Chapter 1 Notes: Taking Risks and Making Profits in a Dynamic Business Environment

Learning Objectives

  • LO 1-1 Describe the relationship between profit and risk, and show how businesses and nonprofit organizations can raise the standard of living for all.

  • LO 1-2 Explain how entrepreneurship and the other factors of production contribute to the creation of wealth.

  • LO 1-3 Analyze the effects of the economic environment and taxes on businesses.

  • LO 1-4 Describe the effects of technology on businesses.

  • LO 1-5 Demonstrate how businesses can meet and beat competition.

  • LO 1-6 Analyze the social changes affecting businesses.

  • LO 1-7 Identify what businesses must do to meet global challenges, including war and terrorism.

  • LO 1-8 Review how past trends are being repeated in the present and what those trends mean for tomorrow’s college graduates.

Getting to Know Daymond John

  • Daymond John: Founder and CEO of FUBU.

  • Started FUBU in 1989 after noticing people paying high prices for a hat that could be made easily. He made hats himself and sold them at a lower price.

  • In 1992, relaunched the company with partners and focused on getting clothes into the hands of celebrities (e.g., LL Cool J).

  • Built FUBU into one of the hottest fashion labels in the U.S.

  • Has generated more than 6 billion in worldwide sales.

  • Invested 15 million of his own money in more than 100 startups.

  • Source image: Jim Bennett/WireImage/Getty Images

Name that Company

  • THIS KOREA-BASED COMPANY is building new EV and battery manufacturing facilities in Bryan County, Georgia.

Business and Wealth Building

1. Business: definition and components

  • A business is any activity that seeks to provide goods and services to others while operating at a profit.

  • Goods are tangible products (e.g., computers, food, clothing, cars, appliances).

  • Services are intangible products (e.g., education, health care, insurance, recreation, travel).

2. Entrepreneur

  • An entrepreneur is a person who risks time and money to start and manage a business.

3. Revenue, Profit, and Loss

  • Revenue: ext{Total amount of money a business takes in during a given period}. (Page 9: option C: Revenue)

  • Profit: ext{Amount of money a business earns above and beyond what it spends for salaries and other expenses}.

  • Loss: ext{When a business’s expenses are more than its revenues}.

4. Revenues, Profits, and Losses (definitions)

  • Revenue: R = ext{price} imes ext{quantity sold} (conceptual definition; reported as total inflows from selling goods/services).

  • Profit: ext{Profit} = ext{Total Revenue} - ext{Total Costs (expenses)}.

  • Loss: ext{Loss} = ext{Total Costs} - ext{Total Revenue} ext{ (when costs exceed revenue)}.

5. Matching Risk with Profit

  • Risk is the chance an entrepreneur takes of losing time and money on a venture that may not prove profitable.

  • Not all enterprises yield the same level of profit.

  • All businesses take risks, but taking bigger risks can yield bigger profits.

6. Risk and Reward: Crocs example

  • Story: Scott Seamans, Lyndon “Duke” Hanson, and George Boedecker designed foam boating clogs.

  • Initial skepticism from friends, but eventual recognition of comfort, slip-resistance, and buoyancy led to a successful venture.

  • Crocs grew to billions in annual sales, illustrating significant rewards from calculated risk.

  • Question raised: What risks and rewards did these entrepreneurs face when starting their business?

7. Standard of Living and Quality of Life

  • Standard of living: ext{The amount of goods and services people can buy with the money they have}.

  • U.S. has a high standard of living largely due to wealth created by its businesses; price levels vary by location.

  • Quality of life: ext{The general well-being of society in terms of political freedom, environment, education, health care, safety, leisure, and rewards that add to satisfaction}.

  • High quality of life requires combined efforts of businesses, nonprofits, and government.

8. Responding to the Various Business Stakeholders

  • Stakeholders: ext{All the people who stand to gain or lose by a business’s policies and activities}.

  • A primary challenge is to recognize and respond to stakeholders’ needs.

  • Figure 1.1 highlights potential conflicts among stakeholder groups (e.g., paying employees more vs. stockholders’ profits).

9. Outsourcing and Insourcing

  • Outsourcing: Contracting with other companies (often in other countries) to perform some firm functions (e.g., production or accounting).

  • Insourcing: Foreign companies opening design/production facilities in the U.S.; the opposite trend of outsourcing.

10. Using Business Principles in Nonprofit Organizations

  • Nonprofit organization: Goals do not include personal profit for owners; profits are reinvested to meet social or educational goals.

  • Management principles apply similarly to both profit-driven and nonprofit organizations because effective management drives mission attainment.

11. Management in Nonprofit Organizations

  • Goals are social and educational, not profit-oriented.

  • Example: The American Red Cross provides aid to millions annually.

