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Business Foundations

A Changing World twelfth edition

O.C. Ferrell Auburn University

Geoffrey A. Hirt DePaul University

Linda Ferrell Auburn University

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BUSINESS FOUNDATIONS: A CHANGING WORLD

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2020 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

1 2 3 4 5 6 7 8 9 LWI 21 20 19

ISBN 978-1-260-56580-5 MHID 1-260-56580-7

Cover Image: ©Steve Allen/Getty Images

All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.

mheducation.com/highered

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Dedication To James Ferrell

To Linda Hirt

To George Ferrell

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Southeast Doctoral Consortium. He received the Harold Berkman Lifetime Service Award from the Academy of Marketing Science and, more recently, the Cutco Vector Distinguished Marketing Educator Award from the Academy of Marketing Science.

Dr. Ferrell has been involved in entrepreneurial engagements, co-founding Print Avenue in 1981, providing a solution-based printing company. He has been a consultant and served as an expert wit- ness in legal cases related to marketing and busi- ness ethics litigation. He has conducted training for a number of global firms, including General Motors. His involvement with direct selling com- panies includes serving on the Academic Advisory Committee and as a fellow for the Direct Selling Education Foundation.

Dr. Ferrell is the co-author of 20 books and more than 100 published articles and papers. His articles have been published in the Journal of Marketing Research, Journal of Marketing, Journal of Business Ethics, Journal of Business Research, Journal of the Academy of Marketing Science, AMS Review, and the Journal of Public Policy & Marketing, as well as other journals.

GEOFFREY A. HIRT Geoffrey A. Hirt of DePaul University previously taught at Texas Christian University and Illinois State University, where he was chairman of the Department of Finance

and Law. At DePaul, he was chairman of the Finance Department from 1987 to 1997 and

O.C. FERRELL O.C. Ferrell is the James T. Pursell Sr. Eminent Scholar in Ethics and Director of the Center for Ethical Organizational Cultures in the Raymond J. Harbert College of Business,

Auburn University. He was formerly Distinguished Professor of Leadership and Business Ethics at Belmont University and University Distinguished Professor at the University of New Mexico. He has also been on the faculties of the University of Wyoming, Colorado State University, University of Memphis, Texas A&M University, Illinois State University, and Southern Illinois University. He received his PhD in marketing from Louisiana State University.

Dr. Ferrell is president of the Academy of Marketing Science. He is past president of the Academic Council of the American Marketing Association and chaired the American Marketing Association Ethics Committee. Under his lead- ership, the committee developed the AMA Code of Ethics and the AMA Code of Ethics for Marketing on the Internet. In addition, he is a former member of the Academy of Marketing Science Board of Governors and is a Society of Marketing Advances and Southwestern Marketing Association Fellow and an Academy of Marketing Science Distinguished Fellow. He has served for nine years as the vice president of publica- tions for the Academy of Marketing Science. In 2010, he received a Lifetime Achievement Award from the Macromarketing Society and a special award for service to doctoral students from the

Authors

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Authors v

held the title of Mesirow Financial Fellow. He developed the MBA program in Hong Kong and served as director of international initiatives for the College of Business, supervising overseas programs in Hong Kong, Prague, and Bahrain, and was awarded the Spirit of St. Vincent DePaul award for his contributions to the university. Dr. Hirt directed the Chartered Financial Analysts (CFA) study program for the Investment Analysts Society of Chicago from 1987 to 2003. He has been a visiting professor at the University of Urbino in Italy, where he still maintains a rela- tionship with the economics department. He received his PhD in finance from the University of Illinois at Champaign-Urbana, his MBA at Miami University of Ohio, and his BA from Ohio Wesleyan University.

Dr. Hirt is currently on the Dean’s Advisory Board and Executive Committee of DePaul’s School of Music. The Tyree Foundation funds innovative education programs in Chicago, and Dr. Hirt also serves on the Grant Committee. Dr. Hirt is past president and a current member of the Midwest Finance Association, a former edi- tor of the Journal of Financial Education, and also a member of the Financial Management Association. He belongs to the Pacific Pension Institute, an organization of public pension funds, private equity firms, and international organiza- tions such as the Asian Development Bank, the IMF, and the European Bank for Reconstruction and Development.

Dr. Hirt is widely known for his textbook Foundations of Financial Management, published by McGraw-Hill/Irwin. This book, in its sixteenth edition, has been used in more than 31 countries and translated into more than 14 different languages. Additionally, Dr. Hirt is well known for his text- book Fundamentals of Investment Management, also published by McGraw-Hill/Irwin and now in its tenth edition. Dr. Hirt enjoys golf, swimming, music, and traveling with his wife, who is a pianist and opera coach.

LINDA FERRELL Linda Ferrell is Professor and Chair of the Marketing Department in the Raymond J. Harbert College of Business, Auburn University. She was for- merly Distinguished Professor

of Leadership and Business Ethics at Belmont University. She completed her PhD in business administration, with a concentration in management, at the University of Memphis. She has taught at the University of Tampa, Colorado State University, University of Northern Colorado, University of Memphis, University of Wyoming, and the University of New Mexico. She has also team-taught classes at Thammasat University in Bangkok, Thailand.

Her work experience as an account executive for McDonald’s and Pizza Hut’s advertising agen- cies supports her teaching of advertising, market- ing management, marketing ethics, and marketing principles. She has published in the Journal of Public Policy & Marketing, Journal of Business Research, Journal of the Academy of Marketing Science, Journal of Business Ethics, AMS Review, Journal of Academic Ethics, Journal of Marketing Education, Marketing Education Review, Journal of Teaching Business Ethics, Marketing Management Journal, and Case Research Journal, and she is co-author of Business Ethics: Ethical Decision Making and Cases (eleventh edition), Management (third edition), and Business and Society (sixth edition).

Dr. Ferrell is the immediate past president of the Academy of Marketing Science and a past president for the Marketing Management Association. She is a member of the NASBA Center for the Public Trust Board, on the Mannatech Board of Directors, and on the college advisory board for Cutco/Vector. She is also on the Board, Executive Committee, and Academic Advisory Committee of the Direct Selling Education Foundation. She has served as an expert witness in cases related to advertising, busi- ness ethics, and consumer protection.

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The twelfth edition represents a complete and comprehensive revision. This is because so many events and changes in the environment relate to the foundational concepts in business. This means that an introduction to business product has to pro- vide adequate coverage of dynamic changes in the economy as they relate to busi- ness decisions. We have listened to your feedback and incorporated needed changes in content, boxes, cases, exercises, support, online resources, and other features.

This is our fifth edition with a chapter on digital marketing and social network- ing in business. Since launching this chapter in the eighth edition, this dynamic area continues to change the face of business. Entrepreneurs and small businesses have to be able to increase sales and reduce costs by using social networking to commu- nicate and develop relationships with customers. The sharing, or “gig,” economy is transforming entrepreneurial opportunities for employees. For example, the number of independent contractors in our economy has increased to almost one-third of the workforce. The Internet is providing opportunities for peer-to-peer relationships for companies such as Uber, Lyft, TaskRabbit, as well as health care services like Dose. Digital marketing has helped many entrepreneurs launch successful businesses. The increase in independent contractors has contributed to a new trend called co- working. For example, WeWork, discussed in Chapter 10, is capitalizing on these co-working opportunities by offering flexible, agile workspaces to businesses rang- ing from freelancers to Fortune 500 companies.

