Taking Risks and Making Profits within the Dynamic Business Environment
Learning Objectives for Taking Risks and Making Profits
LO 1-1: Describe the relationship between profit and risk, and show how businesses and nonprofit organizations can raise the standard of living for all.
LO 1-2: Explain how entrepreneurship and the other factors of production contribute to the creation of wealth.
LO 1-3: Analyze the effects of the economic environment and taxes on businesses.
LO 1-4: Describe the effects of technology on businesses.
LO 1-5: Demonstrate how businesses can meet and beat competition.
LO 1-6: Analyze the social changes affecting businesses.
LO 1-7: Identify what businesses must do to meet global challenges, including war and terrorism.
LO 1-8: Review how past trends are being repeated in the present and what those trends mean for tomorrow’s college graduates.
Profile in Entrepreneurship: Daymond John
Founder and CEO of FUBU: Daymond John started the company in after noticing consumers were paying high prices for hats that were easily manufactured.
Initial Growth: John manufactured the hats himself and sold them at a significantly lower price point.
Strategic Relaunch: In , he relaunched the company with partners, focusing on celebrity endorsements, specifically placing clothing in the hands of figures like LL Cool J.
Financial Success: He established FUBU as a premier fashion label in the U.S., resulting in over dollars in worldwide sales.
Investment Activity: He has personally invested dollars into more than start-up companies.
Fundamentals of Business and Wealth Building
Definition of Business: Any activity that seeks to provide goods and services to others while operating at a profit.
Goods: Tangible products that can be physically handled, such as computers, food, clothing, cars, and appliances.
Services: Intangible products that cannot be held in one's hand, including education, health care, insurance, recreation, and travel and tourism.
Entrepreneur: A person who risks time and money to start and manage a business. Successfully filling a market need provides the opportunity for personal financial gain.
Revenue: The total amount of money a business takes in during a given period by selling goods and services.
Profit: The amount of money a business earns above and beyond what it spends for salaries and other expenses.
Loss: This occurs when a business’s expenses exceed its revenues.
Risk: The chance an entrepreneur takes of losing time and money on a business that may not prove profitable. * Not all enterprises yield the same profit levels. * Taking larger risks potentially leads to earning larger profits.
Entrepreneurial Case Study: Crocs
Origin: Scott Seamans showed a pair of foam boating clogs he helped design to Lyndon “Duke” Hanson and George Boedecker.
Development: Despite initial skepticism regarding the style, the partners were won over by the footwear's comfort, slip-resistance, and buoyancy (ability to float).
Outcome: The trio formed Crocs, which now generates billions of dollars in annual sales.
Standard of Living, Quality of Life, and Stakeholders
Standard of Living: Research defined as the amount of goods and services people can buy with the money they have. * The United States maintains a high standard of living primarily due to wealth created by domestic businesses. * Geographic variations in prices mean that certain locations require more money to purchase the same amount of goods.
Quality of Life: Refers to the general well-being of a society. Factors include: * Political freedom. * Natural environment. * Education. * Health care. * Safety. * Amount of leisure. * Rewards that provide satisfaction beyond standard goods and services. * Maintaining a high quality of life requires cooperation between businesses, nonprofits, and government agencies.
Stakeholders: All the people who stand to gain or lose by the policies and activities of a business and whose concerns the business needs to address. * A primary management challenge is recognizing and responding to conflicting stakeholder needs (e.g., higher employee pay vs. higher stockholder profits).
Outsourcing: Contracting with other companies (often internationally) to perform specific functions like production or accounting.
Insourcing: When foreign companies open design and production facilities within the United States.
Nonprofit Organizations and Modern Employee Values
Nonprofit Organization: An organization whose primary goals are social or educational rather than making a personal profit for owners or organizers. * Nonprofits use financial gains to meet their specific social/educational goals. * Example: The American Red Cross provides assistance to millions, including refugees and victims of natural disasters.
Employee Expectations (Gartner Research, January 2024): Modern employees seek five specific values from work: 1. Deeper connections: Being understood through family and community, not just work roles. 2. Radical flexibility: Autonomy in all aspects of work, beyond just location and timing. 3. Personal growth: Being valued for growth as a person, not just a professional. 4. Holistic well-being: Ensuring wellness offerings are actively used, not just available. 5. Shared purpose: Investing in the organization through concrete action on purpose rather than just corporate statements.
The Five Factors of Production
Definition: The five resources used to create wealth. 1. Land: Natural resources. 2. Labor: Workers. 3. Capital: Includes machines, tools, buildings, and other means of production (often excludes money in strict economic definitions, though money is used to buy capital). 4. Entrepreneurship. 5. Knowledge.
