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History 01/11/2016 Management 101 – Introduction to Business What is Business? The activities connected with the production, movement, acquisition, and exchange of goods and services in a market for a profit An Organization that provides goods or services to earn profits The Mother of All Misrepresented Quotes Henry Ford’s “History is bunk.” So Does History Matter? History is inescapable All people and peoples are living histories Understanding the linkages between past and present is basic for a good understanding of the condition of being human This includes the history of business and business activity Major Developments th st Establishing the foundation for 20 and 21 century America, we can identify these major developments: o Industrialization o Urbanization o Immigration Business History in the U.S. The Colonial Era Approx. 1607 – 1800 o Main Focus: Discovery, expansion, power, independence, industrialization, rural to urban shift The Colonial Era The 16 century was the age of mercantilism, an extremely competitive economic philosophy that pushed European nations to acquire as many colonies as they could. As a result, for the most part, the English colonies in North America were business ventures. 1606, King James I divided the Atlantic seaboard in two, giving the southern hald to the London Company (later the Virginia Company) and the northern half of the Plymouth Company. Both were business ventures. The Protestant Ethic (aka the Protestant Work Ethic, the Puritan Ethic, and the Puritan Work Ethic.) The protestant Ethic urges: o Hard work o Perseverance o Self-control & sobriety o Self-reliance o Saving & planning ahead o Honesty & “observing the rules of the game” Industrial Revolution The term originally referred to the developments that transformed Great Britain between 1750 and 1830, from a largely rural population making a living almost entirely from agriculture to a town-centered society engaged increasingly in factory manufacture. Machines that would do the job of humans The Military Industrial Complex As an aside: o The concept of the Military Industrial Complex o The term was coined by Dwight D. Eisenhower in his presidential “farewell speech” in 1961. o It refers to the relationship between government and the money it spends on maintaining the equipping a standing military This includes the money spent on the Department of Defense together with the contracts given to companies in the defense industry and monies spent in defense industries-related areas This spending represents a significant input to the economy as a whole and has a trickle down effect in to areas that are not defense related. Spending on military build-up – for example, prior to armed conflict – can act as a significant boost to the economy. Business History in the U.S. The Entrepreneurial Era: Mid-1800s to about 1900 o Main focus: increasing industrialization, expansion (the move west) Entrepreneurs John Deere – agricultural Equiptment John D. Rockefeller – oil Thomas Edison, Henry Ford, and Harvey Firestone – 1896 The Production Era early to mid-1900s o Main focus: reducing costs, improving productivity, and manufacturing efficiency The Marketing Era Mid- to late 1900s o Main focus: increasing revenues, increased competition 2000 onward: o A shift in focus from manufacturing to services o Major shift in technology Politics The art or science of government or governing, especially of a political entity, such as a nation, and the administration and control of its internal and external affairs. The activities or affairs engaged in by a government, politician, or political party. Political Systems It is a continuum based on the ownership of property: o Capitalism – Socialism – Communism Capitalism A system of social organization where individuals have the right to own property Believes in individuals ownership and competition o What’s Good about Capitalism? Freedom, choice. You can work wherever, buy whatever, and pretty mush do whatever. If you’re successful, you can be VERY successful. o What’s Bad about Capitalism? No “safety net.” If you’re unsuccessful, you can be VERY unsuccessful. Think about the poor. Big gap between rich and poor. Socialism A system of social organization where major resources are held in common Features government ownership and administration of significant portions of the means of production and distribution of goods A system of society or group living in which there is less emphasis on private property o What’s Good about Socialism? Everyone has a share of the benefits (e.g. everyone has access to healthcare and education) Those who cannot contribute may still participate (disabled, elderly) A more equal distribution of wealth Fewer socioeconomic classes o What’s Bad about Socialism? Higher taxes Less incentive to work harder Less competition means reduced reward to be innovative Communism A system of social organization where all property is held in common; i.e. with ownership being ascribed to every individual in