CHAPTER

OBJECTIVESOBJECTIVES

CHARACTERISTICS OF BUSINESS

Explain the general types and changing nature of businesses.

Describe how global competition has affected the way American businesses operate.

Show how businesses have grown and improved the economic well-being of people.

Discuss the role and nature of entrepreneurship and the opportunities, problems, and obligations of small businesses.

Summarize the value of plans that allow employees to function like entrepreneurs inside businesses.

Explain the importance of studying business principles and management.

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NATURE OF BUSINESS

Business An organization that produces or

distributes a good or service for profitProfit

The difference between earned income and costs

Income – Costs = Profit

NATURE OF BUSINESS

3 Business Activities1. Production

Making a product or providing a service Manufacturing – produce good Service Firms – provide assistance to satisfy specialized

needs

2. Marketing Deals with how goods or services are exchanged

between producers and consumers

3. Finance Deals with all the money matters related to running a

business

NATURE OF BUSINESS

Supply The number of similar products that will

be offered for sale at a particular time and at a particular price

Demand The number of similar products that will

be bought at a given time at a given price

Supply vs. Demand

Supply Demand

Price will decrease

Demand Supply

Price will increase

Types of Businesses

2 major types of businesses Industrial businesses

Produce goods used by other businesses or organizations to make things

Highly Industrial – US, Japan, Germany Third World Nation – Usually poor and few

manufacturing firms (Peru, Chile, Nigeria, Pakistan) Commercial businesses

Engage in marketing (wholesalers and retailers), in finance (banks and investment companies), and in services (medical offices or motels)

Types of Businesses

Services Intangible products that use mostly labor to satisfy consumer

needs (mowing the lawn) Industry

Refers to all businesses within a category What Industry?

Produces and sells books, magazines, newspapers, and other printed documents? Publishing Industry

Produces services such as fire and police protection Government (include all services provided by local, state, and federal

governments) Provides sporting events, live theater, movies, night clubs,

concerts, and casinos Entertainment Industry

Service or Manufacturing?

A watch repair shop Service

Jewelry made by a group of Native Americans Manufacturing

Someone who mows lawns, shovels snow, and removes fallen trees Service

A shop that makes minute timers Manufacturing

Changing Nature of Business

Businesses are constantly changing Must be able to react quickly to change Innovations affect the kinds of products and

services offered for sale Clothes (natural vs. synthetic fibers)

Innovations also affect business operations Computers

Internet Sales

IMPACT OF GLOBAL COMPETITION ON BUSINESS

Focusing on the right things Achieving effectiveness Achieving efficiency

Specialization Technology and innovation Reorganization

IMPACT OF GLOBAL COMPETITION ON BUSINESS

Americans have led the way Consumers purchased new products that were

invented in the US Workers from other countries came by the

thousands to find jobs Over the last 30 years, other countries have become

more industrialized Americans now purchase foreign products Excellent products in greater varieties at lower prices Global Competition

The ability of profit-making organizations to compete with businesses in other countries

Focusing on the right things

Effectiveness Making the right decisions about what products

or services to offer customers and how to produce and deliver them

Efficiency Producing needed goods or services quickly and

at low cost Goal = provide products at the lowest cost

will maintaining quality Good managers focus on BOTH

Effectiveness – Doing the right things Efficiency – Doing the right things well

Achieving Effectiveness

Focus attention on customers’ needs Choices have increased because of competition

among domestic and foreign firms Domestic Firm

Products made by firms in the US Foreign Firm

Products made by firms in other countries Provide excellent customer service

Companies spend millions of dollars researching customers’ preferences

Keeping customers satisfied after the sale = customer loyalty

Achieving Effectiveness

Offer high-quality goods and services New designs, different shapes and colors,

readable instructions, and simplicity of products Americans learned quality lessons from the

Japanese (cars) Total Quality Management (TQM)

Commitment to excellence that is accomplished by teamwork and continual improvement Receive a great deal of training from experts Result = well-made products

Achieving Efficiency

Must produce the products efficiently (measured by output)

Output The quantity produces within a given time

Productivity Refers to producing the largest quantity in

the least amount of time by using efficient methods and modern equipment

PRODUCTIVITY PER WORKER (page 9)

