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CHARACTERISTICS OF BUSINESS

2

UNIT

1

1-1

1-2

1-3

1-4

1-5

1-6

Explain the general types and changing nature of busi-nesses.

Describe how global competition has affected the wayAmerican businesses operate.

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

Discuss the role and nature of entrepreneurship and theopportunities, problems, and obligations of small busi-nesses.

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

Explain the importance of studying business principlesand management.

Sara Donahue waited at the roadside curb forthe school bus with her son, Paul. He was grow-ing so fast. It seemed she had to buy somethingnew for him every week—clothes, shoes, schoolsupplies, baseballs, and now a bicycle. Heryoung daughter, Marta, has similar demands.Last week it was a teddy bear; this week, her firstvisit to the dentist; and next week, a tricycle.

“When will all these expenses stop?” she won-dered.

“What did you say, Mom?” asked Paul.“I’m just thinking out loud, Paul. Here comes

your bus. Don’t forget your Little League gamelater this afternoon.”

Paul shrugged.“I won’t.And I hope you won’tforget that new printer for my computer that’son sale.”

Sara had forgotten, but she could always relyon Paul and Marta to remind her of things tobuy. Of course, her husband, Scott, was good atsending out “don’t forget” signals as well. Fortu-nately, with his good job at the manufacturingplant and her half-time computer program-ming job, the family’s income was adequate tomeet most expenses if they budgeted carefully.

While waving goodbye to Paul as the buspulled away, she recalled reminding Scott toschedule his vacation time for late June when thefamily could drive to the mountains and campout under the stars.“That should keep costsdown,” she mused, “but I’d better start puttingmoney aside for a new tent, sleeping bags, andgas for the long trip.Maybe the money we makeon Saturday’s garage sale will pay for some of it.”

3


American businesses work for Sara Donahue and her family. Asthe family’s financial manager, she pays the bills. Sara and Scott,along with Paul and Marta, are consumers. They buy goods such

as clothes, shoes, tricycles, and tents. Likewise, they buy services suchas trips to the dentist and to movies. Businesses work very hard toprovide the goods and services needed by the Donahue family andeveryone else.

The story of American business is a fascinating one. Products foundin most homes come from countless producers. The flowering plant inthe Donahues’ front window could have been purchased from a green-house operated by a single person. The light bulbs the Donahue fam-ily uses could have been made by a business with 100,000 employees,their carpet from a business with 500 employees, and the cake forMarta’s birthday from a bakery with only 10 workers. These and scoresof other items found in homes, offices, stores, and factories are pro-duced by many kinds of businesses.

■NATURE OF BUSINESSAn organization that produces or distributes a good or service for profitis called a business. Profit is the difference between earned incomeand costs. Every business engages in at least three major activities. Thefirst activity, production, involves making a product or providing a

INCOME VS. OUTGO: A DELICATE BALANCE

Over 22 million businessescurrently exist in the UnitedStates. They vary in sizefrom one employee tonearly 400,000 employeesand in assets from a fewdollars to billions of dol-lars. Some of these busi-nesses have only a fewcustomers, while othershave millions of customerslocated throughout theworld.

service. Manufacturing firms produce goods, whereas service firmsprovide assistance to satisfy specialized needs through skilled workers,such as doctors, travel agents, and taxi drivers. Today the number ofservice firms far exceeds the number of manufacturing firms. For thisreason, it is sometimes said that we live in a service society.

The second activity that businesses are involved in is marketing.Marketing deals with how goods or services are exchanged betweenproducers and consumers. The third activity, finance, deals with allmoney matters related to running a business. Whether a business hasone worker or thousands of workers, it is involved with production,marketing, and finance.

The price that Sara Donahue pays for Paul’s printer will be based inlarge part upon supply and demand for the printer. Supply of a prod-uct refers to the number of similar products that will be offered for saleat a particular time and at a particular price. Demand, on the other hand,refers to the number of similar products that will be bought at a giventime at a given price.

This book will focus on the various activities involved in managinga business successfully. But before examining those activities in detail,let’s take a look at the general nature of business.

■ TYPES OF BUSINESSESGenerally, there are two major kinds of businesses—industrial andcommercial. Industrial businesses produce goods used by otherbusinesses or organizations to make things. Companies that mine orefor making metal products, such as printers and tricycles, are indus-

4

ReinforcementAsk students to name otherservice and manufacturingfirms located in your local geo-graphic area, or ask them tolabel the following firms asmanufacturing or service: (a) awatch repair shop, (b) jewelrymade by a group of NativeAmericans, (c) someone whomows lawns, shovels snow,and removes fallen trees, and(d) a shop that makes minutetimers. Answers: (a) and (c)are service businesses; (b)and (d) are manufacturingbusinesses.

ReteachingShow or distribute Trans-parency Master 1-1 to reviewthe activities engaged in bybusiness owners.

ReinforcementAsk students to create sen-tences in which one or more ofthe following business termsare used: production, manufac-turing firms, service firms, mar-keting, finance, supply, and de-mand. Answers will vary.

ILLUSTRATION 1-1

Customers are the reason busi-nesses exist. Can a businesssurvive without customers?Does a government have cus-tomers?

Teaching with VisualsAnswers to the questionsraised in Illustration 1-1: Allbusinesses have customers orthey would have no reason toexist. Even governments havecustomers—the citizens whopay taxes to buy governmentservices such as public educa-tion, roads to drive on, andarmies to defend them.

trial businesses. So are companies that construct buildings for otherbusinesses. Highly industrialized nations that produce thousands ofproducts, such as the United States, Japan, and Germany, can be dis-tinguished from third world nations, which have few manufacturingfirms and a population that is generally poor.

Unlike industrial businesses, commercial businesses are engaged inmarketing (wholesalers and retailers), in finance (banks and investmentcompanies), and in furnishing services (medical offices, athletic centers,and motels). Services are intangible products that use mostly labor tosatisfy consumer needs. For example, lawn mowing is a service.

Figure 1-1 shows the number of people employed in selected types ofproduction and service industries. Industry is a word often used to referto all businesses within a category. For example, the publishing industryincludes any business that deals with producing and selling books, mag-azines, newspapers, and other printed documents prepared by authors.Even a government can be considered an industry, because it producesservices such as fire and police protection. This industry would includeall services provided by local, state, and federal governments.

■ CHANGING NATURE OF BUSINESSAn important characteristic of business is that it is dynamic, or con-stantly changing. Most businesses react quickly to the changing nature

5


ReinforcementAsk students to name a fewthird world nations. Answersmight include Peru, Chile,Nigeria, Somalia, Nepal, andPakistan.

ReinforcementAsk students to name varioustypes of businesses that mightbe a part of the entertainmentindustry. Answers will varysomewhat, but included mightbe such firms as those en-gaged in providing sportingevents, live theater, movies,night clubs, concerts, andcasinos.

ReinforcementWhile reviewing Figure 1-1,point out that the number ofemployees found in construc-tion and in mining industries isequal.

ReteachingShow or distribute Trans-parency Master 1-2 to reviewcommon business terms.

ReinforcementEmphasize the idea thatchange may be fast or slow.The speed of change is influ-enced by businesses that con-stantly invent and producenew goods and services.

Mfg.

C

on.

M

in.

GenS

v

W/RT

Govt

.

