Galilee College

Introduction to Business Course No. BA 121

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Galilee College

Course Outline

COURSE NUMBER: BA 121 COURSE TITLE: Introduction to Business DEPARTMENT: Business Administration CREDIT VALUE: 3.0 COURSE DURATION: 1 SEMESTER DATE PREPARED: June 2007 PREREQUISITES None PROGRAM COORDINATOR _________________________________

REQUIRED TEXTS: Business in Action, 2/e Courtland L. Bovée John V. Thill Barbara E. Schatzman SUPPLEMENTAL MATERIALS None COURSE DESCRIPTION

The purposes of this course are to give students a general survey course in business and to give prospective business workers an intelligent understanding of common business transactions. It may be elected by nonbusiness students.

COURSE OBJECTIVES Students will be expected to:

Demonstrate knowledge of basic concepts in management, marketing, accounting, and finance. Compare and contrast basic forms of business organization, small businesses, and franchises. Understand environmental factors that impact on business, including legal, ethical, and social/cultural responsibilities. Select specific business disciplines they may wish to explore in greater depth in upper level classes and for career decisions. Discover the relationship between basic, academic business principles and "real world" through assigned reading projects, and class discussions/presentations. Discover and explore the impact of globalization and its influence on U. S. business.

Program Context:

This course is a first year course in all business and accounting programs. Course Learning Outcomes: Learning outcomes identify the knowledge, skills and attitudes that successful students will

have developed and reliably demonstrated as a result of the learning experiences and evaluations during this course. Evaluation Strategies and Grading: Class Attendance Full participation and attendance is expected for this course. Students who miss a class are responsible for any information discussed, assigned or distributed in that class period. Term Project Identify two (2) products where excess supply led to a decrease in price. After doing some research on these two (2) products, determine what caused the excess supply - was it technology, one of the factors of production, the economy, etc. Next identify two (2) other products where a shortage of the products led to an increase in the price of the products. Then, after doing research on these products, determine why supply was insufficient to meet demand. This project requires that you use some logic, some practical experience, and some research to arrive at your answers (conclusions). The Wall Street Journal,Business Week, Forbes,and other business publications should provide your research material. The paper must be typed and in good form. You should reference your sources of information (footnotes or endnotes). Charts and graphs, though not required, would add to the quality of your work.

Grade Distribution - The semester's grade distribution will be figured on the 3 unit exams, the final exam, homework, and the tax return problem as follows: ASSIGNMENTS 100%

Note that violation of academic honesty can affect the course grade. "Cheating" on an exam (i.e., the giving or receiving of aid) will result in a course grade of "F." Note that classroom behavior (for example, talking to other students during lecture) can negatively affect course grades by as much as three letter grades, e.g., an "A" can become a "D."

GRADING SYSTEM: A 94% - 100% Excellent 4.00 D 68% - 74% Passed 1.00 B 87% - 93% Good 3.00 F 0% - 67% Failed 0.00 C 75% - 86% Average 2.00

COVERAGE Chapter 1: Understanding the Fundamentals of Business and Economics Chapter 2: Practicing Ethical Behaviour and Social Responsibility Chapter 3: Competing in the Global Economy Chapter 4: Starting, Financing, and Expanding a Small Business Chapter 5: Selecting the Proper Form of Business Ownership and Exploring Mergers and Acquisitions Chapter 6: Understanding the Functions and Roles of Management Chapter 7: Organizing to Facilitate Teamwork and Communication Chapter 8: Producing Quality Goods and Services

Chapter 9: Motivating Today's Work Force and Handling Employee- Management Relations Chapter 10: Managing Human Resources Chapter 11: Meeting Customers' Needs in the Changing Marketplace Chapter 12: Developing Product, Pricing, and Promotional Strategies Chapter 13: Developing a Distribution Strategy Chapter 14: Analyzing and Using Financial Information Chapter 15: Understanding Banking and Securities

Introduction to Business Chapter 1: Understanding the Fundamentals of Business and Economics Chapter 2: Practicing Ethical Behaviour and Social Responsibility Chapter 3: Competing in the Global Economy Chapter 4: Starting, Financing, and Expanding a Small Business Chapter 5: Selecting the Proper Form of Business Ownership and Exploring Mergers and Acquisitions Chapter 6: Understanding the Functions and Roles of Management Chapter 7: Organizing to Facilitate Teamwork and Communication Chapter 8: Producing Quality Goods and Services Chapter 9: Motivating Today's Work Force and Handling Employee- Management Relations Chapter 10: Managing Human Resources Chapter 11: Meeting Customers' Needs in the Changing Marketplace Chapter 12: Developing Product, Pricing, and Promotional Strategies Chapter 13: Developing a Distribution Strategy Chapter 14: Analyzing and Using Financial Information Chapter 15: Understanding Banking and Securities

Chapter 1: Understanding the Fundamentals of Business and Economics Understanding the Fundamentals of... Section Review 1.1 Defining Business and Economic Systems

Key Terms

• Business • Profit • For-profit organizations • Non-profit organizations • Goods-producing businesses • Capital-intensive businesses • Service businesses • Labor-intensive businesses • E-Commerce • Barriers to entry • Economics • Factors of production • Natural resources • Human resources • Capital • Entrepreneurs • Knowledge • Economic system • Free-market system • Capitalism • Planned system • Communism • Socialism • Privatizing

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Case Studies

• AOL Time Warner • Boeing • Wal-Mart • IBM

Businesses exist to fulfill a need, and provide investors a return from company income after expenses and taxes are paid. This remaining money is called profit. Profit motive may be very important to entrepreneurs, but just as important is showing social responsibility to all stakeholders. Enron and WorldCom are companies that undermined social responsibility for profit, and the results were disastrous.

There are two types of for-profit organizations. Goods-producing businesses create, build, or produce objects of all sizes and forms. Examples of goods-producing businesses are Dell, Sara Lee, and Pulte Homes. Goods-producing businesses often require a large initial investment in materials, equipment, and facilities; therefore, they are called capital-intensive businesses. Capital is the input needed to create a product or service. It can take the form of money, computers, machines, tools, or buildings.

Service-producing businesses market knowledge and/or labor that enhance, explain, or deliver goods. Wells Fargo, KPMG, and FedEx are examples. For approximately 60 years, service businesses have comprised more than 50% of the U.S. businesses; now they comprise 74%. There are five key factors that have contributed to this growth: consumers have more disposable income, services target changing demographics and lifestyles, services need to support complex goods and new technology like e-commerce, companies are increasingly seeking professional advice, and the barriers to entry are relatively low. There are four key service sectors: finance, insurance, and real estate; wholesale and retail trade; transportation and utilities; and other services, the largest sector with 25% of U.S. economic output. Service companies are not normally capital-intensive, but are often labor-intensive. In labor-intensive businesses, human resource costs are the highest.

