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Intro to Business: A Primer Companion text to CapsimCore™ Business Simulation Edition 1

If you would like to purchase a paperback version of Intro to Business: A Primer, Edition 1, please click one of the links below or search for the ISBN on Amazon.

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Capsim Managment Simulations, Inc.

Copyright © 2016 by Capsim Management Simulations, Inc.

Edited by Wendy Guest.

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Table of Contents

Introduction 1

Overview: what is a business? 7

Marketing: how do we identify, entice and add value for customers? 19

Production: how does a business create goods and services to sell? 34

Accounting: how do we keep track of the money? 47

Finance: how do we raise funds, reward shareholders, and manage our assets? 60

Strategy: how does it all work together? 83

Ethics: doing it right – social responsibility and ethical decision making 103

Selling your company and making brilliant business presentations 118

INTRODUCTION One way to learn about business is to read the textbooks, learn the definitions, dis­ cuss case studies, and pass the exam. With Intro to Business: A Primer, in conjunction with CapsimCore Business Simulation, we take a less theoretical and more hands-on approach.

We’re going to learn business by managing a business.

The approach makes sense for two reasons. First, business itself is practical. If there were a single true theory of business success, then every person who started a business and followed the theory would be able to create a profitable and sustainable enterprise. Unfortunately, it’s not that simple. Business requires the practical application of people, skills, ideas and money, and it requires some trial-and-error before you succeed. Sec ond, it is in that process of trial-and-error that mastery develops. If you want to master the basics of business, rather than learn only the theory, this program is for you.

CapsimCore is a basic business simulation designed to give you hands-on experience in running a company. It provides the opportunity to work with all the essential man agerial functions including marketing, production and finance, and to experience the interactions and interrelationships that businesses engage in – internally and externally – to succeed. Many of the concepts you’ll read about in this book, you can apply in the simulation.

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It starts with an idea . . .

Every business requires three basic resources to function and compete: ideas, people and money. In the world of business, those resources are configured and reconfigured over and over again to satisfy the needs and wants of the market.

Sometimes businesses are based on a brilliant idea that completely changes how we do something – such as the way smart phones revolutionized the way we find, man­ age, and communicate information. Sometimes businesses find a new way to make us want more of what we already have – like the fashion industry urging us to update our wardrobe every season. Some businesses continually improve on a basic product – whether it’s cars, light bulbs, fabricated steel or dishwasher detergent. Sometimes we’re being sold an emotion – by the entertainment industry, for example – or a service, like haircuts or gym memberships. Whatever the business, it begins with an idea.

. . . add some good management

Individual brilliance, great ideas, even revolutionary technologies however, are only parts of the equation. The real art of business is to take the basic resources – ideas, people and money – and get them working together as a growing, functional operation. Building a business requires the ability to understand and manage the network of inter­ relationships that delivering your product or service to the market requires.

2 | Intro to Business: A Primer

And to do that, every single business relies on some standard elements and practices. For example: accounting to keep track of the money; marketing to entice customers to buy; and production to get your product or service into the customers’ hands. Put simply, businesses need effective management.

The roots of the word manage come from the Latin word manus agere (to lead by hand) or mansionem agere (to run the house for the owner). The dictionary defines management as “the person or persons controlling and directing the affairs of a busi­ ness or institution.” It is the people who have their hands on the controls of the orga­ nization. In CapsimCore you will get your hands on some critical management tools and begin to build your skills using them. Those tools include accounting statements, forecasts, market data and more – all applied to the task of creating and managing a successful enterprise.

The forms that businesses take might be limitless, but the essence of how to run a company remains the same. The company you will run in this course designs, builds, and sells electronic sensors, but our goal is not to learn about sensors, it’s to build the skills you need to effectively manage a business – any business organization at all.

It starts with an idea…. Smart phones have stimulated many new business ideas. Jack Dorsey is responsible

for a few, and has created two start-ups offering products we didn’t know we needed or wanted until we had them. Twitter is one. Dorsey co-founded the social networking chat site in 2006. Twitter went public in 2013 but by 2016, while it had a market capitalization of around $12 billion, its stock had fallen 70% from its high soon after the IPO. With management instability and takeover rumors, Twitter struggles to turn its promise into profits.

