MGMT 1051 - Chapter 1

Chapter 1: The dynamics of business and economics

THE NATURE OF BUSINESS

1-1 Define basic concepts such as business, profit, and economics

A business tries to earn a profit by providing products that satisfy people's needs. The outcomes of its efforts are products that have both tangible and intangible characteristics that provide value and benefits. When you purchase a product, you are buying the value and benefits you think the product will provide. A Domino's pizza, for example, may be purchased to satisfy hunger, while a Ford F-150 truck may be purchased to satisfy the need for transportation and the desire to present a certain image.

Most people associate the word product with tangible goods-an automobile, smartphone, jeans, or some other tangible item. However, a product can also be a service, which occurs when people or machines provide or process something of value to customers. Dry cleaning, a telemedicine visit, a movie, or sports event

-these are examples of services. An Uber ride satisfies the need for transportation and is, therefore, a service. A product can also be an idea. Accountants and attorneys, for example, provide ideas for solving problems.

The Goal of Business

The goal of business is to earn a profit while maintaining social responsibility. A profit is the difference between what it costs to make and sell a product and what a customer pays for it. In addition, a business has to pay for all expenses necessary to operate. If a company spends $8 on expenses related to production, financing, and marketing, as well as other operating expenses, and sells the product for $12, then the firm has a profit of $4. The profits of the firm are also subject to federal, state, and local taxes. Businesses have the right to keep and use their profits as they choose-within legal limits-because profit is the reward for their efforts and for the risks they take in providing products. Earning profits contributes to society by creating resources that support our social institutions and government. Businesses that create profits, pay taxes, and create jobs are the foundation of our economy. In addition, profits must be earned in an ethically and socially responsible manner. Most businesses give back to the community to support social and economic causes. Not all organizations are businesses, however. Nonprofit organizations-such as Feeding America and United Way, and other charities and social causes-do not have the fundamental purpose of earning profits, although they may provide goods or services and engage in fund-raising. They also utilize skills related to management, marketing, and finance.

To earn a profit requires management skills to plan, organize, and control the activities of the business and to find and develop employees so that it can make products consumers will buy. A business also needs marketing expertise to learn what products consumers need and want and to develop, manufacture, price, promote, and distribute those products. Additionally, a business needs financial resources and skills to fund, maintain, and expand its operations. A business must cover the cost of labor, operate facilities, pay taxes, and provide management. Other challenges for business people include abiding by laws and government regulations and adapting to economic, technological, political, and social changes. Even nonprofit organizations engage in management, marketing, and finance activities to help reach their goals. Nonprofits also need employees with the same skills as businesses.

To achieve and maintain profitability, businesses have found that they must produce quality products, operate efficiently, and be socially responsible and ethical in dealing with customers, employees, investors, government regulators, and the community. Because these groups have a stake in the success and outcomes of a business, they are called stakeholders. Primary stakeholders, who are absolutely necessary for a firm's survival, include customers, employees, suppliers, and investors. Secondary stakeholders have an indirect relationship with the company, so they are not essential for a firm's survival; these include the media, trade associations, and special-interest groups.

The People and Activities of Business

1-2 Identify the main participants and activities of business

Figure 1.1 shows the people and activities involved in business. At the center of the figure are owners, employees, and customers; the outer circle includes the primary business activities-management, marketing, and finance. Owners have to put up resources, time, and effort, as well as financial and human resources, to start a business. Employees are responsible for the work that goes on within a business. Owners can manage the business themselves or hire employees to accomplish this task. In the case of publicly traded companies, chief executive officers (CEOs) do not own their companies but are employees who are responsible for managing all the other employees in a way that earns a profit for investors, who are the real owners. Finally, and most importantly, a business's major role is to satisfy the customers who buy its goods or services. Note also that forces beyond an organization's control-such as legal and regulatory forces, the economy, competition, technology, the political environment, and ethical and social concerns-all have an impact on the daily operations of businesses. You will learn more about these participants in business activities throughout this book. Next, we will examine the major activities of business.

Figure 1.1 Overview of the Business World

Management

Notice that in L Figure 1.1, management and employees are in the same segment of the circle. This is because management involves developing plans, coordinating employees'* actions to achieve the firm's goals, organizing people to work efficiently, and motivating them to achieve the business's goals.

Management involves the functions of planning, organizing, leading, and controlling. Effective managers who are skilled in these functions display effective leadership, decision making, and delegation of work tasks. According to Jeff Bezos, founder and former CEO of Amazon, a key to effective management is to make a small number of high-quality decisions and delegate day-to-day business operations decisions.' Management is also concerned with acquiring, developing, and using resources (including people) effectively and efficiently.

Management involves organization, teamwork, and communication. Operations and supply chain management are also important. Motivating the workforce and managing human resources are necessary for success. Managers at the Ritz-Carlton, for instance, are concerned with transforming resources such as employee actions and hotel amenities into a quality customer service experience. In essence, managers plan, organize, staff, and control the tasks required to carry out the work of the company or nonprofit organization. We take a closer look at management activities in Parts 3 and 4 of this text.

Marketing

Marketing and customers are in the same segment of I Figure 1.1 because the focus of all marketing activities is satisfying customers. Marketing includes all the activities designed to provide goods and services that satisfy consumers' needs and wants. Marketers gather information and conduct research to determine what customers want. Using information gathered from marketing research, marketers plan and develop products and make decisions about how much to charge for their products and when and where to make them available. They also analyze the marketing environment to understand changes in competition and consumers. For example, many fast-food restaurants are phasing out dining rooms and shifting to drive-through-only locations as consumer behavior changes.?

Other restaurants are requiring all orders to be made through an ordering kiosk and then picked up by the customer at the counter.

Marketing focuses on the four P's-product, price, place (or distribution), and promotion-also known as the marketing mix. Product management

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involves key management decisions such as product adoption, development, branding, and product positioning. Selecting the right price for the product is essential to the organization as it relates directly to profitability. Distribution (or place) is an important management concern because it involves making sure products are available to consumers in the right place at the right time. Distribution also includes a supply chain involving a network of materials, components, processes, and information to make and deliver products. Marketers use promotion-advertising, personal selling, sales promotion (coupons, games, sweepstakes), and publicity-to communicate the benefits and advantages of their products to consumers and to increase sales. For example, Texas Pete uses advertising as part of its promotion mix to appeal to restaurant operators who want to expand their menu. The print ads in this campaign highlight the variety of product sizes and flavors offered by the hot sauce brand. We will examine marketing activities in Part 5 of this text.