the community The theory is that everybody pools their resources and labor to evenly/equally distribute everything o What’s Good about Communism? Security, basic needs met Everyone would have a job, house, health care, etc. o What’s Bad about Communism? Lack of choice Everyone expected to be the same Little to no reward or incentive for being a better worker Little to no disincentive or punishment for being a slacker Economics The social science that deals with the production, distribution, and consumption of goods and services and with the theory and management of economies or economic systems Human wants may be unlimited; resources are not Economics and/or Economic Systems The way a nation makes economic choices about how the resources will be used to produce and distribute goods and services Standards used to Distinguish Economic Systems Who owns the resources? What decisions-making process is used to allocate resources and products? What types of incentives guide economic decision makers? Characteristics of an Economic System What determines what (and how much) is produced? What determines how it is produced? What determines how the economy’s output is divided among its people? What determines the rate of growth the economy is expected to achieve? Economic System Mechanism, on a continuum between “market” and “planned (or “command”), that allocates resources, goods, and services to people within that system. Market Economy Decisions on allocation are made by individuals in response to supply and demand. In a market economy, prices act as signals of scarcity. When the price of something is high, that means its more scarce. Demand for it is high relative to supply. Mixed Economy A combination of planned/command and market economies in which some industries are privately owned and other are publicly owned or nationalized Many capitalist political systems have mixed economies o In a Mixed Economy… People can create their own businesses and make a profit All businesses pay taxes, which benefit everyone Government subsidizes such things as… Postal Service Rail Lines Libraries Health Care Social Programs Roads Infrastructure (bridges, freeways, etc.) Planned/Command Economies All resources are collectively owned and directed by the government which decides what and how much to produce Economic decisions are often made to further the goals of the government In a command economy, production costs (how much it costs to make an item), are not necessarily reflected in the price of the item. o For example, it might cost $2 to produce a loaf of bread, but the price might be set at $1 in order to ensure that customers are able to afford adequate food. Microeconomics The study of individual units within an economy (industries, firms, specific products, etc.) Macroeconomics The study of a nation's economy as a whole Measuring Economic Activity Gross Domestic Product (GDP) o The value of all goods and services produced within a country, regardless of the nationality of the company producing them Gross National Product (GNP) o The value of goods and services produced by the companies of a country regardless of where in the world those companies are operating Ways of Reporting GDP & GNP Both are generally given in $US and may be expressed in terms of absolute (total value) or per capita (literally, per head; total value divided by the number of people in the country’s population) They may also be shown as Real GDP/GNP, (adjusted for inflation), or as Nominal (unadjusted) figures. Inflation Inflation means increases in prices over time or a decline in the value or purchasing power of money. There are TWO main causes: o Cost push - the cost of raw materials and wages increase, and the cots are passed on to consumers o Demand pull - there is more demand for a product than there is supply, and supplies are able to raise prices for extra profit Measuring Economic Activity Also called the Cost of Living Index Consumer Price Index (CPI) measures change in the cost of typical wage-earner purchases of goods and services expressed as a percentage of those same goods and services in some prior period. A key government indicator for measuring the rate of inflation o Cost of living index = CPI What makes up CPI? o Housing(40.5%) o Food and Beverage (16.4%) o Apparel (4.2%) o Transportation (16.6%) o Medical care (6%) o Recreation (5.9%) o Education & Communication (5.4) o Other (5%) Standard of Living Not to be confused with Cost of Living, even though they are connected Standard of Living is the measure of the prosperity and quality of life of a country. In general, the higher the Standard of Living in a country, the better the life of its citizen The Business Cycle (Economic Cycle) The periodic but irregular up-and-down movement in economic activity, measured by fluctuations in real GDP and macroeconomic variables. A complete cycle typically lasts from three to five years, but could last ten years or more. It is divided into four phases of economic activity usually consisting of: o Recession o Recovery o