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105120

1980 1985 1990 1996

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USA France Germany Japan Canada England

Achieving Efficiency

3 ways Efficiency can be achieved1. Specialization of effort

2. Better technology and innovation

3. Reorganization

1. Specialization

Workers become an expert at their assigned task (car mechanics)

Improves quality while increasing the amount produced

Mass production The use of up-to-date equipment and assembly

line methods to produce large quantities of identical goods The cost decreases

2. Technology & Innovation

Advances in technology Businesses spend billions of dollars

annually on inventing, buying, and using new technology

Innovation Refers to the development of new ideas,

products, and processes that contribute to satisfying customers

3. Reorganization (most difficult)

Downsize Cutting back on the goods and services provided

and the number of employees needed to produce them

Employees are the most important resource Empowerment

Letting workers decide how to perform their work tasks and offer ideas on how to improve the work process Quality of work improved Fewer managers needed

If a student was fastest to finish an exam but received the lowest grade, would you say the student was1. Effective and efficient2. Effective but inefficient3. Ineffective but efficient4. Ineffective and inefficient

Answer 3

BUSINESS GROWTH AND PROSPERITY

Gross domestic product (GDP) Underground economy Individual well-being

GDP

GDP (Gross Domestic Product) The total market value of all goods and

services produced in a country in a year

Measures a nation’s economic wealth Underground Economy

Income that is not recorded in the GDP Illegal activities – drugs A student babysitting

UNITED STATESGROSS DOMESTIC PRODUCT

4.75.8 6.3

7.17.8

8.8

0

2

4

6

8

10

1987 1990 1992 1994 1996 1998

Tri

llio

ns

of

Do

llar

s

Individual Well-Being

Another measure of the nation’s wealth Economic wealth of individuals Average yearly family income

More than $42,000 Male with no high school diploma

$16,000 Male with a high school diploma

$25,000 College graduate

More than $39,000

INDIVIDUAL WELL-BEING

99.9%

99.8%

83.0%

77.4%

61.4%

58.4%

35.0%

0% 20% 40% 60% 80% 100%

Refrigerators

Color Televisions

Microwave Ovens

Clothes Washers

Cordless Phones

Answering Machines

Personal Computers

Percentage of U.S. Households Owning Selected Items

ENTREPRENEURSHIP

Popularity of small business Growth of small business Growth of franchise business Risks of ownership Obligations of ownership

Entrepreneur

Someone who starts, manages, and owns a business

2 reasons for business growth1. Individuals want to own their own

business

2. The ease in which a business can be started

Popularity of Small Business

Small Business A business that is operated by one or a

few individuals

Growth of Franchise Business

Franchise Legal agreement in which a distributor buys the

right to sell the franchising company’s product or service under the company’s name and trademark

2 parties: Franchisor – the parent company of a franchise

agreement that provides the product or service Franchisee – the distributor of a franchised

product or service

Franchise (cont)

Franchisee pays initial fee Pays 3-8% of weekly sales Get exclusive rights to sell the franchised

product/service Get special training and advice Failure rate = 5-10% (much lower than non-

franchised businesses) 12% of all businesses are franchises Greatest # of franchises are in auto/truck

dealerships and gasoline stations

Risk of Ownership

Success – depends on managerial effectiveness Risk – the possibility of failure

Competition from businesses Changes in prices Changes in style Competition from new products Changes in economic conditions

1 out of every 4 to 5 fail within 3 years About half cease in 6-7 years

This includes businesses that voluntarily go out of business, sell the business, or add new owners

Failure Category = 18%

The Results of 814,000 Firms 8 Years After Starting (in %)

28%

18%

54%

VoluntarilyClosed

Failed

Still Surviving

Obligations of Ownership

To Customers To Workers To Management To Competitors To Investors To the Public Page 21

INTRAPRENEURSHIP

Intrapreneur An employee who is given funds and freedom to

create a special unit or department within a company in order to develop a new product, process, or service

Employee Stock Ownership Plan (ESOP) Permits employees to directly own the company

in which they work by allowing them to buy shared in it Highly motivated to make their company profitable