Understanding Business: The Core Notes

Textbook Information and Authorship

• Title: Understanding Business: The Core, Second Edition.

• Authors:

  • William G. (Bill) Nickels: Emeritus professor of business at the University of Maryland, College Park. He has over $30$ years of experience teaching graduate and undergraduate courses in marketing, promotion, and introduction to business. He has won the Outstanding Teacher on Campus Award four times and holds an MBA from Western Reserve University and a PhD from Ohio State University.

  • James M. (Jim) McHugh: Former chair of the Business and Economics Department at St. Louis Community College at Forest Park. He coordinated business curriculum and taught Introduction to Business for nearly $30$ years. He holds an MBA from Lindenwood University and served as chief of staff to the St. Louis County Executive.

  • Susan M. McHugh: Learning specialist with an MEd from the University of Missouri. She is a professional curriculum developer for both public and private sectors, with expertise in adult learning theory.

• Publishing Data: Published by McGraw Hill LLC in New York, NY (Copyright $2021$). Previous edition copyright $2016$. ISBNs include $978-1-264-05959-1$ (bound) and $978-1-264-12617-0$ (loose-leaf).

• Dedication: The authors dedicate the work to their families (Marsha, Joel, Carrie, Claire, Casey, Dan, Molly, Michael, Lindsay, Patrick, and Quinn) and the team of instructors and students who provided guidance.

Features of the Global Standard for Business Education

• Relevancy and Currency: The content addresses contemporary challenges including Brexit, ransomware, $3D$ printing, and robo-advisors.

• Educational Technology:

  • McGraw-Hill Connect: An online assignment and assessment solution for customizing courses.

  • SmartBook 2.0: An adaptive reading experience that personalizes content based on student comprehension and memory recall.

  • Application Exercises: Includes Click-and-Drag exercises for models, Video Cases for real-world scenarios, and $15$-minute Mini-Simulations.

  • Auto-Scored Writing Assignments: Provides feedback on short-answer prompts.

• Instructional Resources:

  • Teacher’s resource manual and a test bank with over $300$ questions per chapter.

  • PowerPoint presentations with integrated polling.

  • Video Library: Includes Hotseat videos (workplace challenges), iSeeIt! (animated explanations), and specifically produced company case videos.

Structural Changes and Updates in the Second Edition

• Chapter Consolidation: The text was condensed to $16$ chapters based on reviewer feedback.

  • Former Chapters $1$ and $2$ (Business Environment and Economics) are now Chapter $1$.

  • Former Chapters $11$ and $12$ (HRM and Employee-Management Issues) are now Chapter $10$.

  • Former Chapters $16$ and $17$ (Finance and Securities) are now Chapter $15$, with investing content moved to Bonus Chapter C.

• New Content Chapters: Bonus Chapter B (Technology) was promoted to Chapter $13$: Using Technology to Manage Information.

• New Section: "Career Exploration" was added to the end of each chapter to identify business opportunities.

• Contemporary Topics Added: Includes the gig economy, social media advertising, benefit corporations, circular economy, market-based pay, ban-the-box rules, holocracy, drones, and the Wells Fargo/Volkswagen scandals.

Business Trends: Cultivating a Business in Diverse, Global Environments

• Ann-Marie Campbell Case Study (Home Depot): Campbell, a Jamaican immigrant, rose from a part-time sales associate to Executive Vice President of U.S. stores, overseeing over $2,000$ locations and $400,000$ employees. She holds an MBA ($2005$) and emphasizes that permanent success comes from developing others. She was listed among Fortune's top $50$ most powerful women in business for four consecutive years.

• Defining Business Success:

  • Business: Any activity seeking to provide goods and services to others for a profit.

  • Goods: Tangible products (computers, food, clothing, cars).

  • Services: Intangible products (education, health care, insurance, recreation).

  • Revenue: Total money taken in by selling goods and services during a given period.

  • Profit: Money earned above and beyond what is spent on salaries and expenses.

  • Loss: Occurs when expenses are more than revenues. Over $175,000$ U.S. businesses close annually.