Finance

Owners and finance are adjacent in ' Figure 1.1 because, although management and marketing have to deal with financial considerations, it is the primary responsibility of the owners to provide financial resources in the form of owners' equity represented by common stock. Accounting, money, and the financial system, as well as understanding the securities market, are important for business success. People who work as accountants, financial analysts, investment advisors, or bankers are all part of the financial world. Management of large corporations rely on investors and loans from financial institutions and often issue stocks or bonds to have financial resources. Owners of small businesses in particular often rely on bank loans for funding. Part 6 of this text discusses financial management.

Why Study Business?

1-3 Explain why studying business is important

Studying business can help you develop skills and acquire knowledge to prepare for your future career, regardless of whether you plan to work for a large corporation, start your own business, work for a government agency, or manage or volunteer at a nonprofit organization. The field of business offers a variety of interesting and challenging careers in marketing, human resources management, information technology, finance, production, accounting, data analytics, and more. Job titles include accountant and auditor, financial analyst, human resources specialist, management analyst, market research analyst, project manager, purchasing manager, training and development specialist, and many, many more? A wide variety of career opportunities exist in the world of business, especially for college graduates. Research shows that the earning potential of college graduates is much higher than that of nongraduates.

Studying business can also help you better understand the many business activities that are necessary to provide satisfying goods and services. Most

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businesses charge a reasonable price for their products to ensure that they cover their production costs, pay their employees, provide their owners with a return on their investment, and perhaps give something back to their local communities and societies. Allbirds, Bombas, Cisco, Dr. Bronner's, General Mills, HP, Merck, Microsoft, Texas Instruments, and Warby Parker are just a few examples of successful companies that give back. Thus, learning about business can help you become a well-informed consumer and member of society.

Business activities help generate not only the profits that are essential to individual businesses and local economies, but also the products that provide quality of life for the public. Understanding how our free-enterprise economic system allocates resources and provides incentives for industry and the workplace is important to everyone.

THE ECONOMIC FOUNDATIONS OF BUSINESS

1-4 Compare the four types of economic systems

It is useful to explore the economic environment in which business is conducted. In this section, we examine economic systems, the free-enterprise system, the concepts of supply and demand, and the role of competition. These concepts play important roles in determining how businesses operate in a particular society.

Economics is the study of how resources are distributed for the production of goods and services within a social system. You are already familiar with the types of resources available. Land, forests, minerals, water, and other things that are not made by people are natural resources. Human resources (labor) refer to the physical and mental abilities that people use to produce goods and services. Financial resources (capital) are the funds used to acquire the natural and human resources needed to provide products. These resources are related to the factors of production, consisting of land, labor, capital, and enterprise used to produce goods and services. The firm can also have intangible resources such as a good reputation for quality products or being socially responsible. The goal is to turn the factors of production and intangible resources into a competitive advantage.

Economic Systems

An economic system describes how a particular society distributes its resources to produce goods and services. A central issue of economics is how to fulfill an unlimited demand for goods and services in a world with a limited supply of resources. Different economic systems attempt to resolve this central issue in numerous ways.

Although economic systems handle the distribution of resources in different ways, all economic systems must address three important issues:

1. What goods and services, and how much of each, will satisfy consumer needs?

2. How will goods and services be produced, who will produce them, and with what resources will they be produced?

3. How are the goods and services to be distributed to consumers?

Communism, socialism, and capitalism, the basic economic systems found in the world today ( Table 1.1), have fundamental differences in the way they address these issues. The factors of production in command economies are controlled by government planning. In many cases, the government owns or controls the production of goods and services. Communism and socialism are, therefore, considered command economies.

Communism

Karl Marx (1818- 1883) first described communism as a society in which the people, without regard to class, own all the nation's resources. In his ideal political-economic system, everyone contributes according to ability and receives benefits according to need. In a communist economy, the people (through the government) own and operate all businesses and factors of production. Central government planning determines what goods and services satisfy citizens' needs, how the goods and services are produced, and how they are distributed. However, no true communist economy exists today that satisfies Marx's ideal.

On paper, communism appears to be efficient and equitable, producing less of a gap between rich and poor. In practice, however, communist economies have been marked by low standards of living, critical shortages of consumer goods, high prices, corruption, and little freedom. Russia, Poland, Hungary, and other eastern European nations have turned away from communism and toward economic systems governed by supply and demand rather than by central planning.

However, their experiments with alternative economic systems have been fraught with difficulty and hardship. Countries such as Venezuela have tried to incorporate communist economic principles without success. Even Cuba is experiencing changes to its predominantly communist system. Similarly, China was the first communist country to make strong economic gains by adopting capitalist approaches to business. Economic prosperity has advanced in China with the government claiming to ensure market openness, equality, and fairness through state capitalism. As a result of economic challenges, communism is declining and its future as an economic system is uncertain.

Socialism

Socialism is an economic system in which the government owns and operates basic industries-postal service, telephone, utilities, transportation, health care, banking, and some manufacturing-but individuals own most businesses. For example, in Sri Lanka the postal service is owned by the government, and the country's state-owned electricity company controls nearly 100 percent of the market. Central planning determines what basic goods and services are produced, how they are produced, and how they are distributed. Individuals and small businesses provide other goods and services based on consumer demand and the availability of resources. Citizens are dependent on the government for many social services, such as education, health care, and subsidized housing.

Most socialist nations, such as Norway, India, and Israel, are democratic and recognize basic individual freedoms. Citizens can vote for political offices, but central government planners usually make many decisions about what is best for the nation. People with low income and high living expenses in Norway can apply for a housing allowance grant in order to pay for housing of a good standard, as determined by the government.® People are free to go into the occupation of their choice, but they often work in government-operated organizations. Socialists believe their system permits a higher standard of living than other economic systems, but the difference often applies to the nation as a whole rather than to its individual citizens. Socialist economies profess egalitarianism-equal distribution of income and social services. They believe their economies are more stable than those of other nations. Although this may be true, taxes and unemployment are generally higher in socialist countries. However, countries like Finland, which is rated as the world's happiest country, have a high standard of living.

Capitalism

Capitalism (free enterprise) is an economic system in which individuals own and operate the majority of businesses that provide goods and services.

Competition, supply, and demand determine which goods and services are is an economic system in which individuals own and operate the majority of businesses that provide goods and services. Competition, supply, and demand determine which goods and services are produced, how they are produced, and how they are distributed. The United States, Canada, Japan, and Australia are examples of economic systems based on capitalism.

There are two forms of capitalism: pure capitalism and modified capitalism. In pure capitalism, also called a free-market system, all economic

decisions are made without government intervention. This economic system was first described by Adam Smith in The Wealth of Nations (1776). Smith, often called the father of capitalism, believed that the "invisible hand of competition" best regulates the economy. He argued that competition should determine what goods and services people need. Smith's system is also called laissez-faire ("let it be") capitalism because the government does not interfere in business. But Smith believed the system required ethical and socially responsible conduct.