Square is another of Dorsey’s ideas. Square is a small credit card reader that plugs into a smart phone or tablet, replacing card-processing equipment and making it simple for any small merchant to accept credit cards. Square went public in late 2015 but its IPO was labeled ‘lackluster’ and it was valued at $2.9 billion – less than half its private valuation a year before. Profits continue to be illusive.

Uber, another San Francisco start-up, launched the smart phone ride-on-demand app that streamlined personal transport. But it hasn’t been an easy ride. Traditional taxi unions, limo companies and city governments, the “rent seekers” in the market, have attempted to maintain the status quo through regulation and litigation. Unrest among Uber drivers protesting changes to their compensation has also plagued the company. However, Uber spread quickly to more than 60 countries and around 270 cities and, as it has raised around $10 billion since it started in 2010, it isn’t rushing to go public. But while Uber competitor SideCar has already come and gone, its major rival Lyft partnered with India’s Ola, China’s Didi Kuaidi and GrabTaxi in 2016, forming a ride share partnership now covering about half the world’s population.

Twitter, Square, Uber, Lyft and others are great ideas that were turned into businesses but still require excellent, fleet-footed management to become fully established firms that make a profit.

How many other businesses can you name that offered new products we didn’t know we needed until we saw them?

Introduction | 3

. . . and develop mastery.

The good news is that brilliant and successful business people – whether it’s Mukesh Ambani, Bill Gates, Rupert Murdoch, or Mark Zuckerberg – were not born with a “busi­ ness success” gene. Their success is not simply due to an inbuilt talent, and this means any one of us could be successful in business one day.

The bad news is that like all successful business people, we need to devote thousands and thousands of hours to our goal – trying and failing, learning from our mistakes, and trying again – because it turns out that while many of us have the right attributes to be successful in business, not all of us are willing to invest the time. To become expert in any field, we need to engage in what is called “deep practice”.

Deep practice

That’s not to say genetics is always irrelevant – if you want to be a world-class basket­ ball player, it helps to be tall – but few occupations require specialized characteristics such as height. Most require a combination of skills that can be developed and honed through practice, and this is especially true for business acumen.

Sensors: a fast-growing sector Electronic sensors – the product you will be designing, producing, marketing, and

selling during your simulation – exist in many applications.

One crucial sector is the fast-growing consumer electronics market. With “wearables” a hot trend in electronic devices, the health-conscious, tech-savvy buyers in the “quantified-self” market are being offered devices to measure their energy input and

output against personal fitness goals. Wearables all require sensors.

Jawbone (the industrial design company that first developed sleek, in-ear Bluetooth devices) launched its first fitness-tracking wrist band Up in late 2011. Up had early technical problems which Nike+ took advantage of by promoting its rival FuelBand. Four years later, however, neither product was a blip on the market share chart for wearables. By 2016 the market was dominated by Fitbit, Apple and Xiaomi. According to CCS Insight’s Wearable Forecast Worldwide 2015 – 2019, the market is set to grow from $15 billion to $25 billion, with smart watches accounting for more than half of the revenue.

At the All Things Digital Conference in May 2013, Apple CEO Tim Cook said there were problems to be solved in building wearable electronics – but the growing market would be good news for the sensor industry: “The whole sensor field is going to explode,” Cook said. “It’s already exploding. It’s a little all over the place right now, but with the arc of time, it will become clearer I think.”

By late 2015, the Worldwide Quarterly Wearable Device Tracker reported the number of devices shipped in 3rd quarter 2015 were up 197% over the same quarter 2014 – from 7.1 million units to 21 million units. And what about internal wearables? Nature Magazine reports skin surface and implanted sensors are being developed for monitoring the health of the human body. Sensors can, for example, warn of an impending heart attack or epileptic seizure.

The functionality of sensors will be expanded, refined and improved dramatically over the coming years.

4 | Intro to Business: A Primer

Success is often embedded in environmental influences. For example, the presence or absence of a great coach or mentor matters significantly. The presence of a role model in the culture also influences success. The opportunity to develop a skill matters most of all. You can’t become a pianist if there are no pianos!

