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

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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 launched Chobani, Greek yogurt was 1% of the market in the U.S. Within five years it was almost 60%. “So we take quite a bit of credit for that,” he said. “What we did was make it for everyone, and we made it delicious. And when people tasted it for the first time, this wow effect came in.”

Sales of Chobani yoghurt hit a billion dollars in 2013, but a product recall that same year proved costly. By 2015 competition was intense and sales growth slower. Along with private equity funds and management assistance from TPG Capital, the company started looking to more innovation to stimulate growth. Chobani launched its “flip” range including Mango and Sriracha, or Chipotle Pineapple, mixing yoghurt with crunchy, savory toppings for all-day snacking. Innovation surrounding Chobani, however, has not been restricted to yogurt. As Ulukaya told USA Today: “That old plant that we turned back to life opened four different other factories somewhere else because of the butterfly effect. So you open the Greek yogurt factory. Then somebody has to make a cup factory. Somebody has to make a foil factory. Somebody has to make a fruit factory. Then the farmers have to add more cows. Then the people have to work on the farms. Then the trucks have to go up to those factories. All of that contributes to billions and billions of dollars invested and thousands of jobs created.”

Overview | 11

team where each team member, depending on his or her business function, will pursue different interests.

The Big Picture: The Enterprise System

Now that we’ve discussed some basics about business, business functions, and manage­ ment, let’s look a little closer at the economic forces that impact business functioning.

Businesses operate within an overall economic system. There are at least three key terms to understand when thinking about overall economic systems.

MARKET: a mechanism that facilitates the exchange of goods and ser­ vices between buyers and sellers. DEMAND: the quantity of goods and services that consumers are willing to buy at different prices. SUPPLY: the quantity of goods and services that businesses are willing to provide at those prices.

The terms of a sales transaction, or the quantity of goods traded and the trading price, are determined by the supply of and demand for any particular good or service.

Economic systems are typically, but not always, embedded in a framework of activities that are carried out by mostly democratic elected representatives (the government) of a society within its geographic boundaries. Activities that serve the society by fulfilling basic needs (e.g. roads, defense, security) or needs that no other business can serve (e.g. judicial branches) are performed by public enterprises.

Unlike public enterprises, the simulated company you will run in the CapsimCore Sim­ ulation is a private enterprise. In private enterprise systems individual citizens (rather than governments) own and operate the majority of businesses. Private enterprise sys­ tems require four essential conditions:

1. Private property 2. Freedom of choice 3. The right to keep profits 4. An environment where fair competition can occur

The theory underlying the private enterprise system is that competition among busi­ nesses will produce an efficient allocation of resources across the economy. Goods and services are desired where they produce the greatest benefit or are used most produc­ tively. Throughout this economic process, pressure is exerted from several areas. For example, there is pressure to lower prices and pressure to innovate through technolog­ ical and procedural improvements.

When businesses compete in a private enterprise system, value is created for con­ sumers. Customers are offered additional choices because businesses are motivated to innovate often through technological advancements to improve their offerings and

12 | Intro to Business: A Primer

make them more attractive. Innovation of processes, products, and services also mo­ tivates businesses to price their offerings attractively to position themselves for future and sustainable success.

Internal and External Stakeholders

Within an economic system are various groups with a stake in the way businesses oper­ ate. Earlier, we defined these different groups as business “stakeholders”. All businesses will have stakeholders from the four categories we discussed. One way to think of these stakeholders is in terms of their being either internal or external to a business.

The key internal stakeholders are owners (stockholders/shareholders), who derive eco­ nomic benefits when the business makes a profit, and whose investments lose value when it doesn’t, and employees, who also derive economic benefits through wages but can experience additional benefits (such as training and experience) or disadvantages (exposure to toxins/accidents). The key external stakeholders are customers, who want the best product or service possible for the lowest possible price, and the society at

Stakeholders’ changing needs and demands The Easy-Bake Oven may have been a favorite toy of American children for more

than 50 years, but in recent years Hasbro, its manufacturer, has had to respond dramatically to stakeholders including both customers and government regulators.

The toy, launched in 1963, is a working oven in which mini-portions of cake mix and other treats are fed on small trays into a slot and emerge cooked. In 2003 it was voted

Parenting magazine’s Toy of the Year. In 2006 it was inducted into the American Toy Hall of Fame. Since then, however, Hasbro has dealt with health and safety concerns, environmental legislation, and claims of sexism related to the Easy-Bake design.