Throughout the product, we recognize the importance of sustainability and “green” business. By using the philosophy reduce, reuse, and recycle, we believe every business can be more profitable and contribute to a better world through green initiatives. There is a “Going Green” box in each chapter that covers these environ- mental changes. Our “Entrepreneurship in Action” boxes also discuss many innova- tions and opportunities to use sustainability for business success. Sustainability is not only a goal of many businesses, but it is also providing career opportunities for many of our students.

We have been careful to continue our coverage of global business, ethics and social responsibility, and information technology as they relate to the foundations important in an introduction to business course. Our co-author team has a diversity of expertise in these important areas. O.C. Ferrell and Linda Ferrell have been rec- ognized as leaders in business ethics education, and their insights are reflected in every chapter and in the “Business Integrity” boxes. Geoff Hirt has a strong back- ground in global business development, especially world financial markets and trade relationships.

The foundational areas of introduction to business, entrepreneurship, small busi- ness management, marketing, accounting, and finance have been completely revised. Examples have been provided to which students can easily relate. An understanding of core functional areas of business is presented so students get a holistic view of the world of business. Box examples related to “Responding to Business Challenges,”

Welcome

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Welcome vii

“Entrepreneurship in Action,” “Going Green,” and “Business Integrity” help provide real-world examples in these areas.

Our goal is to make sure that the content and teaching package for this book are of the highest quality possible. We wish to seize this opportunity to gain your trust, and we appreciate any feedback to help us continually improve these materials. We hope that the real beneficiary of all of our work will be well-informed students who appreciate the role of business in society and take advantage of the opportu- nity to play a significant role in improving our world. In this new edition, we have additional content to help our students understand how our free enterprise system operates and how we fit into the global competitive environment. This course is an opportunity for students to understand how they can create their own success and improve their quality of life.

O.C. Ferrell

Geoffrey A. Hirt

Linda Ferrell

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viiiviii

Business Foundations: A Changing World, twelfth edition, offers faculty and students a focused resource that is exciting, applicable, and happening! What sets this learning program apart from the competition? An unrivaled mixture of exciting content and resources blended with application focused text and activities, and fresh topics and examples that show students what is happening in the world of business today!

Our product contains all of the essentials that most students should learn in a semester. Business Foundations has, since its inception, delivered a focused presentation of the essential material needed to teach introduction to business. An unrivaled mixture of exciting content and resources, application-focused content and activities, and fresh topics and examples that show students what is happening in the world of business today set this text apart!

Focused, Exciting, Applicable, Happening

It’s easy for students taking their first steps into business to become overwhelmed. Longer products try to solve this problem by chopping out examples or topics to make ad hoc shorter editions. Business Foundations carefully builds just the right mix of coverage and applications to give your students a firm grounding in business principles. Where other products have you sprinting through the semester to get everything in, Ferrell/Hirt/Ferrell allows you the breathing space to explore topics and incorporate other activities that are important to you and your students. The exceptional resources and the Active Classroom Resource Manual support you in this effort every step of the way.

Focused!

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Focused, Exciting, Applicable, Happening ix

It’s exciting to see students succeed! It’s exciting to see more As and Bs in a course without grade inflation. Ferrell/Hirt/Ferrell makes these results possible for your course with its integrated learning package that is proven effective, tailored to each individual student, and easy to use.

Exciting

Applicable When students see how content applies to them, their life, their career, and the world around them, they are more engaged in the course. Business Foundations helps students maximize their learning efforts by setting clear objectives; delivering interesting cases and examples; focusing on core issues; and providing engaging activities to apply concepts, build skills, and solve problems.

Happening! Because it isn’t tied to the revision cycle of a larger book, Business Foundations inherits no outdated or irrelevant examples or coverage. Everything in the twelfth edition reflects the very latest developments in the business world—from the recent recession, high unemployment rates, and the financial instability in Europe to the growth of digital marketing and social networking. In addition, ethics continues to be a key issue, and Ferrell/Hirt/Ferrell use “Business Integrity” boxes to instill in students the importance of ethical conduct in business. To ensure you always know what’s happening, join the author-led Facebook group page supporting this text.

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xx

As always, when revising this material for the current edition, all examples, figures, and statistics have been updated to incorporate any recent developments that affect the world of business. Additionally, content was updated to ensure the most pertinent topical coverage is provided. We now provide bonus chapters in the text—Bonus Chapter A, The Legal and Regulatory Environment, and Bonus Chapter B, Personal and Financial Planning—to meet market demands. In addition, we have added a new online Appendix C, which provides the basics of risk management. Both insurable and noninsurable risk are covered in this appendix.

Here are the highlights for each chapter:

Chapter 1: The Dynamics of Business and Economics

• New boxed features describing real-world business issues • Updated unemployment statistics • New chart on online retailing

Chapter 2: Business Ethics and Social Responsibility

• New boxed features describing issues in business ethics and social responsibility • New data on global trust in different industries • New examples about ethical issues in the sharing economy • New content about aggressive financial or business objectives • New example of a bribery scandal

Chapter 3: Business in a Borderless World

• New boxed features describing issues in international business • Updated list of top 10 countries with which the U.S. has trade deficits/surpluses • New content on U.S. aluminum and steel tariffs • Updated Euro Zone details • New details on the EU’s General Data Protection Regulation (GDPR)

Chapter 4: Options for Organizing Business

• New boxed features describing real-world business issues • New chart of world’s biggest dividend payers • Updated table of America’s largest private companies

Chapter 5: Small Business, Entrepreneurship, and Franchising

• New boxed features describing current business issues • Examples of innovative small businesses • New information on artificial intelligence • Updated table of the fastest growing franchises • Updated table of the most business-friendly states

Chapter 6: The Nature of Management

• New boxed features describing current business issues • New content about business models

New to This Edition

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• New table of compensation packages of CEOs • New content on gender equality • New See for Yourself Videocase—JCF Fitness

Chapter 7: Organization, Teamwork, and Communication

• New boxed features describing current business issues • New examples of organizational culture • New content on artificial intelligence • New stats on email usage in the workplace • New See for Yourself Videocase—Freshii

Chapter 8: Managing Operations and Supply Chains

• New boxed features describing current business operational issues • New content on marketing research and artificial intelligence • New section on blockchain technology • New content on drone technology • Extensive overhaul of Managing the Supply Chain section

Chapter 9: Motivating the Workforce

• New boxed features describing current business issues • New examples of organizational culture

Chapter 10: Managing Human Resources

• New boxed features describing current HR issues • Updated common job interview questions • New content on wage gap • New example of how soft benefits inspire loyalty