The likelihood that a business can achieve its goals is greatly dependant on their country's economy. The method of developing, managing and allocating resources is called the economic system. There are five economic resource types, also called factors of production, used to produce goods and services: natural resources, human resources, capital, entrepreneurs, and knowledge. There are two categories of economic systems: planned systems and free-market systems.

Planned systems are controlled fully or predominantly by the government. When the government has total control, like it does in Cuba, it is considered communist. Communism is founded on centralized planning and the absence of any private enterprise. Socialism is practiced by countries that control ownership and operation of vital industries, but permit private ownership of less vital ones. When a planned system country begins to adopt free-market system attributes, this is called privatizing.

Free-market systems are much different than communist systems. In a free-market system, control of industries primarily relies upon individuals. There are two types of free-market systems: capitalism and mixed capitalism. Capitalism is based on freedom and competition. In capitalist societies, the economic system is based on economic freedom and pure competition without any government intervention. In mixed capitalism, as practiced in the U.S., the government does intervene to influence some prices, wages, and allocation of resources.

Section Outline

I. Why Study Business? II. What is a Business?

A. Goods-Producing Businesses vs. Service B. Growth of the Service Sector

1. Five attributable factors

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a. Natural Resources b. Human Resources c. Capital d. Entrepreneurs e. Knowledge

2. Sectors of the U.S. Economy a. Goods-Producing Sectors

1) Manufacturing 2) Construction 3) Agriculture 4) Mining

b. Service Sectors 1) Transportation 2) Wholesale and Retail Trade 3) Finance, Insurance, and Real Estate 4) Other Services

3. Here Comes the Electronic Economy

III. What is an Economic System? A. Types of Economic Systems

1. Free Market System a. Capitalism b. Mixed Capitalism

2. Planned System a. Communism b. Socialism

B. The Trend Toward Privatization

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Understanding the Fundamentals of... Section Review 1.2 How Free-Market Economic Systems Work

Key Terms

• Demand • Supply • Equilibrium price • Comptition • Pure competition • Monopoly • Oligopoly • Monopolistic competition • Competitive advantage • Anti-trust legislation • Stakeholders • Monetary policy • Recession • Business cycle • Fiscal policy • Discount rate • Prime interest rate (the Prime) • Federal Reserve Board • Income tax • Inflation / Deflation • Regulation / Deregulation • Demand curve • 1996 Telecommunications Act • Economic indicators • Gross domestic product (GDP) • Consumer price index (CPI) • Gross national product (GNP)

Case Studies

• Airline industry • LivePerson.com • Microsoft • Macy's • 3M • TSA • AT&T

Summary

A seller is any group or individual that offers a product or service for sale. Sellers can be large multinational corporations offering catalogs of goods, or a neighborhood teenager who mows lawns after school. A buyer is any individual or group motivated and capable of purchasing a good or service. A buyer may be a bakery purchasing flour, a businesswoman purchasing stock, or you buying a cup of coffee. With each purchase buyers make, they are demonstrating an increased demand for that product. The quantity available for the buyer to purchase is the seller's capacity and inventory, or supply. Every time a sale is finalized, this decreases the number or amount available to purchase. In other words, an increase in demand will decrease the supply.

The seller may choose to increase the price of a product as the demand increases. For example, tickets for a Superbowl-bound football team are likely to both sell out more quickly, and sell at a higher price than those teams in last place. When the demand drops, the seller can lower prices to continue selling the product with lower demand. Immediately after September 11, 2001, airlines drastically reduced round-trip ticket fares because people weren't

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traveling. Whenever the quantity demanded of a product roughly equals the supply available, the balance is a result of attaining an equilibrium price. Supply and demand are graphically represented by a demand curve.

In a free market system, competition is encouraged. Demand for a product is greatly influenced by the price of many similar products available on the market, the competition. If a business can differentiate its product from others in the market, then it has gained a competitive advantage. If there is not any competition for the product, then the business has a monopoly on the market. Though it is a rare occurrence, the U.S. government has broken apart several large businesses such as AT&T to eliminate a monopolistic environment. The resulting Baby Bells, through the 1996 Telecommunications Act, were forced to share the networks they created with other business in the industry to promote fair competition. When a few large producers overwhelmingly dominate the market, they have created an oligopoly. An oligopoly is more likely to occur when the barriers to entry are very high. If an industry has a large number of buyers and sellers, and there are no clear dominating forces or differentiated products, then this is considered pure competition. Tomato vendors within a farmer's market are an example. If the products in a non-dominated competitive situation can be somewhat differentiated, then this is monopolistic competition. Lipstick and golf balls can fall into this category.

The government helps maintain balance in a free market system by promoting competition. Companies often see their markets like a pie. They struggle to increase their portion of the market. One way to increase their share of the pie is to purchase another company. In an acquisition a large company purchases a smaller company. Mergers take place when two or more companies combine to form a larger company. The government oversees mergers and acquisitions to ensure the new formation will not significantly decrease competition. For example, before American Airlines could purchase TWA, the government had to give its approval.

The government also maintains anti-trust legislation to promote competition. This regulates how dominating companies, often in oligopoly, are permitted to use their power over smaller competing companies and supply chain partners. Though a 900-pound gorilla can do anything it wants to, companies must adhere to the anti-trust requirements.

Another role for the government in a free market economy is to protect stakeholders by regulating and deregulating industries. In regulation, the government is intentionally limiting competition. The government has regulated the utility industry to control prices and maintain standards. Because the industry has high barriers to entry and is monopolistic, unregulated prices could skyrocket. The government wants utility companies to maintain a specific standard, while maintaining prices that allow all buyers access to services. Each price change must be justified to, and approved by the government. Other reasons to regulate an industry can be to ensure safety or ethical business practices. In 2002, the government took control of airport security to increase safety of travelers and residents. Deregulation is the relaxing or eliminating of regulations of an industry. Proponents say deregulation will allow competitors to enter the market, provide more choices for buyers, and either reduce or maintain lower prices. The television cable industry has been deregulated.

The U.S. government has many agencies created to ensure safety of the people. The tasks of these agencies are to oversee businesses to unsafe or unfair practices. Examples of these agencies include the Federal Trade Commission, Occupational Safety and Health Administration, Environmental Protection Agency, and Equal Employment Opportunity Commission. The government funds these agencies largely through taxes. The largest source of revenue for the government is income tax. When the government changes its fiscal policy, by managing revenues and expenditures, it can also change the pace of the economy.

Finally, in a free market economy the government works to maintain economic stability. The economy is rarely static. This pattern of movement is the business cycle. The economy fluctuates, rises, and falls like waves. The government's goal is to monitor the economy's health, and decrease the severity of the extremes. The economy's health is measured by comparing consumer attitudes, production, spending, world status, and employment. When the economy is growing and people are increasing their purchases, it is a period of economic expansion. Conversely, if general spending declines and businesses are releasing workers, then it is a period of economic contraction and a possibility of recession. A recession occurs when income, employment, and production drop and there are two consecutive quarters of decline in gross domestic product (GDP).