Modified capitalism differs from pure capitalism in that the government intervenes and regulates business to some extent. One of the ways in which the United States and Canadian governments regulate business is through laws. Laws such as the Federal Trade Commission Act, which created the Federal Trade Commission to enforce fair competition and consumer protection, illustrate the importance of the government's role in the economy. In the United States, states have leeway to regulate business. For example, the state of California has a comprehensive consumer privacy law that applies to businesses that meet certain requirements, but there is no comprehensive privacy law at a federal level in the United States.?

Mixed Economies

No country practices a pure form of communism, socialism, or capitalism, although most tend to favor one system over the others. Most nations operate as mixed economies, which have elements from more than one economic system. In socialist Sweden, most businesses are owned and operated by private individuals. In the capitalist United States, an independent federal agency operates the postal service. In Germany, the Deutsche Post is privatized and trades on the stock market. In Hungary, Poland, and other eastern European nations, capitalist ideas have been implemented, including private ownership of businesses.

After Russia invaded the Ukraine, tension between many Western countries and Russia ended many trade relationships. China and the United States have engaged in a trade war with a 25 percent tariff on $250 billion in Chinese goods. Russia and China are examples of how there can be challenges between different economic systems. Also, less democratic political systems with planned economies can be in conflict with free-enterprise economies in world markets.

Countries such as China and Russia have used state capitalism to advance the economy. State capitalism tries to integrate the powers of the state with the advantages of capitalism. It is led by the government but uses capitalistic tools such as listing state-owned companies on the stock market and embracing globalization.® State capitalism includes some of the world's largest companies such as Russia's Gazprom, which has the largest reserves of natural gas and is majority-owned by the Russian government. Years ago, China's largest companies were all state owned, but today some of the country's most valuable companies are publicly traded, such as Alibaba, an e-commerce giant, and Tencent, a multinational technology company.

The Free-Enterprise System

Many economies-including those of the United States, Canada, and Japan-are based on free enterprise, and many communist and socialist countries, such as China and Russia, are applying more principles of free enterprise to their own economic systems. Free enterprise provides an opportunity for a business to succeed or fail on the basis of market demand. In a free-enterprise system, companies that can efficiently manufacture and sell products that consumers desire will probably succeed. Inefficient businesses and those that sell products that do not offer needed benefits will likely fail as consumers take their business to firms that have more competitive products.

A number of basic individual and business rights must exist for free enterprise to work. These rights are the goals of many countries that have recently embraced free enterprise.

1. Individuals must have the right to own property and to pass this property on to their heirs. This right motivates people to work hard and save to buy property.

2. Individuals and businesses must have the right to earn profits and to use the profits as they wish, within the constraints of their society's laws, principles, and values.

3. Individuals and businesses must have the right to make decisions that determine the way the business operates. Although there is government regulation, the philosophy in countries like the United States and Australia is to permit maximum freedom within a set of rules of fairness.

4. Individuals must have the right to choose what career to pursue, where to live, what goods and services to purchase, and more. Businesses must have the right to choose where to locate, what goods and services to produce, what resources to use in the production process, and so on.

Without these rights, businesses cannot function effectively because they are not motivated to succeed. Thus, these rights make possible the open exchange of goods and services. In the countries that favor free enterprise, such as the United States, citizens have the freedom to make many decisions about the employment they choose and create their own productivity systems. Many entrepreneurs are more productive in free-enterprise societies because personal and financial incentives are available that can aid in entrepreneurial success. For many entrepreneurs, their work becomes a part of their system of goals, values, and lifestyle. Consider successful entrepreneurs of innovative companies such as Anne Wojcicki (23andMe), Bill Gates (Microsoft), Rihanna (Fenty Beauty), and Walt Disney (The Walt Disney Company). Many of the world's billionaires are self-made entrepreneurs.

The Forces of Supply and Demand

1-5 Describe the role of supply, demand, and competition in a free-enterprise system

​​In the United States and in other free-enterprise systems, the distribution of resources and products is determined by supply and demand. Demand is the number of goods and services that consumers are willing to buy at different prices at a specific time. From your own experience, you probably recognize that consumers are usually willing to buy more of an item as its price falls because they want to save money. Consider handmade rugs, for example. Consumers may be willing to buy six rugs at $350 each, four at $500 each, but only two at $650 each. The relationship between the price and the number of rugs consumers are willing to buy can be shown graphically with a demand curve.

Supply is the number of products that businesses are willing to sell at different prices at a specific time. In general, because the potential for profits is higher, businesses are willing to supply more of a good or service at higher prices. For example, a company that sells rugs may be willing to sell six at $650 each, four at $500 each, but just two at $350 each. The relationship between the price of rugs and the quantity the company is willing to supply can be shown graphically with a supply curve.

In 9 Figure 1.2, the supply and demand curves intersect at the point where supply and demand are equal. The price at which the number of products that businesses are willing to supply equals the amount of products that consumers are willing to buy at a specific point in time is the equilibrium price. In our rug example, the company is willing to supply four rugs at $500 each, and consumers are willing to buy four rugs at $500 each. Therefore, $500 is the equilibrium price for a rug at that point in time, and most rug companies will price their rugs at $500. As you might imagine, a business that charges more than $500 (or whatever the current equilibrium price is) for its rugs will not sell as many and might not earn a profit. On the other hand, a business that charges less than $500 accepts a lower profit per rug than could be made at the equilibrium price. If the cost of making rugs goes up, businesses will not offer as many at the old price.

Changing the price alters the supply curve, and a new equilibrium price results. This is an ongoing process, with supply and demand constantly changing in response to changes in economic conditions, availability of resources, and degree of competition. For example, the price of oil can change rapidly and has been between $0 and $113 a barrel over the last 10 years. Oil prices dropped below $0 when demand went down rapidly and supply increased during the COVID-19 pandemic. Oil prices returned to normal when supply and demand were more balanced. Prices for goods and services vary according to these changes in supply and demand. Supply and demand are the forces that drive the distribution of resources (goods and services, labor, and money) in a free-enterprise economy.

BIG TECH IS UNDER BIG SCRUTINY

The five largest technology companies in the United States-Alphabet, Amazon, Apple, Meta, and Microsoft-have attracted scrutiny from regulators and lawmakers worldwide. In the United States, the Federal Trade Commission (FTC) was established to enforce fair competition and consumer protection. Both the FTC and the U.S. Department of Justice (DOJ enforce federal antitrust laws to prevent the formation of monopolies and promote competition. Some people are concerned about Big Tech business practices, fearing that they stifle competition.

When a company has little to no competition, it can increase prices and reduce choices for consumers. Generally, monopolies are considered to be bad for the economy. One way the FTC has fought against Big Tech getting bigger is by challenging acquisitions. In one example, the agency sued to prevent Microsoft from acquiring video game company Activision Blizzard, arguing the deal would harm consumers.