Chapter 11: Customer-Driven Marketing

• New boxed features describing current marketing issues • New content on marketing orientation • New content on supply chain management • New content on marketing analytics dashboards

Chapter 12: Dimensions of Marketing Strategy

• New boxed features describing current marketing issues • Logistics added as key term • New definition for physical distribution key term • New See for Yourself Videocase—Zappos

Chapter 13: Digital Marketing and Social Media

• New boxed features describing current digital marketing issues • New stats on social media use by platform • New stats on mobile app activities

Chapter 14: Accounting and Financial Statements

• New boxed features describing current accounting issues • Updated rankings of accounting firms in the U.S. • Updated financial information for Microsoft

New to This Edition xi

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xiixii

Chapter 15: Money and the Financial System

• New boxed features describing current financial issues • Updated life expectancy of money • Updated cost to produce coins • New content on cryptocurrency • New See for Yourself Videocase—Kiva

Chapter 16: Financial Management and Securities Markets

• New boxed features describing current financial issues • Updated short-term investment possibilities • Updated U.S. corporate bond quotes • New content on electronic markets

xii New to This Edition

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Michael Bento Owens Community College

Patty Boyle Lane Community College

Dennis Brode Sinclair Community College

Angela Casler California State University

Steven M. Dunphy Indiana University Northwest

Terri Gonzalez-Kreisman Delgado Community College

Chad Grooms Gateway Community and Technical College

Ivan Franklin Harber Jr. Indian River State College

Dan Jones Ball State University

Stephen Konrad Portland State University

Hui Pate Skyline College

Daniel Pfaltzgraf University of Toledo

Linda L. Ridley CUNY Hostos Community College

Michael Rose Butler Community College

Amanda Stocklein State Fair Community College

Rhonda K. Thomas Butler Community College

Bruce Yuille Mid Michigan Community College

Acknowledgments

The twelfth edition of Business Foundations: A Changing World would not have been possible without the commitment, dedication, and patience of Jennifer Sawayda and Kelsey Reddick. Kelsey Reddick provided oversight for editing text content, and Jennifer Sawayda developed the cases, boxes, and the supplements. Anke Weekes, Executive Brand Manager, provided leadership and creativity in planning and imple- menting all aspects of the twelfth edition. Haley Burmeister, Product Developer, did an outstanding job of coordinating all aspects of the development and production process. Kathryn Wright was the Content Project Manager. Bruce Gin managed the technical aspects of Connect. Others important in this edition include Gabe Fedota (Marketing Manager) and Jessica Cuevas (Designer). Michael Hartline developed the Personal Career Plan in Appendix B. Vickie Bajtelsmit developed Bonus Chapter B on personal financial planning. Eric Sandberg of Interactive Learning assisted in developing the interactive exercises. Many others have assisted us with their help- ful comments, recommendations, and support throughout this and previous editions. Thank you for all of your insight and feedback. We’d like to express our sincere thanks to the reviewers who helped us shape the twelfth edition. Your time and thoughtful feedback has helped us greatly make this another great revision:

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xiv Acknowledgments

Brenda Anthony, Tallahassee Community College NaRita Gail Anderson, University of Central

Oklahoma Phyllis Alderdice, Jefferson Community College Vondra Armstrong, Pulaski Tech College John Bajkowski, American Association of Individual

Investors Gene Baker, University of North Florida Lia Barone, Norwalk Community College Ellen Benowitz, Mercer County Community College Stephanie Bibb, Chicago State University Gene Blackmun, Rio Hondo College Susan Blumen, Montgomery College Barbara Boyington, Monmouth–Ocean County Small

Business Development Center Suzanne Bradford, Angelina College Alka Bramhandkar, Ithaca College Dennis Brode, Sinclair Community College Harvey S. Bronstein, Oakland Community College Colin Brooks, University of New Orleans Eric Brooks, Orange County Community College Nicky Buenger, Texas A&M University Anthony Buono, Bentley College Tricia Burns, Boise State University Diana Carmel, Golden West College William Chittenden, Texas State University Michael Cicero, Highline Community College Margaret Clark, Cincinnati State Tech & Community

College Mark Lee Clark, Collin College Debbie Collins, Anne Arundel Community

College–Arnold Karen Collins, Lehigh University Katherine Conway, Borough of Manhattan Community

College Rex Cutshall, Indiana University Dana D’Angelo, Drexel University Laurie Dahlin, Worcester State College Deshaun H. Davis, Northern Virginia Community

College Yalonda Ross Davis, Grand Valley State University Peter Dawson, Collin County Community

College–Plano John DeNisco, Buffalo State College Tom Diamante, Corporate Consulting Associates, Inc. Joyce Domke, DePaul University Glenn Doolittle, Santa Ana College Michael Drafke, College of DuPage John Eagan, Erie Community College/City Campus

SUNY

Glenda Eckert, Oklahoma State University Thomas Enerva, University of Maine–Fort Kent Robert Ericksen, Business Growth Center Donna Everett, Santa Rosa Junior College Joe Farinella, University of North

Carolina–Wilmington Bob Farris, Mt. San Antonio College Gil Feiertag, Columbus State Community College James Ferrell, R. G. Taylor, P.C. Cheryl Fetterman, Cape Fear Community College Art Fischer, Pittsburg State University Jackie Flom, University of Toledo Anthony D. Fontes III, Bunker Hill Community

College Jennifer Friestad, Anoka–Ramsey Community College Chris Gilbert, Tacoma Community College/University

of Washington Ross Gittell, University of New Hampshire Connie Golden, Lakeland Community College Terri Gonzales-Kreisman, Phoenix College Kris Gossett, Ivy Tech Community College of Indiana Carol Gottuso, Metropolitan Community College Bob Grau, Cuyahoga Community College–Western

Campus Gary Grau, Northeast State Tech Community College Jack K. Gray, Attorney-at-Law, Houston, Texas Catherine Green, University of Memphis Claudia Green, Pace University Maurice P. Greene, Monroe College Phil Greenwood, University of Wisconsin–Madison David Gribbin, East Georgia College Selina Andrea Griswold, University of Toledo John P. Guess, Delgado Community College Peggy Hager, Winthrop University Michael Hartline, Florida State University Paul Harvey, University of New Hampshire Neil Herndon, University of Missouri James Hoffman, Borough of Manhattan Community

College MaryAnne Holcomb, Antelope Valley College Timothy D. Hovet, Lane Community College Joseph Hrebenak, Community College of Allegheny

County–Allegheny Campus Stephen Huntley, Florida Community College Rebecca Hurtz, State Farm Insurance Co. Donald C. Hurwitz, Austin Community College Scott Inks, Ball State University Steven Jennings, Highland Community College Carol Jones, Cuyahoga Community College–Eastern

Campus

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Acknowledgments xv

Sandra Kana, Mid-Michigan Community College Norm Karl, Johnson County Community College Janice Karlan, LaGuardia Community College Eileen Kearney, Montgomery County Community