The GDP is one of the key economic indicators. It gives the dollar value of all goods and services produced within the nation's geographic borders. The GDP figure would include finished goods at a Honda plant in Texas, but would not include the value of products produced by Texas Instruments employees at their Japan facility. Another measure is the less popular gross national product (GNP) which only includes domestically based businesses at any location. In

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the GNP, all of Texas Instrument's product value would be included, whether produced in Dallas or Tel Aviv. The Honda plant in Texas would not be included in the GNP. Another key market indicator is the consumer price index (CPI) which measures inflation. Inflation is characterized by widespread rising prices, and deflation indicates steadily falling prices throughout the economy. The CPI is a monthly statistic reported by the government. It measures the change in prices of various goods and services that consumers' purchase.

The U.S. Federal Reserve Board (Fed) is a government-appointed group that oversees the U.S. central banking system. The Fed regulates the nation's money supply to help stabilize the economy and control inflation by managing the amount of money available. This monitory policy will increase or decrease interest rates. The discount rate is the interest rate that the Fed charges on loans to commercial banks. The prime interest rate (Prime) is the lowest interest rate banks offer on short-term loans to preferred borrowers. There are four key ways the Fed changes the money supply. The first is to change the reserve requirement. If the Fed increases the reserve requirement, the money supply will decrease. The second way the Fed can change the money supply is to change the discount rate. If the Fed lowers the discount rate, the money supply is increased. The third way is to conduct open market operations, or sell government bonds. If the Fed buys open-market operations, then the money supply is increased. The last way the Fed can change the money requirement is to establish selective credit controls. This changes the margin requirements. If there are fewer controls, then the money supply is increased.

Section Outline

I. Theory of Supply and Demand in a Free-Market System A. Buyer's Perspective B.Seller's Perspective C.The Relationship Between Supply and Demand

II. Competition in a free-market system A. Competition B. Pure Competition C. Monopoly D. Oligopoly E. Monopolistic Competition

III. Government's role in a free-market system A. Fostering competition

1. Antitrust Legislation 2. Mergers and Acquisitions

B. Regulating and deregulating industries C. Protecting stakeholders D. Contributing to economic stability

1. Monetary policy 2. Changing the Reserve requirement 3. Changing the discount rate 4. Conducting open-market operations 5. Establishing selective credit controls 6. Fiscal policy

IV. How a free-market system monitors its economic performance A. Watching economic indicators B. Measuring price changes

1. Inflation and deflation 2. Consumer Price Index (CPI)

C. Measuring a nation's output 1. Gross Domestic Product (GDP) 2. Gross National Product (GNP)

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Understanding the Fundamentals of... Section Review 1.3 Challenges of a Global Economy

Key Terms

• Globalization • Cultural diversity • Customer satisfaction • EU • WTO • NAFTA

Summary

Globalization has the tendency to turn many countries' economies into one world economy. Movement toward globalization is controversial. Advocates on both sides of the globalization debate agree that globalization will bring change. One of the key issues in opposition to the World Trade Organization is the WTO's inclination toward globalization.

Technology like miniaturization, telecommunications, and computerization has made it easier to share information. This changes how we interact and the speed at which changes occur. Technology has also decreased the barriers between people of different nations, and has therefore furthered globalization.

Businesses are actively moving the globalization process forward. In order to continue building profit, businesses must look outside of their nation's borders for customers. Governments have tried to assist their businesses by forming alliances with other countries. Examples of this are the European Union (EU) and NAFTA.

Globalization provides many new opportunities but also poses challenges. For example, a global company must appreciate and reflect the cultural diversity of its marketplace. It is important to act in a socially responsible and ethical manner that is consistent with the different cultures. In the U.S. cultural diversity is increasing. By 2010, minorities will count for 50% of the workforce, and immigrants should account for 50% of the new U.S. workers.

Another challenge is to quickly produce and adapt quality products. Creating quality products will become even more important in a global economy. Rapid deployment is necessary to compete in the highly competitive global marketplace. The biggest challenge for small businesses is being able to make their product difficult to imitate. That is particularly tricky with technologically advanced or well-funded competition. Small businesses often do not have enough capital to successfully weather tough times the volatile global economy. They must move quickly, and be creative to compete in the marketplace. Creating and improving customer satisfaction is imperative. Customer satisfaction factors incorporate every aspect of the organization and operations.

Section Outline

I. Challenges of a Global Economy A. Acting as one world-wide market B. Opening new markets for goods and services

II. Challenges for Business A. Producing quality goods B. Starting and managing a small business C. Thinking globally D. Committing to a culturally diverse workforce E. Behaving in an ethically and socially responsible manner F. Keeping pace with technology and e-commerce

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End of Chapter 1 Questions

1. Identify four key social and economic roles that businesses serve. 2. Differentiate between a free-market system and planned economy. 3. Explain how supply and demand interact to affect price. 4. Name five strategies companies use to gain a competitive advantage. 5. List the three major economic roles of the U.S. government. 6. Identify five challenges that businesses are facing today .

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Chapter 2: Practicing Ethical Behaviour and Social Responsibility Practicing Ethical Behaviour and Social... Section Review 2.1 Differentiating Ethics from Social Responsibility

Key Terms

• Social responsibility • Ethics • Business ethics • Trade secrets • Electronic eavesdropping • Corporate detectives • Insider trading • Conflict of interest • Code of ethics • Federal sentencing guidelines • Whistle blowing • Ethical dilemma • Federal Corrupt Practices Act • Ethical lapse

Case Studies

• Patagonia • Enron • Proctor & Gamble • Publishers Clearing House • IEEE

Social responsibility and ethics should not be used interchangeably. Ethics is the application of moral standards accepted by society. It is ethical to take a found wallet and search for its owner. Business ethics is the application of ethics within a business setting. If an employee who installs software and meticulously keeps records to ensure he has not exceeded the purchased limit, then he is practicing ethics. Companies that steal trade secrets or patents, electronically eavesdrop, or hire corporate detectives to dumpster dive into competitive firms' trash, are clearly exhibiting unethical behaviour. Unethical telecommunication companies practice cramming and slamming. Strong business ethics includes avoiding the mere appearance of unethical behaviour. Actions can be legal, yet unethical. It is not illegal to recruit and hire the competition's employees, but it is unethical. Companies should compete fairly, communicate truthfully, and avoid harming employees, customers, the company, and other stakeholders. Eighty-one percent of top managers believe they use ethics on a daily basis. Yet, less than 30% of Americans believe that corporate executives put employees and stockholder interests first. The most common form of taking advantage of investors is to cheat on expense accounts. Insider trading is using information that is not publicly available to gain a profit on stock purchases or sales. It is both unethical and illegal. In 2002, Martha Stewart was accused of using her friendship with top executives to sell her stock quickly before the general public learned of upcoming problems causing stock prices to drop. The timely sale saved her an estimated $1 million, but the damage to her reputation from this controversy cost her much more. The Foreign Corrupt Practices Act makes most bribes paid by U.S. companies operating outside of the United States illegal. Small payments are acceptable in certain circumstances. Another common way business people can cause harm is through conflicts of interest. If a consultant is hired by a company to determine which supplier to use, and the consultant recommends a supplier in which she is a majority stockholder, then she has a conflict of interest. There are three factors that most influence ethical behaviour:

• Cultural differences • Knowledge • Organizational behaviour Some companies develop a formal statement called the code of ethics to guide employee behaviour and the organization's decisions. This written statement alone is not enough to promote ethical behaviour. To promote ethical awareness some companies develop employee communication efforts, formal training, or an ethics hotline. Eighty percent of large companies have some type of ethical awareness program. If ethics policies and procedures are in place, then the Federal Sentencing Guidelines (1991) give some flexibility and companies may not be prosecuted or charges may be reduced in some circumstances.

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When employees find ethical, legal, or harmful practices within their companies, they may turn to outside sources like the government or media for help. This is called whistle-blowing. Time magazine's "Persons of the Year 2002" were Cynthia Cooper of WorldCom, Sherron Watkins of Enron, and Coleen Rowley of the FBI. All are recognized for their widely publicized whistle-blowing in 2002. According to Time's cover, "[these women] reminded us of what American courage and American values are all about." Whistle-blowing does take courage, for whistle-blowers can be fired. Ethical situations are classified into two general types: ethical dilemmas and ethical lapses. An ethical dilemma is a situation where each side of an issue can be supported with valid arguments. For example, if a manager suspects a best-selling product is dangerous, does she pull it from the shelves or wait for test results? An ethical lapse is a situation in which a person makes a decision that is clearly wrong. If a salesperson knows the product is on sale, but charges a customer full price to receive a larger commission, this is an ethical lapse.

Section Outline I. What is Ethical Behaviour?

A. Competing fairly and honestly B. Communicating truthfully C. Not causing harm to others

II. Factors Influencing Ethical Behaviour

A. Cultural differences B. Knowledge C. Organizational behaviour

1. Ethical awareness a. Training program b. Executives set the tone

2. Code of Ethics a. IEEE Code of Ethics b. Federal sentencing guidelines

3. System of reporting a. Formal b. Whistle blowing

III. How to Make Ethical Decisions A. Measurement

1. Cultural standards 2. Legal standards 3. Personal judgment 4. Golden Rule 5. Intent

B. Needs of Stakeholders 1. Outsiders' benefits 2. Supervisor's approval 3. Employees' approval

C. Philosophical approaches 1. Utilitarian decision 2. Individual, legal, and human rights 3. Principles of justice

D. Ethical Situations 1. Ethical dilemmas 2. Ethical lapses

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Practicing Ethical Behavior and Social... Section Review 2.2 Social Responsibility in Business

Key Terms

• Caveat emptor • Social audit • Philanthropic • Cause-related marketing • Pollution • Ecology • EPA • Green marketing • Consumerism • Consumer bill of rights • CPSC • FDA • ADA • OSHA • Discrimination • EEOC • Affirmative action • Civil Rights Act of 1991 • Diversity initiative

Case Studies

• Enron • Arthur Anderson Company • Ben & Jerry's • Newman's Own • Ford Motor Company • Firestone • Liggett Group

Summary "Let the buyer beware" is the message of caveat emptor, but the push these days is to promote corporate social responsibility—concern for the welfare of society. When business takes time to improve the world in which it operates, it is considered to be exercising social responsibility. Attention to this issue does not exclude improving profits. Examples of social responsibility include encouraging employees to volunteer at Special Olympics, donating a copier to a woman's shelter, or initiating a recycling program. The Enron case study gives us an example of how negligence and unethical behavior can harm everyone involved. Ninety-five percent of adults agree that businesses have an obligation to stakeholders beyond the profit margin. The Board of Directors must juggle social responsibility with profit-though it is possible that social responsibility can increase profit. Companies may use social audits to assess their social responsibility performance. One example of social responsibility is donations to charitable, humanitarian, or educational institutions. This is considered philanthropic. When a company publicizes that the donation is acquired from profit of a portion of product sales, then the company is engaging in cause-related marketing to contribute to social responsibility goals. A common focus of company donations is the environment. Some industries have damaged their reputation by their contribution to pollution. Studies of the balance of nature, called ecology, pushed the federal government to develop the Environmental Protection Agency (EPA). There are many actions that a company can take to address environmental concerns. These include making environmental issues an everyday issue, measuring environmental performance, tying compensation to environmental performance, and challenging partners, suppliers, and consumers to be environmentally conscious. Another environmentally conscious act is to reduce and eliminate waste production. Some waste can be eliminated by using improved manufacturing techniques, practicing and promoting conservation and recycling, and using high-temperature incinerators. Most of the solid waste produced today comes from computers and other electronic equipment. When companies exploit their environmental policies through advertising and publicity, they are using green marketing. Since President Kennedy's administration developed a consumer bill of rights, businesses have been pressured to consider consumer needs and interests. This movement is called consumerism. There are four main topics that consumer-oriented legislation addresses: safe products, available information, product choice, and feedback options. The Consumer Product Safety Commission (CPSC) is the leading agency that develops and enforces safety rules for products. The Food and Drug Administration (FDA) and Agricultural Department (USDA) lead the work to ensure that accurate product information is provided to consumers.

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While the Board of directors takes responsibility for the needs of the investors, the executives must take responsibility for the employees. This includes the two categories of equality in employment and workplace safety. There are several key legislature related to employment equality. The Civil Rights Act of 1964 established the EEOC that attempts to eliminate discrimination. The Civil Rights Act of 1991 extended the first to include women. Affirmative Action was established to encourage recruitment of minorities and women. In 1990 the Americans with Disabilities Act (ADA) gave equal opportunities for people with disabilities. Disabilities refer not only to obvious physical conditions that may impair people, but also people with cancer, heart disease, diabetes, epilepsy, AIDS, drug addition, alcoholism, and emotional illness. Today approximately 75% of U.S. companies have established some enhancing opportunities for minorities called discrimination initiatives. Workplace safety rules are established and enforced by the Occupational Safety and Health Administration (OSHA).

