Understanding Economic Systems and Business
Chapter 1: Understanding Economic Systems and Business
Introduction & Learning Outcomes
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Learning Outcomes (after reading this chapter, you should be able to answer):
How do businesses and not-for-profit organizations help create our standard of living?
What are the sectors of the business environment, and how do changes in them influence business decisions?
What are the primary features of the world’s economic systems, and how are the three sectors of the U.S. economy linked?
How do economic growth, full employment, price stability, and inflation indicate a nation’s economic health?
How does the government use monetary policy and fiscal policy to achieve its macroeconomic goals?
What are the basic microeconomic concepts of demand and supply, and how do they establish prices?
What are the four types of market structure?
Which trends are reshaping the business, microeconomic, and macroeconomic environments and competitive arena?
Team Rubicon: Disaster Relief and a Sense of Purpose
Significance of Not-for-Profits: Account for a substantial amount of economic activity in the United States, representing an undeniable force in the business world.
Distinction from For-Profit: Their focus is on goals other than profit, falling outside the traditional model of a for-profit business.
Mission: This shift away from profit allows them to pursue missions of social improvement and contributions to society as a whole.
Effectiveness Requirement: To be truly effective in a not-for-profit organization, an individual must share the organization’s vision.
Founding of Team Rubicon:
Cofounders: Jake Wood and William McNulty.
Inspiration: Witnessed the devastation of the Haiti earthquake in 2010.
Initial Action: Both Marines, they knew they could help in the chaotic situation.
Rapid Mobilization (within 24 hours): Enlisted six other military veterans and first responders, gathered donations and supplies from friends and family, and traveled to Haiti for disaster relief.
Birth of Organization: Team Rubicon was born from this effort.
Organization Name Origin:
Reference: Named after the Rubicon, a river in northern Italy.
Historical Context: Julius Caesar and his troops crossed this river on their march to Rome, which marked a point of no return.
Symbolism for Team Rubicon: Underscores the cofounders’ experiences in Haiti, where they proceeded despite advice from government officials and other aid organizations not to, carrying crucial gear and medical supplies to earthquake victims after crossing from the Dominican Republic.
Team Rubicon's Mission (Seven years later): Twofold mission:
To pair the skills and experiences of military veterans with first responders to provide immediate aid in any type of disaster.
To provide a sense of community and accomplishment to veterans who have served their country proudly but may be struggling as a result of their war experiences.
Mission Statement - Three Provisions for Veterans: According to its mission statement, Team Rubicon seeks to provide veterans three things they sometimes lose after leaving the military:
Purpose: Gained through disaster relief efforts.
Sense of Community: Built by serving with others.
Feeling of Self-Worth: From recognizing the impact one individual can make when dealing with natural disasters.
Organizational Structure and Operations:
Headquarters: Los Angeles area.
Staff: Over 60 employees working in 10 regions across the country.
Volunteers: More than 40,000 volunteers ready to deploy within 24 hours.
Staff Positions (similar to for-profit companies): Regional administrators, field operations (including membership and training), marketing, communications, and social media, fundraising and partnership development, finance and accounting, and people operations.
Employee Background: Staff members bring professional and/or military experience and share the organization's vision.
Recruitment Paths: Many started as volunteers while in for-profit careers; others joined through the strong internship program.
Impact and Achievements (2016):
Training: Trained 8,000 military veterans and first responders in disaster relief.
Disaster Response: Responded to 46 disasters.
Volunteer Hours: Required more than 85,000 volunteer hours.
Funding and Partnerships:
Sources of Funds: Donations from individuals and corporations.
Key Partnership Example: Southwest Airlines, which provides hundreds of free plane tickets annually to fly volunteers to disaster sites.
Community Engagement: Actively engages its nationwide community at every level (volunteer to board member) and every step of its operation (training, planning, implementation, fundraising, volunteer recruitment).
Recognition: Over several years, recognized as one of the top nonprofits to work for by The NonProfit Times, based on employee surveys and business partners’ input on the work environment.
Appeal of Not-for-Profit Sector: Its growth within the overall economy indicates it appeals to many, offering opportunities for those interested in nonprofit careers and passionate about helping others, including disaster victims and returning military personnel.
Understanding Economic Systems and Business
Module Scope: Provides basic structures of the business world: how it's organized, external influences, future direction, and how economies and governments shape economic activity.
Business Dynamics: Thousands of new businesses start daily in the U.S.; many fail, few succeed greatly (e.g., Apple, Google, Amazon).
Key to Survival: Successful organizations understand that change is constant and adapt to environmental trends.
Module Focus: Introduces primary functions of business, risk-profit relationship, importance of not-for-profit organizations, major business environment components (demographic, social, political/legal, competitive), how economies provide jobs and create products, government's role in economic activity (e.g., tax policies), supply and demand in pricing, and key trends in various environments.
1.1 The Nature of Business
Question: How do businesses and not-for-profit organizations help create our standard of living?