Many business practices of the tech giants have been called into question. The DOJ has investigated Google's online advertising to determine whether the company abuses its dominance to snuff out the competition. The department also endorsed a bill that would prevent Amazon from selling its own Amazon-branded products on its marketplace. The company has been accused for years of producing knockoffs of third-party products and boosting its own merchandise in search results. Regulators in Europe found that Meta, the parent company of Facebook, Instagram, WhatsApp, Messenger, and Meta Quest, illegally forced users to agree to receiving personalized and targeted ads.

Often, lawsuits against these companies can be lengthy and costly. Some argue that regulators should enforce new rules that hold Big Tech to higher standards, similar to America's largest banks and telecommunications corporations. These companies have special classifications that give the government more control to rein them in. Taking this approach, the government could require major technology companies to share data with new competitors, give consumers greater control over their data, and more.

Proponents say mandated data sharing could greatly benefit entrepreneurs and nurture competition. It could also give consumers the opportunity to transfer data between platforms. On the other hand, some people believe broad regulation can hinder innovation and product development and lead to unintended consequences such as loss of privacy. Only time will tell if regulators can rein in Big Tech.

The Nature of Competition

Competition, the rivalry among businesses for consumers' dollars, is another vital element in free enterprise. According to Adam Smith, competition fosters efficiency and low prices by forcing producers to offer the best products at the most reasonable price; those who fail to do so are not able to stay in business.

Thus, competition should improve the quality of the goods and services available and reduce prices. Competition allows for open markets and provides opportunities for both individuals and businesses to successfully compete. Entrepreneurs can discover new technology, ways to lower prices, as well as methods for providing better distribution or services to disrupt the market. Consider how SpaceX (Elon Musk), Virgin Galactic (Richard Branson), and Blue Origin (Jeff Bezos) are turning space tourism into a reality. 11

Within a free-enterprise system, there are four types of competitive environments: pure competition, monopolistic competition, oligopoly, and monopoly.

Pure competition exists when there are many small businesses selling one standardized product, such as agricultural commodities like wheat, corn, and cotton. To put this into perspective, consider the fact that there are hundreds of thousands of corn farms in the United States. No one business sells enough of the product to influence the product's price. And, because there is no difference in the products, prices are determined solely by the forces of supply and demand.

Monopolistic competition exists when there are a large number of businesses competing for market share (though fewer than in a pure competition environment) and the differences among the goods they sell are small. Aspirin, soft drinks, and jeans are examples of such goods. These products differ slightly in packaging, warranty, name, and other characteristics, but all satisfy the same consumer need. Businesses have some power over the price they charge in monopolistic competition because they can make consumers aware of product differences through advertising. Consumers value some features more than others and are often willing to pay higher prices for a product with the features they want. For example, the Dyson Supersonic Hair Dryer costs more than $400 and offers different features and benefits than other hair dryers.

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An oligopoly exists when there are very few businesses selling a product. In an oligopoly, individual businesses have control over their products' prices because each business supplies a large portion of the products sold in the marketplace. Nonetheless, the prices charged by different firms stay fairly close because a price cut or increase by one company will trigger a similar response from another company. Examples include airlines, automobiles, and pharmaceuticals. In the airline industry, for example, when one airline cuts fares to boost sales, other airlines quickly follow with rate decreases to remain competitive. On the other hand, airlines often raise prices at the same time. Oligopolies exist when it is expensive for new firms to enter the marketplace. Not just anyone can acquire enough financial capital to build an automobile production facility or purchase enough airplanes and related resources to build an airline.

When there is one business providing a product in a given market, a monopoly exists. Utility companies that supply electricity, natural gas, and water are monopolies. The government permits such monopolies because the cost of creating the good or supplying the service is so great that new producers cannot compete for sales. Government-granted monopolies are subject to government-regulated prices. Some monopolies exist because of technological developments that are protected by patent laws. This monopoly allows the developer to recover research, development, and production expenses and to earn a reasonable profit. A drug can receive a 20-year patent from the time it is discovered or the chemical is identified. For example, when Eli Lilly's patent for cancer drug Alimta expired, competitors released generic versions of the drug.

Economic Cycles and Productivity

Expansion and Contraction

Economies are not stagnant; they expand and contract. Economic expansion occurs when an economy is growing and people are spending more money.

Their purchases stimulate the production of goods and services, which in turn stimulates employment. The standard of living rises because more people are employed and have money to spend. Rapid expansions of the economy, however, may result in inflation, a continuing rise in prices. Inflation can be harmful if individuals' incomes do not increase at the same pace as rising prices, reducing their buying power. Following the COVID-19 pandemic, inflation in the United States hit the highest level in four decades as prices of goods and services increased.

Economic contraction occurs when spending declines. Businesses cut back on production and lay off workers, and the economy as a whole slows down.

Contractions of the economy can lead to a recession-a decline in production, employment, and income. Recessions are often characterized by rising levels of unemployment, which is measured as the percentage of the population that wants to work but is unable to find jobs. ' Figure 1.3 shows the overall unemployment rate in the civilian labor force over the past 80 years. Rising unemployment levels tend to stifle demand for goods and services, which can have the effect of forcing prices downward, a condition known as deflation. Deflation poses a serious economic problem because price decreases could result in consumers delaying purchases. If consumers delay their consumption to wait for lower prices, the economy could fall into a recession.

The United States has experienced numerous recessions, the most recent ones occurring in 1990-1991, 2002-2003, 2008-2011, and 2020. The Great Recession of 2008-2011 was caused by the collapse in housing prices and consumers inability to stay current on their mortgage and credit card payments. This caused a crisis in the banking industry, with the government bailing out banks to keep them from failing. This, in turn, caused a slowdown in spending on consumer goods and a decrease in employment. Unemployment reached 10 percent of the labor force. Ten years later, unemployment was nearing a 50-year low, but during the COVID-19 pandemic, the unemployment rate skyrocketed to a record 14.7 percent in April 2020, the worst since the Great Depression. 13 As Americans were urged to stay home to prevent the spread of the virus, nonessential businesses-such as clothing stores, gyms, and salons-shuttered, and many were forced to lay off employees. Even restaurants, many of which remained open for pickup and delivery, suffered greatly. Though online and nonstore sales were up 21.2 percent year over year, overall retail sales were down 21.6 percent, according to the U.S. Census Bureau. 14 As the economy recovered, unemployment dropped to 3.6 percent in 2022. As the economy rebounded from the pandemic, there was a shortage of workers because many did not return to work or dropped out of the workforce. These economic cycles in employment, prices, and consumption will continue to change in the future. Personal consumption makes up almost 70 percent of gross domestic product, so consumer engagement is extremely important for economic activity. A severe recession may turn into a depression, in which unemployment is very high, consumer spending is low, and business output is sharply reduced, such as what occurred in the United States in the early 1930s.