In/RE

0

10

20

30

40

50

No. of Employees (in millions)

Production Industries Other Industries

9.208

5.738

26.777

46.393

8.320

.634

.634

FIGURE 1-1

Employment in Major Industries

Source: Statistical Abstract of the United States, 1998

Mfg. � ManufacturingCon. � ConstructionMin. � MiningGenSv � General ServicesW/RT � Wholesale & Retail

TradeGovt. � GovernmentIn/RE � Insurance & Real

Estate

of society. For instance,travel by horse was the principal means oftransportation until theinvention of steampower. Then, with theemergence of the firstcross-country railroadin 1869, goods andservices traveled mainlyby rail for about 50years. When the gaso-line engine arrived,travel patterns shiftedfrom train to car, bus,and truck. Shortly there-after, airplanes glidingalong at 100 miles anhour were soon re-placed by jets criss-crossing countries andoceans, carrying people

and goods to their destinations in a matter of hours.Innovations affect the kinds of products and services offered for sale.

For example, clothing used to be made from only natural fibers, suchas cotton and wool. Then chemical researchers developed syntheticfibers, such as rayon, nylon, and polyester. Now consumers have morechoices in clothing and other fabric products.

Innovations also affect business operations. For example, since AppleComputer built one of the first personal computers about thirty yearsago, computers have increasingly influenced the way businesses dobusiness. Computers help businesses produce products as well as keeptrack of billing, inventory, and customer information. Computers arenow involved in most key business functions. Use of the Internet toconduct business has also had a significant impact on business opera-tions large and small. You will learn how innovations affect businessoperations in many of the chapters in this book.

Figure 1-2 shows the growth in different categories of business inthe U.S. since 1980. As you can see, service businesses are increasingin number faster than any other type of business in the U.S.

■ IMPACT OF GLOBAL COMPETITION ON BUSINESSFor hundreds of years, American businesses have led the way in pro-ducing new goods and services for sale around the world. Consumersworldwide eagerly purchased exciting new products that were invented

6

Background NoteInform students of the hundredsof thousands of immigrants whocame to this country during theIndustrial Revolution, especiallyduring the late 1800s and early1900s. Many left their countriesas they do today to escapepoverty, wars, and religious persecution in search of bettertimes and prosperity. Manygreat-grandparents were amongthose people seeking jobs inbooming American businesses.

ILLUSTRATION 1-2

Jets that criss-cross countriesand oceans can carry peopleand goods to their destina-tions in a matter of hours. Howhave advances in transporta-tion changed the nature ofbusiness?

EnrichmentHave students work in groupsto make a list of different ma-terials used to make clothing.Then ask which of those mate-rials are not from naturalsources but are manufacturedby businesses.

EnrichmentAsk students to form smallgroups and to list major itemsthat were not available 25 yearsago. Answers will include suchitems as CD players, large tele-vision screens, portablephones, pagers, computers,and battery-operated cars.

Teaching with VisualsAnswer to the question raisedin Illustration 1-2: As travel pat-terns have shifted, people andgoods can be moved muchmore quickly. This means thatbusiness can be conducted ata much faster pace.

and made in the United States. Factories hummed with activity, work-ers from other countries arrived by the thousands to find jobs, and peo-ple spent their wages buying the goods that the firms produced. Manyleaders from foreign countries also arrived to find out how Americanbusinesses were managed.

Over the last 30 years, however, other countries have become moreindustrialized and have learned how to invent and produce new prod-ucts for consumers. Americans gradually began to purchase these for-eign products. Foreign firms also learned how to make goods efficiently,so they could offer excellent products in greater varieties at lower prices.American business leaders soon realized it was time for change, time torely on America’s abundant human talent to meet the challenge of globalcompetition. Global competition is the ability of profit-making organi-zations to compete with businesses in other countries. Let’s look atwhat is happening to help America compete in a global economy.

■ FOCUSING ON THE RIGHT THINGSBusinesses often study themselves to determine whether they are doingthe right things and doing the right things well. Two terms are used todescribe these two points. First, effectiveness means making the rightdecisions about what products or services to offer customers and howto produce and deliver them. Second, efficiency means producingneeded goods or services quickly and at low cost. Firms that provideproducts at the lowest cost while maintaining desired quality will

7


ReinforcementUse Figure 1-2 to review thegrowth of American businessesby the key industries shownand to point out that servicebusinesses have been thefastest-growing segment. Re-mind students that these statis-tics verify the statement that welive in a service economy.

Background NoteA classic example of fallingbehind is the automobile in-dustry. Because profits werehigher on larger cars, Detroitcar makers concentrated onlarge expensive cars of aver-age quality. However, Ameri-cans began buying GermanVolkswagens and Japanesecompact cars. At first, Japa-nese quality was also low; thenit improved. Detroit firms awak-ened slowly. Before turningtheir firms around, however,Americans became adjustedto purchasing often better-quality foreign products that fittheir needs.

ReinforcementPoint out that global competi-tion is the driving force behindthe major decisions made bymost large companies today.

ReteachingShow or distribute TransparencyMaster 1-3 to distinguish be-tween effectiveness and effi-ciency.

0

500

1000

1500

2000

2500

19801985

1990

1995

Manufacturing

WholesaleTrade

Retail Trade

Services

Growth (in thousands)

FIGURE 1-2

Growth in Selected Types ofIndustries


succeed. Some firms are extremely efficient but very ineffective, whileothers are effective but inefficient. Good managers focus on both effec-tiveness and efficiency.

■ ACHIEVING EFFECTIVENESSMaking the right decisions requires both common sense and skill. Know-ing what customers want is critical to business success and to achiev-ing effectiveness. What kind of tent, for example, will best satisfy theneeds of the Donahue family when they take their summer vacationin the mountains? In the past, customers bought whatever was avail-able because there were few brands, colors, and styles from which toselect. Today, the choices for most goods have increased because ofcompetition among domestic and foreign firms. Domestic goods (prod-ucts made by firms in the United States) must compete with foreigngoods (products made by firms in other countries).

Unlike in the past, firms today focus more on gathering informationfrom customers, studying their buying habits, testing new products withcustomers, and adding new features to existing products. New designs,different shapes and colors, readable instructions, and simplicity ofproduct use are features customers like. Major corporations spend mil-lions of dollars examining customers’ preferences. Equally important isthat successful firms also invest heavily in keeping customers satisfiedafter products are sold. Product guarantees and conversations with cus-tomers about the product help keep customers loyal.

Customers want not only products that best meet their needs, butalso high-quality products. A major new emphasis of American pro-ducers is to make products of high quality. Japanese car makers are

8

ILLUSTRATION 1-3

American car producers havelearned to equal or exceedforeign car makers in thequality of their products. Isquality an important factorwhen you buy a car or otherexpensive product?

EnrichmentAsk students to conduct ashopping trip to identify do-mestic and foreign goods. Stu-dents may be unaware thatmany of the products they pur-chase are foreign goods.There are few domestic shoes,for example, because shoescan be made less expensivelyby many foreign firms. Many ofthe students’ wristwatches areforeign made but their cottonshirts are probably made do-mestically.

ReinforcementFind out if any students re-cently have been interviewedin malls or by phone aboutwhat products they use or like,whether they have filled outquestionnaires at restaurantsconcerning the quality of thefood and service, or whetherthey have received question-naires after buying a product.

Teaching with VisualsAnswers may vary to thequestion raised in Illustration1-3, but most will say yes.

ExtensionIf a student was the fastest tofinish an exam but receivedthe lowest grade, would yousay the student was (a) effec-tive and efficient; (b) effectivebut inefficient; (c) ineffectivebut efficient; or (d) ineffectiveand inefficient? Answer: c.

excellent examples of how foreign producers captured a large portionof the market worldwide by providing customers with reliable andattractive cars. In the past, American car producers were not meetingthe needs of many buyers. Too many cars had too many defects thatrequired numerous trips to car dealers to correct. On the other hand,Japanese cars had fewer flaws.