Ubiquity of Businesses: Encountered daily (gas stations, fast food, mobile banking, online shopping).
Definition of Business: An organization that strives for a profit by providing goods and services desired by its customers.
Role in Consumer Needs: Meet needs by providing medical care, autos, countless other goods and services.
Goods vs. Services:
Goods: Tangible items manufactured by businesses (e.g., laptops).
Services: Intangible offerings that cannot be held, touched, or stored (e.g., physicians, lawyers, hairstylists, car washes, airlines).
Inter-Organizational Service: Businesses also serve other organizations (hospitals, retailers, governments) with machinery, goods for resale, computers, etc.
Standard of Living Creation: Businesses create the goods and services that form the basis of our standard of living.
Measuring Standard of Living: Measured by the output of goods and services people can buy with their money.
U.S. Standard: One of the highest in the world.
Comparative Example: Countries like Switzerland and Germany have higher average wages but not higher standards of living due to higher prices (e.g., McDonald's meal costing potentially 10 vs. less than 5 in the U.S.), meaning the same money buys less.
Quality of Life:
Definition: General level of human happiness based on factors like life expectancy, educational standards, health, sanitation, and leisure time.
Collective Effort: Businesses, government, and not-for-profit organizations collaboratively build a high quality of life.
Global Ranking (2017): Vienna, Austria ranked highest; not one U.S. city in top 10; Baghdad, Iraq, lowest.
Risk in Business:
Definition: The potential to lose time and money or otherwise not be able to accomplish an organization’s goals.
Examples: American Red Cross (not meeting blood demand), Microsoft (falling short of revenue/profit goals).
Revenue, Costs, and Profit/Loss:
Revenue: Money a company receives by providing services or selling goods to customers.
Costs: Expenses incurred from creating and selling goods and services (e.g., rent, salaries, supplies, transportation).
Profit: Money remaining after all costs are paid (revenues > costs).
Loss: Occurs when costs are greater than revenues.
Intelligent Resource Use: Can increase sales, hold down costs, and earn profit.
Risk of Business: Not all companies earn profits.
Risk-Profit Relationship: Generally a direct relationship in U.S. business: greater risks, greater potential for profit (or loss).
Conservation vs. Nimbleness: Conservative companies may lose to nimble competitors who adapt quickly.
Sony Example: Once a leader (Walkman, Trinitron TVs), lost ground and profits over two decades by not embracing new technologies (digital music, flat-panel TVs).
Mistake: Misjudged market, stayed with proprietary technologies instead of cross-platform options.
Competitor Success: Apple grabbed digital music market share with iPods and iTunes.
Sony's Restructuring (by 2016): Experienced substantial success with PlayStation 4 and original gaming content.
Not-for-Profit Organizations:
Definition: An organization that exists to achieve some goal other than the usual business goal of profit.
Examples: Charities (Habitat for Humanity, United Way, American Cancer Society, World Wildlife Fund), most hospitals, zoos, arts organizations, civic groups, religious organizations.
Growth: Number of nonprofits, employees, and volunteers has increased considerably over the last 20 years.
Government Role: Government is the largest and most pervasive not-for-profit group.
Nongovernmental Not-for-Profits: Over 1.5 million entities in the U.S.; contribute over 900 billion annually to the U.S. economy.
Goal Focus: Goals are not profit-focused (e.g., feeding the poor, preserving environment, increasing ballet attendance, preventing drunk driving).
Competition: Do not compete directly like for-profit businesses (e.g., Ford vs. Honda), but do compete for talented employees, limited volunteer time, and donations.
Blurring Boundaries:
Increased exchange of ideas between not-for-profit and for-profit sectors.
For-profit businesses are now addressing social issues (discussed in ethics chapter).
Successful not-for-profits apply business principles for effectiveness.
Managerial Concerns: Not-for-profit managers are concerned with: strategy development, careful budgeting, performance measurement, innovation, productivity improvement, accountability, fostering an ethical workplace.
Museum Director Example: Manages artistic goals alongside administrative/business aspects (HR, finance, legal). Ticket revenues are only a fraction of costs, so fundraising is crucial. Boards include art patrons and business executives for sound fiscal decisions, requiring directors to balance artistic mission and financial policy.
Future Trend: Major art museums will seek new directors as over one-third approach retirement.
Factors of Production: The Building Blocks of Business
Definition: Resources (inputs) required to provide goods and services, regardless of for-profit or not-for-profit sector.
Four Traditional Factors: Natural resources, labor (human resources), capital, and entrepreneurship.
Fifth Factor (Many Experts): Knowledge, acknowledging its key role in business success.
Efficiency: Efficient use of factors of production allows a company to produce more goods and services with the same resources.
Natural Resources:
Definition: Commodities useful inputs in their natural state.
Examples: Farmland, forests, mineral and oil deposits, water.
Alternative Term: Sometimes called