College Craig Kelley, California State University–

Sacramento Susan Kendall, Arapahoe Community College Ina Midkiff Kennedy, Austin Community College Kathleen Kerstetter, Kalamazoo Valley Community

College Arbrie King, Baton Rouge Community College John Knappenberger, Mesa State College Gail Knell, Cape Cod Community College Anthony Koh, University of Toledo Regina Korossy, Pepperdine University Velvet Landingham, Kent State University–Geauga Jeffrey Lavake, University of Wisconsin–Oshkosh Daniel LeClair, AACSB Chad T. Lewis, Everett Community College Richard Lewis, East Texas Baptist College Corinn Linton, Valencia Community College Corrine Livesay, Mississippi College Thomas Lloyd, Westmoreland Community College Terry Loe, Kennerow University Terry Lowe, Illinois State University Kent Lutz, University of Cincinnati Scott Lyman, Winthrop University Dorinda Lynn, Pensacola Junior College Isabelle Maignan, ING Larry Martin, Community College of Southern

Nevada–West Charles Therese Maskulka, Youngstown State University Theresa Mastrianni, Kingsborough Community

College Kristina Mazurak, Albertson College of Idaho Debbie Thorne McAlister, Texas State University–San

Marcos Noel McDeon, Florida Community College John McDonough, Menlo College Tom McInish, University of Memphis Mark McLean, Delgado Community College Chris Mcnamara, Fingers Lake Community College Kimberly Mencken, Baylor University Mary Meredith, University of Louisiana at Lafayette Michelle Meyer, Joliet Junior College George Milne, University of Massachusetts–Amherst Daniel Montez, South Texas College Glynna Morse, Augusta College Suzanne Murray, Piedmont Technical College

Stephanie Narvell, Wilmington College–New Castle Fred Nerone, International College of Naples Laura Nicholson, Northern Oklahoma College Stef Nicovich, Lynchburg College Michael Nugent, SUNY–Stony Brook University

New York Mark Nygren, Brigham Young University–Idaho Lauren Paisley, Genesee Community College James Patterson, Paradise Valley Community College Wes Payne, Southwest Tennessee Community College Dyan Pease, Sacramento City College Constantine G. Petrides, Borough of Manhattan

Community College John Pharr, Cedar Valley College Shirley Polejewski, University of St. Thomas Daniel Powroznik, Chesapeake College Krista Price, Heald College Larry Prober, Rider University Vincent Quan, Fashion Institute Technology Michael Quinn, Penn State University Stephen Pruitt, University of Missouri–Kansas City Victoria Rabb, College of the Desert Gregory J. Rapp, Portland Community College Tom Reading, Ivy Tech State College Delores Reha, Fullerton College David Reiman, Monroe County Community College Susan Roach, Georgia Southern University Dave Robinson, University of California–Berkeley Carol Rowey, Surry Community College Marsha Rule, Florida Public Utilities Commission Carol A. Rustad, Sylvan Learning Cyndy Ruszkowski, Illinois State University Martin St. John, Westmoreland Community College Don Sandlin, East Los Angeles College Nick Sarantakes, Austin Community College Andy Saucedo, Dona Ana Community College–Las

Cruces Dana Schubert, Colorado Springs Zoo Marianne Sebok, Community College of Southern

Nevada–West Charles Jeffery L. Seglin, Seglin Associates Daniel Sherrell, University of Memphis Morgan Shepherd, University of Colorado Elaine

Simmons, Guilford Technical Community College Greg Simpson, Blinn College Nicholas Siropolis, Cuyahoga Community College Robyn Smith, Pouder Valley Hospital Kurt Stanberry, University of Houston Downtown Cheryl Stansfield, North Hennepin Community

College

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xvi Acknowledgments

Ron Stolle, Kent State University–Kent Edith Strickland, Tallahassee Community College Jeff Strom, Virginia Western Community College Lisa Strusowski, Tallahassee Community College Scott Taylor, Moberly Area Community College Wayne Taylor, Trinity Valley Community College Ray Tewell, American River College Rodney Thirion, Pikes Peak Community College Evelyn Thrasher, University of

Massachusetts–Dartmouth Steve Tilley, Gainesville College Amy Thomas, Roger Williams University Kristin Trask, Butler Community College Allen D. Truell, Ball State University

George Valcho, Bossier Parish Community College Ted Valvoda, Lakeland Community College Gunnar Voltz, Northern Arizona University–Flagstaff Sue Vondram, Loyola University Elizabeth Wark, Springfield College Emma Watson, Arizona State University–West Ruth White, Bowling Green State University Elisabeth Wicker, Bossier Parish Community College Frederik Williams, North Texas State University Richard Williams, Santa Clara University Pat Wright, University of South Carolina Lawrence Yax, Pensacola Junior College–Warrington Bruce Yuille, Cornell University–Ithaca

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Part 1 Business in a Changing World 1 The Dynamics of Business and Economics 2

2 Business Ethics and Social Responsibility 36

3 Business in a Borderless World 72

Part 2 Starting and Growing a Business 4 Options for Organizing Business 108

5 Small Business, Entrepreneurship, and Franchising 140

Part 3 Managing for Quality and Competitiveness 6 The Nature of Management 172

7 Organization, Teamwork, and Communication 202

8 Managing Operations and Supply Chains 234

Part 4 Creating the Human Resource Advantage 9 Motivating the Workforce 270

10 Managing Human Resources 298

Part 5 Marketing: Developing Relationships 11 Customer-Driven Marketing 332

12 Dimensions of Marketing Strategy 362

13 Digital Marketing and Social Media 400

Part 6 Financing the Enterprise 14 Accounting and Financial Statements 436

15 Money and the Financial System 474

16 Financial Management and Securities Markets 504 Bonus Chapters

A The Legal and Regulatory Environment 534

B Personal Financial Planning 556

Glossary 581 Indexes 597 Appendixes (Available Online and via Create)

A Guidelines for the Development of the Business Plan

B Personal Career Plan

C Risk: The Basics of Risk Management

Brief Contents

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xviii

Part 1 Business in a Changing World 1

CHAPTER 1

The Dynamics of Business and Economics 2

Enter the World of Business 3 Warren Buffet: The Oracle of Omaha 3

Introduction 4 The Nature of Business 4

The Goal of Business 4

The People and Activities of Business 5

Why Study Business? 7 The Economic Foundations of Business 8

Economic Systems 8

The Free-Enterprise System 11

The Forces of Supply and Demand 12

The Nature of Competition 13

Economic Cycles and Productivity 15 The American Economy 18

The Importance of the American Economy 18

Responding to Business Challenges 20 The Trix of the Trade: General Mills’ Brand Strategy 20

A Brief History of the American Economy 20

The Role of the Entrepreneur 22

Entrepreneurship in Action 23 ATA: Engineering Good Teamwork 23

Going Green 24 Rainforest Alliance Stands Out in a Forest of Nonprofits 24

The Role of Government in the American Economy 24

The Role of Ethics and Social Responsibility in Business 24

Can You Learn Business in a Classroom? 25

So You Want a Job in the Business World 27 Review Your Understanding 27 Critical Thinking Questions 28 Learn the Terms 28 Check Your Progress 29 Get Involved 29 Build Your Skills: The Forces of Supply and Demand 29 Solve the Dilemma: Mrs. Acres Homemade Pies 30 Build Your Business Plan: The Dynamics of Business and Economics 31 See for Yourself Videocase: Redbox Succeeds by Identifying Market Need 31 Team Exercise 32 Notes 32