After only 100 hours of deep practice, a person becomes noticeably better at a subject than others who haven’t done that work. At 1000 hours, he or she becomes highly skilled in that subject, and it doesn’t stop there. So “talent” becomes somewhat pre­ dictable and measurable. You can say a person with 100 hours of deep practice is less competent than a person with 1,000 hours of deep practice.

Viewed in this way, talent becomes a choice. The choice is to trade off the time to de­ velop one talent, for time spent on something else. The more time spent focused on a single talent, the less time can be given to others.

Business acumen is a function of deep practice; talent has little to do with it.

Simulations and deep practice

Simulations are designed to offer focused opportunities for deep practice. That’s why they are often more effective than passive tools such as textbooks, videos, or lectures.

By the way, “deep practice” is very different from “ordinary practice.” After commuters who drive to school or work can accumulate thousands of hours of driving, but that doesn’t make them expert drivers. The key to deep practice is self-awareness. That is, paying attention to what you are doing well and not so well. This is so important to learning that scientists use a specific term for it: “metacognition,” or thinking about the way you think and learn.

Deep practice has these characteristics:

ƒ It is intentional. You are consciously seeking improvement as you practice.

ƒ It is at the limits of your present capability. ƒ You fail. Often. If you didn’t, you wouldn’t be at the limits of your

capability. You try again. ƒ You are seeking incremental improvement in each practice session,

not breakthroughs. ƒ You are practicing the right things, not the wrong things. This often

requires a coach. ƒ You have a feedback system in place, one that tells you when you are

right and when you are wrong. ƒ You spend between half an hour and three hours a day in deep

practice. If you spend more, you are getting diminishing returns. There is only so much you can accomplish in one day.

Overview | 5

Simulations work because they are hands-on experiences that mimic the real world. Well-designed simulations, such as CapsimCore Business Simulation present problems at the limits of your capabilities, offer positive and negative feedback, have a “coach,” and work your brain in a way that builds your business skills. Throughout the training, you can witness the incremental improvements in yourself over time.

Here’s a list of “do’s and don’ts” to enable you to use the simulation to develop your business acumen, in much the same way that you’d use a gym to build muscle.

Do’s:

ƒ Feedback is critically important to deep practice. The simulation delivers it via your online interface and in your reports. Both positive feedback and negative feedback are important. When the results come in, compare your expectations with the actual results. Why were you right? Why were you wrong? This applies when your results are both better than expected and worse than expected.

ƒ Focus on your portion of the company’s decisions each round. In sports, a player may spend a day of practice on only one skill. This same principle applies to business acumen and management skills.

ƒ Add a new skill each round such as pricing for products, sales forecasting, production analysis, financial modeling, and so forth.

ƒ Practice the old skills as well as the new skill. ƒ Use your coaches. These include your instructor, of course, but also

the auto- mated coaches that produce the end of round report available on your interface. If you encounter something you do not understand, the answer is probably in the online support system or you can contact support@Capsim.

Don’ts:

ƒ Don’t treat failure as a bad thing. Failure is a good thing. It means that you are practicing at the limits of your ability. It has been estimated that Olympic ice skaters fall 20,000 times on their way to a gold medal. The skaters practice at their limits, focusing on the movements that make them fall. Failure is also feedback. An emergency loan, a stock-out, a capacity shortage – simulations are designed to highlight mistakes such as these – but the important questions are, “What led to the failure?” and “How can I avoid this in the future?”

ƒ Don’t ask others to do it for you. Do the work yourself. Don’t seek help from past or present students. This is the equivalent of going to the gym to watch other people work out.

ƒ Don’t be concerned with the confusion you feel at the beginning of the simulation. Of course you’re confused – you’ve never run a multimillion-dollar company before. Trust the process. The confusion will fade.

ƒ Don’t focus on your mistakes. That angst locks you in place and prevents growth. As difficult as it is to accept, if you are not looking bad, you are not growing.

6 | Intro to Business: A Primer

So let’s begin.

This text can be read in conjunction with your CapsimCore simulation experience. It is designed to enlarge on the concepts you’ll come across in the simulation and introduce the way they work through examples in real, operating companies.

Remember, the best way to learn is to try, fail, try again and be persistent! Our hope is that you’ll find this a fun learning experience that will motivate you to continue to develop your business management skills.