American producers learned important lessons about quality fromthe Japanese. Today, American car producers are building productsthat equal or exceed Japanese and European standards. American carmanufacturers and producers of many other products vigorously stressto their workers the importance of quality. The concept is called totalquality management (TQM), which is a commitment to excellencethat is accomplished by teamwork and continual improvement. WhereTQM is practiced, managers and employees receive a great deal oftraining on the topic of quality from experts. The result is a return towhat customers want—well-made products.

■ ACHIEVING EFFICIENCYNot only must firms do the right things, such as offering high-qualityproducts, but they must also produce their products efficiently. Efficiencyis measured by output—the quantity produced within a given time. Pro-ductivity, on the other hand, refers to producing the largest quantity inthe least amount of time by using efficient methods and modern equip-ment. Workers are more productive when they are well equipped, welltrained, and well managed. Employee productivity has grown over theyears in manufacturing firms, as shown in Figure 1-3, but the growth hasnot been as rapid as in a few other industrialized nations.

9


Competition based on qual-ity has grown in impor-tance worldwide. In theUnited States, the MalcolmBaldrige National QualityAward program is managedby an agency of the federalgovernment. Each year,hundreds of firms apply forthis distinctive nationalhonor. Organizations thatwin an award usually no-tice an upturn in demandfor their products. Qualityawards are also offered inother countries. The Japa-nese offer the DemingAward, which is namedafter an American who wasan expert on quality.

COUNTRY

United States

France

Germany

Japan

Canada

England

1980

71.9

70.5

77.3

63.9

78.5

54.4

1985

87.7

83.8

88.9

77.3

94.1

71.2

1990

97.7

99.1

99.0

95.4

95.8

89.3

1996

120.2

117.0

117.0

114.3

108.6

106.1

Productivity Per Worker in Selected Industrialized Nations

FIGURE 1-3

Output-per-Hour Index forManufacturing Employees(Index: 1992 � 100)


ReteachingShow or distribute Trans-parency Master 1-4 aboutways to achieve effectiveness.

ExtensionAsk students which country inFigure 1-3 increased most inindex points and by how muchover the 20-year period.Answer: England, 51.7 points.Which country grew the least? Answer: Canada, 30.1 points.How much did the U.S. grow?Answer: 48.3 points. By 1996,which countries outproducedthe U.S.? Answer: none.

Efficiency—including improved productivity—can be achieved inthree ways:

1. Specialization of effort2. Better technology and innovation3. Reorganization.

SPECIALIZATION In any business with more than a few employees, workcan be performed more efficiently by having workers become special-ists. In a large automobile repair shop, for example, not all workers aregeneral mechanics. Rather, some workers specialize in body repair workwhile others specialize in repairing transmissions or engines. Whenworkers specialize, they become expert at their assigned tasks. As aresult, specialization improves quality while increasing the amountproduced. Because specialization improves efficiency, it is no wonderthat businesses hire or train employees for many specialized jobs.

Effectiveness can also be improved through mass production, theuse of up-to-date equipment and assembly line methods to producelarge quantities of identical goods. Through mass production, the costof goods manufactured decreases because it is possible to produce moreitems in less time. Today, electronically driven equipment, includingcomputers and robots, makes it possible to mass-produce large num-bers of items with fewer workers.

TECHNOLOGY AND INNOVATION Effectiveness can also be improvedthrough advanced technology. Technology includes equipment, manu-facturing processes, and materials from which products are made.Because of new discoveries and inventions, better-quality goods andservices are built at a faster pace and often at a lower cost. Improvedmaterials, for example, may weigh less, last longer, and permit fasterproduct assembly. Examples of new technology are found in every-day items such as cars, clothing, computers, and electronic appliances.Advanced technology helps companies stay ahead of competitors. Andbecause technology has a significant impact on productivity, businessesspend billions of dollars annually on inventing, buying, and usingnew technology.

Innovation refers to the development of new ideas, products, andprocesses that contribute to satisfying customers. But creating newproducts and processes is just the first step. To gain the benefits ofinnovation, firms must transform their creativity into high-quality prod-ucts and services or cost-saving benefits.

REORGANIZATION The third and most difficult way to obtain increasedefficiency is through reorganizing the way work gets done. From thelate 1970s through the early 1990s, companies experienced slow growth,for reasons explained in a later chapter. However, one key reason forthe slow growth arose from the competition of other industrializednations. The typical reaction to slow growth caused by global compe-

10

ReinforcementAsk students to consider spe-cialization from the point ofview of medical doctors. Wouldthey rather have a heart trans-plant done by a general practi-tioner (one who treats all med-ical problems) or one who is aheart surgeon?

ReinforcementAsk if mass production re-quires the use of specialists.Answer: Yes, because eachstep along an assembly linerequires employees to do oneor two tasks well and quickly.Point out that the downside ofspecialization is that tasks areso narrow in scope that work-ers may become bored.

Background NoteModern technology often re-quires fewer workers to do thesame work or the same num-ber of workers to producemore work.

Background NoteNucor is a small innovativesteel company that has a highproductivity rate. To produce aton of steel, Nucor uses farfewer workers than large steelfirms use. Other than operatinga highly efficient firm, the maindifference for the high produc-tivity rate is the use of its steel-making technology that waspurchased from a German firm.

Background NoteDownsizing is still occurring infirms, and the employees laidoff usually do not expect to re-turn to those companies. Theyusually find different but oftentemporary jobs at firms payingequal or lower salaries. How-ever, the time it takes to findemployment is often longerthan during years of rapidgrowth.

tition was to cut back production costs by laying off workers. A busi-ness would downsize by cutting back on the goods and services pro-vided and the number of employees needed to produce them. By lay-ing off workers, dropping unprofitable products or selling them to otherfirms, or increasing the use of technology, firms were able to cut theircosts. But the problem of producing excellent products inexpensivelystill existed. Better ways were needed to compete with foreign firms,many of which had lower labor costs. Some firms boldly decided tomove in a direction that was similar to tearing down the business andrebuilding it.

Many firms arrived at the conclusionthat employees are their most importantresource. Further, managers learned thatby empowering workers, the firm couldbecome more productive. Empower-ment is letting workers decide how toperform their work tasks and offer ideason how to improve the work process.Empowerment dramatically changed therole of the worker.

In the past, workers performed narrowtasks on assembly lines and had littledecision-making power. After empower-ing workers, firms found that the qualityof work often improved, as did the effi-ciency of production. Although better-trained and highly skilled workers wererequired, fewer managers were needed.Companies were able to reduce the num-ber of levels of management by pushingdown the day-to-day decisions directly toworkers rather than to managers. Work-ers were taught to use computers, towork in teams, and to be responsible forquality.

While practicing empowerment, somemanagers were also redesigning the work-flow throughout their organizations—aconcept sometimes called reengineering.Instead of typical assembly lines foundin factories and offices, steps were elimi-nated, abbreviated, or placed entirely inthe hands of employees. Customer com-plaints dropped. Fewer well-trained work-ers with the help of advanced technologyand streamlined work processes couldbetter satisfy customers than could more

11


A re you good at analyzing detailed financialinformation? If so, you might want to con-sider a career as a financial manager. Prac-

tically every firm has one or more financial man-agers, who prepare financial reports, oversee theflow of cash, monitor credit, assess the risk oftransactions, raise capital, analyze investments,and evaluate the present and future financialstatus of the business. In small firms, financialofficers usually handle all financial managementfunctions personally. In large firms, these man-agers oversee financial management depart-ments and help top managers develop financialand economic policy, which is then implementedby employees.

Although financial managers are found in al-most every industry, the majority are employedby services industries and financial institutions.

A bachelor’s degree in finance or a related fieldis the minimum educational requirement, butmany employers want graduates with master’sdegrees and a strong analytical background. Con-tinuing education is vital for financial managers,reflecting the growing complexity of global trade,changing state and federal laws and regulations,and varying economic conditions.