Economies expand and contract in response to changes in consumer, business, and government spending. War also can affect an economy, sometimes stimulating it (as in the United States during World Wars I and II) and sometimes stifling it (as during the Vietnam, Persian Gulf, and Iraq wars). Although fluctuations in the economy are inevitable and to a certain extent predictable, their effects-inflation and unemployment-disrupt lives, and thus governments try to minimize them.

Measuring the Economy

1-6 Specify why and how the health of the economy is measured

Countries measure the state of their economies to determine whether they are expanding or contracting and whether corrective action is necessary to minimize the fluctuations. One commonly used measure is gross domestic product (GDP)-the sum of all goods and services produced in a country during a year.

GDP measures only those goods and services made within a country and therefore does not include profits from companies' overseas operations; it does include profits earned by foreign companies within the country being measured. However, it does not take into account the concept of GDP in relation to population (GDP per capita). L Figure 1.4 shows the increase in U.S. GDP over several years.

Another important indicator of a nation's economic health is the relationship between its spending and income (from taxes). When a nation spends more than it takes in from taxes, it has a budget deficit. In the 1990s, the U.S. government eliminated its longstanding budget deficit by balancing the money spent for social, defense, and other programs with the amount of money taken in from taxes.

In recent years, however, the budget deficit has reemerged and grown to record levels. Because many Americans do not want their taxes increased and Congress has difficulty agreeing on appropriate tax rates, it is difficult to increase taxes and reduce the deficit. Like consumers and businesses, when the government needs money, it borrows from the public, banks, and even foreign investors. The national debt is more than $31 trillion. 15 This figure is especially worrisome because to reduce the debt to a manageable level, the government either has to increase its revenues (raise taxes) or reduce spending on social, defense, and legal programs, neither of which is politically popular. The national debt figure changes daily and can be seen on the U.S. Treasury Fiscal Data website.

L Table 1.2 describes some of the other ways we evaluate our nation's economy.

THE AMERICAN ECONOMY

1-7 Outline the evolution of the American economy

As we said previously, the United States is a mixed economy with a foundation based on capitalism. The answers to the three basic economic issues are determined primarily by competition and the forces of supply and demand, although the federal government does intervene in economic decisions to a certain extent. For instance, the federal government exerts oversight over the airline industry to make sure airlines remain economically viable as well as for safety and security purposes.

Standard of living refers to the level of wealth and material comfort that people have available to them. The United States, Germany, Australia, and

Norway all have a high standard of living, meaning that most of their citizens are able to afford basic necessities and some degree of comfort. These nations are often characterized by a high GDP per capita. However, a higher GDP per capita does not automatically translate into a higher standard of living. Costs of goods and services are also factors. The European Union and Japan, for instance, tend to have higher costs of living than in the United States. Higher prices mean that it costs more to obtain a certain level of comfort than it does in other countries. Countries with low standards of living are usually characterized by poverty, higher unemployment, and lower education rates. To understand the current state of the American economy and its effect on business practices, it is helpful to examine its history and the roles of the entrepreneur and the government.

The Importance of the American Economy

The American economy is an open economy, or an economy in which economic activities occur between the country and the international community. As an open economy, the United States is a major player in international trade. Open economies tend to grow faster than economies that do not engage in international trade. This is because international trade is positively related to efficiency and productivity. Companies in the United States have greater access to a wider range of resources and knowledge, including technology. In today's global environment, the ability to harness technology is critical toward increased innovation. 16 In contrast, research indicates a negative relationship between regulatory actions and innovation in firms, suggesting that too much regulation hinders business activities and their contribution to the American economy. 17

When looking at the American economy, growth in GDP and jobs are the two primary factors economists consider. A positive relationship exists between a country's employment rate and economic growth. A nation's output depends on the amount of labor used in the production process, so there is also a positive correlation between output and employment. In general, as the labor force and productivity increase, so does GDP. Profitable companies tend to hire more workers than those that are unprofitable. Therefore, companies that hire employees not only improve their profitability but also drive the economic wellbeing of the American economy. 18

Government public policy often moves quickly to protect the economy. For example, during the COVID-19 pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide financial assistance to individuals, small businesses, state and local governments, as well as some larger firms. This historic action was designed to protect the economy while many businesses had to close to prevent the spread of the virus. 19

Government public policy also drives the economy through job creation. In order for any nation to ensure the social and economic health of the country, there must be a tax base to provide for the public interest. The vast majority of taxes come from individuals. It is estimated that individual income taxes contribute more than $2 trillion to the U.S. government's total revenue, while corporate taxes contribute $284 billion. 20 Individuals who earn $539,901 or more pay $162,718 plus 37 percent of the amount over $539,900 in individual income taxes. 21

Business is also an important source of tax revenue. Those that are classified as sole proprietorships, partnerships, and S corporations (discussed further in the chapter titled "Options for Organizing Business") pay taxes according to the individual income tax code. Corporations are taxed differently. Approximately 5 percent of the government's total revenues come from corporate income taxes 22 In 2017, the largest tax reform in the U.S. tax rate in over 30 years changed the corporate tax rate from 35 percent to 21 percent. 23 The average global corporate tax rate is nearly 24 percent, while some countries such as Ireland have a corporate tax rate as low as 12.5 percent. The U.S. tax reform lowered the highest individual tax rate from 39.6 percent to 37 percent, but the reform capped the deduction of state and local taxes at $10,000.24 Some people believe it would be beneficial to increase both corporate income taxes and individual income taxes for higher income brackets.

A Brief History of the American Economy

The Early Economy

Before the colonization of North America, Native Americans lived as hunter/gatherers and farmers, with some trade among tribes. The colonists who came later operated primarily as an agricultural economy. People were self-sufficient and produced everything they needed at home, including food, clothing, and furniture. Abundant natural resources and a moderate climate nourished industries such as farming, fishing, shipping, and fur trading. A few manufactured goods and money for the colonies' burgeoning industries came from England and other countries.

As the nation expanded slowly toward the West, people found natural resources such as coal, copper, and iron ore and used them to produce goods such as horseshoes, farm implements, and kitchen utensils. Farm families who produced surplus goods sold or traded them for things they could not produce themselves, such as coffee, salt, and farm equipment. Some families also spent time turning raw materials into clothes and household goods. Because these goods were produced at home, this system was called the domestic system.

Nearly 18% of people work primarily from home, according to the U.S. Census Bureau.

The Industrial Revolution

The 19th century and the Industrial Revolution brought the development of new technology and factories. The factory brought together all the resources needed to make product-materials, machines, and workers. Work in factories became specialized as workers focused on one or two tasks. As work became more efficient, productivity increased, making more goods available at lower prices. Railroads brought major changes, allowing farmers to send their agricultural products all over the nation to markets.