CHAPTER 2

Business Ethics and Social Responsibility 36

Enter the World of Business 37 NFL Tackles Safety Expectations 37

Introduction 38 Business Ethics and Social Responsibility 38 The Role of Ethics in Business 40

Recognizing Ethical Issues in Business 41

Fairness and Honesty 47

Going Green 47 Chipotle Chips Away at Food Safety Advancements 47

Making Decisions about Ethical Issues 49

Improving Ethical Behavior in Business 50

Consider Ethics and Social Responsibility 52 Eaton Maintains a Successful Ethics Program 52

The Nature of Social Responsibility 53

Entrepreneurship in Action 55 A Step Ahead: Blake Mycoskie Provides Leadership for Social Entrepreneurship 55

Contents

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Contents xix

Social Responsibility Issues 56

Unemployment 61

So You Want a Job in Business Ethics and Social Responsibility 62 Review Your Understanding 63 Critical Thinking Questions 63 Learn the Terms 63 Check Your Progress 64 Get Involved 64 Build Your Skills: Making Decisions about Ethical Issues 64 Solve the Dilemma: Customer Privacy 65 Build Your Business Plan: Business Ethics and Social Responsibility 66 See for Yourself Videocase: Warby Parker: An Affordable World Vision 66 Team Exercise 67 Notes 67

CHAPTER 3

Business in a Borderless World 72

Enter the World of Business 73 Alibaba: China’s National Treasure 73

Introduction 74 The Role of International Business 74

Why Nations Trade 75

Trade between Countries 75

Balance of Trade 76 International Trade Barriers 77

Economic Barriers 77

Ethical, Legal, and Political Barriers 78

Entrepreneurship in Action 79 Kenya Counts on Mobile Banking 79

Responding to Business Challenges 82 Uber Attempts to Make a Right Turn 82

Social and Cultural Barriers 83

Technological Barriers 85 Trade Agreements, Alliances, and Organizations 85

General Agreement on Tariffs and Trade 85

The North American Free Trade Agreement 86

The European Union 87

Asia-Pacific Economic Cooperation 88

Association of Southeast Asian Nations 89

World Bank 90

International Monetary Fund 90

Getting Involved in International Business 90

Exporting and Importing 90

Trading Companies 92

Licensing and Franchising 92

Contract Manufacturing 93

Outsourcing 93

Offshoring 93

Going Green 94 Algae: A Biofuel Breakthrough 94

Joint Ventures and Alliances 94

Direct Investment 94 International Business Strategies 96

Developing Strategies 96

Managing the Challenges of Global Business 96

So You Want a Job in Global Business 97 Review Your Understanding 97 Critical Thinking Questions 98 Learn the Terms 98 Check Your Progress 99 Get Involved 99 Build Your Skills: Global Awareness 99 Solve the Dilemma: Global Expansion or Business as Usual? 100 Build Your Business Plan: Business in a Borderless World 101 See for Yourself Videocase: Electra Bikes: Better, Cooler, Awesomer! 101 Team Exercise 102 Notes 102

Part 2 Starting and Growing a Business 107

CHAPTER 4

Options for Organizing Business 108

Enter the World of Business 109 Louisville Slugger Hits the Ball Out of the Park 109

Introduction 110 Sole Proprietorships 110

Advantages of Sole Proprietorships 111

Disadvantages of Sole Proprietorships 113 Partnerships 114

Types of Partnership 115

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xx Contents

Articles of Partnership 115

Advantages of Partnerships 115

Disadvantages of Partnerships 117

Taxation of Partnerships 118

Consider Ethics and Social Responsibility 119 Beer Hound Brews the Perfect Partnership 119

Corporations 119

Creating a Corporation 120

Types of Corporations 121

Elements of a Corporation 123

Advantages of Corporations 125

Disadvantages of Corporations 126

Going Green 127 To B or Not to B: Cascade Engineering Adopts B Corporation Certification 127

Other Types of Ownership 128

Joint Ventures 128

S Corporations 128

Limited Liability Companies 128

Entrepreneurship in Action 129 Moving on Up: The VIP Moving & Storage LLC Experience 129

Cooperatives 129 Trends in Business Ownership: Mergers and Acquisitions 130

So You’d Like to Start a Business 132 Review Your Understanding 133 Critical Thinking 134 Learn the Terms 134 Check Your Progress 134 Get Involved 134 Build Your Skills: Selecting a Form of Business 135 Solve the Dilemma: To Incorporate or Not to Incorporate 135 Build Your Business Plan: Options for Organizing Business 136 See for Yourself Videocase: PODS Excels at Organizing a Business 136 Team Exercise 137 Notes 137

CHAPTER 5

Small Business, Entrepreneurship, and Franchising 140

Enter the World of Business 141 Chick-fil-A Earns Grade A for Quality 141

Introduction 142 The Nature of Entrepreneurship and Small Business 142

What Is a Small Business? 143

The Role of Small Business in the American Economy 144

Consider Ethics and Social Responsibility 146 Shark Tank Takes a Bite of Success 146

Industries That Attract Small Business 146 Advantages of Small-Business Ownership 149

Independence 149

Costs 150

Flexibility 150

Focus 150

Entrepreneurship in Action 151 Sseko Helps Women Get a Step Ahead 151

Reputation 151 Disadvantages of Small-Business Ownership 151

High Stress Level 151

High Failure Rate 152 Starting a Small Business 153

The Business Plan 154

Forms of Business Ownership 154

Financial Resources 154

Approaches to Starting a Small Business 156

Help for Small-Business Managers 157

Going Green 158 Growing a Family Business: Haney’s Appledale Farm 158

The Future for Small Business 159

Demographic Trends 159

Technological and Economic Trends 159 Making Big Businesses Act “Small” 160

So You Want to Be an Entrepreneur or Small-Business Owner 161 Review Your Understanding 162 Critical Thinking Questions 162 Learn the Terms 163 Check Your Progress 163 Get Involved 163 Build Your Skills: Creativity 163 Solve the Dilemma: The Small-Business Challenge 164 Build Your Business Plan: Small Business, Entrepreneurship, and Franchising 165

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Contents xxi

See for Yourself Videocase: Sonic—A Successful Franchise with an Old-Fashioned Drive-In Experience 165 Team Exercise 166 Notes 166

Part 3 Managing for Quality and Competitiveness 171

CHAPTER 6

The Nature of Management 172

Enter the World of Business 173 Home Depot Builds Effective Management System 173