Key Insight: Modern wealthy countries are defined more by their entrepreneurship and knowledge than by natural resources.
The Business Environment Elements
Definition: The surrounding factors that either help or hinder business development.
1. Economic and Legal Environment: Government can promote business by: * Allowing private ownership. * Minimizing interference in free exchange. * Passing laws for enforceable contracts. * Establishing tradable currency. * Minimizing corruption (e.g., bureaucratic processes in India are cited as time-consuming obstacles).
2. Technological Environment: Includes phones, computers, mobile devices, medical imaging, robots, AI, and social media. * Productivity: The amount of output generated relative to the amount of input (such as hours worked). * E-commerce: Electronic buying and selling, categorized as Business-to-consumer () and Business-to-business (). * Databases: Electronic storage files for information used to be responsive to customers. * Identity Theft: Illegal obtaining of personal information like Social Security or credit card numbers. * Case Example: Walt Disney World’s MagicBand uses technology to act as a ticket, room key, and payment system.
3. Competitive Environment: * Competing through quality, low prices, and excellent service. * Empowerment: Giving frontline workers the responsibility, authority, freedom, training, and equipment to respond quickly to customer requests.
4. Social Environment: * Demography: The statistical study of human populations (size, density, age, race, gender, income). * Diversity: Moving beyond simple recruitment to creating workplaces of inclusion and belonging. * Aging Population: People aged and over are the wealthiest demographic, but retirees will eventually drain wealth via Social Security. * Single-Parent Families: Growth in this household type has led to business policies like family leave and flextime. * Generation Z (): This group is becoming the largest consumer block. They rely heavily on social media (TikTok) for product recommendations and benefit from influencer marketing.
5. Global Business Environment: * Grown through efficient distribution and the Internet. * War and Terrorism: These have drained trillions of dollars from the U.S. economy and diverted funds to efforts like the Ukraine war. Global unrest creates uncertainty, the biggest risk in business.
6. Ecological Environment: * Climate Change: Movement of planetary temperature over time. * Greening: The trend toward saving energy and producing eco-friendly products. * Circular Economy: Keeping products in a value circle to produce no waste; materials are recycled or reused. * Case Example: The Plant in Chicago is an indoor farm using rainwater irrigation and solar power to support over companies.
Global Adaptation: KFC Menu Innovations
Regional Strategy: KFC employs food innovation teams globally to follow regional trends.
Products: * The Zinger: Created in Trinidad and Tobago, now a global success. * The "Chizza": A pizza with a fried chicken crust, sold in the Philippines.
Evolution of U.S. Business
Agricultural Era (1800s): Initially the lead economic driver. Technological advances like the harvester led to larger, more efficient farms but fewer farmers.
Industrial Era (19th and 20th Centuries): Jobs moved from farms to factories. Technological improvements eventually increased factory productivity, requiring fewer workers.
Service Era (mid-1980s to present): The service industry has generated almost all recent employment increases and offers many high-paying roles.
Information Age: A global technical revolution where innovation is paramount and value is often based on intellectual capital.
Questions & Discussion
TESTPREP 1: * What is the difference between revenue and profit? * What is the difference between standard of living and quality of life? * What is risk, and how is it related to profit? * What do the terms stakeholders, outsourcing, and insourcing mean?
TESTPREP 2: * What are some of the advantages of working for others? * What benefits do you lose by being an entrepreneur, and what do you gain? * What are the five factors of production? Which ones seem to be the most important for creating wealth?
TESTPREP 3: * What are four ways the government can foster entrepreneurship? * What is the difference between effectiveness, efficiency, and productivity? * What is empowerment? * What are some of the major issues affecting the economy today?
TESTPREP 4: * What major factor caused people to move from farming to manufacturing and from manufacturing to the service sector? * What does the future look like for tomorrow’s college graduates?
Discussion Question on Crocs: What risks and rewards did Seamans, Hanson, and Boedecker face when starting their business?
Discussion Question on Nonprofits: Why do good management principles apply equally to profit-seeking businesses and nonprofit organizations?
Discussion Question on International Business: What would be the effect of more business freedom in India, a country of more than people?
Discussion Question on Disney: Do you think the MagicBand encourages visitors to make more purchases in the park?
Discussion Question on Family Needs: What can managers do to try to retain valued employees who are single parents juggling job demands and child-rearing?
Discussion Question on Agricultural Tech: How do you think smaller farms could use agricultural technology to compete against larger operations?