OVERVIEW: what is a business? 1

Learning Goals

After reading this chapter you will be able to:

ƒ Define what a business represents and why businesses exist. ƒ Define essential business concepts including products,

services,profits, and stakeholders.

ƒ Describe the major functions of business. ƒ Discuss the role of management in business success. ƒ Differentiate between performance effectiveness and efficiency. ƒ Describe the enterprise system and how it relates to business. ƒ Differentiate between internal and external stakeholders. ƒ Discuss key market concepts such as specialization, uncertainty, and

risk. ƒ Compare and contrast economic and opportunity costs. ƒ Describe the differences between financial and managerial

accounting.

What is a business? A business can be defined as any organization that provides products, services or both to individual consumers or to other organizations. The essential role of a business is to create products or offer services that satisfy customer needs or wants. Whether is it creating smart phones or offering home delivery of groceries, businesses could not exist without someone desiring their products or services.

Let us start with some basic definitions of essential concepts:

PRODUCT: a good that has tangible characteristics and that provides sat­ isfaction or benefits (e.g., an automobile). SERVICE: an activity that has intangible characteristics and that provides satisfaction or benefits (e.g., a mechanic per- forming automotive repair). PROFIT: the basic goal of most businesses. Profit is the difference be­ tween what it costs to make and sell a product or service and what the customer pays for it. STAKEHOLDERS: groups of people who have a vested interest (a “stake”) in the actions a business might take. There are four major groups of stake­ holders: (1) owners, (2) employees, (3) customers, and (4) society. The specific interests of each of these stakeholder groups may sometimes conflict with each other.

8 | Intro to Business: A Primer

To summarize, a business sells products or services with the specific goal of making a profit, and in the process has an impact on various stakeholders.

Business, however, is much more interesting than its definitions. As described in the introduction, every business requires three basic resources – people, ideas, and mon­ ey – that are configured and reconfigured over and over again to satisfy the needs and wants of customers. In that process there may be winners and losers, there may be cheaters, heroes, hard work, laughter, tears – the theory of business may be straightfor­ ward, but the experience of business is an exciting, ever-changing story, as you will dis­ cover in the CapsimCore Business Simulation. Let’s look at the way businesses deploy their three important resources.

Business functions and functioning

Each business must employ people to entice customers, produce its products or ser­ vices, organize workflow, plan to fund or pay for its operations, and more. Whatever type of business it is, the work that has to be done will typically fall into four basic “business functions.”

MARKETING is all the activities designed to provide the goods and ser­ vices that satisfy customers. These activities include market research, de­ velopment of products, pricing, promotion, and distribution. PRODUCTION refers to the activities and processes used in making prod­ ucts or delivering services. These activities involve designing the produc­ tion processes (investments in facilities and equipment) and the efficient management and operation of those processes. ACCOUNTING is the process that tracks, summarizes, and analyzes a company’s financial position. FINANCE refers to the activities concerned with funding a company and using resources effectively.

There is no one simple formula for successful business functioning or performance. Put simply, ideas (innovation + product development) + people (marketing + operations + leadership) + money (finance + accounting) does not equal a well-functioning busi­ ness. Business is all about complex interactions – external interactions with customers, competitors, communities, and regulators – and internal interactions between all the people who operate the functions of the business itself. Engineers, computing wizards, accountants, human resource professionals, creative designers, marketers, and sales people – they may all be necessary to a business, but they are not sufficient to guaran­ tee success.

To be successful, businesses need good managers who are able to see the big picture and understand how all the individual business functions work together. Fortunately, we know a lot about what goes into good management.

Overview | 9

To summarize, a business sells products or services with the specific goal of making a profit, and in the process has an impact on various stakeholders.

Business, however, is much more interesting than its definitions. As described in the introduction, every business requires three basic resources – people, ideas, and mon- ey – that are configured and reconfigured over and over again to satisfy the needs and wants of customers. In that process there may be winners and losers, there may be cheaters, heroes, hard work, laughter, tears – the theory of business may be straightfor- ward, but the experience of business is an exciting, ever-changing story, as you will dis- cover in the CapsimCore Business Simulation. Let’s look at the way businesses deploy their three important resources.