Introduction 174 The Importance of Management 174 Management Functions 175

Planning 175

Entrepreneurship in Action 177 Rebecca Ray Designs Has It in the Bag 177

Organizing 179

Directing 179

Controlling 180 Types of Management 181

Levels of Management 181

Areas of Management 184 Skills Needed by Managers 185

Technical Expertise 186

Conceptual Skills 186

Analytical Skills 186

Human Relations Skills 186 Leadership 187

Going Green 189 New Belgium Brewing Brews Up “Green” Management Style 189

Employee Empowerment 189 Decision Making 190

Recognizing and Defining the Decision Situation 190

Developing Options 191

Analyzing Options 191

Selecting the Best Option 191

Responding to Business Challenges 192 Zappos Puts the Right Foot Forward 192

Implementing the Decision 192

Monitoring the Consequences 193

Management in Practice 193

So You Want to Be a Manager 194 Review Your Understanding 195 Critical Thinking Questions 195 Learn the Terms 195 Check Your Progress 196 Get Involved 196 Build Your Skills: Functions of Management 196 Solve the Dilemma: Making Infinity Computers Competitive 197 Build Your Business Plan: The Nature of Management 198 See for Yourself Videocase: Building a Strong and Healthy Business 198 Team Exercise 199 Notes 199

CHAPTER 7

Organization, Teamwork, and Communication 202

Enter the World of Business 203 Keurig Green Mountain Brews Effective Communication 203

Introduction 204 Organizational Culture 204 Developing Organizational Structure 205 Assigning Tasks 207

Specialization 207

Departmentalization 208 Assigning Responsibility 210

Delegation of Authority 210

Degree of Centralization 211

Span of Management 212

Responding to Business Challenges 213 Whole Foods Focuses on the Whole Team 213

Organizational Layers 213

Entrepreneurship in Action 214 Sugar Bowl Bakery Hits the Sweet Spot 214

Forms of Organizational Structure 214

Line Structure 214

Line-and-Staff Structure 214

Multidivisional Structure 216

Matrix Structure 216 The Role of Groups and Teams in Organizations 217

Committees 218

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xxii Contents

Task Forces 218

Teams 219

Going Green 220 Connection and Collaboration: How Timberland Works as a Team 220

Communicating in Organizations 220

Formal and Informal Communication 221

Monitoring Communications 223

Improving Communication Effectiveness 223

So You Want a Job in Managing Organizational Culture, Teamwork, and Communication 225 Review Your Understanding 225 Critical Thinking Questions 226 Learn the Terms 226 Check Your Progress 227 Get Involved 227 Build Your Skills: Teamwork 227 Solve the Dilemma: Quest Star in Transition 228 Build Your Business Plan: Organization, Teamwork, and Communication 229 See for Yourself Videocase: A Freshii Approach to Food and Business 229 Team Exercise 230 Notes 230

CHAPTER 8

Managing Operations and Supply Chains 234

Enter the World of Business 235 Trading Up: Trader Joe’s Operational Success 235

Introduction 236 The Nature of Operations Management 236

The Transformation Process 237

Operations Management in Service Businesses 238 Planning and Designing Operations Systems 241

Planning the Product 241

Designing the Operations Processes 242

Consider Ethics and Social Responsibility 244 Improving the Supply Chain with Blockchain 244

Planning Capacity 244

Planning Facilities 245

Sustainability and Manufacturing 248

Going Green 249 Meet Your Meat: This Company Is Disrupting the Global Meat Market 249

Managing the Supply Chain 249

Procurement 251

Managing Inventory 251

Outsourcing 253

Routing and Scheduling 254 Managing Quality 255

Entrepreneurship in Action 257 El Pinto: When You Are Hot, You Are Hot 257

International Organization for Standardization (ISO) 257

Inspection 258

Sampling 259 Integrating Operations and Supply Chain Management 259

So You Want a Job in Operations Management 260 Review Your Understanding 260 Critical Thinking Questions 261 Learn the Terms 261 Check Your Progress 262 Get Involved 262 Build Your Skills: Reducing Cycle Time 262 Solve the Dilemma: Planning for Pizza 263 Build Your Business Plan: Managing Service and Manufacturing Operations 264 See for Yourself Videocase: How Sweet It Is: Creating Supply Chain Efficiencies at the Cocoa Exchange 264 Team Exercise 265 Notes 265

Part 4 Creating the Human Resource Advantage 269

CHAPTER 9

Motivating the Workforce 270

Enter the World of Business 271 Facebook Knows How to Motivate Employees 271

Introduction 272 Nature of Human Relations 272 Historical Perspectives on Employee Motivation 274

Classical Theory of Motivation 274

Consider Ethics and Social Responsibility 275 King Arthur: Baked to Perfection 275

The Hawthorne Studies 276

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Contents xxiii

Theories of Employee Motivation 276

Maslow’s Hierarchy of Needs 276

Herzberg’s Two-Factor Theory 278

McGregor’s Theory X and Theory Y 279

Theory Z 280

Entrepreneurship in Action 281 Namasté Solar Embraces Employee Democracy Model of Management 281

Equity Theory 281

Expectancy Theory 283

Goal-Setting Theory 283 Strategies for Motivating Employees 283

Behavior Modification 283

Job Design 284

Going Green 286 Patagonia Attracts and Empowers Passionate Employees 286

Importance of Motivational Strategies 288

So You Think You May Be Good at Motivating a Workforce 289 Review Your Understanding 289 Critical Thinking Questions 290 Learn the Terms 290 Check Your Progress 291 Get Involved 291 Build Your Skills: Motivating 291 Solve the Dilemma: Motivating to Win 292 Build Your Business Plan: Motivating the Workforce 292 See for Yourself Videocase: The Container Store’s Secret to Success: Employee Satisfaction 293 Team Exercise 294 Notes 294

CHAPTER 10

Managing Human Resources 298

Enter the World of Business 299 Sheryl Sandberg: Wonder Woman 299

Introduction 300 The Nature of Human Resource Management 300 Planning for Human Resource Needs 300 Recruiting and Selecting New Employees 301

Recruiting 301

Consider Ethics and Social Responsibility 302 Recruiters Embrace NonTraditional Recruitment Methods 302

Selection 303 Legal Issues in Recruiting and Selecting 305 Developing the Workforce 307

Training and Development 307

Assessing Performance 308

Turnover 309 Compensating the Workforce 311

Financial Compensation 311

Benefits 312

Going Green 313 Employees Like Green Incentives 313

Managing Unionized Employees 314

Collective Bargaining 315

Resolving Disputes 316 The Importance of Workforce Diversity 317

The Characteristics of Diversity 317

Why Is Diversity Important? 317

The Benefits of Workforce Diversity 318

Affirmative Action 320 Trends in Management of the Workforce 320

Entrepreneurship in Action 321 Off to WeWork We Go 321

So You Want to Work in Human Resources 322 Review Your Understanding 322 Critical Thinking Questions 323 Learn the Terms 323 Check Your Progress 324 Get Involved 324 Build Your Skills: Appreciating and Valuing Diversity 324 Solve the Dilemma: Morale among the Survivors 326 Build Your Business Plan: Managing Human Resources 326 See for Yourself Videocase: The Importance of Hollywood Labor Unions 326 Team Exercise 327 Notes 327