For more career information about financialmanagers, check your library or the Internet forresources.

FINANCIAL MANAGER

ReinforcementPoint out that most managersof major organizations agreethat empowerment has beenthe single most valuablechange that improved howtheir businesses operate.

12

EFFICIENCY AND EFFECTIVENESS—DELL DIRECT

Companies can satisfy customers in manyways. Most buyers want a high-qualityproduct at the lowest possible price and

a great deal of help when trouble occurs witha product. Successful firms in recent yearshave introduced innovative ways to meet cus-tomer expectations. Domino’s Pizza, for ex-ample, delivers to your door quickly, as doesLands End. United Parcel Service and Fed-eral Express also come to your door to de-liver or pick up packages.

Dell Computer Corporation, however, wasthe first to do what everyone said wouldsurely fail—sell computers using a toll-freephone number. Michael Dell, the founder ofthe firm, was told that people want to see,touch, and try highly technical products be-fore they buy. They were wrong.

Michael Dell, who had always looked foreasier and faster ways to get things done,got an idea while in college that he believedwould serve the computer customer well. Hewould provide customers with a catalog ofcomputers and computer parts. When theyknew what they wanted, they could call histoll-free number, place the order with a creditcard, and expect to have the computershipped directly to their homes or offices

within a brief period. Because he didn’t incurthe expense of maintaining a physical store,Dell was able to keep prices low. He kept noinventory, preferring to make and mail thecustomer’s tailor-made machine soon afterreceiving the order.

To further make customers happy, he pro-vided a guarantee, and later an extended re-pair contract offering local service if anythingwent wrong. The idea worked beyond any-one’s imagination. Within a few years hisbusiness was profitable and growing rapidly.Dell products are among the highest-ratedmachines, and satisfied customers spreadthe good news. Dell is now one of America’slargest firms with computers sold around theworld using the same ideas that he createdin 1983, when the business was launched.

Many other computer firms have copied hislow cost, fast service, and customer satisfac-tion guarantee. Gateway 2000, Compaq, andMicron imitated Dell in selling directly to cus-tomers. Dell and its competitors now sell theirproducts over the Internet as well as throughtoll-free phone calls. Many other firms in dif-ferent businesses soon adopted MichaelDell’s ideas to gain the effectiveness and effi-ciency that leads to satisfied customers.

THINK CRITICALLY1. Why do you think buyers like to purchase from Dell Computer Corporation?2. What specific actions did Dell take to make his company effective?3. What specific actions did Dell take to make his company efficient?4. If you don’t have Internet access, find a recent magazine or newspaper article dealing with

the company and report on it to the class. If you have Internet access, go to the Dell Website at www.dell.com to gather information about the company and report your findings.

See the Teacher’s Resource Manual for suggested answers.

workers using outdated methods and equipment. Most major firms—and many smaller ones—adopted these newer practices and are find-ing that customer satisfaction has risen along with productivity. Theconcept of redesigned work and workflow will appear in more detailin a later chapter.

American firms are renewing their position as strong competitors inworld business as a result of restructuring and a more intensive focuson quality and customers’ needs. Empowering workers has contributeda great deal to the rebuilding. Those firms are now doing the rightthings well. Furthermore, no large or small businesses in an industrial-ized society should think only about customers in their own countries.Their customers are located around the corner and around the world.American factories exist in other countries, and businesses in othercountries make and sell products in this country.

You will learn more about international business in Chapter 4.

■BUSINESS GROWTH AND PROSPERITYOverall, the United States is a prosperous nation. Much of its prosper-ity is due to business growth. Around the world, people admire andenvy this country’s economic strength. Let’s look at two ways in whicha nation measures its economic wealth and its benefits to citizens.

■ GROSS DOMESTIC PRODUCTThe first measure of a nation’s economic wealth is the gross domes-tic product (GDP). The GDP is the total market value of all goodsand services produced in a country in a year. Whenever products orservices are purchased, the total dollar amount is reported to the fed-eral government. The GDP of the United States is compared from yearto year and is also compared with the GDP of other countries. Thesecomparisons provide a measure of economic success.

Certain types of transactions, however, are never included in the GDP.These transactions are not recorded because they are unlawful or donot occur as part of normal business operations. For example, when astudent is hired to mow lawns, formal business records are not normallyprepared and the income is usually unrecorded. When drugs are soldillegally, such transactions are not recorded. Income that escapes beingrecorded in the GDP is referred to as the underground economy.Business transactions that occur in the underground economy haveincreased in recent years in relation to the total GDP. Some econo-mists believe that estimates range between 5 percent during a briskeconomy to 20 percent of the GDP during a lagging economy. Thesize of the underground economy concerns government officials.

In a recent year, the total known and recorded GDP for the UnitedStates reached the staggering $8.8 trillion mark, as shown in Figure 1-4.And in a recent year, the U.S. GDP exceeded the total GDP of four

13


American firms also formjoint agreements with do-mestic and foreign firms.For example, Ford MotorCompany and Mazda Mo-tors work with each otherto make car parts and en-tire cars for each other.Similar arrangements existwith European firms. Sony,a large electronics manu-facturer in Japan, hasformed alliances with manyfirms in the world, many ofwhich are American.

ReinforcementPoint out that joint agreementswith other firms inside and out-side the country are making itmore difficult to classify aproduct as domestic (Ameri-can) or foreign. For example,although the Honda Civic ismade in the United States, it ispart American, part Japanese,and part Canadian.

ReteachingShow or distribute Trans-parency Master 1-5 on ways toachieve efficiency.

Background NoteThe GDP is frequently referredto in newspapers and businessmagazines because it mea-sures whether a country is per-forming well or poorly in rela-tion to other countries.

14

0

2

4

6

8

10

United States GDP (in trillions of dollars)

19871990

19921994

19961998

8.8

7.8

7.1

6.3

5.8

4.7

FIGURE 1-4

U.S. GDP since 1987

Source: Bureau of Economic Analysis, 1998

ILLUSTRATION 1-4

Why could hiring a neighbor-hood youngster to mow yourlawn be considered part ofthe underground economy?

ExtensionDid the GDP decrease duringany time block shown in Fig-ure 1-4? Answer: No. Betweenwhich two time periods did theGDP appear to grow most indollars? Answer: 1987–1990.

Teaching with VisualsAnswer to the question raisedin Illustration 1-4: Because theearnings most likely are notreported for tax purposes.

major countries combined—Japan, Germany, England, and Mexico. Therate of growth and the current size of the GDP indicate, in a rather strik-ing way, the economic strength of the country.

■ INDIVIDUAL WELL-BEINGA second measure of a nation’s wealth is the individual well-being of itscitizens. While GDP figures are helpful in judging the overall growth ofan economy, such figures by themselves tell little about the economicworth of individuals. However, the U.S. Department of Commerce gath-ers information that reveals the financial well-being of U.S. citizens.

With increased income, an average family improves its level of liv-ing. Over 65 percent of all families live in homes they own. As shownin Figure 1-5, many families now own items once considered luxuries.For example, refrigerators, color televisions, microwave ovens, clotheswashers, and cordless phones are found in a majority of households.Over half of all U.S. households have answering machines, and a thirdown personal computers. In addition, Americans still invest large sumsof money in education, with many adults receiving some educationbeyond high school. Further, individuals invest in life-enrichment

15


Family income has in-creased steadily, with theaverage yearly family in-come currently exceeding$42,000—much more thanit was a decade ago. In arecent year, the average in-dividual yearly income for amale without a high schooldiploma was $16,000; butfor a male with a diploma,it jumped to about $25,000.College graduates earnedover $39,000.