Growth o Decline Unemployment inevitably rises during contractions and inflation tends to worsen during expansion To avoid the inflation and unemployment problems of business cycles, the federal government frequently undertakes various fiscal and monetary policies The Economy Consumers o Provide labor and capital (investment) to businesses o Purchase goods and services from businesses, providing revenues o Pay taxes to government o Receive services from government Businesses o Provide jobs, wages, and other income o Produce goods and services for customers o Pay taxes o Receive some government services Government o Collect taxes from individuals and businesses o Provide services to individuals and businesses o Set “The Rules” The U.S. Federal Budget Where does the Government Get its Money? o Individual income taxes 48% o Social Security & Payroll taxes 34% o Corporate Taxes 10% o Excise Taxes 4% o Other Sources 4% Where Does that Money Go? o Social Security 21.7% o National Defense 17.4% o Income Security 14.1% o Medicare 11.3% o Health 10.8% o Net Interest 7.7% o Education & Social Services 3.7% o Transport 2.8% o Veterans Benefits 2.7% o Other 7.9% Factors of Production Land/Natural Resources Labor Capital Entrepreneurship o The factors of production are blended together to produce goods and services for sale and for consumption Role of Profits Reward for Risk Taking o Most business owners have many ways to invest their money at various levels of risk. Without the possibility of profit, most business owners would not be prepared to compete for their survival. Feedback Mechanism that Allocates Resources o Goods that generate a profit will continue to be produced and sold. o Unprofitable goods will be discontinued and discarded. o Businesses are responsive to consumer demand, and they allocate most of their resources to the goods that are the greatest demand. Saving to Cover Bad Times o Business people must save money during good times to survive business down-turns. o Sometimes businesses must produce a profit before they can save. Reinvestment to Provide for Growth o A firm’s ability to innovate and grow often requires holding back profits and investing that money in new equipment and buildings to help the business grow. Revenues, Costs, and Profits Revenues o Revenues are the amounts that a business earns from selling goods and providing services to its customers o They are NOT the same as profit Cost o The money a business must spend to produce goods and services o The total expenditures made by the business to run the operation **We distinguish between fixed costs and variable costs** Fixed Costs Rent, advertising, insurance, and office supplies Things which tend to remain the same regardless of production output Variable Costs Those costs that vary depending on a company’s production volume; they rise as production increases and fall as production decreases Can include direct material costs or direct labor costs necessary to complete a certain project Total Cost Consists of variable costs and fixed costs Economies of Scale A simple concept that can be demonstrated through an example o Example: Assume you are a small business owner and are considering printing a market brochure. The printer quotes price of $5,000 for 500 brochures, and $10,000 for 2,500 copies While 500 brochures will cost $10 per brochure, 2,500 will only cost you $4 per brochure This cost advantage arises because the printer has the same initial set-up cost regardless of whether the number of brochures printed is 500 or 2,5000 Once these costs are covered, there is only a marginal extra cost for printing each individual brochure. Learning Curve Effects The more times a task has been performed, the less time is required on each subsequent iteration. The Environment of the Firm Economic Factors Technical Factors Cost of Capital Processes Capital Equipment New Products US Economy Pollution Foreign Economies Capital Equipment Political Factors Social/Cultural Factors Business/Govt. Relations Work Ethic Foreign Relations Consumerism Legislation Social Change Factors in the Environment of the Firm These provide the business with OPPORTUNITIES for new sales and/or improving profits, or they generate THREATS that can reduce sales and profits. Types of Competition Pg 70 in Textbook Characteristics Pure Monopolisti Oligopoly Monopoly Competitio c n Competition Number of Many Few to many Few No direct Competitors competition Ease of entry Easy Somewhat Difficult Regulated by into industry by difficult government new firms Similarity of Similar Different Similar or No directly goods or services different competing offered by products competing firms Control over Non Some Some Considerable in price by a pure individual firms monopoly; little in a regulated monopoly Examples Small-scale Local fitness- Boeing Rawlings farmer in center aircraft Sporting Goods, Indiana exclusive supplied of major-league baseballs What is international business? It consists of transactions that are devised and carried out across national