Part 5 Marketing: Developing Relationships 331

CHAPTER 11

Customer-Driven Marketing 332

Enter the World of Business 333 Dollar General Narrows in on Strategic Segmentation 333

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xxiv Contents

Introduction 334 Nature of Marketing 334

The Exchange Relationship 334

Functions of Marketing 336

Creating Value with Marketing 336

Responding to Business Challenges 337 Cool Beans: Starbucks Refines the Customer Experience 337

The Marketing Concept 337

Evolution of the Marketing Concept 339 Developing a Marketing Strategy 341

Selecting a Target Market 341

Developing a Marketing Mix 344

Entrepreneurship in Action 346 Wanelo: $100 Million Valuation, Zero Products 346

Going Green 347 Viridian Energy: Green Energy Gets Personal 347

Marketing Research and Information Systems 348

Online Marketing Research 349 Buying Behavior 351

Psychological Variables of Buying Behavior 351

Social Variables of Buying Behavior 352

Understanding Buying Behavior 352 The Marketing Environment 352 Importance of Marketing to Business and Society 353

So You Want a Job in Marketing 355 Review Your Understanding 355 Critical Thinking Questions 356 Learn the Terms 356 Check Your Progress 356 Get Involved 357 Build Your Skills: The Marketing Mix 357 Solve the Dilemma: Will It Go? 357 Build Your Business Plan: Customer-Driven Marketing 358 See for Yourself Videocase: Marriott: Your Home Away from Home 358 Team Exercise 359 Notes 359

CHAPTER 12

Dimensions of Marketing Strategy 362

Enter the World of Business 363 Harley-Davidson Rolls in the New Products 363

Introduction 364 The Marketing Mix 364 Product Strategy 364

Developing New Products 364

Classifying Products 367

Product Line and Product Mix 368

Product Life Cycle 368

Identifying Products 371

Entrepreneurship in Action 375 FarmLinks: The Ultimate Alabama Resort 375

Pricing Strategy 375

Pricing Objectives 376

Specific Pricing Strategies 376 Distribution Strategy 377

Going Green 378 How Archer Daniels Midlands Connects Farm, Factory, and Table 378

Marketing Channels 378

Intensity of Market Coverage 382

Physical Distribution 383

Importance of Distribution in a Marketing Strategy 384

Promotion Strategy 384

Responding to Business Challenges 385 Amazon Sells Everything from A-to-Z 385

The Promotion Mix 385

Promotion Strategies: To Push or to Pull 389

Objectives of Promotion 390

Promotional Positioning 391 Importance of Marketing Strategy 391

So You Want to Be a Marketing Manager 392 Review Your Understanding 392 Critical Thinking Questions 393 Learn the Terms 393 Check Your Progress 394 Get Involved 394 Build Your Skills: Analyzing Motel 6’s Marketing Strategy 394 Solve the Dilemma: Better Health with Snacks 395 Build Your Business Plan: Dimensions of Marketing Strategy 395 See for Yourself Videocase: Cutting Edge Quality: Cutco “Knives for Life” 395 Team Exercise 396 Notes 397

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Contents xxv

CHAPTER 13

Digital Marketing and Social Media 400

Enter the World of Business 401 Facebook in the Face of Data Privacy Controversy 401

Introduction 402 Growth and Benefits of Digital Communication 402 Using Digital Media in Business 403 Digital Media and the Marketing Mix 404

Social Media Marketing 408 Consumer-Generated Marketing and Digital Media 409

Social Networks 409

Consider Ethics and Social Responsibility 411 Recruiters Turn to Social Media to Find Network of Talent 411

Blogs and Wikis 412

Media Sharing 413

Mobile Marketing 414

Applications and Widgets 416

Going Green 417 Going Green? There’s an App for That 417

Online Monitoring and Analytics 418 Using Digital Media to Learn about Consumers 419 Legal and Social Issues in Internet Marketing 419

Entrepreneurship in Action 420 Why Kayak.com is a Travel Search Engine Worth Visiting 420

Privacy 420

Identity Theft and Online Fraud 421

Intellectual Property Theft and Other Illegal Activities 422 Digital Media’s Impact on Marketing 423

So You Want to Be a Digital Marketer 424 Review Your Understanding 424 Critical Thinking Questions 425 Learn the Terms 425 Check Your Progress 425 Get Involved 426 Build Your Skills: Planning a Digital Marketing and Social Networking Site 426 Solve the Dilemma: Developing Successful Freeware 427 Build Your Business Plan: Digital Marketing and Social Networking 427

See for Yourself Videocase: Should Employees Use Social Media Sites at Work? 427 Team Exercise 428 Notes 428

Part 6 Financing the Enterprise 435

CHAPTER 14

Accounting and Financial Statements 436

Enter the World of Business 437 By the Numbers: Deloitte Excels in the Big Four 437

Introduction 438 The Nature of Accounting 438

Accountants 438

Accounting or Bookkeeping? 440

The Uses of Accounting Information 440

Entrepreneurship in Action 443 Perfectly Al Dente: How This Pasta Company Handles Its Finances 443

The Accounting Process 444

The Accounting Equation 444

Double-Entry Bookkeeping 445

The Accounting Cycle 445 Financial Statements 447

The Income Statement 448

The Balance Sheet 452

Going Green 453 Stranded Assets Pose a Financial and Environmental Risk 453

The Statement of Cash Flows 457 Ratio Analysis: Analyzing Financial Statements 459

Profitability Ratios 460

Asset Utilization Ratios 461

Liquidity Ratios 462

Debt Utilization Ratios 463

Per Share Data 464

Responding to Business Challenges 465 How Data Analytics Is Changing the World of Accounting 465

Importance of Integrity in Accounting 465

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xxvi Contents

So You Want to Be an Accountant 466 Review Your Understanding 467 Critical Thinking Questions 467 Learn the Terms 468 Check Your Progress 468 Get Involved 468 Build Your Skills: Financial Analysis 469 Solve the Dilemma: Exploring the Secrets of Accounting 469 Build Your Business Plan: Accounting and Financial Statements 470 See for Yourself Videocase: Goodwill Industries: Accounting in a Nonprofit 470 Team Exercise 471 Notes 471

CHAPTER 15

Money and the Financial System 474

Enter the World of Business 475 How Mobile Banking Is Breaking the Bank 475

Introduction 476 Money in the Financial System 476

Functions of Money 476

Characteristics of Money 477

Types of Money 479

Entrepreneurship in Action 480 Square Rounds Out Its Product Offering 480

Responding to Business Challenges 483 Decrypting Cryptocurrencies 483

The American Financial System 484

The Federal Reserve System 484

Banking Institutions 487

Consider Ethics and Social Responsibility 490 Bank on It: Widespread Wells Fargo Fraud Uncovered 490

Nonbanking Institutions 490

Electronic Banking 493

Future of Banking 495

So You’re Interested in Financial Systems or Banking 496 Review Your Understanding 497 Critical Thinking Questions 497 Learn the Terms 498 Check Your Progress 498