Section Outline I. Identifying social responsibility in business

A. Enron Case Study B. Social Responsibility and Profits

1. Social responsibility can align with strategic planning 2. Balance social concerns with stakeholders' rights

C. Ben & Jerry's: Balancing social responsibility with profits II. Increasing social responsibility in business

A. Responsibility toward society and the environment 1. Pervasiveness of pollution 2. Government effort to reduce pollution 3. Business effort to reduce pollution

B. Responsibility toward consumers 1. Right to safe products 2. Right to be informed 3. Right to choose which products to buy 4. Right to be heard

C. Responsibility toward investors D. Responsibility toward employees

1. Push for equality in employment 2. Occupational safety and health

Practicing Ethical Behavior and Social... Section Review 2.3 Ethics and Social Responsibility around the World

Key Terms

• Terrorism • Ethics • Society • Social group

Case Study

• KFC • Singapore • Russia • Italy • China • Mexico • Ireland • United States

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Summary Ethics are the principles and standards of moral behavior that are accepted by society as right or wrong. For example, most of the people in the United States accept murder as unacceptable behavior- something that is morally wrong. Society determines what is ethical. In the United States, the penalty for vandalism is a fine or jail sentence, and narcotics possession usually brings a jail sentence. In Singapore, the sentence for people who vandalize is mandatory beating with a rod- called caning. Narcotics possession in Singapore often means death. In China, the government is trying to control the population so it has restricted families to two children. The people value the lives of males over females. If the second baby born to a family is female, the parents will often kill her or leave her in the street to die, and then try again to produce a male heir. What is unethical in the United States can be an everyday occurrence accepted by other societies. In Russia, for example, bribery is a customary practice that is discussed openly, but in the U.S. bribery is unethical and can be illegal.

Social groups are two or more people who interact with one another. It is probable that you belong to several social groups. Your family is a social group, so are your colleagues at the office. Extended social groups joined by cultural and economic ties are societies. Country borders often outline society boundaries. Religions that contain the majority of power or population within a society greatly influence the standards of those within that society. For example, according to the Census Bureau the U.S. population is predominantly Protestant; therefore, the core values held by Protestants are among the significant contributions in determining what is ethical in this society. Since the United States contains people with many different religious beliefs and many ethnic backgrounds, that is not the only influence on this society. In Iran, the religious leaders control the government, so that religion will be most influential on their society. In Italy, Mexico, and Ireland, the Catholic religion is an influence.

Social responsibility varies between societies as well. For example, in Syria people are expected by society to take care of everyone in their neighborhood. If the senior citizen who lives down the street needs a window repaired, her neighbors are neglectful if they do not quickly repair it for her. The four rights of social responsibility are important in every society, but how it is applied differs. The four rights of responsibility are:

• Right to safe products • Right to be informed • Right to be heard • Right to choose

How can business people ensure they are meeting social responsibilities and ethical standards in foreign countries? The key is to investigate. Information sources can include the government, the Internet, travel agents, books, magazines, newspapers, consultants, and colleagues who have experience in that country. Some businesses try to adopt the highest standards of social responsibility and ethics required among the countries they operate in, and then apply it to operations in every country. One company that takes this stance is Proctor & Gamble. Other companies only meet the minimum standards in each country of operation. There is an ongoing debate over foreign labor: should a company exploit the low compensation requirements in one country while maintaining their corporate presence in another? Some believe that the company is creating jobs that would otherwise not be available; therefore, the company is helping the community and being socially responsible by creating those jobs. Others believe that the company is taking advantage of the people, and the company should offer the same wage they would pay in their home country. There are many factors to consider when judging whether a company has met ethical and social responsibilities, when moving through operational arenas the boundaries seem indistinct.

Section Outline I. Ethics II. Social groups III. Societies IV. Social responsibility V. Current issues and investigation

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End of Chapter 2 Questions

1. Explain the difference between an ethical dilemma and an ethical lapse 2. List four questions you might ask yourself when trying to make an ethical

decision 3. Identify three steps that businesses are taking to encourage ethical behavior 4. Discuss three types of activity that socially responsible companies might

engage in 5. Identify five of the eight steps that some businesses are taking to address

environmental problems 6. List four rights of consumers

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Chapter 3: Competing in the Global Economy Section Review 3.1 The Global Business Environment

Key Terms

• Stereotype • Culture • Importing • Exporting • Licensing • Franchising • Strategic alliance • Joint venture • Foreign Direct Investment (FDI) • Foreign Corrupt Practices Act • Export management company • Export trading company • Multinational Corp. (MNC) • Big emerging markets

Case Studies

• Whirlpool • UPS • Euro Disney

When a company decides to operate in more than one county, it must take into consideration a number of factors they would not need to consider locally. When moving into another country it is important not to accept generalizations, called stereotypes, about a particular culture or race. Understanding the differences in culture is the first step needed to successfully enter a global marketplace. The biggest challenge that U.S. and European senior executives say they face is changing individuals' behaviour. There are five points that seasoned international businesspeople suggest for international communication: be alert to other customs, deal with the individual, clarify intents and meanings, adapt your style to the other person's, and show respect. The five most common forms of international business are:

• Importing • Exporting • Licensing • Franchising • Strategic alliances and Joint ventures The least risky form of international business activity is sending products to sell in to other countries. This is exporting. There is increased interest in countries labeled as one of the big emerging markets. These countries are listed by the U.S. International Trade Administration as having the greatest potential for U.S. products in the next two decades. Countries included on this list are the Chinese Economic Area, South Korea, Singapore, Thailand, Malaysia, Indonesia, Vietnam, India, South Africa, Turkey, and Brazil. Importing, or bringing internationally produced products into a local market, is typically considered the other side of exporting. One market in the U.S. for imports is foreign vehicles. When a company needs an international strategy that requires little out-of-pocket cost, they often choose licensing. With this option the company contracts a foreign-based company to produce and market its product. In return, they receive a royalty or fee. Franchising is now the fastest growing form of international business activity. The advantage of franchising globally is the ability to bypass some trade restrictions. If a company wants to develop a long-term relationship with another company to share ideas, resources, and technologies, it chooses a strategic alliance. Advantages of strategic alliances include ease of market entry, shared risk, and synergy. One type of strategic alliance is a joint venture. In this agreement organizations share investment costs, management, and profits. Foreign Direct Investment gives companies the opportunity to directly invest in an already established or new local company from another country. This is considered an inclusive form of international business. Companies that have established a physical presence in several countries are called multinational companies (MNCs).

