Business Dynamics - Ch. 1-11

goods

tangible products such as computers, food, clothing, cars, and appliances

services

intangible products (that can’t be held in your hand) such as education, health care, insurance, recreation, and travel and tourism

entrepreneur

a person who risks time and money to start and manage a business

revenue

total amount of money a business takes in during a given period by selling goods and services

profit

amount of money a business earns above and beyond what it spends for salaries and other expenses

loss

when a business’s expenses are more than its revenues

risk

the chance an entrepreneur takes of losing time and money on a business that may not prove profitable

• not all enterprises make the same amount of profit

• all businesses take risks, but taking big risks could earn a company big profits

standard of living

the amount of goods and services people can buy with the money they have

quality of life

the general well-being of a society in terms of its political freedom, natural environment, education, health care, safety, amount of leisure, and rewards that add to the satisfaction and joy that other goods and services provide

• requires the combined efforts of businesses, nonprofits, and government agencies

• #1 = Denmark, #2 = Sweden, #3 = Switzerland

stakeholders

all the people who stand to gain or lose by the policies and activities of a business and whose concerns the business needs to address

• a primary challenge is to recognize and respond to the needs of stakeholders

• often, the needs of a firm’s various stakeholders will conflict

outsourcing

contracting with other companies (often in other countries) to do some functions of a firm, like production or accounting

• many foreign companies are opening design and production facilities in the U.S., called insourcing

nonprofit organization

an organization whose goals do not include making a personal profit for its owners or organizers

• uses financial gains to meet social or educational goals

factors of production

the five resources used to create wealth:

• land (natural resources)

• labor (workers)

• capital

• entrepreneurship

• knowledge

business environment

the surrounding factors that either help or hinder the development of businesses

• 5 elements

5 Elements of the Business Environment

1. economic and legal environment

2. technological environment

3. competitive environment

4. social environment

5. global business environment

The Economic and Legal Environment

• freedom of ownership

• contract laws

• elimination of corruption

• tradable currency

• minimum taxes and regulation

The Technological Environment

• information technology

• databases

• bar codes

• the internet

The Competitive Environment

• customer service

• stakeholder recognition

• employee service

• concern for the environment

The Social Environment

• diversity

• demographic changes

• family changes

Ways gov. can promote entrepreneurship

• allowing private ownership of businesses

• minimizing interference w/ the free exchange of goods and services

• passing laws that enable businesspeople to write enforceable contracts

• establishing a currency that’s tradable in world markets

• minimizing corruption

Technology

from phones to software programs, it makes business processes more effective, efficient, and productive

productivity

the amount of output you generate given the amount of input

• Ex: hours worked

e-commerce

the buying and selling of goods online

• Business-to-consumer (B2C)

• Business-to-business (B2B)

competing by exceeding customer expectations

customers want good quality products at low prices with great customer service

• technology plays a key role

competing by restructuring and empowerment

b/c business is more customer-driven, some managers give frontline employees more decision-making power

empowerment

giving frontline workers the responsibility, authority, freedom, training, and equipment they need to respond quickly to customer requests

demography

the statistical study of the human population with regard to its size, density, and other characteristics such as age, race, gender, and income

• richest demographic group are aged 75+

• retired people draining economy of wealth due to social security

• Gen. Z will be the largest group of consumers in the world

war and terrorism

• drained trillions of dollars from the U.S. economy

• money was diverted to Ukraine war effort

• increased unrest creates uncertainty, which may be the biggest risk in business

free trade

the movement of goods and services among nations w/o political or economic barriers

Pros of free trade

• the global market contains over 7.9 billion potential customers for goods and services

• productivity grows when countries produce goods and services in which they have a comparative advantage

• global competition and less-costly imports keep prices down, so inflation does not curtail economic growth

• free trade inspires innovation for new products and keeps firms competitively challenged

• uninterrupted flow of capital gives countries access to foreign investments, which help keep interest rates low

Cons of free trade

• domestic workers (particularly in jobs that are manufacturing based) can lose their jobs due to increased imports or production shifts to low-wage global markets

• workers may be forced to accept pay cuts from employers, who can threaten to move their jobs to lower-cost global markets

• moving operations overseas b/c of intense competitive pressure often means the loss of service jobs and growing numbers of white-collar jobs

• domestic companies can lose their comparative advantage when competitors build advanced production operations in low-wage countries

comparative advantage

a country should sell to other countries those products that it produces most efficiently and buy from other countries products that it cannot produce as effectively or efficiently

absolute advantage

a country has a monopoly on producing a specific product or is able to produce it more efficiently than all other countries

