviews ingredients for safety Offset CO2 emissions created from production and travel Being certified that a business is ethical or good for the environment can help improve reputation and sales. These organizations tend to have fewer ethical misconduct disasters and are more trusted by customers. Method Products, Inc. is a home and personal care company that takes the greatest care to be ethical and eco-friendly. Click on the logo to access the company’s homepage. FHF 1-41

Can You Learn Business in a Classroom? Yes!!! To be successful in business, you need: Knowledge Skills Experiences and Good judgment FHF 1-42