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U.S. companies must be aware of all laws and regulations that surround going global. For example, the Foreign Corrupt Practices Act outlaws actions such as bribing government officials to approve deals, but some small payments are allowed. Those companies not familiar with the laws of exporting often hire an intermediary company, or export management company, to oversee the process. There are also international marketing service companies, called export trading companies, which can assist with marketing and foreign distributors that provide consulting services. Section Outline I. Cultural differences in the global business environment

A. Be alert to other customs B. Deal with the individual C. Clarify intent and meaning D. Adapt your style E. Show respect

II. Legal differences in the global business environment III. Forms of international business activity

A. Importing and exporting B. International licensing C. International franchising D. International strategic alliances and joint ventures E. Foreign direct investment

IV. Product strategies for international markets Competing in the Global Economy Section Review 3.2 Fundamentals of International Trade

Key Terms

• Economies of scale • Absolute advantage • Comparative advantage theory • Balance of trade • Balance of payments • Trade deficit • Protectionism • Tariffs • Duties • Quotas • Sanctions • Embargos • Dumping • Subsidies • Restrictive import standards • Free trade • GATT • WTO • APEC • IMF • World Bank • Trading Blocs • NAFTA • EU • Euro • Exchange rate • Devaluation • Pegged or Fixed value

Case Studies

• Saudi Arabia • Whirlpool • McDonald's

Summary Nations trade to acquire needed products and sell excess products. The advantages of international trade are to increase a nation's total output, offer lower prices and greater variety to consumers, increased competition, and expansion of products. Organizations that benefit from large purchases or increased efficiencies have reached economies of scale. Simply put, if they buy in bulk quantities, it costs less.

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There are two methods that countries use to decide what to trade. The first is absolute advantage. If a country can create products faster, less expensively, of higher quality than all others, or if it is the only country that can supply this product, it has absolute advantage in the global market. This product will be the obvious choice to trade internationally. Absolute advantage rarely lasts long unless it is based on a natural resource like oil, precious minerals, or gems. Then the advantage lasts as long as the resource lasts. More common is the comparative advantage theory. In this theory, the country primarily exports those goods they are more efficient at producing. For example, some Asian countries produce electronic components very efficiently. In exchange, they often purchase beef from the U.S. International trade is measured by calculating imports and exports. There are two primary calculations: balance of trade and balance of payments. Both calculations are performed for a particular time period. Calculation of the balance of trade shows if the nation has a trade surplus or trade deficit. The balance of payments is considered the broadest indicator of international trade. This calculation is used to get the most complete picture of trade. It compares money coming into a country versus money leaving the country. Balance of Trade = Exports minus Imports

• If exports exceed imports then there is a trade surplus • If imports exceed exports then there is a trade deficit

Balance of Payments = Payments In minus Payments Out Includes: trade, foreign investments, military expenses, tourism, foreign aid, and international transactions

Countries trade without restrictions with other countries, this is free trade; but countries can choose to restrict trade with other countries. This is protectionism. The most common reasons to restrict trade are to save jobs, or nurture growing and weak industries. Methods of protectionism include tariffs, quotas, embargos, and sanctions.

Protectionist Method Description

Tariffs Tax on imports Quotas Limit on the amount imported per year Embargo Complete ban of an import Sanctions Politically motivated embargo

Subsidies Financial assistance to enable competition in international markets

Dumping Selling a large amount of product internationally at or below cost of production domestically

Restrictive import standards

Requiring a restrictive standard or license that is difficult for foreign producers to obtain

There is a trade agreement and several trade organizations you should be familiar with. The key trade agreement is the General Agreement on Tariffs and Trade (GATT) that was established after WWII. All participators in the GATT must give all members equal trade advantages. The World Trade Organization (WTO) has 144 member countries and promotes free trade and lowering the cost of doing business. The Asian Pacific Economic Cooperation Council (APEC) was created to help Pacific Rim countries with trade. Despite its name, the United States, Canada and Mexico are among its members. The International Monitory Fund (IMF) is affiliate with the United Nations. It provides short-term loans to countries that cannot meet expenses. It is often considered the lender of last resort. The World Bank, also know as the International Bank of Reconstruction and Development, provides low-interest loans to developing nations for transportation, health, education, and telecommunications. Trading blocs also promote international trade by promoting free trade among regional members.

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Trading Bloc Members ASEAN - Association of Southeast Asian Nations

Southeast Asian Nations including Indonesia, Malaysia, Philippines, Singapore, and Thailand

NAFTA - North American Fair Trade Agreement

United States, Canada, Mexico

EU - European Union

Fifteen European countries. Unofficial headquarters in Brussels, Belgium. Eleven countries formed the European Monitory Union and use the Euro as currency.

Mercosur Argentina, Brazil, Paraguay, Uruguay FTAA - Free Trade Area of the Americas Proposed joining of Mercosur and NAFTA

One of the difficulties of international trade is exchanging currency. Eleven of the fifteen EU countries eliminated this concern by creating the EMU and sharing one currency, the Euro. The exchange rate determines how much of one currency can be traded for another currency. Anyone who has traveled internationally has experienced how some rates fluctuate daily. When a country's economy causes the currency to drop in relation to other currencies, this is devaluation. There are two methods of valuating currency: floating exchange rate system, and pegged or fixed exchange rate. In the floating rate a countries currency fluctuates in response to supply and demand. Pegged currency is a country's way to stabilize their currency rate by tying it to a rate of a more stable country. These countries often tie their currency to the value of the U.S. dollar. When a currency is pegged, its value will rise and fall in direct proportion to the other country's currency.

Section Outline I. Why nations trade

A. Economies of scale B. Absolute advantage C. Comparable advantage theory

II. How international trade is measured A. Balance of trade B. Balance of payments

III. Trade restrictions IV. Agreements and organizations promoting international trade V. Trading Blocs VI. Foreign exchange rates and currency valuation Competing in the Global Economy Section Review 3.3 Terrorism's Impact on the Global Business Environment

Key Terms

• Terrorism • U.S. Customs

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Case Studies

• World Trade Center • KFC • Whirlpool

Summary The terrorist attacks in the U.S. have had a great short-term impact on consumer spending and international trade with the U.S. Consumers have expressed their uncertainty by decreased spending, and costs have risen for international trade. Long-term consequences have not been determined. Foreign trade accounts for 30% of the U.S. economy, so this impact can be tremendous. The more countries that cooperate and work toward eliminating terrorism, the faster the global economy accelerates. In the wake of the attacks, the U.S. borders have increased security. For example, at the Mexican border all containers entering the U.S. must be opened and inspected. Security delays are expected to cause higher inventory costs, manufacturing costs, and transportation costs. Prior to 9-11-01, the time required for cargo-laden trucks to enter the U.S. was two hours. Now the delay is approximately seven hours. The organization that is responsible for goods entering the U.S. is the Customs Service. Each day, the U.S. Customs service processes about 38,000 trucks and railway cars. In 2003, the U.S. created the Homeland Security Agency to centralize domestic security. The HSA has pulled underneath its control over 20 other governmental agencies including FEMA and the newly formed Transportation Security Agency (TSA), which now controls security of the airports. Changes in international travel include increased security, more restrictions, and additional delays.

Section Outline I. World Trade Center attack II. US trade and the world economies III. Case studies

End of Chapter 3 Questions

1. What are the opportunities and challenges of conducting business in other countries?

2. Identify five forms of international business activity. 3. Explain the theory of comparative advantage. 4. What are some the arguments for and against protectionism? 5. Discuss the function, advantages, and disadvantages of trading blocs. 6. Explain why a country might devalue its currency.