China’s perspective on comparative advantage

“independence and self-reliance” — Xi wants China to make as much and import as little as possible

balance of trade

total value of a nation’s exports compared to its imports over a particular period

trade surplus

• favorable

• when the value of a country’s exports exceeds that of its imports

trade deficit

• unfavorable

• when the value of a country’s imports exceeds that of its exports

balance of payments

difference b/n money coming into a country (from exports) and money leaving the country (from imports) plus money flows from other factors such as tourism, foreign aid, military expenditures, and foreign investment

• goal: have more money flowing into that country than out — favorable balance

• unfavorable balance = more money flows out of country than in

dumping

selling products in a foreign country at lower prices than those charged in the producing country

• prohibited by U.S. laws

• products must be priced to include 10% overhead costs plus an 8% profit margin

foreign direct investment (FDI)

the buying of permanent property and businesses in foreign nations

foreign subsidiary

a company owned in a foreign country by another company, called the parent company

primary advantage of foreign subsidiary

parent company maintains complete control over its technology or expertise

primary disadvantage for foreign subsidiary

must commit funds and technology within foreign boundaries

multinational corporation

an organization that manufactures and markets products in many different countries and has multinational stock ownership and multinational management

sovereign wealth funds (SWFs)

investment funds controlled by governments holding large stakes in foreign companies

culture

set of values, beliefs, rules, and institutions held by a specific group of people

• social structures, religion, manners and customs, values and attitudes, language, and personal communication

ethnocentricity

an attitude that your own culture is superior to other cultures

exchange rate

the value of one nation’s currency relative to the currencies of other countries

high value of the dollar

dollar is trading for more foreign currency; foreign products become cheaper

low value of the dollar

dollar is trading for less foreign currency; foreign goods become more expensive

floating exchange rates

currencies float in value depending on the supply and demand for them in the global market

devaluation

lowering the value of a nation’s currency relative to other currencies

Foreign Corrupt Practices Act of 1978

prohibits “questionable” or “dubious” payments to foreign officials to secure business contracts

technological differences

• influence the features and feasibility of exportable products

  • residential electrical systems may differ

  • computer and internet use may not be affordable or available

trade protectionism

the use of gov. regulations to limit the import of goods and services

• allows domestic producers to survive, grow, and produce jobs

tariffs

a tax imposed on imports

protective tariffs

import taxes

revenue tariffs

tariff to raise money for gov.

import quota

a limit on the number of products in certain categories that a nation can import

embargo

a complete ban on the import or export of a certain product, or the stopping of all trade with a particular country

• political disagreements can lead to this

nontariff barriers

not as specific or formal as import quotas or embargos but can be just as detrimental to free trade

General Agreement on Tariffs and Trade (GATT)

A 1948 agreement that established an international forum for negotiating mutual reductions in trade restrictions

World Trade Organization (WTO)

An independent entity of 164 member nations whose purpose is to oversee cross-border trade issues and global business practices; headquartered in Geneva

• Many worry this organization’s authority and legitimacy could be crumbling as many countries ignore them and implement export controls, tariffs, and subsidies

common markets

a regional group of countries that have a common external tariff, no internal tariffs, and a coordination of laws to facilitate exchange; also called a trading bloc

common markets

• European Union (EU)

• Mercosur

• ASEAN

• COMESA

North American Free Trade Agreement (NAFTA)

agreement that created a free-trade area among the U.S., Canada, and Mexico

• passed in 1993

• its attempts to boost job growth, fight poverty, improve environmental controls, and close the wage gap b/n Mexico and United States largely failed

The United States—Mexico—Canada Agreement (USMCA)

• North American Free Trade Agreement (NAFTA)

• this organization replaced NAFTA; the new agreement was ratified in 2020

Goals of USMCA

• create level playing field for U.S. workers w/ improved rules

• modernize and strengthen food and agriculture trade in North America

• support modern economy

• introduce new rules on digital trade, anticorruption, and good regulatory practices

offshore outsourcing

process whereby one firm contracts w/ other companies abroad to do some or all of its functions

• U.S. firms have outsourced payroll functions, accounting, and manufacturing for years

• w/ the growth of global markets, companies have been shifting to offshore outsourcing

  • there are some quality issues

  • many companies have begun reshoring

pros of offshore outsourcing

• less-strategic tasks can be outsources globally so that companies can focus on areas in which they can excel and grow

• outsourced work allows companies to create efficiencies that in fact let them hire more workers

• consumers benefit from lower process generated by effective use of global resources and less developed nations grow, thus fueling global economic growth

cons of offshore outsourcing

• jobs may be lost permanently and wages fail due to low-cost competition offshore

• offshore outsourcing may reduce product quality and can therefore cause permanent damage to a company’s reputation

• communication among company members, w/ suppliers, and w/ customers becomes much more difficult

Enron Corp scandal

• Former CEO Kenneth Lay, CFO Andrew Fastow, and CEO Jeffrey Skilling were found guilty of committing accounting fraud by moving billions of dollars of debt off Enron’s balance sheet

  • artificially inflated company’s stock and bond prices

• executives who bankrupted the company made millions while employees and other small investors lost billions of dollars.