• Entrepreneurs and Wealth Creation:

  • Entrepreneur: A person who risks time and money to start and manage a business.

  • Risk: The chance of losing time and money on a business that may not be profitable. Successful entrepreneurs provide jobs and pay taxes that fund public facilities (hospitals, schools, etc.).

  • Standard of Living: The amount of goods and services people can buy with their money. The U.S. has a high standard because of business wealth creation, even if hourly wages in countries like Germany or Japan are higher, as prices in those nations are also higher (e.g., $7$ for beer in Japan vs. $4$ in the U.S.).

Stakeholders and the Nonprofit Sector

• Stakeholders: People who stand to gain or lose by a business’s activities. This group includes customers, employees, stockholders, suppliers, dealers (retailers), bankers, the community, media, environmentalists, competitors, unions, critics, and government leaders.

• The Conflict of Needs: Balancing stakeholder demands is a core managerial role; for example, high wages for employees may reduce stockholder profits.

• Nonprofit Organizations: Groups whose goals are social or educational rather than personal profit (e.g., United Way, Salvation Army, American Red Cross). The Red Cross assists approximately $30$ million people annually. Nonprofits still require business skills like marketing and financial management.

The Five Elements of the Business Environment

• Economic and Legal Environment: Includes freedom of ownership, contract laws, elimination of corruption, and minimum taxes/regulations to encourage entrepreneurship.

• Technological Environment: Includes information technology, databases, and social media.

  • Effectiveness: Producing the desired result.

  • Efficiency: Producing goods/services using the least resources.

  • Productivity: Output generated relative to input (e.g., hours worked).

  • Drones Example: Property inspectors using drones can reduce costs from $200$-$300$ (for a $6$-hour manual inspection) to $10$ (for a $1$-hour drone inspection).

• Competitive Environment: Focuses on customer service, stakeholder recognition, and environmental concern. Firms must be customer-driven and differentiate themselves.

• Social Environment: Focuses on demography—the statistical study of population size, density, age, race, gender, and income.

  • Social Security Impact: In $1940$, $42$ workers supported each retiree; currently, that number is under $3$ and is projected to reach $2$ by $2030$.

• Global Environment: Includes trade agreements, international economic conditions, and globalization facilitated by efficient distribution and the Internet.

Economics and the Factors of Production

• Economics: The study of how society chooses to employ resources to produce and distribute goods and services.

  • Macroeconomics: Operation of a nation’s economy as a whole.

  • Microeconomics: Behavior of people and organizations in specific markets.

  • Resource Development: Studying how to increase resources (e.g., fish farming, hydroponics).

• Five Factors of Production:

  1. Land: Natural resources used for products.

  2. Labor: Human workers (increasingly replaced by technology).

  3. Capital: Machines, tools, and buildings (not necessarily money itself).

  4. Entrepreneurship: The willingness to take risks to use resources.

  5. Knowledge: Information technology determining and responding to consumer needs.

Comparative Economic Systems

• Command Economies: Government decides production, distribution, and growth.

  • Socialism: Basic businesses (steel, mines, utilities) are government-owned to distribute profits evenly. Pros: Social equality, longer vacations, free healthcare/education. Cons: Brain drain (loss of the best and brightest to other countries), high taxes, less innovation.

  • Communism: Government makes almost all economic decisions and owns all major factors of production. Cons: Government doesn't know what to produce without market prices; leads to shortages and lack of incentive.

• Free-Market Economies (Capitalism): Factors of production/distribution are privately owned and operated for profit. Based on Adam Smith’s The Wealth of Nations ($1776$).

  • Invisible Hand: The process where self-directed gain turns into social and economic benefits for all as business owners hire others and grow the economy.

  • Four Basic Rights of Capitalism:

    1. Right to own private property.

    2. Right to own a business and keep all profits.

    3. Right to freedom of competition.

    4. Right to freedom of choice.

• Mixed Economies: A blend where some allocation is made by the market and some by the government. Most nations, including the U.S., operate as mixed economies.