Refrig

erator

s

Color T

elevis

ions

Microwave

Oven

s

Clothes

Wash

ers

Cordles

s Pho

nes

Answeri

ng M

achin

es

Person

al Com

puters

0

20

40

60

80

100

Percentage of Households Owning Selected Items

35.0

58.461.4

77.483.0

99.899.9

FIGURE 1-5

Families buy appliances andoffice equipment with their incomes.


ExtensionWhat conclusion and recom-mendation can be made ifthose with less than a highschool education earn $16,000while those with a high schooleducation earn $25,000 andthose with college degrees earn$39,000? Answer:You earnmore money as you obtainmore education. Therefore, pur-sue higher levels of education.

EnrichmentPlace students in groups tomake a list of what the aver-age family owns. The list maybe composed of the itemslisted in Figure 1-5; othermajor items may also beadded. Prepare a class profileof the average American rep-resented in the class.

16

activities by traveling in this country and abroad. Despite these largeexpenditures on material goods and services, Americans saved nearly$227 billion in a recent year.

Even though the typical American has done well when comparedto people in other countries, some problems still exist. For example,slow economic periods may create job shortages, layoffs, and reducedincomes. Some people cannot find employment because of inadequateskills. When incomes drop, it becomes more difficult to buy homes andto send children to college. Lower incomes could also lead to poverty.You will learn more about these and similar problems in later chapters.

■ENTREPRENEURSHIPThe successful growth of business in the United States resulted frommany factors. Two reasons for business growth are the strong desireby individuals to own their own businesses and the ease with which abusiness can be started. Someone who starts, manages, and owns abusiness is called an entrepreneur.

■ POPULARITY OF SMALL BUSINESSIt is the tradition of this country to encourage individuals to becomeentrepreneurs. Few government controls, for example, prevent a per-son from launching a new business. Almost anyone who wishes to doso may start a business. As a result, many new businesses spring upeach year. These new businesses may have physical facilities, such asa store in a mall, or they can be individuals working in home officesor businesses that exist only on the Internet.

Small business is the term applied to any business that is operatedby one or a few individuals. Because it is normally costly to start a man-ufacturing business, few small firms produce goods.

In past years, when many large firms were laying off thousands ofworkers, small businesses with less than 20 employees were hiring inlarge numbers. Often, the new entrepreneurs were highly skilled man-agers who were displaced by large firms that were downsizing. Smallfirms, on the other hand, were reported to be hiring twice as manyapplicants as the number of employees laid off by large firms. In addi-tion, many of these small firms were adding more high-paying jobsthan low-paying jobs.

Many small businesses are one-person or family operations with onlya few employees. Examples include restaurants, gift shops, gas stations,and bakeries. Computers have made it possible for small businesses tooperate from homes and on the Internet. For example, consultantsworking from their homes can do much of their work by e-mail withclients, and craftspeople can offer their products for sale on the Inter-net, without the expense of a storefront. According to the U.S. Depart-ment of Commerce, many businesses earn less than $250,000 in yearlyrevenue, with many of the very small shops earning far less.

Most small businesses arecommonly found in serviceand retail trade fields thatusually employ fewer than100 people. Nearly 98 per-cent of all businesses inthe country are classifiedas small. However, overhalf the total number ofworkers in this country areemployed by businesseswith fewer than 500 em-ployees. In addition, therevenue generated from allsmall businesses accountsfor about half of the GDP.

EnrichmentAsk each student to indicatewhether any family memberwas laid off from a job duringthe last two years. For thosewho answer yes, ask whetherthe family members foundequal-, better-, or lower-qualityjobs and how long it took tofind a job. Also ask whetherthe family had difficult financialtimes during the layoff period.Discuss the results of studentanswers in relation to the well-being of American familiestoday.

ReinforcementAsk student volunteers to pro-vide the names of entrepre-neurs, that is, people whostarted, manage, and owntheir own businesses.

17


■ GROWTH OF SMALL BUSINESS Most large businesses today began as very small businesses. Becausethey supplied products and services consumers desired and becausethey were well managed, they became larger and larger. For example,Subway began as a small business and now has over 13,000 restaurantsaround the country. McDonalds and Holiday Inn, once small businesses,now operate worldwide.

■ GROWTH OF FRANCHISE BUSINESSFor the person with an entrepreneurial spirit, a popular way to launcha small business is through a franchise. A franchise is a legal agree-ment in which a distributor buys the right to sell the franchising com-pany’s product or service under the company’s name and trademark.Many Docktor Pet Centers, Pizza Huts, and Roy Rogers Restaurants areoperated by small business owners under such agreements. The twoparties to a franchise agreement are the franchisor, the parent com-pany of a franchise agreement that provides the product or service, andthe franchisee, the distributor of a franchised product or service.

In a typical franchise agreement, the franchisee pays an initial feeto the franchisor and a percentage—usually 3 to 8 percent—of weeklysales. In return, the franchisee gets help in selecting a store site andgets exclusive rights to sell the franchised product or service in a speci-fied geographic area.

The franchisor also provides special training and advice in how tooperate the franchise efficiently. These services are particularly valuableto inexperienced entrepreneurs. They give a franchise business a far

ILLUSTRATION 1-5

Many small businesses areone-person or family opera-tions with few employees. Canyou name some examples inyour community?

Background NoteThe king of all franchise oper-ations is probably McDonald’s,which has the largest chain offast food restaurants. It hasmore than 25,000 outlets in119 countries. McDonald’s stillcontinues to grow, particularlyinternationally.

ReinforcementEmphasize that the parentcompany is called franchisor,which is spelled with an “or”ending rather than “er.”

ReinforcementAsk students to offer a guessat what it would cost to launcha franchised fast food busi-ness. Estimates will vary butare likely to be too low.IHOP—The InternationalHouse of Pancakes—warnspotential franchisees that fran-chise fees can range between$50,000 and $600,000, de-pending on the particular factsand circumstances concerningthe individual restaurant andits location. However, someservice-type businesses costmuch less. Decorating DenInc. can be started out of one’shome for about $15,000-$25,000, but a van must beleased or purchased to trans-port materials needed to workwith customers.

Teaching with VisualsAnswers will vary to the ques-tion raised in Illustration 1-5.

greater chance of success than a firm starting on its own does. While5 to 10 percent of franchised businesses fail, the failure rate is far lowerthan the failure rate of non-franchised businesses.

Prospective franchisees should carefully check out the franchisor.Fraudulent dealers have deceived many innocent people. Franchiseagreements may require franchisees to buy all items from the franchisor,often at a price substantially higher than available elsewhere. Somefranchisors have been charged with allowing other franchisees to openbusinesses too close to each other. To avoid these problems, some stateshave passed laws to protect franchisees. Potential franchisees shouldseek the help of lawyers and accountants before signing franchisingagreements.

In spite of possible dangers, the number of franchises has grownsteadily over the years, especially in the retail area. According to a recentreport, franchises employ over eight million people and account fornearly half the retail store sales in the country. About 12 percent of allbusinesses are franchise businesses, such as those listed in Figure 1-6.The two areas with the greatest number of franchises are auto and truckdealerships and gasoline service stations. However, fast food restau-rants and convenience shops such as 7-Eleven food stores are alsoquite popular. In recent years, the number of franchises for service-typebusinesses that do not require large sums of money to get startedhave steadily increased.

■ RISKS OF OWNERSHIPThe success of a business depends greatly on managerial effectiveness.If a business is well managed, it will likely earn an adequate income.

18

AgwayBudget Rent-A-CarCentury 21Denny’sFairfield Inn by MarriottGoodyear Tire CentresHoward JohnsonInternational Dairy QueenJiffy LubeKwik CopyLawn Doctor, Inc.Midas International Corp.