Factories began to spring up along the railways to manufacture farm equipment and products such as textiles, clothing, and household items to be shipped by rail. John Deere's farm equipment increased farm production and reduced the number of farmers required to feed the young nation. Farmers began to move to cities to find jobs in factories and a higher standard of living. Henry Ford developed the assembly-line system to produce automobiles. Workers focused on one part of an automobile and then pushed it to the next stage until it rolled off the assembly line as a finished automobile. Ford's assembly line could manufacture many automobiles efficiently, and the price of his cars was $200, making them affordable to many Americans.

The Manufacturing and Marketing Economies

Industrialization brought increased prosperity, and the United States gradually became a manufacturing economy-one devoted to manufacturing goods and providing services rather than producing agricultural products. Businesses became more concerned with the needs of the consumer and entered the marketing economy. Marketing advanced when Alexander Turney Stewart built one of the first department stores in the 1860s. Aaron Montgomery Ward developed a catalog in 1872 with 10,000 items that could be shipped by train. The development of retail institutions created the demand for more manufactured products.

Companies conducted research to find out what products consumers needed and wanted. Advertising made consumers aware of products and important information about features, prices, and other competitive advantages.

Because these developments occurred in a free enterprise system, consumers determined what goods and services were produced. They did this by purchasing the products they liked at prices they were willing to pay. The United States prospered, and American citizens had one of the highest standards of living in the world.

The Service and New Digital Economy

After World War I, with the increased standard of living, Americans had more money and more time. They began to pay others to perform services that made their lives easier. Beginning in the 1960s, more and more women entered the workforce. The United States began experiencing major shifts in the population.

The U.S. population experienced the slowest pace of growth since the Great Depression, with the South leading the population gains. While the birth rate in the United States is declining, new immigrants help with population gains. 25 The profile of the family is also changing: Today there are more single-parent families and individuals living alone, and in two-parent families, both parents often work.

One result of this trend is that time-pressed Americans are increasingly paying others to do tasks they used to do at home, like cooking, laundry, landscaping, and child care. These trends have gradually changed the United States to a service economy-one devoted to the production of services that make life easier for busy consumers. Businesses increased their demand for services, especially in the areas of finance and information technology. Service industries such as restaurants, banking, health care, child care, auto repair, leisure-related industries, and even education are growing rapidly and may account for as much as 80 percent of the U.S. economy. These trends continue with advanced technology contributing to new service products based on technology and digital media that provide smartphones, social networking, and virtual worlds. This has led to the growth of e-commerce, or transactions involving goods and services over the internet. E-commerce has led to firms that would have been unheard of a few decades ago, such as eBay, Shopify, Etsy, and Amazon. More about the digital world, business, and new online social media can be found in the chapter titled "Digital Marketing and Social Media."

The economy experienced a major shift in 2020 as a result of the COVID-19 pandemic. Travel bans were issued, people across the globe were ordered to stay at home, nonessential businesses were closed, students attended school online, major events were canceled, and many people began to work remotely. Even as businesses began to reopen, the world experienced a new normal. As working from home became mainstream, many companies reevaluated their real estate needs and permanently shuttered offices in major cities, impacting the commercial real estate market. Online grocery ordering gained popularity, telemedicine became widespread, and shopping shifted online. Many retailers filed for bankruptcy during the pandemic due to changes in consumer behavior, including Ann Taylor, Belk, Brooks Brothers, GNC, Guitar Center, J.C. Penney, J. Crew, Lord & Taylor, Neiman Marcus, and Pier 1.27 As the pandemic was ending, the disruption had a lasting effect. Some workers remained remote, but many firms brought workers back into offices. Firms turned to technology to adjust for shortages in the workforce. The use of cloud computing, artificial intelligence, and robotics accelerated. By 2023, air travel was almost back to pre-pandemic levels.

ZOOM RACES TO STAY AHEAD OF THE PACK

Zoom, a video communications company, is a household name, but it wasn't always that way. Founded in 2011, Zoom entered the videoconference technology market at a time when consumer and business demand was just starting to ramp up. It wasn't until the COVID-19 pandemic struck nearly a decade later that Zoom experienced an unprecedented surge in demand and became widely recognized as an industry leader.

Founder and CEO Eric Yuan set out to build a high-quality, easy-to-use videoconferencing tool with modern features that would operate on slow internet connections. Yuan created a superior product that caters to the needs and wants of its customers, providing value and benefits. Zoom has become the video communications platform of choice for millions of users.

Zoom enjoyed steady growth for years, with a $9.2 billion valuation at the time of its 2019 initial public offering (IPO). Social distancing and isolation in 2020 amid the pandemic fueled the demand for video communication and dramatically increased new Zoom user registrations.

Zoom's user-friendly nature is one of the primary reasons the company emerged from the pandemic as one of the biggest corporate success stories. The platform is now worth more than $20 billion.

The software company attracts many users to its free Basic account and attempts to convert these users into paying customers, a pricing model known as freemium pricing. Freemium pricing can be expensive for companies because it costs money to acquire new customers and to offer free access, making it especially painful when customers discontinue service after a free trial. However, it has proven to be an effective strategy used by many technology companies.

During the pandemic, Zoom experienced record profits and signed on big-name clients. However, as the pandemic waned so too did its consumer business. Unlike corporations that sign large multi year agreements, consumers can cancel subscriptions easily. Zoom will have to determine the best way to attract new customers, retain existing customers, and convert free users into paying users.

Technology and the Economy

Technology is rapidly accelerating and is changing the environment of business. Technology includes the methods and processes creating applications to solve problems, perform tasks, and make decisions. New technology associated with artificial intelligence enabled by big data and advanced computing systems is changing the way work is accomplished. The result is disruptive technology such as smart buildings, digital wallets, and drones, robotics, and machines that can communicate and make decisions like humans. This creates opportunities for new business models and job opportunities.

Artificial intelligence (Al) relates to machine (computer) learning that is able to perform activities and tasks that usually require human intelligence such as decisions, visual perception, and speech recognition. In short, it makes computers act like humans. Although it's estimated Al will disrupt 25 percent of U.S. jobs, the timeline is uncertain. However, the World Economic Forum predicts that Al will create more jobs than it takes, including new roles that do not exist today. Because of this, educational institutions and business will need to keep employment dynamic by providing individuals with the soft skills needed to work alongside Al and its enablers.2 Al's enablers, as seen in

Figure 1.5, include big data, blockchain, drones, robotics, and more.