  • Good management principles apply to nonprofits just as in for-profit enterprises.

12. What Employees Want

  • 5 value drivers employees seek:

    • Deeper connections: feeling understood through family and community ties, not just work relations.

    • Radical flexibility: autonomy in how, where, and when work gets done.

    • Personal growth: value growth as a person, not only as a professional.

    • Holistic well-being: care for overall well-being, beyond just benefits.

    • Shared purpose: involvement in purposeful actions, not just corporate statements.

  • Source: Gartner article, Beyond the Text (Jan 2024).

TESTPREP 1

  • What is the difference between revenue and profit?

  • What is the difference between standard of living and quality of life?

  • What is risk, and how is it related to profit?

  • What do the terms stakeholders, outsourcing, and insourcing mean?

The Importance of Entrepreneurs to the Creation of Wealth 1

Positives to Being an Entrepreneur

  • Freedom to succeed

  • Make own decisions

  • Possible wealth

Negatives to Being an Entrepreneur

  • Freedom to fail

  • No paid vacations

  • No health insurance

Importance of Entrepreneurs

  • To create wealth for its citizens, a country needs more than natural resources; it needs the efforts of entrepreneurs and the knowledge to produce goods/services.

  • Question: How can government support entrepreneurship and the spread of knowledge?

  • Visual example: Burke/Triolo Productions/The Image Bank/Getty Images

Women in the Workforce

  • Labor force participation rate for women reached an all-time high in June 2023 (21st century data cited):

    • February 2020: 77 ext{%}

    • April 2020: 73.5 ext{%}

    • June 2023: 77.8 ext{%}

  • Despite higher participation, the gender wage gap persists:

    • For every 1.00 earned by men, women earned:

    • 1982: 0.65 ext{ dollars}

    • 2002: 0.80 ext{ dollars}

    • 2022: 0.82 ext{ dollars}

The Five Factors of Production

  • Factors of production: the five resources used to create wealth:

    • Land (or natural resources)

    • Labor (workers)

    • Capital

    • Entrepreneurship

    • Knowledge

  • Key idea: What makes rich countries rich today is entrepreneurship and knowledge.

  • Figure 1.2 lists the five factors of production: Land, Labor, Capital, Entrepreneurship, Knowledge.

TESTPREP 2

  • What are some advantages of working for others?

  • What benefits do you lose by being an entrepreneur, and what do you gain?

  • What are the five factors of production? Which ones seem to be the most important for creating wealth?

The Business Environment 1

  • The surrounding factors that either help or hinder the development of businesses.

  • Five elements:

    • Economic and legal environment

    • Technological environment

    • Competitive environment

    • Social environment

    • Global business environment

Figure 1.3: The Global Business Environment

  • GLOBAL BUSINESS ENVIRONMENT emphasized.

  • Subcomponents:

    • The Economic and Legal Environment: elements include 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.

  • GLOBAL COMPETITION, FREE TRADE, and QUALITY IMPERATIVE are guiding concepts.

The Business Environment 2: The Economic and Legal Environment

  • Government can promote entrepreneurship by:

    • Allowing private ownership of businesses.

    • Minimizing interference with 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.

The Business Environment 3: Differences Between Countries

  • Starting a business varies by country; example: India has a time-consuming and bureaucratic process for obtaining government permission.

  • New businesses can still be a major source of wealth and employment.

  • Question prompt: What would be the effect of more freedom to create business opportunities in a country with 1.4+ billion people?

The Business Environment 3: How Technology Benefits Workers and You

  • Technology encompasses: phones, computers, mobile devices, medical imaging, robots, Internet, AI, social media, software/apps.

  • Productivity is the output generated relative to input; defined as ext{Productivity} = rac{ ext{Output}}{ ext{Input}}.

Maintaining Cycles of Sustainability with a Circular Economy

  • Circular economy aims to keep products in the value circle; reduce waste.

  • The Plant in Chicago: indoor farm using rainwater and solar power; supports >20 companies with reduced waste.

The Growth of E-Commerce

  • E-commerce defined as the buying and selling of goods online.

  • Types: Business-to-Consumer (B2C) and Business-to-Business (B2B).

Using Technology to Be Responsive to Customers

  • Database: electronic storage for information.

  • Identity theft: obtaining individuals’ personal information (e.g., SSN, credit card numbers) for illegal purposes.

Using Technology for Customers: Disney MagicBand

  • MagicBand uses RFID to serve as park ticket, hotel key, payment system, and access to extras like PhotoPass.

  • Question: Does the MagicBand encourage more purchases in the park? (Discussion prompt)

The Business Environment 6: The Competitive Environment

  • Competing by Exceeding Customer Expectations:

    • Customers want high quality at low prices with excellent service.