Nathan’s Famous, Inc.Orange Julius of AmericaPizza HutQuik Print, Inc.Roy RogersSbarro, Inc.TCBY SystemsUniclean SystemsWendy’s Old Fashioned Hamburgers

Yogi Bear’s Jellystone Park

Ziebert Tidycar

Franchises from A to Z

FIGURE 1-6

Many businesses are fran-chise operations.

Source: Bureau of Economic Analysis, 1998

EnrichmentSplit the class into smallgroups to (a) determine whichfranchises in Figure 1-6 existin your geographic area, and(b) explain what product orservice the franchise handles.

ReinforcementStress that new businessesface many risks. However,risks can be reduced substan-tially by taking preventivesteps, such as developing agood business plan and get-ting experience in the type ofbusiness you plan to open.

From an adequate income, it can pay all expenses and earn a profit.If a business does not earn a profit, it cannot continue for long. Anentrepreneur assumes the risk of success or failure.

Risk—the possibility of failure—is one of the characteristics of busi-ness that all entrepreneurs must face. Risk (which will also be discussedin the credit and insurance chapter) involves competition from otherbusinesses, changes in prices, changes in style, competition from newproducts, and changes that arise from economic conditions. Wheneverrisks are high, the risk of failure is also high.

Businesses close for a number of reasons. Thousands fail yearly forfinancial reasons, as shown in Figure 1-7. One out of every four to fivebusinesses fails within three years, and about half cease operationswithin six to seven years. However, those figures include firms thatvoluntarily go out of business, such as by selling to someone else orby adding more owners. The results of a study shown in Figure 1-8indicate that only 18 percent should fall into the failure category. Thereported causes of failures are shown in Figure 1-9. Most often, eco-nomic and financial factors cause businesses to fail.

■ OBLIGATIONS OF OWNERSHIPAnyone who starts a business has a responsibility to the entire com-munity in which the business operates. Customers, employees, suppli-ers, and even competitors are affected by a single business. Therefore,

19


40

60

80

100

1990198919881987198619851984

Reported Failures (in thousands)

Business Failures: 1985–1996

40

60

80

100

19851987

19911995

19891993

1997

FIGURE 1-7

Number of Businesses thatFail Annually

ExtensionAsk students to refer to Figure1-7 and speculate what mighthave caused the drop in busi-ness failures between 1987and 1989. If students cannotventure an answer, refer themto Figure 1-4 to find a clue.Answer: The economy wasgrowing rapidly, which meansdemand for goods and ser-vices was strong. Also ask stu-dents what might have causeda large increase in businessfailures between 1989 and1991. Answer: The economywas sluggish—a mild reces-sion occurred.

Background NoteMany businesses start eachyear and a sizable number nolonger exist at the end of sixyears. However, many surviveand become prosperous.Some owners become soprosperous that they createbranch stores nationwide.

a business that fails creates an economic loss that is shared by othersin society. For example, an unsuccessful business probably owesmoney to other firms that will also suffer a loss because they cannotcollect. In fact, a business that cannot collect from several other busi-nesses may be placed in a weakened financial condition and it, too,may fail.

20

18%Failed

28%Voluntarily

Closed

54%Still Surviving

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

FIGURE 1-8

Many of the businesses re-ported as failures are not fail-ures.

Source: The Dun & Bradstreet Corporation, 1992

ECONOMIC CAUSES

Industry weakness, low profits, and low sales

FINANCE CAUSES

Heavy expenses and burdensome debts

DISASTER AND FRAUD

Hurricanes, floods, and theft

NEGLECT CAUSES

Business conflicts, family problems, and poor work habits

STRATEGY CAUSES

Overexpansion and difficulty collecting from customers

EXPERIENCE CAUSES

Inadequate planning and inexperience

PERCENT OF FAILURES

64.1

23.9

6.7

3.7

0.9

0.8

PRIMARY REASONS FOR FAILURES

FIGURE 1-9

Causes of Business Failures

Source: Adapted from Business Failure Record. The Dun & Bradstreet Corporation, 1992.

ReinforcementReview Figure 1-8. Point outthe reasons why the failurerate reported to the newsmedia by Dun & Bradstreet ishigher than the actual failurerate. A business may discon-tinue operations merely be-cause profits are unsatisfac-tory or an owner may retire ordie. These situations may ap-pear to be business failureswhen they are not. True fail-ures should be those that in-volve financial losses to own-ers and creditors.

ReinforcementReview Figure 1-9 and pointout that entrepreneurs mayhave little control over the eco-nomic factors; however, someof the factors can be managedand controlled somewhat. Themore entrepreneurs knowabout business, the greaterthe chance of success.

Background NoteWhen one large business fails,smaller businesses that aredependent upon the largebusiness often fail too.

An executive of a major business association pointed out the fol-lowing obligations of business owners:

1. TO CUSTOMERS: That they may have the best at the lowest cost,consistent with fairness to all those engaged in production and dis-tribution.

2. TO WORKERS: That their welfare will not be sacrificed for the ben-efit of others, and in their employment relations, their rights will berespected.

3. TO MANAGEMENT: That it may be recognized in proportion to itsdemonstrated ability, considering always the interest of others.

4. TO COMPETITORS: That there will be avoidance of every form ofunfair competition.

5. TO INVESTORS: That their rights will be safeguarded and they willbe kept so informed that they can exercise their own judgmentrespecting their interests.

6. TO THE PUBLIC: That the business will strive in all its operationsand relations to promote the general welfare and to observe faith-fully the laws of the land.

Just as every business has an obligation to the community, the com-munity has an obligation to each business. Society should be awarethat owners face many risks while trying to earn a fair profit on the invest-ment made in the business. Consumers should realize that the pricesof goods and services are affected by expenses that arise from operat-ing a business. Employees should also realize that a business cannotoperate successfully, and thereby provide jobs, unless each worker isproperly trained and eager to work. The economic health of a com-munity is improved when groups in the community are aware of eachother’s obligations. Some of the social and ethical dilemmas faced bybusinesses are examined in Chapter 2.

■ INTRAPRENEURSHIPRather than lose creative employees who may quit to start their ownbusinesses, employers now encourage creativity through intrapreneur-ships. An intrapreneur is an employee who is given funds and free-dom to create a special unit or department within a company in orderto develop a new product, process, or service. Although the maincompany finances the new venture, intrapreneurs enjoy the freedomof running their operations with little or no interference from uppermanagers.

Some of the largest corporations in the United States provide intrapre-neurship opportunities. By so doing, valuable employees provide thecompany with innovative products and services.

IBM and other major corporations such as 3M (which makes Scotchtape, Post It Notes, and a variety of other products) and General Electric

21


IBM entered late into thepersonal computer market.When IBM decided to makea small computer, itneeded a good product in ahurry. An intrapreneurshipunit was created. Within abrief period, the employ-ees who voluntarily joinedthe unit made a personalcomputer that soon outsoldother brands.

ExtensionFrom the list of obligations ofbusiness owners, which obli-gations apply to treating peo-ple fairly, honestly, and ethi-cally?Answer: It can be argued thatall apply.

Background NoteNeither consumers nor cus-tomers should expect some-thing for nothing. Each groupmust understand the concernsand needs of other groups. Em-ployees, consumers, and man-agers are all dependent uponone another to be informed andto respect each other.