The U.S. Economic System and Market Dynamics

• Supply and Demand:

  • Supply: Quantity of products owners are willing to sell at different prices. Higher prices lead to higher supplied quantities.

  • Demand: Quantity of products people are willing to buy. Lower prices lead to higher quantity demanded.

  • Equilibrium Point: The crossing point where quantity demanded equals quantity supplied. This eventually becomes the market price.

• Degrees of Competition:

  • Perfect Competition: Many sellers; identical products (e.g., agricultural products). Rare today.

  • Monopolistic Competition: Large number of sellers with similar products perceived as different (e.g., hot dogs, PCs).

  • Oligopoly: A few sellers dominate (e.g., tobacco, aircraft, automobiles).

  • Monopoly: One seller controls total supply and price. Prohibited in the U.S. except for public utilities (e.g., water, electric power).

Key Economic Indicators and Stabilization

• Gross Domestic Product (GDP): Total value of final goods/services produced in a country annually. Includes production from foreign-owned companies located within the country (e.g., Honda in Ohio).

• Unemployment Rate: Percentage of civilians $16+$ years old who are unemployed and have tried to find work in the last four weeks. Down below $\%4$ in $2019$. Full employment is considered $\%4$ to $\%5$.

• Price Indexes:

  • Inflation: General rise in prices; "too many dollars chasing too few goods."

  • Hyperinflation: Prices rise by $\%50$ per month. Venezuela reached over $\%10,000,000$ in $2019$.

  • Disinflation: Inflation rate is declining.

  • Deflation: Prices are declining.

  • Stagflation: Economy slows but prices rise.

  • Consumer Price Index (CPI): Monthly statistics measuring inflation/deflation. Core inflation is CPI minus food and energy.

  • Producer Price Index (PPI): Measures price changes at the wholesale level.

• The Business Cycle:

  1. Economic Boom: Business is booming.

  2. Recession: Two or more consecutive quarters of GDP decline.

  3. Depression: Severe recession with deflation (e.g., $1930s$).

  4. Recovery: Economy stabilizes and starts to grow.

Fiscal and Monetary Policy

• Fiscal Policy: Federal efforts to stabilize the economy through taxes and spending (Keynesian economic theory).

  • National Deficit: Money spent beyond tax collections in a fiscal year. Reached over $1.1\,trillion$ in $2020$.

  • National Debt: Sum of deficits over time (now almost $23\,trillion$).

• Monetary Policy: Management of money supply and interest rates by the Federal Reserve Bank (the Fed).

  • To slow the economy (and prevent inflation), the Fed raises interest rates or lowers the money supply.

  • To boost the economy, the Fed lowers interest rates.

Evolution of the U.S. Economy

• Agriculture: Since the $1800s$, inventions like Cyrus McCormick’s harvester ($1834$) and Eli Whitney’s cotton gin revolutionized productivity. Farmers dropped from $\%33$ of the population to less than $\%1$ today.

• Manufacturing: Technological improvements eliminated many factory jobs but increased wealth.

• Service Industries: Now make up nearly $\%80$ of the U.S. economy's value. High-paying sectors include law, health, telecommunications, and finance.

• Information-Based Revolution: The current era is defined by a global and technical revolution affecting all sectors (agricultural, industrial, and service).

Discussion and Review (Test Prep)

• Relationship of Revenue, Profit, and Loss: Revenue is total intake; profit is revenue minus expenses; loss is expenses exceeding revenue.

• Risk and Profit Connection: Risk is the chance of loss; higher risks are often undertaken in hopes of higher profits.

• Comparison of Economics: Macroeconomics deals with the whole nation (e.g., national debt), while microeconomics deals with individual market behaviors (e.g., gas prices vs. car size).

• Allocation of Resources: Resources include Land, Labor, Capital, Entrepreneurship, and Knowledge.

• Economic Systems Comparison: In Socialism, basic industries are government-owned; in Communism, the government owns almost everything; in Capitalism, property and business are privately owned.

• Monetary Policy Responsibility: The Federal Reserve Bank (the Fed) is responsible for managing interest rates and the money supply.