WorldCom scandal

• international accounting irregularities (not disclosing debt and falsely counting revenue that was not received) made the company look almost $11 billion more profitable than it was.

• loss of >30,000 jobs and $180 billion in losses to investors

• CEO Bernie Ebbers served 13 years of a 25-year sentence

ethics

standards of moral behavior; that is, behavior accepted by society as right versus wrong

unethical behavior

• in the office; violate safety standards, goof off

• personal: lie, not act honorably

• at school: plagiarize from the internet

  • studies found a strong relationship between academic dishonesty and dishonesty at work

ethical dilemmas

must choose between two unsatisfactory alternatives

• ask yourself:

  • Is my proposed action legal?

  • Is it balanced?

  • How will it make me feel about myself?

compliance-based ethics codes

emphasize preventing unlawful behavior by increasing control and by penalizing wrong-doers

integrity-based ethics codes

define the organization’s guiding values, create an environment that supports ethically sound behavior, and stress a shared accountability among employees

Guide to Whistleblowing

1. Identify the issue

2. document the facts

3. determine who needs to know

4. make a decision about maintaining confidentiality

5. make the call or submit your disclosure

corporate social responsibility (CSR)

a business’s concern for the welfare of society

• based on a commitment to integrity, fairness, and respect

• some feel this is not a manager’s role

• proponents argue that businesses owe their existence to the societies they serve and cannot exist in societies that fail

companies with good ethical reputations attract and retain better employees, draw more customers, and enjoy greater employee loyalty

corporate philanthropy

CSR that includes charitable donations

corporate social initiatives

CSR that includes enhanced forms of corporate philanthropy directly related to the company’s competencies

corporate responsibility

includes everything from hiring minority workers to making safe products

corporate policy

the position a firm takes on social and political issues

President Kennedy’s 4 basic rights of consumers

1. the right to safety

2. the right to be informed

3. the right to choose

4. the right to be heard

expanded rights of Kennedy’s basic 4

expanded by the United Nations in 1985

5. the right to satisfaction of basic needs

6. the right to redress

7. the right to consumer education

8. the right to a health environment

insider trading

an unethical activity in which insiders use private company information to further their own fortunes of those of their family and friends

Regulation FD

a new rule adopted by the SEC for fair disclosure (responsibility to investors)

responsibility to employees

• create jobs and provide a chance for upward mobility

• treat employees with respect

• offer salaries and benefits that help employees reach their personal goals

• loss of employee commitment, confidence, and trust in the company and tis management can be costly

green movement

emerged as concern about climate change increased

• businesses are trying to minimize their carbon footprint

• environmental efforts may increase costs but can create jobs and allow for higher prices—and increase market share

  • emerging renewable-energy and energy-efficient industries currently account for more that 3 million jobs

responsibility to society and the environment

• green movement

• many nonprofits receive funding directly from businesses, which helps both benefit

social audit

a systematic evaluation of an organization’s progress toward implementing socially responsible and responsive programs

5 types of watchdogs

1. socially conscious investors

2. socially conscious research organizations

3. environmentalists

4. union officials

5. customers

International ethics regulations

• Foreign Corrupt Practices Act

• Inter-American Convention Against Corruption

• UN, EU, and organization for Economic Cooperation and Development condemnation of corporate bribery

• ISO 26000

Friedman’s Opinion

• “the social responsibility of a business is to increase its profits”

  • corporate executive has a direct responsibility to his employers, which is to conduct the business in accordance with their desires (to make as much money as possible)

  • preaching social responsibility in the opposing opinion=preaching pure and unadulterated socialism

Mackey’s Opinion

• “the best way to maximize profits over the long-term is to not make them the primary goal of the business”

  • entrepreneurs discover &/or create the purpose of a business—not investors, politicians, lawyers, or economists

  • management’s role is to optimize the health and value of the entire complex, evolving, and self-adaptive system

  • business = community of people working together to create value for others (customers, employees, investors, greater society)

  • best way to maximize long-term shareholder value is to optimize value for all major constituents (all interdependent)

  • No right amount to donate to the community, but 0% is too little

Business Roundtable Opinion

• companies should work to deliver value to customers, invest in employees, deal fairly w/ suppliers, support communities, and generate long-term shareholder value

• corporate boards have a legal obligation to protect the interests of shareholders

• focusing on range of stakeholders amounts to grandstanding that misdirects resources

• idea that companies have an obligation to society isn’t universally popular

• shareholders, not CEOs, should be the ones influencing society

• Council of Institutional Investors said the statement gives CEOs cover to dodge shareholder oversight

sole proprietorship

a business owned, and usually managed, by one person

partnership

a legal form of business w/ 2+ owners