In early 2007 nearly a million of the pink-and-purple ovens were recalled. Hasbro had received 249 reports of children getting their hands or fingers caught in the oven’s opening, including 77 reports of burns, 16 of which were reported as second- and third-degree burns, with one leading to a partial finger amputation for a 5-year-old girl.

After the recall, a redesigned oven was launched, powered by the heat source the Easy-Bake used from the beginning – an incandescent bulb. Environmental legislation announced by President George W. Bush that same year, however, required a phase-out of incandescent bulbs by 2012. In 2011 Hasbro launched a new oven, powered by a heating element.

The next year, a New Jersey teen, McKenna Pope, collected 40,000 signatures – including those of several celebrity chefs – asking Hasbro to launch an Easy-Bake that was gender neutral. McKenna claimed the oven’s feminine-looking pinks and purples alienated her younger brother. At the 2013 Toy Show, Hasbro launched an oven in black and silver. Responding to this pressure may have proved controversial internally, however, because it was not Hasbro’s first attempt to appeal to boys. In 2002 it had launched the Queasy Bake Cookerator, making “boy friendly” treats such as Chocolate Crud Cake and Dip ‘N Drool Dog Bones. The product failed to reach adequate sales and was withdrawn.

It can be difficult – even for an established product such as the Easy-Bake and an established manufacturer such as Hasbro – to keep up with the various pressures from different stakeholders.

Overview | 13

large that may also be benefited (more jobs for more people leading to more tax reve­ nue) or disadvantaged (toxic waste in the water system/market failures).

The private enterprise system needs laws to make corrections when markets do not produce outcomes desirable for the people who live in a society. The laws are set by governments elected to act on behalf of the whole society – and they are designed to protect all stakeholders according to a mutual sense of justice. In this sense, govern­ ments establish rules for the overall economic system designed to balance the needs of the society with the drivers of profit.

Stakeholders in an oil spill On April 20th 2010, an explosion on the Deepwater Horizon oil rig, operated by British

Petroleum in the Gulf of Mexico, triggered the largest marine oil spill of its type in U.S. history.

The rig sank, 11 people were killed, 17 were seriously wounded and oil flowed underwater from the well, discharging more than 200 million gallons before it was declared fully capped in September. On April 30th President Barack Obama said: “This oil spill is the worst environmental disaster America has ever faced ... Make no mistake: We will fight this spill with everything we’ve got for as long as it takes. We will make BP pay for the damage their company has caused. And we will do whatever’s necessary to help the Gulf Coast and its people recover from this tragedy.”

The scale of the disaster resulted in adverse effects on a very wide range of stakeholders. Owners saw their investment in BP halved as the market capitalization of the company plunged from $180 billion in April 2010 to $90 billion by June of that year. Employees suffered not only from the direct and indirect effects of the deaths and injuries, but from the impact of working for the world’s largest oil producer one day, and its most infamous the next. Customers felt less inclined to buy BP products with BP-branded gas stations in the U.S. (most of which are not owned by BP) suffering losses of between 10% and 40% of sales.

It was, however, society that felt the largest impacts. In Louisiana, for example, 17% of all jobs are related to the oil industry. Job losses in the state followed a moratorium on offshore drilling, implemented while investigations were underway. Jobs were lost in tourism (the industry reports losing $23 billion in the region) and fishing (reported losses of $2.5 billion), as the effects of the spill and cleanup efforts devastated both industries. Health issues included 143 cases of chemical poisoning in the first two months of the disaster alone, with the American Journal of Disaster Medicine suggesting “cancers, liver and kidney disease, mental health disorders, birth defects and developmental disorders should be anticipated among sensitive populations and those most heavily exposed.” The oil spill area included more than 8,000 species of fish, birds, mollusks, crustaceans, sea turtles and marine mammals, with effects on these animals including death from oil or the cleanup chemicals, disease, birth defects and mutations, and lesions and sores.