ReinforcementStress that intrapreneurs arecreative employees with goodideas who are given the op-portunity to invent new prod-ucts, discover new approachesto make or sell products, andlead teams that are willing toreinvent the way work is done.

have also captured the innovative abilities of employees with entre-preneurial characteristics. Employees benefit because they risk neithertheir salaries nor their savings to launch a new business. Employersalso benefit by keeping creative employees who might have startedsuccessful competing businesses. Furthermore, employers and con-sumers benefit because new and better products, processes, and ser-vices are introduced at a quickened pace through intrapreneurships.

In recent years, businesses that struggled for survival in a globaleconomy offered an ownership opportunity to employees. Thatopportunity became known as an employee stock ownership plan(ESOP), which permits employees to directly own the company inwhich they work by allowing them to buy shares in it. Companiesbenefit by obtaining funds from employees who buy shares andthereby become highly motivated to make their company a success.ESOPs have been shown to increase productivity.

■ IMPORTANCE OF STUDYING BUSINESSPRINCIPLES AND MANAGEMENTWhether you plan to operate a business of your own, move up in acompany hierarchy, or simply be a valuable employee for a company,you must be well informed about the production, marketing, andfinancial activities of a business. As an owner, you must have a com-plete understanding of all phases of business operations, includingemployee relations and government regulations. You also need thisknowledge to become a competent employee. Moreover, if youexpect to become a supervisor or an executive of a company, youmust fully grasp how the activities of all departments are coordinatedin a smoothly operating business. Even organizations that are notprofit-making businesses, such as the government and charitableorganizations, operate in a manner similar to businesses. Businessknowledge will help you contribute as an employee in one of theseorganizations as well. You will have an opportunity to learn aboutcareer possibilities in the business world in the last chapter of thisbook.

22

Avis, the car rental firm,has an ESOP that createdemployee participationgroups that focused onsolving problems. Avis be-came a more profitablecompany because employ-ees worked harder and bet-ter when they knew theywould share in the profitsas owners.

ReinforcementRemind students that the prin-ciples of business applyacross the board to all kinds oforganizations. Whether oneworks for charitable and reli-gious organizations, medicaland legal offices, or state andfederal agencies, knowledgeabout business principles andmanagement will be valuablefor job success.

Background NoteTo encourage creative employ-ees to remain with their com-panies, the 3M Company (Min-nesota Mining andManufacturing), which is oneof the top 100 firms in thiscountry, encourages employ-ees to experiment with newideas and products. The fa-mous Post-It note pads werecreated by two 3M employees.

CHAPTER CONCEPTS■ In recent years, increased global competition has changed greatly

the way businesses operate, requiring firms to become more effi-cient and effective at providing goods and services of high qual-ity at low prices to satisfy customers around the world. Globalcompetition has produced streamlined firms that use new meth-ods to operate. Innovations, such as the development of com-puter technology, have changed the way businesses run.

■ A prosperous business system provides the majority of a coun-try’s citizens with a high standard of living. Evidence is shown ina continuously growing GDP and the variety of goods and ser-vices that people are able to buy.

■ The ease of starting a small business has resulted in many peo-ple either becoming entrepreneurs or intrapreneurs, behavinglike business owners inside firms. While many small firms fail, agreat many become highly successful as independent owners,franchisees, or large international firms.

■ An understanding of basic business terms and principles will helpyou become an effective employee or a successful business owner.

BUILD VOCABULARY POWERDefine the following terms and concepts.1. business 16. total quality management (TQM)2. production 17. output3. manufacturing firms 18. productivity4. service firms 19. mass production5. finance 20. downsize6. industrial businesses 21. empowerment7. third world nations 22. gross domestic product (GDP)8. commercial businesses 23. underground economy9. services 24. entrepreneur

10. industry 25. small business11. global competition 26. franchise12. effectiveness 27. franchisor13. efficiency 28. franchisee14. domestic goods 29. intrapreneur15. foreign goods 30. employee stock ownership

plan (ESOP)

REVIEW FACTS1. About how many businesses of all kinds are there in the United

States?2. What three activities do all businesses perform?3. Which two types of businesses, shown in Figure 1-1, employ the

most workers?

23


REVIEWCHAPTER 1See the Teacher’s ResourceManual for solutions to end-of-chapter activities.

24

4. Which type of business is growing in number faster than anyother type of business in the U.S.?

5. Name three techniques that American businesses can use toimprove efficiency and productivity.

6. When workers are empowered, what happens in anorganization?

7. Why is the gross domestic product (GDP) important?8. What proof is there that the average American family is finan-

cially well off?9. Is it relatively easy or difficult to start a small business?

10. How much do small businesses contribute to the GDP yearly,and how much of the total workforce is employed by smallbusinesses?

11. In a typical franchise arrangement, what are the advantages tothe franchisee?

12. What are the dangers to consider when seeking a franchisor?13. What are the two main causes for business failure?14. Why would a large business encourage intrapreneurship?15. How does a company benefit from having an employee stock

ownership plan?

DISCUSS IDEAS1. How does an industrial firm differ from a manufacturing firm?2. How have advances in computer technology benefited busi-

nesses? Give examples of business tasks that computers couldmake easier.

3. Study Figure 1-2, which shows changes in the growth of U.S.businesses by selected categories. What is happening to U.S.manufacturing compared to other categories? What might besome causes of this condition? How are the types of businessesin the U.S. economy changing as a result?

4. Discuss which is more important, effectiveness or efficiency.5. Discuss a plan of worker specialization and mass production

for a company that makes motorcycles. What are the advan-tages and disadvantages of specialization?

6. Many new products and methods have been created in thiscountry, but does the number of new inventions always lead tobusiness success over competitors? Explain your answer.

7. Discuss what types of people might prefer to be specialists onan assembly line doing the same tasks continuously, and whattypes would most prefer to be empowered employees.

8. How might it be possible for the GDP to be larger than thereported amount in a given year? What can be done to preventinaccurate GDP amounts that are reported?

9. Why might a person who wishes to go into business not wantto consider a franchise arrangement?

10. Give examples of risks that the owner of a gasoline service sta-tion might have.

11. Not only does the owner of a business have an obligation toemployees, but also each employee has an obligation to theemployer. Mention some specific obligations that each has.

12. Discuss why it is important for employees, consumers, or citi-zens to understand how American business operates.

ANALYZE INFORMATION1. Compare the total of industrial types of businesses in Figure 1-1

with the total of the service industries shown. (a) Approximatelywhat is the total employment for the production industries andfor the other industries? (b) By what percentage is the one grouplarger than the other?

2. Use the actual GDP figures (shown below) to answer these ques-tions: (a) What is the actual number of dollars for 1970? Show allthe necessary digits. (b) What is the percent of increase for eachdecade? (c) Calculate the total percent of increase from 1970 to1997. (d) Determine the average yearly increase in the GDP forthe period shown.

Year GDP1970 1.036 trillion1980 2.7841990 5.7441997 8.080

3. From his regular job, Ramon earned $25,000 last year, on whichhe paid his federal taxes. He also paid taxes on a week-long jobheld before getting his full-time job, from which he earned $600.In addition, Ramon earned $12,500 painting homes for relatives,neighbors, and friends. Early in the year, he bought an antiquecar in poor condition for $3,500. After spending $6,000 on spe-cial parts and many hours remodeling the car, he sold it for$31,000 and received cash for the full amount. Neither the moneymade when the antique car was sold nor the money earned forpainting homes was reported on his income tax return. (a) Howmuch of Ramon’s earnings were taxes last year? (b) How muchincome earned was a part of the underground economy on whichno taxes were paid? (c) What percent of his total income for theyear was from his underground economy earnings? (d) DoesRamon have a moral obligation to report his underground econ-omy earnings? Explain your answer.