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Chapter 4: Starting, Financing, and Expanding a Small Business Section Review 4.1 Understanding the World of Small Business

Key Terms

• Small business • SBA • Lifestyle business • High-growth ventures • Entrepreneur • Intrapreneur • Glass ceiling • Downsize • Outsource

Case Studies

• Papa John's • ShippingSupply.com

According to the Small Business Administration (SBA), the definition of a small business is:

• Independently owned and operated • Not dominant in its field • Relatively small in terms of annual sales • Fewer than 500 employees-can be fewer employees depending on business type. Small businesses:

• Create about 75% of new jobs • Generate more than half of the private U.S. GDP • Develop 98% of "radical" new-product development according to NSF • Supply the needs of big businesses • Provide specialized goods and services • Spend $2.2 trillion annually, only slightly less than big businesses There are two categories of small businesses: lifestyle businesses and high-growth ventures. The table below contrasts the two types.

Characteristic Lifestyle businessHigh-growth venture Managed and run by: One or two people Team Percent of all small businesses 80-90% 10-20% Growth potential Limited High Typical expansion Slow Rapid Cash flow Low Medium to High Investors Few Several to many

New small business owners are surprised by how much time is required to maintain their businesses. Those who come from big business environments are particularly challenged by the amount of work that is required. Other surprises often include the amount of money required and the amount of time required. The activity that takes up the most time in a new business is direct selling. Risk takers that begin new businesses in private industry are called entrepreneurs. Do not confuse this with intrapreneurs who create innovation within a bigger organization. The number of small businesses increases when the economy weakens, but when the economy was strong in the 1990s small businesses increased. The main factors that contributed to the rise in small businesses were technology

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including the Internet, rise in the number of women and minority business owners, downsizing, and outsourcing. The increasing availability and decreasing cost of technology allowed small business owners to create professional documents and websites accessible to a global customer base. From 1987 to 1997 the number of new minority businesses increased 168%. The number of women-owned businesses also increased tremendously from 5% to 39% of all small businesses. The main reason women start small businesses is that they have an entrepreneurial idea. Less important reasons listed in ascending order are: the glass ceiling effect, boredom in current job, and downsizing. The glass ceiling effect is the unseen barrier for women to advance further in a male-dominated industry. When companies suffer through difficult times, they often fire or layoff employees. This is also called downsizing. These talented people now have a great opportunity to begin a business of their own, and many take that opportunity. Another way for companies to reduce recurrent costs is to subcontract, or outsource, specific functions and/or projects. When they look for a company to take the outsourced tasks, they often look for small businesses. Section Outline I. Economic roles of small businesses

A. Provide jobs B. Introduce new products C. Supply needs of large corporations D. Provide goods and services

II. Characteristics of small businesses

A. Limited resources B. Innovation

III. Factors contributing to the increase in the number of small businesses

A. Technology and the Internet B. Rise in number of women and minority small-business owners C. Downsizing and Outsourcing

Starting and Financing a Small Business Section Review 4.2 Starting a Small Business

Key Terms

• Business plan • Start-up • Franchise • Mission • Marketing strategy • Design and development plan • Operations plan • Critical risks and problems • Financial projections • Exit strategy • Franchisor • Franchisee • SCORE • Incubator

Case Studies

• Kate Spade • Heavenly Bounty

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Summary Entrepreneurs are adaptable, driven, intelligent leaders that are highly disciplined and creative. They watch the trends, anticipate future moves and exploit them. When they make mistakes they quickly adjust and overcome so not to repeat the same errors. After making the decision to jump into a new business, the next thing to do is begin planning. A business plan is necessary for whatever business type the entrepreneur chooses. A business plan provides an orderly statement of a company's goals and how it intends to achieve those goals. It is also a tool used to attract investors. Standard sections of a business plan include:

• Summary of business concept • Mission statement and goals of company • Company and industry background • Timeline of business development • Description of products and services to be offered • Competition and market analysis • Possible critical risks and problems • Design and development plans, if necessary • Operations plan-facilities, labor and equipment needed • Marketing strategy-how to sell the product • Management summary • Financial projections, budget, and capital required • Exit strategy-how investors cash out There are three ways to begin a business: create a startup, buy a franchise, or purchase an existing business. Choosing the startup option, a new venture, is the most common with sixty-six percent of all new businesses beginning as a startup. This is also the most difficult option. Purchasing an existing business reduces risks only if the background is thoroughly investigated. A franchise is a business arrangement in which a small business (franchisee) buys the rights to sell goods or services of the supplier (franchisor). McDonalds and Subway are two very popular franchisors. One of the best ways to evaluate a prospective franchisor is to talk to other franchisees. Advantages of choosing franchises are: getting a successful business blueprint, instant name recognition, training, advertising programs, standardized quality, and an instant support network. Disadvantages of franchises include upfront costs, monthly royalties, fixed suppliers, and little independence or creativity options. There are three types of franchises:

Franchise Type Description Example Product franchise Right to sell trademarked goods Car dealerships Manufacturing franchise Right to produce and distribute manufacturer's products Soft-drink bottling

plant Business-format franchise

Right to open a business using a franchisor's name and format for doing business Fast food chains

Regardless of the business type the entrepreneur chooses, there is a risk of failure. Lack of management skills, experience, uncontrolled growth, and proper financing are some of the most common reasons businesses fail. Chaos is the fastest way to kill a successful business. How does a business get help to continue? The textbook mentions three sources: SCORE, Incubators, and the Internet. SCORE is the Service Corps of Retired Executives, a resource partner of the SBA. These are retired businesspeople who volunteer to consult small businesses on financing, business plans, and growth. Incubators are organizations that help small businesses through the early stages of development. Help includes office space, legal and accounting services, advice, support for marketing and administration, and contacts. The Internet contains a large amount of data for research and the opportunity to market services globally in real-time. Section Outline I. Characteristics of entrepreneurs

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II. Importance of preparing a business plan III. Small business ownership options

A. Franchise alternative 1. Types of franchises 2. How to evaluate a franchise 3. Advantages of franchising 4. Disadvantages of franchising

B. Why new businesses fail IV. Sources of small business assistance

A. SCORE B. Incubators C. The Internet

Starting and Financing a Small Business Section Review 4.3 Financing a New Business

Key Terms

• Capital structure • Short-term financing • Long-term financing • Cost of capital • Debt financing • Secured loans • Unsecured loans • Collateral • Equity financing • Going public • IPO • Stock • Venture capitalist • Angel investor • Private financing • Micro-loan • SBIC • MESBIC