Business functions and functioning

Each business must employ people to entice customers, produce its products or ser- vices, organize workflow, plan to fund or pay for its operations, and more. Whatever type of business it is, the work that has to be done will typically fall into four basic “business functions.”

MARKETING is all the activities designed to provide the goods and ser- vices that satisfy customers. These activities include market research, de- velopment of products, pricing, promotion, and distribution. PRODUCTION refers to the activities and processes used in making prod- ucts or delivering services. These activities involve designing the produc- tion processes (investments in facilities and equipment) and the efficient management and operation of those processes. ACCOUNTING is the process that tracks, summarizes, and analyzes a company’s financial position. FINANCE refers to the activities concerned with funding a company and using resources effectively.

There is no one simple formula for successful business functioning or performance. Put simply, ideas (innovation + product development) + people (marketing + operations + leadership) + money (finance + accounting) does not equal a well-functioning busi- ness. Business is all about complex interactions – external interactions with customers, competitors, communities, and regulators – and internal interactions between all the people who operate the functions of the business itself. Engineers, computing wizards, accountants, human resource professionals, creative designers, marketers, and sales people – they may all be necessary to a business, but they are not sufficient to guaran- tee success.

To be successful, businesses need good managers who are able to see the big picture and understand how all the individual business functions work together. Fortunately, we know a lot about what goes into good management.

Managing a Business As we discussed earlier, without customers a business would not be sustainable. This fact also applies to managers – without managers a business would wither and die. Successful management requires individuals who juggle the trade-offs and compro­ mises necessary to keep a complex business moving along a clear strategic track. These individuals must also display intellectual flexibility to adjust to changing customer de­ mands, and be able to harness the impact of creative abrasion that results from dealing with various business stakeholders who often have colliding agendas that must be met in the drive for success, profitability, and sustainability.

When we say “success,” however, what do we really mean? One useful way to think about success in management is that it entails the two “E’s” of performance: effective­ ness and efficiency. Performance effectiveness means doing the right thing. Perfor­ mance efficiency means doing things right.

Being effective involves committing to a course of action that allows you to accomplish your goals. It is a measure of how appropriately and successfully your actions achieve your goal. Being efficient refers to employing the right processes to achieve the goal. Ef­ ficiency is measured by comparing the resources invested with the outcomes achieved.

Decisions that shape the marketing, production, and financial functions of a business are often made in environments that are specialized, complex, uncertain, and risky. Managing these functions requires planning, organizing, leading, and controlling all the important variables.

10 | Intro to Business: A Primer

PLANNING: Determining what the organization needs to do and how to get it done. ORGANIZING: Arranging the organization’s resources and activities in such a way as to make it possible to accomplish the plan. LEADING: Enacting the plan, including guiding and motivating employ­ ees to work toward accomplishing the necessary tasks. CONTROLLING: Measuring and comparing performance to expectations established in the planning process and adjusting either the performance or the plan.

Regardless of the business functions or the types of managerial decisions to be made, effective and efficient management cannot be achieved without leadership. At higher levels of responsibility, people who may be referred to as chief executives or senior managers fill leadership roles. Of course, the more people, functions, and processes a company has, the more its senior management will need to align and coordinate management activities. You will have the opportunity to experience a plethora of man­ agement challenges in your simulated company, particularly if you are operating in a

Innovation sparks growth He has been called the “Steve Jobs of yogurt”. Hamdi Ulukaya, a Turkish

immigrant to the U.S., built the Chobani yogurt company that made him a billionaire in six years on an obsession for brewing the perfect cup of yogurt.

In 2005 Ulukaya bought a defunct yogurt factory from Kraft in New Berlin, N.Y., with a U.S. Government-backed small business loan - and went on to shake up an industry owned by the major food companies. In 2007 he launched an innovation into the already crowded yogurt market: low-fat, sugar-free, Greek-style yogurt with a taste customers loved.

As Ulukaya told USA Today: “I literally lived in the plant for 18 months to make that perfect cup. And then five years after, it just exploded. I did not have all the ideas right from the beginning. I just jumped in and learned the swimming right in there.”

Chobani went from six employees to 3,000 in five years and added a second plant in Twin Falls, Idaho, in 2012. When Ulukaya …

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