4. You wish to start a small, profitable business in the neighbor-hood of your school, and you set these guidelines for yourself:The business cannot be a franchise, must be able to operate withonly a few workers, must be legal, and must not require an

25


REVIEW

investment greater than $5,000. Either alone or in a group, gen-erate as many creative ideas as possible. Follow instructions setby your teacher. After developing your ideas, decide which twowould have the greatest likelihood of success. Present your ideasto the class.

5. At a library or on the Internet, find a recent article about problemsa U.S. company or industry is having in competing with foreigncompanies. Write a report describing the problems and what theU.S. companies are doing to compete more successfully.

6. Research and prepare a report on the current economic climatewith regard to GDP, unemployment, standard of living, and othereconomic indicators.

SOLVE BUSINESS PROBLEMSCASE 1-1The Kirk family came to this country early in the 20th century andmade a bicycle that soon became known for its quality. Throughmuch of the century, Kirk was the “Cadillac” of American bicycles.In the 1960s, it ran circles around numerous competitors; one in fourbikes was a Kirk. Throughout this time, the Kirk family managedthe company.

The success of Kirk’s line of bicycles gave the company great con-fidence—perhaps too much confidence. During the last three yearssales dropped, slipping from one million bikes sold yearly to 500,000the next year and 250,000 last year. Three major competitors withnifty lower-priced bikes who sold to K-Mart, Sears, and other largestores were stealing customers. When mountain bikes became pop-ular, Kirk management ridiculed this new fad.

In the meantime, the quality of Kirk bikes faded. To cut costs,employees were let go and lower-quality parts were bought fromforeign firms and installed. Kirk managers made no attempt to talkto biking customers. Neither did the managers listen to the hundredsof dealers who sold Kirk bicycles in specialty shops. Loyal dealersstarted adding competitors’ products to survive. Bike deliveries wererunning late. The changes made to cut costs did not correct the situ-ation. For the last three years, Kirk operated at a loss. Somethingdrastic had to occur.

Recently, Kirk was purchased by another company. Headquartersfor the company was set up in Colorado, where biking is popular.Kirk’s new managers talked to customers and dealers. As a result,new products rolled off the assembly line that were satisfying loyaldealers and older bikers who recalled the excellent quality of theKirk two-wheelers. But can the new Kirk adequately rebuild itself tocompete in a tough market? Quality Kirk bikes sold only at specialtyshops cost $250 to $2,500, which is far more than most bikes pur-chased at discount stores. Plenty of persuading will be needed to

26

convert the price-conscious casual bikers or the more serious riderswho put on 25 to 100 miles a week.

Signs of success appear on the horizon. A small profit is expectedthis year for the struggling firm. Whether the new managers canreestablish Kirk’s earlier lead in the marketplace is yet to bedetermined.

Think Critically:1. What was the main reason the old Kirk company failed? Explain

your answer.2. What should the new managers do to help improve Kirk’s effec-

tiveness?3. What might the company do to help improve its efficiency?4. Create a title for this case that provides the theme to the story.5. With permission of the instructor, join two other students to dis-

cuss and make recommendations for how the Kirk company mightexpand its business.

CASE 1-2Fast Food Fellows, often shortened to “Fellows,” is a major restau-rant franchise that sells outlets to entrepreneurs interested in open-ing their own businesses. The franchisees are usually quite success-ful because of the strict rules set by the franchisor. Despite highstart-up costs, many applications are rejected.

Emi Tanaka and Rosa Lopez, two friends who have known eachother for years, decided they would quit their jobs and go into busi-ness for themselves. Neither friend had been a manager or run abusiness before, but Rosa had worked as a restaurant cashier andEmi’s parents ran a small clothing shop where she occasionally workedafter school and summers. Both agreed that a new restaurant in theirhometown would be an excellent idea and even agreed on a build-ing that had a “for rent” sign. Both liked to cook at home and hadvisited many restaurants. They agreed that a nice place in the busi-ness district of their town would attract shoppers, workers, and oth-ers. Both believed they could raise enough money to get started.

Emi and Rosa believed that a franchised business would be thebest choice, and both seemed to have adequate money to invest.They checked the local library and Internet resources for franchisinginformation and found a long list of possibilities. They studied thelist and decided Fellows was their favorite. They gathered as muchinformation as possible, contacted its headquarters, and obtained andmailed a Fellows application. They were excited when called in fora meeting with the manager. However, they were surprised to learnthat the start-up cost was quite high and the fee was 8 percent ofweekly sales.

After thinking about it for a few days, they decided that becausethe franchise business had a great reputation, it could not fail. There

27


REVIEW

was no need to check with other franchisors. The business soonopened and customers were plentiful. While both were concernedabout how much they had to pay the headquarters each week, theywere surprised when they learned that a new Fellows franchise hadrecently been granted and would soon open less than two milesaway. What would happen to their profits? They contacted a fewother Fellows franchisees from other towns and learned that thefranchisor often put other outlets too near to one another. Emi andRosa were upset, as were other Fellows franchisees, but what couldthey do?

Think Critically:1. Did Emi and Rosa make any mistakes in how they made their

decision to select Fellows? Give reasons for your answer. (Withdirections from your instructor, you may prefer to form groups ofthree to five students. Half the groups should argue that Emi andRosa made the right decision, while the others should argue thatthey made the wrong decision. Each group should then providereasons for the decisions.)

2. If you believe it is unfair for the franchisor to cause reducedprofits because outlets are located too near to one another,which of the following choices should the franchisor select:lower the weekly royalty percentage fee of 8 percent and reduceits profits; place outlets farther apart and make lower profits; orkeep things the way they are? Provide a reason for your answer.

3. What action might the franchisees take to protect their interestsin their franchise outlets?

4. What advice would you give others who want to open a fran-chised business?

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Throughout this course, you will participate in a continuing projectin which you will plan your own business—a juice bar. This projectwill require you to gather and analyze information and make deci-sions about your new business. The section called “Project: MyBusiness, Inc.” at the end of each chapter will guide you throughthe next step in business planning, as you apply what you learnedin the chapter to a realistic new business venture. Develop writtenanswers to each of the Data Collection and Analysis activities identi-fied by your teacher, using a computer if possible. After you havecompleted each chapter’s activities, save your work in the notebookyou have prepared.

Juice bars are a part of two industries—fast food and healthfoods. While juice bars are popular today, you will want your busi-

MY BUSINESS, INC.PROJECT:PROJECT:

ness to be successful in the future. It is not practical to start a busi-ness that may not be needed in a few years. In this chapter you willbe asked to study information to help you determine the future ofyour business and to make the first specific decisions about yourbusiness.

DATA COLLECTION1. Review newspapers, magazines, and other publications to gather

information about the size and growth of the health and fitnessmarket as well as the fast food industry.

2. In your city or neighborhood, identify the types of businessesthat exist in the areas of fast food and health foods. (Try to includethe very small businesses that operate as a part of a larger busi-ness such as a supermarket or health club.) Develop a list thatincludes the name of each business, a brief description of thebusiness, the type of products offered, and the business location.

3. Find information that identifies the failure rate of new fast foodbusinesses and of health and fitness businesses.

4. Using the Internet and the library or by visiting businesses inyour area, identify the common types of products offered byjuice bar businesses.

ANALYSIS1. What factors have led to the growth of juice bars?2. Is there any evidence that this type of business may not be as

successful in the future?3. What are the advantages and disadvantages of starting a small

juice bar business in your community?4. Create a name for your business. A good business name should

be short and easy to remember. It should relate to the type ofbusiness being operated, should be appealing to prospective cus-tomers, and different from other similar businesses. You may wantto create an interesting design for your business name that couldbe used on signs and in promotion.

5. Develop an initial business concept. The business concept is aone- to two-paragraph statement that describes the business anda possible location, the most likely customers, and the primaryproducts and services that could be offered.

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