The company was charged with 11 counts of manslaughter under U.S. law for the deaths of workers and tried under provisions of the Clean Water Act. The U.S. Government National Commission investigation into the disaster placed blame for the spill squarely at the feet of BP and its contractors Halliburton and Transocean, citing cost cutting and insufficient safety procedures. By July 2015 agreement had been reached to settle all federal and state claims, leaving BP a total bill of $53.8 billion for cleanup, compensation, and environmental fines. The disaster is one of the most vivid examples in recent history of how errors in business can negatively and dramatically impact a wide range of stakeholders.

14 | Intro to Business: A Primer

Everyday life – risk Think about tossing a coin. You cannot consistently predict when you flip a coin whether it will land with the “head” or the “tail” side up. Not knowing which side will land facing up is a form of uncertainty. Place a bet with a friend about which side will land facing up and the amount of the bet is a measure of the risk. If you bet 20 cents, then the risk associated with the bet is small. If you are in the same economic position and bet $100,000, then the risk associated with the bet is enormous.

All areas of law or regulation that influence business practice contribute to our shared definition of fairness. Examples include establishing standards of conduct in negotiat­ ing contracts with a company’s buyers or suppliers, providing information (advertising) to consumers, providing information to potential investors, and negotiating with em­ ployees or their representatives.

To summarize, we have an overall economic system based on privately owned busi­ nesses, regulated to ensure the rights of all stakeholders are protected, and fueled by transactions between buyers and sellers in various markets. Next, let’s look at the no­ tion of a market.

Markets – the engine that keeps it all running

Everyday life – specialization and complexity It is Sunday morning and you decide to en­ joy breakfast at a local café. Your need is specialized and so is the café business serv­ ing breakfast – but think about the com­ plexity of the separate activities in different types of industries and markets that have to be precisely coordinated to provide your breakfast experience: agriculture (growing the tomatoes, collecting the eggs); transport (moving everything from supplier to whole­ saler to your table); grocery wholesaling (from the napkins to the ketchup); construc­ tion (the building you are sitting in); furniture (the chair you are sitting in); food service (cooks, kitchen hands, wait-staff); banking (lending money to all of the other industries to keep them operating); entertainment (the music playing in the background) …. it’s a complex web of markets matching supply with demand.

A market – according to our definition – is a mechanism that facilitates the exchange of goods and services between buyers and sellers. From cavemen trading stone tools for bison meat, to the NASDAQ (an electronic market for buyers and sellers of stock), informal and formal markets have existed as long as human demand has been able to find a source of supply.

Some terms you’ll come across in relation to markets are specialization, uncertainty, and risk.

In an economic context, specialization is a measure of how broadly or narrow­ ly the range of activities performed by a business is defined. A bicycle shop, for example, is a more specialized retail store than Wal-Mart because the bicycle shop focuses on a narrow and deep range of products. Specialization creates an op­ portunity for greater efficiency and in­ creased productivity. The division of tasks that comes with specialization introduces a need for coordination of those specialized tasks. These different levels of special­ ization and different kinds of coordinating mechanisms create a complex economic environment.

Markets are also characterized by uncertainty and risk. Uncertainty is not knowing an exact outcome or not being able to predict the exact consequences of a choice in a decision situation. The greater the uncertainty, the less you can know about the results of a particular choice. Decision makers must work to reduce uncertainty by compiling as much relevant information as possible about a decision situation. Risk is also asso­

Overview | 15

All areas of law or regulation that influence business practice contribute to our shared definition of fairness. Examples include establishing standards of conduct in negotiat- ing contracts with a company’s buyers or suppliers, providing information (advertising) to consumers, providing information to potential investors, and negotiating with em- ployees or their representatives.

To summarize, we have an overall economic system based on privately owned busi- nesses, regulated to ensure the rights of all stakeholders are protected, and fueled by transactions between buyers and sellers in various markets. Next, let’s look at the no- tion of a market.

Markets – the engine that keeps it all running

A market – according to our definition – is a mechanism that facilitates the exchange of goods and services between buyers and sellers. From cavemen trading stone tools for bison meat, to the NASDAQ (an electronic market for buyers and sellers of stock), informal and formal markets have existed as long as human demand has been able to find a source of supply.

Some terms you’ll come across in relation to markets are specialization, uncertainty, and risk.

In an economic context, specialization is a measure of how broadly or narrow- ly the range of activities performed by a business is defined. A bicycle shop, for example, is a more specialized retail store than Wal-Mart because the bicycle shop focuses on a narrow and deep range of products. Specialization creates an op- portunity for greater efficiency and in- creased productivity. The division of tasks that comes with specialization introduces a need for coordination of those specialized tasks. These different levels of special- ization and different kinds of coordinating mechanisms create a complex economic environment.