borders to satisfy the objectives of individuals, companies, and organizations. Globalization Economies, markets and people in different countries are becoming more interconnected everyday Globalization has the potential of raising the standard of living, but can also challenge long-held cultural values about the role of business in society Because of globalization, for the first time in history, the availability of international goods and services can be accessed by many individuals in many countries, and from diverse economic backgrounds Factors in Increase Globalization Increase in and expansion of technology Liberalization of cross-border trade and resource movement Development of services that support international business Growing consumer pressures Increased global competition Changing political situations Expanded cross-national cooperation Multinational Enterprises (MNEs) AKA Multination Corporations (MNCs) MNEs/MNCs are firms that operate in an integrated fashion in a number of countries They buy and sell goods across national borders and make direct investments in fully integrated operations in other countries They are involved in the traditional aspects of international commerce (sourcing inputs and selling goods & much more) Comparative & Absolute Advantage Comparative Advantage o One of the oldest theories in economics, usually ascribed to David Ricardo (1772-1823) o The theory underpins the economic case for free trade but it often misunderstood or misrepresented by opponents of free trade o Comparative Advantage states that a country should produce and sell to other countries those goods or products which it produces most efficiently and buy from other countries those things that they produce more efficiently Absolute Advantage o When a country can produce the same amount of output with less input relative to other countries EXAMPLE: o Two countries: US & Egypt Both produce two crops: Wheat & Cotton Assume that in the US the acreage for wheat is the same as the acreage for cotton and it is the same in Egypt With No Trade Wheat Cotton Total US $100 $80 180m Egypt $40 $60 100m Combined rev: $280 This indicates that the US is more efficient at producing wheat than cotton and Egypt is more efficient at producing cotton than wheat Reasons for Going International Proactive Motivations Reactive Motivations Profit Advantage Competitive pressure Unique products Overproduction Technological Advantage Declining domestic sales Exclusive information Excess capacity Tax benefit Saturated domestic markets Economies of scale Proximity to customers & ports Opportunity for Revenue Growth o There may be market saturation at home and/or potential for additional sale in foreign markets Can Compete More Effectively Abroad o Reduced consumer resistance and/or Government regulations Greater Control of Resources Abroad o Typically for extractive or agricultural activities Forestall Foreign Competition o Attack foreign competitors in their home markets Portfolio Balancing o Balancing activities across mature and growth markets Financial Imperfections o Cheaper loans, government grants, exchange rate opportunities International Entry Strategies Importing/Exporting Licensing Franchising Inter-firm cooperation Foreign Direct Investment (FDI) Licensing Under a licensing agreement, one firm permits another to use its intellectual property for compensation designated as royalty. The property licensed may include: o Patents o Trademarks o Copyrights o Technology o Technical know-how o Specific business skills Benefits: o It requires neither capital investment nor detailed involvement with foreign customers o It capitalizes on research and development already conducted o It helps avoid host country regulations applicable to equity ventures Cons: o Franchising Franchising is the granted of the right by a parent company to another independent entity to do business in a prescribed manner Inter-firm Cooperation Main Types o Strategic Alliances: An arrangement between two or more companies with a common business objective while remaining independent organizations Strategic alliances may be with suppliers, customers, competitors, and companies in other industries to achieve goals o Joint Ventures: Involves the participation of two or more companies in an enterprise in which each party contributes assets, has come equity, and shares risk It can include a controlling ownership in a business enterprise in one country by an entity based in another country Exchange Rates The price of one nations currency in terms of another nations currency Usually specified as the amount of one currency that can be traded per unit of another This is often called the foreign exchange rate in that it is the price determined in the foreign exchange market when people buy and sell foreign exchange (i.e. supply & demand) Hard and Soft Currencies Hard currencies o Historically, money that is in the form of precious metals, especially gold. o In modern times, any national currency that is expected to retain its value (and even