Get Involved 498 Build Your Skills: Managing Money 498 Solve the Dilemma: Seeing the Financial Side of Business 499 Build Your Business Plan: Money and the Financial System 499 See for Yourself Videocase: Crowdfunding: Loans You Can Count On 499 Team Exercise 500 Notes 501

CHAPTER 16

Financial Management and Securities Markets 504

Enter the World of Business 505 No Shock: General Electric Struggles after Poor Financial Management 505

Introduction 506 Managing Current Assets and Liabilities 506

Managing Current Assets 506

Consider Ethics and Social Responsibility 509 Making Every Woman Count: Improving Gender Diversity in Finance 509

Managing Current Liabilities 510 Managing Fixed Assets 512

Capital Budgeting and Project Selection 513

Assessing Risk 513

Pricing Long-Term Money 513

Going Green 515 How Making Sustainability a Top Priority Helps the Bottom Line 515

Financing with Long-Term Liabilities 516

Bonds: Corporate IOUs 516

Types of Bonds 517 Financing with Owners’ Equity 518 Investment Banking 520

Entrepreneurship in Action 521 Sounds like Spotify’s Non-IPO Was a Hit 521

The Securities Markets 522

Stock Markets 522

The Over-the-Counter Market 523

Measuring Market Performance 523

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Contents xxvii

So You Want to Work in Financial Management or Securities 526 Review Your Understanding 527 Critical Thinking Questions 527 Learn the Terms 528 Check Your Progress 528 Get Involved 528 Build Your Skills: Choosing among Projects 529 Solve the Dilemma: Surviving Rapid Growth 530 Build Your Business Plan: Financial Management and Securities Market 530 See for Yourself Videocase: Tom & Eddie’s: Fed through Nontraditional Channels 530 Team Exercise 531 Notes 531

Bonus Chapters A. The Legal and Regulatory Environment 534 B. Personal Financial Planning 556

Glossary 581

Indexes Name Index 597 Company Index 604 Subject Index 608

Appendixes (Available Online and via Create) A. Guidelines for the Development of the

Business Plan B. Personal Career Plan C. Risk: The Basics of Risk Management

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PART 1

Chapter 1 The Dynamics of Business and Economics

Chapter 2 Business Ethics and Social Responsibility

Chapter 3 Business in a Borderless World

Business in a Changing World

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Chapter Outline Introduction The Nature of Business The Goal of Business The People and Activities of Business Why Study Business? The Economic Foundations of Business Economic Systems The Free-Enterprise System The Forces of Supply and Demand The Nature of Competition Economic Cycles and Productivity The American Economy The Importance of the American Economy A Brief History of the American Economy The Role of the Entrepreneur The Role of Government in the American Economy The Role of Ethics and Social Responsibility in Business Can You Learn Business in a Classroom?

1 The Dynamics of Business and Economics

Learning Objectives After reading this chapter, you will be able to:

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

LO 1-2 Identify the main participants and activities of business.

LO 1-3 Explain why studying business is important.

LO 1-4 Compare the four types of economic systems.

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

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

LO 1-7 Outline the evolution of the American economy.

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

LO 1-9 Evaluate a small-business owner’s situation and propose a course of action.

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Enter the World of Business

Warren Buffet: The Oracle of Omaha Warren Buffett did not change his life plans when he was rejected by Harvard.

An avid reader with a photographic memory, he persevered. He researched

other universities and discovered that Benjamin Graham, the author of the The

Intelligent Investor, was a professor at Columbia University. He immediately

enrolled there, was accepted, and became the star pupil and eventual partner

of the famous Graham. After graduating, Buffett started a lucrative career, taking

ownership in companies that he believed would do well in business.

Buffett’s company, Berkshire Hathaway, has become a conglomerate with

ownership in well-performing companies, including Geico, Heinz, Benjamin

Moore, and See’s Candies. Because Berkshire Hathaway owns companies in so

many different industries, it reduces the risk that the failure of any one industry

will significantly affect the company. Most importantly, Buffett believes in these

firms and their value, a strategy that has made him one of the 10 richest people

in the world.

Leading such a variety of companies comes with challenges as well.

Companies require leaders who know the business and have specialized

expertise—something nearly impossible for one person to do with so many dif-

ferent business areas. For this reason, Buffett depends on his managers to lead

the various companies. He believes giving his managers autonomy allows them

to achieve their highest performance. He wants his managers to “own” their job.

By hiring knowledgeable managers and empowering them to run the compa-

nies as they believe best, Buffett is able to lead his vast business conglomerate

successfully.

Buffett’s organizational leadership philosophy includes focusing on the busi-

ness. At his headquarters, 25 people run the organization. He encourages entre-

preneurs “to focus on the business and not growing a large staff.” Buffett has

earned the moniker “Oracle of Omaha” because he has lived there most of his

life and many investors follow his advice and decisions.1

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4

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Introduction We begin our study of business in this chapter by examining the fundamentals of business and economics. First, we introduce the nature of business, including its goals, activities, and participants. Next, we describe the basics of economics and apply them to the U.S. economy. Finally, we establish a framework for studying busi- ness in this text.

The Nature of Business A business tries to earn a profit by providing products that satisfy people’s needs. The outcomes of its efforts are products that have both tangible and intangible characteris- tics that provide satisfaction and benefits. When you purchase a product, you are buying the benefits and satisfaction you think the product will provide. A Subway sandwich, for example, may be purchased to satisfy hunger, while a Honda Accord may be pur- chased to satisfy the need for transportation and the desire to present a certain image.

Most people associate the word product with tangible goods—an automobile, smartphone, jeans, or some other tangible item. However, a product can also be a service, which occurs when people or machines provide or process something of value to customers. Dry cleaning, a checkup by a doctor, a movie or sports event— these are examples of services. An Uber ride satisfies the need for transportation and is therefore a service. A product can also be an idea. Accountants and attorneys, for example, provide ideas for solving problems.

The Goal of Business The primary goal of all businesses is to earn a profit, the difference between what it costs to make and sell a product and what a customer pays for it. In addition, a business has to pay for all expenses necessary to operate. If a company spends $8 to produce, finance, promote, and distribute a product that it sells for $10, the business earns a profit of $2 on each product sold. Businesses have the right to keep and use their profits as they choose—within legal limits—because profit is the reward for their efforts and for the risks they take in providing products. Earning profits contributes to society by creat- ing resources that support our social institutions and government. Businesses that create profits, pay taxes, and create jobs are the foundation of our economy. In addition, profits must be earned in a responsible manner. Not all organizations are businesses, however. Nonprofit organizations—such as National Public Radio (NPR), Habitat for Humanity, and other charities and social causes—do not have the fundamental purpose of earn- ing profits, although they may provide goods or services and engage in fund-raising. They also utilize skills related to management, marketing, and finance. Profits earned by businesses support nonprofit organizations through donations from employees.

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

business individuals or organizations who try to earn a profit by providing products that satisfy people’s needs.