Markets are also characterized by uncertainty and risk. Uncertainty is not knowing an exact outcome or not being able to predict the exact consequences of a choice in a decision situation. The greater the uncertainty, the less you can know about the results of a particular choice. Decision makers must work to reduce uncertainty by compiling as much relevant information as possible about a decision situation. Risk is also asso-

ciated with the consequences of choice; therefore risk is a measure of the significance of those decisions.

Decision making – the critical skill

When planning, organizing, operating, and controlling a company, decisions are con­ stantly made and the quality of those deci­ sions determines, to a large extent, whether and how the company will achieve its goals. In today’s world of work, teams make the vast majority of strategic, high-impact decisions. These teams can range from product devel­ opment teams and quality control teams to top management teams comprised of exec­ utives from each business function.

The process of defining problems and op­ portunities that merit attention, generating and evaluating alternative courses of action, and committing to the action that is most likely to produce the optimal result is one way to describe the decision-making process.

Decision making also involves comparing the economic and opportunity rewards (benefits) and sacrifices (costs) involved in a course of action and committing to the one that best meets your goals. The objective is to make the parties involved “better off” than they were before the transaction took place. Typically, good decisions are commitments that help you accomplish your goals in whatever way you define them. Business decisions primarily focus on gain­ ing economic rewards, which means there is an assumption that we only engage in trans­ actions that offer the potential to improve our “position.” When we choose a course of action, it requires a sacrifice to obtain the reward. In economic terms, this sacrifice is called a “cost.” When evaluating alternative choices, a decision maker considers two kinds of costs, the economic cost and the opportunity cost:

An economic cost is the money spent imple­ menting the decision.

An opportunity cost is the cost of what you gave up doing when you committed to the course of action you chose.

Everyday life – risk Think about tossing a coin. You cannot consistently predict when you flip a coin whether it will land with the “head” or the “tail” side up. Not knowing which side will land facing up is a form of uncertainty. Place a bet with a friend about which side will land facing up and the amount of the bet is a measure of the risk. If you bet 20 cents, then the risk associated with the bet is small. If you are in the same economic position and bet $100,000, then the risk associated with the bet is enormous.

Everyday life – opportunity cost Consider being offered two jobs. One of­ fers $10,000 more in base salary but few prospects for promotion. The other offers less money but has more opportunities for promotion and future training. You have two choices: Take the higher paying job, or the lower paying job. The economic cost of taking the second job is $10,000. The op­ portunity cost of taking the first job is the chance for promotion, future training, and higher pay in the future. In the long run, op­ portunity costs are often more important than economic costs, but economic costs generally easier to determine than oppor­ tunity costs.

16 | Intro to Business: A Primer

Assessing opportunity costs is important to determine the true cost of any decision. Opportunity cost can measure anything that is of value. The opportunity cost is not the sum of the available alternatives, but rather the benefit of the best single alternative. If there is no explicit accounting or monetary cost attached to a course of action, ignoring opportunity costs may create an illusion that the benefits cost nothing at all, turning them into a hidden cost associated with that action. The opportunity cost of a compa­ ny’s decision to build a new plant on vacant land the company owns, for example, is the loss of the land for another purpose, such as using it to build a facility to be leased to another business, or to have access to the cash that could have been generated from selling the land. Only one set of choices is possible. Only one set of benefits is attainable.

Accounting – keeping track of financial outcomes

Every business keeps track of its financial health through accounting. Accounting is a set of rules applied to a company’s financial records that allows owners and managers to monitor, analyze, and plan the finances of the business. In short, accounting deals with the business resource of “money” we discussed at the beginning of this chapter.

Whatever business you are in, the stakeholders in your business – and that, as we know, might be owners and shareholders, potential buyers, customers, or even the govern­ ment’s tax office – need to have a consistent frame of reference for assessing the fi­ nancial health of your company. That consistent frame of reference is the company’s financial reports. To understand the financial reports, however, we need to understand some of the basic principles that underpin the rules and principles of accounting.

There are two major types of accounting: Financial Accounting and Management Accounting.