Al is moving rapidly across business functions because it can resolve predictable business activities. By 2022, 50 percent of firms across the world tried to use Al in some way. Virtual assistants can provide assistance, knowledge, and accurate answers to queries for both customers and workers. Al is widely used to gain insights into consumer behavior and preferences. It can be used to write blog posts, create articles, forecast financial performance, or manage operations. 30

Using machine technology to analyze thousands of emails with customer service concerns can create a response that is faster and more accurate than

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using humans to respond. One study estimates Al-powered chat tools handle up to 70 percent of conversations with customers. 31 Additionally, Al has the potential to make the world more efficient in predictable, physical work such as assembly lines, food preparation, packaging, welding, and other repetitive tasks.

While it has the potential to provide greater productivity and higher quality service, it also creates new challenges 32 For instance, Al has the potential to be just as biased as humans because it can adopt preexisting human biases and engage in unintentional discrimination. 33 Surveillance is another sensitive issue that is related to privacy. Facial recognition has been found to falsely identify Asian and African American faces 10 to 100 times more often than Caucasian faces, according to the National Institute of Standards and Technology 34 Tracking communication, profiles, and other searchable information will accelerate with Al.

Businesses have an unprecedented amount of data at their fingertips. Big data refers to large volumes of structured and unstructured data that are transmitted at very fast speeds. Al systems learn from big data, such as consumer shopping habits, web browsing history, and social media activity. Insights from big data can improve decision making and inform business strategies. For example, Kroger, the largest supermarket operator in the United States, operates a retail data science insights and media company to drive internal operational decisions and help consumer packaged goods companies. 35 However, the amount of data available to businesses creates consumer privacy concerns. Half of business ethics violations are related to the improper use of big data analytics, according to Gartner. 36 It's important for businesses to consider the best ways to collect, store, and share consumer data.

Blockchain will enable Al with the development of databases that can be used in Al learning. Blockchain is a decentralized record-keeping technology that stores linked blocks of ordered transactions over time. The distinguishing feature of a blockchain is the ordered rules of how the data go into the database. The data are locked into a system without a central person controlling them. The key is no single authority can make changes to fit their needs. The finance industry, supply chain, marketing, human resource management, and most other areas of business will become more efficient in developing and tracking information.

Blockchain has the potential to make databases and digital infrastructures more secure and trustworthy; for example, scanning data in a blockchain database and tracking products from a point of production to consumption. For this reason, blockchain is especially important in managing the supply chain. It can track product history, generate invoices, detect counterfeit products, manage returned products, and help find and reuse materials rather than new resources. It can enable firms to trace deliveries, verify transactions, and handle payments. It is transforming the supply side of business 38 This means that the movement of agricultural products, for instance, can be tracked from the farm to the table. To combat shoplifters, Lowe's developed an anti theft tool that uses radio-frequency identification (RFID) chips and blockchain technologies to render stolen products inoperable. The RFID tags allow the products to be activated at the point of sale, and blockchain technology creates a secure and anonymized record of authentic product purchases.

Drones, unmanned aerial devices, can be programmed with Al to perform human tasks such as delivering products or collecting environmental data and imagery. Drones can be beneficial in a variety of industries such as construction, farming, defense, insurance, outdoor entertainment, and retail. UPS uses drones to deliver prescription medication from CVS to retirees in Florida. As of now, adoption of this technology is limited because few companies have permission from the Federal Aviation Administration (FAA) to fly drones beyond visual line of sight.41 Drones pose a challenge not only to airspace but privacy as well. Though businesses may not intentionally surveil the population, drones with cameras have the potential to take photos and videos of people without their consent.

In addition to drones, robots can automate and optimize tasks and can be programmed with Al to perform human-like actions by learning, reasoning, and using language through machine learning. Restaurant chain Chili's has a robot called Rita to escort guests to their seats, bus tables, serve food, and sing happy birthday. Robots used in this type of application can efficiently and effectively assist customers. As with Al's other enablers, privacy is a concern with robots because they have the potential to collect sensitive data that could violate an individual's privacy.

Al and its enablers are rapidly changing the world of business. Big data can be combined with Al machine learning to provide important information and help leaders make decisions on key issues. Blockchain combined with Al can enable new business models. For example, cryptocurrency such as bitcoin is based on blockchain technology. Drones can help extend the reach of businesses, and robots can create a personalized shopping experience. These advanced technologies will make it possible to create entrepreneurs that will develop new business.

1-8 Explain the role of the entrepreneur in the economy

The Role of the Entrepreneur

An entrepreneur is an individual who risks money, time, and effort to develop for profit an innovative product or way of doing something. Dan Fleyshman is a true American entrepreneur. At age 19, he licensed his clothing company for $9.5 million. Later, he grew his energy drink company "Who's Your Daddy?" to reach 55,000 retail stores and helped launch a successful poker website. He is now an active investor, supporting more than 36 companies, and runs a charity called the Model Citizen Fund that supplies homeless shelters with backpacks and other supplies.*3

The free-enterprise system provides the conditions necessary for entrepreneurs to succeed. In the past, entrepreneurs were often inventors who brought all the factors of production together to produce a new product. Thomas Edison, whose inventions include the record player and light bulb, was an early American entrepreneur. Henry Ford was one of the first persons to develop mass-assembly methods in the automobile industry. Other entrepreneurs, so-called captains of industry, invested in the country's growth. John D. Rockefeller built Standard Oil out of the fledgling oil industry, and Andrew Carnegie invested in railroads and founded the United States Steel Corporation. Andrew Mellon built the Aluminum Company of America and Gulf Oil. J. P. Morgan started financial institutions to fund the business activities of other entrepreneurs. Although these entrepreneurs were born in another century, their legacy to the American economy lives on in the companies they started, many of which still operate today. Consider the history of Eli Lilly. Colonel Eli Lilly in Indianapolis, Indiana, was continually frustrated with the quality of pharmaceutical products sold at the time. As a pharmaceutical chemist, he decided to start his own firm that would offer the highest-quality medicines. His firms, Eli Lilly and Company, would go on to make landmark achievements, including being one of the first pharmaceutical firms to mass-produce penicillin. Today, Eli Lilly is one of the largest pharmaceutical firms in the world.

Entrepreneurs are constantly changing American business practices with new technology and innovative management techniques. Bill Gates, for example, built Microsoft, a software company whose products include Word and Windows, into a multibillion-dollar enterprise. Frederick Smith had an idea to deliver packages overnight, and now his FedEx Company plays an important role in getting documents and packages delivered all over the world for businesses and individuals. Steve Jobs co-founded Apple and turned the company into a successful consumer electronics firm that revolutionized many different industries.

Entrepreneurs have been associated with such uniquely American concepts as Walt Disney, Spanx, Tesla, McDonald's, SpaceX, Google, Facebook, and Walmart. We will examine the importance of entrepreneurship further in the chapter "Small Business, Entrepreneurship, and Franchising."

The Role of Government in the American Economy

The American economic system is best described as modified capitalism because the government regulates business to preserve competition and protect consumers and employees. Federal, state, and local governments intervene in the economy with laws and regulations designed to promote competition and to protect consumers, employees, and the environment. Many of these laws are discussed in the l Chapter 2 Appendix.