appreciate in value), and is readily acceptable for most international transactions o U.S. dollar, the British pound, and the Euro tend to be near the top of the list of hard currencies (aka hard money) Soft currencies o Those currencies which are regarded as volatile and not expected ti retain their value and for which there is consequently little demand on the currency markets Example: the Nigerian naira Strong and Weak Currencies The terms strong, weak, strengthening, and weakening can be used to refer to any currency o Example: if the US dollar has fallen in value compared to the other country, it means the US dollar buys less of the other currency It also means that the other currency can buy more dollars Dealing with Other Cultures Value & Attitudes o Toward: Time Achievement Work Wealth Change Language o Spoken Language o Written Language o Official Language o Language hierarchy o Linguistic pluralism Social Organization o Kinship o Authority structures o Stratification o Interest groups o Social mobility Religion o belief & norms o rituals o sacred objects o prayer o holidays Education o System: Primary Secondary Higher o Literacy Level o Who has access? Technology & Material Culture o Energy system o Transportation o Communication o Urbanization o Level of technology & science Politics o Ideologies o Nationalism o Sovereignty o Imperialism o Political risk Law o Common/code law o Regulation o Antitrust policy o Toward foreigners o Penalties o Employment Economic Environment o Developed/developing company? o Newly industrialized country? o Protection vs. Free trade o International trade agreement o Trading blocs o Ethics Social Responsibility Belief about right & wrong The obligation of business to contribute to society A close relationship, but not the same. Ethics and the Law Law often represents an ethical minimum Ethics often represents a standard that exceeds the legal minimum There is often some overlap between the two Business Ethics The public’s interest in business ethics has increased during the last four decades It is largely spurred by the media Why it’s important? o Understanding business ethics and social responsibility makes you informed of your rights as a consumer, an employee, and a citizen. Rules or standards governing the conduct of a business Moral code – what is ‘right’ and what is ‘wrong’? Highly subjective nature There may be tension between different stakeholders/stakeholder groups Two Key Branches of Ethics Descriptive ethics – involves describing, characterizing and studying morality o – “What is” Normative ethics – involves supplying and justifying moral systems o “What should be” Four Important Ethical Questions What is? What ought to be? How do we get from what is to what ought to be? What is our motivation for acting ethically? Stakeholders Local Community – provide employment, safe working environment, minimize pollution and negative externalities – provide external benefits? Government – abide by the law, pay taxes, abide by regulations Management – their aims versus those of the organization as a whole Environment – limit pollution, congestion, environmental degradation, development, etc. Responsibilities to Stakeholder Groups Shareholders – generate profits and pay dividends Customers – provide good quality products at reasonable prices. Safety, honesty, decency and truthfulness Employees – health and safety at work, security, fair pay Suppliers – pay on time, pay fair rates for the work done, provide elements of security Tension Profits versus higher wages Expansion versus development Production versus pollution Supplier benefits versus consumer prices/lower costs Survival of the business versus needs of stakeholders Ethical Dilemmas it is important to consider outcomes of the decision-making process. One way of dealing with ethical dilemmas is by using the four way test to evaluate decisions. This test involves askng four questions o Is my decision a truthful one? o Is my decision fair to everyone affected? o Will it build goodwill for the organization? o Is the decision beneficial to the parties who have vested interest in the outcome? 7 Principles of Admirable Business Ethics 1. Be trustful 2. Keep an open mind 3. Meet obligations 4. Have clear documents 5. Become community involved 6. Maintain accounting control 7. Be respectful 3 Models of Management Ethics Immoral Management o – a style devoid of ethical priniciples and active opposition to what is ethical Moral Management o – Conforms to high standard of ethical behavior Amoral Management o – Intentional – does not consider ethical factors o – unintentional – casual or careless about ethical considerations in business External Sources of a Manager’s Values Religious values Philosophical values Cultural values Legal values Professional values Internal Sources of a Manager’s Values Respectful for the authority structure Loyalty Conformity Performance Results Are you Ethical? is it stealing ever OK? Is it OK to take paper or other office supplies from work? Is making long-distance