FINANCIAL ACCOUNTING produces the balance sheets, income state­ ments, and cash flow statements that ensure external stakeholders can access the information they need. These stakeholders are usually peo­ ple and groups outside the company who need accounting information to decide whether or not to engage in some activity with the company. That might include individual investors; stockbrokers and financial ana­ lysts who offer investment assistance; consultants; bankers; suppliers; la­ bor unions; customers; local, state, and federal governments; and gov­ ernments of foreign countries in which the company does business. MANAGEMENT ACCOUNTING provides vital information about a com­ pany to internal users. Because it is for internal use, it does not have to conform to the restrictions of outside regulation and can be expressed in whatever way is most useful for managers. Information can be reported in dollars, units, hours worked, products manufactured, number of de­ fective products, or the quantity of con- tracts signed. The job of a man­ agement accountant is to produce information that is relevant to specific segments of the company’s products, tasks, plants, or activities. The goal of that information is to enable managers to make more informed and effective decisions.

Overview | 17

The reports a management accountant produces might forecast revenues, predict costs of planned activities, and provide analysis based on those forecasts. By describing how alternative actions might affect the company’s profit and solvency, forecasts and analyses help managers plan.

We’ll talk in greater detail about financial accounting and reports such as income state­ ments, cash flow statements, and balance sheets in Chapters 4 & 5. More detail will be provided on managerial accounting including budgets, cost analysis, and management reporting in Chapters 2 & 3, which cover marketing and production

18 | Intro to Business: A Primer

Chapter 1 Review Questions

Business Basics 1. What are the four main business stakeholder groups? 2. What are the primary functions of business? 3. What are the four major activities involved in managing a business? 4. What is the difference between performance effectiveness and

performance efficiency?

The Private Enterprise System 5. How would you define supply? 6. How would you define demand? 7. How would define a market? 8. What are the four conditions that must exist for the free enterprise

system to exist? 9. What are the implications of the relationship between supply and

demand? 10. What are the differences between internal and external

stakeholders? 11. What is specialization? 12. How would you illustrate the concept of “uncertainty”? 13. How would you illustrate the concept of “risk”?

Decision Making 14. What is the difference between an economic cost and an

opportunity cost? 15. What is the main purpose of the accounting function of a business? 16. What are the differences between financial and managerial

accounting?

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

Learning Goals

After reading this chapter you will be able to:

ƒ Describe the role of a marketing manager. ƒ Describe the key activities of marketing research. ƒ Discuss the seven steps of information gathering for market research. ƒ Define and differentiate the “4P’s” of marketing. ƒ Discuss the importance of market segmentation. ƒ Describe the purposes and goals of marketing strategy. ƒ Define “diminishing returns” and discuss why this matters to

marketing. ƒ Compare and contrast the concepts of risk, ambiguity, and

conformance with regard to marketing.

Overview of Marketing Basics

No matter how good a firm is at offering its products and services, it has to strive for constant improvement because satisfying the customer is a never-ending process. From buying a bottle of shampoo or ordering a cup of coffee, to choosing a health-care provider or setting up a retirement plan, the abundance of choice in the market makes decision making increasingly complex for consumers. The same is true for customers in business-to-business markets, like the electronic sensor market.

For any company, understanding the relationship its customers have with the company and its product, and how those relationships develop or deteriorate over time, is critical to the long-term profitability and sustainability of the firm.

Today’s customers have access to a wealth of information, as well as many choices in the marketplace. Acquiring and retaining customers can, therefore, be challenging. But a satisfied and/or loyal customer – a “captured” customer – is, in simple economic terms, an asset that yields future cash-flows and contributes to a firm’s future growth.

Without unlimited resources, it is impossible for any firm to excel in every aspect of its product: that is, to provide the highest quality, fastest delivery and widest variety at the lowest price. Therefore, firms must make tradeoffs on the basis of what they do best, what their competitors are offering, and what criteria they think matter most to their customers. Managers often struggle to determine the “best” configuration of

2

20 | Intro to Business: A Primer

product-service offerings that will appeal to their chosen target markets and to poten­ tial customers.

The Marketing Manager’s Role

Ideally, all company activities should satisfy customer needs. The role of a marketing manager is to focus the company’s efforts on identifying, satisfying, and following up on its customers’ needs - all at a profit. The marketing manager has to understand how:

ƒ To clearly define, describe and forecast the needs of its customers by using data (Market Research),