Additionally, government agencies such as the U.S. Department of Commerce measure the health of the economy (GDP, productivity, etc.) and, when necessary, take steps to minimize the disruptive effects of economic fluctuations and reduce unemployment. When the economy is contracting and unemployment is rising, the federal government through the Federal Reserve Board (see chapter titled "Money and the Financial System") tries to spur growth so that consumers will spend more money and businesses will hire more employees. To accomplish this, it may reduce interest rates or increase its own spending for goods and services. When the economy expands so fast that inflation results, the government may intervene to reduce inflation by slowing down economic growth. This can be accomplished by raising interest rates to discourage spending by businesses and consumers. This tactic was put to use as the economy recovered from the COVID-19 pandemic. Prices continued to rise, so the Federal Reserve increased interest rates to tamp down inflation. Techniques used to control the economy are discussed in "Money and the Financial System.”

INSIDE ANOTHER TOMORROW’S DESIGN FOR SOCIAL RESPONSIBILITY

Another Tomorrow is a sustainable clothing company founded by entrepreneur Vanessa Barboni Hallik. Hallik wants to create socially responsible clothing in an ethical way, educate others, and engage in social activism through fashion. The company's value system is based on environmental, animal, and human welfare.

Another Tomorrow demonstrates its commitment to high performance, accountability, and transparency through its B Corporation certification. B Corp certification is a voluntary program that for-profit companies can participate in as a means of measuring their impact and holding themselves to high standards. Well-known B Corps include Toms, Thrive Market, Warby Parker, and Patagonia.

Sustainable and ethical sourcing and manufacturing are at the center of Another Tomorrow's operations and supply chain. The company uses ethically sourced wool, organic cotton, organic linen, and recycled cashmere and follows responsible chemical standards. Since the company has high standards for its materials and its business partners, Another Tomorrow's supply chain has proven to be delicate.

Extreme weather patterns have threatened the availability of ethical wool. Switching between suppliers quickly is not easy since the company is not only focused on animal welfare but also on the fair treatment of workers. The company has had to broaden its pool of suppliers to make the company more resilient.

Scaling sustainable sourcing can be challenging in the fashion industry. Because of its premium pricing strategy, Another Tomorrow is able to hold its products to higher standards than other clothing companies. Its products, which range from $95 to $1,900, are intended to be high-quality investment pieces that can stand the test of time. While most consumers cannot afford these prices, Another Tomorrow positions itself as a luxury apparel brand.

In general, the fashion industry has a long way to go with social responsibility. Consumption patterns have changed to favor highly profitable, cheap, trendy clothing, often referred to as fast fashion. Another Tomorrow, however, operates on a platform for a technology-based circular economy, a framework that involves reducing waste and pollution, recycling materials, and keeping products in use for as long as possible. To reduce waste, the company offers its customers the option to resell their clothes on the company's website for cash or store credit.

The Role of Ethics and Social Responsibility in Business

While most businesses are ethical and socially responsible, there are incidences of misconduct. In many cases, misconduct by individuals within firms has an adverse effect on employees, investors, and other stakeholders. This misconduct undermines public confidence in corporate America and creates debates about ethics in business. Business ethics generally refers to the standards and principles used by society to define appropriate and inappropriate conduct in the workplace. In many cases, these standards have been codified as laws prohibiting actions deemed unacceptable.

Society is increasingly demanding that businesspeople behave socially responsibly toward their stakeholders, including customers, employees, investors, government regulators, communities, and the natural environment. Diversity in the workforce is not only socially responsible, but also highly beneficial to the financial performance of companies. According to a McKinsey consulting firm study, organizations that have diverse leadership are more likely to report higher financial returns. Diversity creates increased employee satisfaction and improved decision making. When actions are heavily criticized, a balance is usually required to support and protect various stakeholders.

While one view is that ethics and social responsibility are a good supplement to business activities, there is an alternative viewpoint. Ethical behavior can not only enhance a company's reputation, but can also drive profits.46 The ethical and socially responsible conduct of companies such as 3M, Hasbro, Salesforce, and Xcel Energy provides evidence that good ethics is good business. There is growing recognition that the long term value of conducting business in an ethical and socially responsible manner that considers the interests of all stakeholders creates superior financial performance.

To promote socially responsible and ethical behavior while achieving organizational goals, businesses can monitor changes and trends in society's values.

Businesses should determine what society wants and attempt to predict the long-term effects of their decisions. While it requires an effort to address the interests of all stakeholders, businesses can prioritize and attempt to balance conflicting demands. The goal is to develop a solid reputation of trust and avoid misconduct to develop effective workplace ethics. Fortunately, most businesses embrace this goal.

CAN YOU LEARN BUSINESS IN A CLASSROOM?

Obviously, the answer is yes, or there would be no purpose for this textbook or course! To be successful in business, you need knowledge, skills, experience, and good judgment. The topics covered in this chapter and throughout this book provide some of the knowledge you need to understand the world of business. In addition, the "Build Your Skills" exercise will help you develop skills that may be useful in your future career. However, good judgment is based on knowledge and experience plus personal insight and understanding. Therefore, you need more courses in business, along with some practical experience in the business world, to help you develop the special insight necessary to put your personal stamp on knowledge as you apply it. The challenge in business is in the area of judgment, and judgment does not develop from memorizing an introductory business textbook. If you are observant in your daily experiences as an employee, as a student, and as a consumer, you will improve your ability to make good business judgments.

Building your soft skills by setting goals

Employers today want employees with strong soft skills-skills such as communication, leadership, teamwork, self-management, critical thinking, and people skills. You learned in this chapter that all businesses have goals. Consider your own goals for taking this course. What do you hope to learn or gain? Next, set a specific goal for yourself related to this course. For example, your goal might be to earn a grade of B or higher or to determine which particular field of business you are most interested in pursuing. Finally, list three specific steps you can take to ensure you meet your goal by the end of the course.

Whether you choose to work at an organization or become an entrepreneur, you will be required to know the basic concepts and principles in this book. You need to be prepared for changes in the way business will be conducted in the future. New business models or ways businesses create value will emerge based on the internet, connected technologies, drones, driverless cars, the metaverse, and artificial intelligence. It should be exciting to think about your opportunities and the challenges of creating a successful career. Our society needs a strong economic foundation to help people develop a desired standard of living. Our world economy is becoming more digital and competitive, requiring new skills and job positions. Individuals like you can become leaders in business, nonprofits, and government to create a better life.

Figure 1.6 is an overview of how the chapters in this book are linked together and how the chapters relate to the participants, the activities, and the environmental factors found in the business world. The topics presented in the chapters that follow are those that will give you the best opportunity to begin the process of understanding the world of business.