  • Competing by Restructuring and Empowerment:

    • Empowerment: frontline employees’ responsibility, authority, freedom, training, and equipment to respond quickly to customer requests.

Empowerment (Poll)

  • A question asks: With empowerment, do you feel empowered in your most recent job? (Options: Yes/No)

The Social Environment 7: Demography and Managing Diversity

  • Demography: statistical study of population size, density, and characteristics (age, race, gender, income).

  • Managing Diversity: move beyond recruitment of minorities; promote inclusion and belonging in the workplace.

Resident Population of the United States by Race, 2022

  • White alone, non-Hispanic: 57.8% of total population; 60.8% of adults; 47.3% of under-18s.

  • Hispanic or Latino: 18.7% of total; 16.8% of adults; 25.7% of under-18s.

  • Black or African American alone, non-Hispanic: 12.1% of total; 11.7% of adults; 13.2% of under-18s.

  • Source: Census.gov (January 2024)

The Business Environment 8: Increase in the Number of Older Citizens

  • People 75+ are currently the richest demographic group.

  • Retirees may drain the economy via Social Security.

  • Increase in single-parent families prompts programs such as family leave and flextime.

Diversity in Age

  • The U.S. workforce is highly diverse in age, requiring managers to adapt to generational differences.

  • Discussion questions: What challenges arise when working with someone much younger or older?

Who Will Support Social Security?

  • Worker-to-recipient ratio left in the chart shows historical trends and projected values:

    • 1960: 5.1

    • 2010: 3.0

    • 2021: 2.7

    • 2035: 2.3

Single-Parent Families

  • More working families are single parents juggling job and child-rearing.

  • Managerial responses to retain valued employees facing these challenges (e.g., flexibility, support).

The Rise of Gen Z’s Economic Influence

  • Gen Z: born 1995–2009; will be the largest group of consumers globally.

  • Marketers must capture Gen Z’s attention and engage them.

Companies Compete for the Online Attention of Gen Z

  • Gen Z heavily uses social media; TikTok is central for information and recommendations.

  • Strategies:

    • Influencers as brand ambassadors.

    • Direct ad space on TikTok.

The Global Environment

  • Globalization has grown due to efficient distribution and Internet connectivity.

  • War and terrorism drain trillions from the U.S. economy and divert funds (e.g., Ukraine war).

  • Increased geopolitical unrest creates uncertainty and is a major business risk.

How Global Changes Affect You

  • Global expansion creates new jobs.

  • Rapid changes drive the need for continuous learning and adaptation.

The Ecological Environment

  • Climate change: long-term movement of planetary temperatures up or down.

  • Greening: trend toward saving energy and producing less harmful products.

KFC’s Finger-Lickin’ Good Global Offerings

  • KFC offers region-specific items:

    • Zinger created in Trinidad and Tobago; now global.

    • Chizza: pizza with fried chicken crust (Philippines).

  • 18 global food innovation teams organized around the world.

  • Teams develop dishes based on regional tastes, which may not appeal everywhere.

TESTPREP 3

  • What are four ways the government can foster entrepreneurship?

  • What is the difference between effectiveness, efficiency, and productivity?

  • What is empowerment?

  • What are some major issues affecting the economy today?

The Evolution of U.S. Business 1: Progress in Agricultural and Manufacturing Industries

  • 1800s: Agriculture led economic development.

  • Technological advances (e.g., harvester) enabled large-scale farming, leading to fewer farmers on larger farms.

  • Industrialization moved jobs from farms to factories.

  • As technology increased productivity, fewer workers were needed in factories.

Technology and Agriculture

  • Agriculture remains a key U.S. industry; technology boosted productivity and efficiency, enabling larger farms.

  • Smaller farms face competition; potential strategies include using agricultural technology to compete more effectively.

The Evolution of U.S. Business 2: Progress in Service Industries

  • Since the mid-1980s, the service sector accounted for almost all job growth.

  • More high-paying jobs exist in service industries.

The Evolution of U.S. Business 3: Progress in the Information Age

  • Information-based global/technical revolution is reshaping all sectors.

  • Intellectual capital constitutes a significant portion of a company’s value.

  • Innovation is encouraged as a core driver of growth.

The Evolution of U.S. Business 4: Your Future in Business

  • The text prepares you with concepts that enable leadership and business understanding for tomorrow’s workplace.

TESTPREP 4

  • What major factor caused people to move from farming to manufacturing and from manufacturing to the service sector?

  • What does the future look like for tomorrow’s college graduates?

Closing note

  • This chapter presents a broad view of how risks, entrepreneurship, the environment (economic, legal, technological, social, global), and evolving demographics interact to shape wealth creation, living standards, and the future of work.