calls at work unethical? Is it OK to surf the web at work? Would you snitch on a co-worker? Corporate Social Responsibility (CSR) The process by which businesses negotiate their role in society In the business world, ethics is the study of morally appropriate behaviors and decisions, examining that “should be done” Although the two are linked in most firms, CSR activities are not guarantee of ethical behavior Definitions of CSR Requires managers to consider their acts in terms of a whole social system, and be responsible for the effects of those acts anywhere in that system CSR mandates that the corporation has not only economic and legal obligations, but also certain responsibilities to society that extend beyond these obligations Reasons for CSR Activities CSR activities are important to and even expected by the public o And they are easily monitored worldwide CSR activities help organizations hire and retain the people they want CSR activities contribute to business performance Reasons for Unethical Behavior Reason Percen t Power 4% Money 73% Advancement 40% Recognition 38% Take it out on someone 13% [Total > 100% because of multiple answers] Role Conflict Role conflict occurs when a person finds themselves torn between two roles with which they identify, but each role has conflicting requirements. People will act out what they believe is expected of them, despite conflicting with their values, principles, and ethics Business Organizations There are four basic types of business organization: Government Department o E.g: Federal – department of energy Non-Profit o E.g.: Charities – United Way Not-for-Profit o E.g.: Research institutions – Battelle For-Profit o E.g.: Companies – Microsoft, Nike The fundamentals of business apply to all – setting goals, For-Profit Business Ownership Sole Proprietorship o A business owned by a single owner o Sole proprietor: the owner of a sole proprietorship Characteristics of successful sole proprietors o Willing to accept full responsibilities o Willing to work flexible hours o Experience Advantages of a Sole Proprietorship All earnings go to the sole proprietor Easy organization Complete control Lower taxes Leaving a legacy Disadvantages of a Sole Proprietorship Sole proprietor incurs all losses Unlimited liability: no limit on the debts for which the owner is liable Limited funds Limited skills Few fringe benefits Types of Business Ownerships Partnership A business that is co-owned by two or more people Partners: co-owners of a business Two types: o General Partnership: one in which all parties have unlimited liability. General partners manage the business, receive a salary, share the profits or losses of the business. o Limited Partnership: a firm that has some limited partners whose liability is limited to the cash or property they contributed to the partnership Partnership Advantages Disadvantages Additional funding Control is shared Losses are shared Unlimited liability More specialization Profits are shared Disagreements among partners Limited Liability Company (LLC) A firm that has all the favorable features of a typical general partnership but also offers limited liability for the partners. Corporation A state-chartered entity that pays taxes and is legally distinct from its owners Charter: o A document used to incorporate a business. The charter describes important aspects of the corporation. Bylaws: o General guidelines for managing a firm Who can incorporate? Anyone. Normally stock is not issued to outsiders when individuals incorporate, so the advantages and disadvantages are not exactly the same as for large corporations S Corporation A unique government creation that looks like a corporation, but is taxed like sole proprietorship and partnerships Startup funding 565,000 are launching each month in the US There top sources of funding are: o Personal savings and credit 57% o Friends and family 38% o Banks 1.43% o Angel Investors .91% o Venture Capital .05% Crowdfunding is also a new source of capital Corporations Private vs Public Corporations o Privately held: Ownership is restricted to a small group of investors o Publicly held: Shares can be easily purchased or sold by investors o Going public: The act of initially issuing stock to the public (IPOs) Publically Owned (or Quoted) Corporations Once a firm goes public, its stock price changes over time in response to demand for that stock investors The price is publicly displayed by the stock exchange and can be found on financial news websites and in come newspapers. Owned by stockholders/shareholders to earn a return o May receive dividends from the firm o Stock may increase in value Corporations Advantages Disadvantages Limited liability High organizational expense Access to funds Transfer of ownership Financial disclosure Agency problems: when managers do not act as responsible agents for the shareholders who own the business High taxes: Capital Gain: the price received from the sale of stock minus the price paid for the stock
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