Summary When a business needs external financing, there are four topics to consider: length of term, type of financing, cost of capital, and source of financing. Financing terms can be broken into two categories: short-term financing and long-term financing. Short-term financing is capital that will be repaid within one year. It is typically debt financing and is used to increase cash-flow and pay creditors. Long-term financing is any financing that extends beyond one year. It is more costly than other financing. This financing is used to buy buildings, equipment, vehicles, and other assets. Long-term financing is also used to fund new or grow existing businesses. The cost of capital is the average interest rate it must pay on financing. It is similar to the interest rate you must pay when purchasing a house. It is not included in the initial price of the house, but is an additional expense that should be considered. There are three main factors that affect the interest rate a particular company must pay:

• Risk associated with the company-how likely is it that the company will repay? • Most common interest rate currently available-rates fluctuate with economic environment • What type of financing is chosen

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The two types of financing are debt financing and equity financing. Debt financing is a short-term loan instrument that can be secured or unsecured. A secured loan is backed by the company's assets or collateral. If the company cannot repay the loan, then the lender will take the collateral away from the company. Payments must be made regardless of operating results. Assets typically secured include buildings, equipment, and land. An unsecured loan is not backed by an asset; therefore, the lender cannot take immediate ownership. Equity financing is offering company stock for sale. Stock is a (usually small) percentage or share of company ownership. The first offering of this stock is called the initial public offering (IPO). Making this initial offering is called "going public." This process is often time-consuming and costly.

Characteristic Debt Financing Equity financing Typical Term Short - loan Long - IPO Subcategories Secured or Unsecured Preferred stock or Common stock

Benefits 1. Lender doesn't gain ownership interest 2. Obligations are limited by loan terms 3. Less costly and time consuming than equity financing

1. No specific maturity date 2. Company not required to repay 3. Can include many more investors

Private financing is obtaining capital from individual investors, family and friends, partners, or customers. There are four sources that the textbook emphasizes: venture capitalists, angel investors, credit cards, and SBA assistance. Venture capitalists (VCs) raise money privately as opposed to a public stock offering on the open market. VCs are specialists in financing new businesses. In exchange for their help, VCs expect ownership interest in the company. Their goal is to make a large profit on investments. In the dot-com era, VCs were much more generous with funds and required fewer guarantees than they do today. Angel investors focus on risky startup companies looking for second-round financing. Just like gamblers, Angel investors try to play against the odds. Angel investors are willing to lend smaller sums than other investors. Angels can provide expertise in addition to money. Credit cards help fund one-third of the companies with 19 or fewer employees. In the 1990s, credit card companies began to focus on small businesses as a source of new income. Credit cards are popular because of their availability and ease of use. The disadvantage is the high interest rates associated with credit cards. The Small Business Administration offers private financing for some small businesses. It is possible to receive micro-loans backed by the SBA, but the demand for these loans is very high. The SBA offers limited direct loans to minorities, women, and veterans through investment firms created by the SBA for small business assistance. These include the Small Business Investment Companies (SBICs) and Minority Enterprise Small Business Investment Companies (MESBICs). These firms operate similarly to angel investors and VCs, but are more willing to accept risk. Section Outline I. Length of term II. Cost of capital III. Debt versus equity financing IV. Private financing sources

A. Venture capitalists B. Angel investors C. Credit cards D. Small Business Administration assistance

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End of Chapter 4 Questions

1. List four important functions of small businesses in the economy. 2. What are three factors contributing to the increase in the number of small

businesses. 3. Name the key characteristics common to most entrepreneurs. 4. Name 12 topics that should be covered in a formal business plan. 5. List five things you should know before starting a business . 6. List three ways of getting into business for yourself .

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Chapter 5: Selecting the Proper Form of Business Ownership and Exploring Mergers and Acquisitions Section Review 5.1 Choosing a Form of Business Ownership Proprietorships and Partnerships

Key Terms

• Sole Proprietorship • Partnership • Corporation • Limited partnership • General partnership • Unlimited liability • LLP

Case Studies

• Kinkos • KPMG

These factors should be pondered when considering which type of business organization to form: tolerance for risk, long-term goals, and tax-advantages. The three most common forms of business ownership are:

• Sole proprietorship • Partnership-General and limited • Corporation-Public or private; general or limited liability A sole proprietorship is owned by one person. It is the least expensive form of business to begin, and is often started part-time based in the home. Advantages include the cost of establishment, satisfaction of independence and privacy, and the ability to keep all after-tax income. Public disclosure of financials is not necessary. Profits are taxed at the individual income tax rate, rather than the higher corporate tax rate. A major disadvantage of a sole proprietorship is that the owner has unlimited liability, a term used when the owner has personal liability for any business expense. Any personal asset like an entrepreneur's home or car may be used to satisfy business debts. Other disadvantages in sole proprietorships are that they are least likely to find outside financing, and cannot take advantage of synergy of joint ownership. Partnerships are unincorporated businesses owned by two or more people. Partnerships are the least popular form of business ownership. There are two types of partnerships: general and limited. In general partnerships all partners have the right to participate as co-owners and are individually liable for the business. Limited partnerships have one or more general partners, and one or more limited partners. Limited partners have a liability limited to their investment. Only general partners participate in the daily management. A limited liability partnership (LLP) is one in which all partners have limited liability. LLPs are restricted by states to include or omit particular types of businesses. In addition to the same advantages as sole proprietorships, partnerships also have the advantage of distributed liability (among partners) and a greater chance for survival. Disadvantages include the increased likelihood of disagreements among owners, and controversy over exit strategies. Section Outline I. Sole Proprietorship

A. Characteristics of business ownership forms B. Advantages of sole proprietorships C. Disadvantages of sole proprietorships

II. Partnerships

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A. Advantages of partnerships B. Disadvantages of partnerships C. Partnership agreement

Selecting the Proper Form of Business... Section Review 5.2 Choosing a Form of Business Ownership Corporations

Key Terms

• Corporation • Shareholder • Stock certificate • Common stock • Dividends • Preferred stock • Private corporation • Public corporation • Liquidity • S Corporation • LLC • Subsidiary • Parent company • Holding company • CEO • Proxy • Board of Directors • C-level • Alien corporation • Foreign corporation • Domestic corporation

Case Studies

• Arthur Andersen • Avis • Hyatt • Home Depot • Hallmark

Summary A corporation is an organization that can legally own property and conduct business. It has most of the legal rights of a person. Unlike sole proprietorships and partnerships, a corporation's legal status and obligations exist independently of its owners. This means that the owners are not personally liable for any business debts. A corporation is owned by shareholders. These are people who have an ownership share (percent) of the company. The document that declares that ownership is called a stock certificate. There are two types of stock: common and preferred. Common stock is ownership that includes voting rights. Owners of common stock have the last claim on distributed profits and assets. Distributed profits are called dividends. The distribution of these dividends is authorized by the Board of Directors. Companies do not have to provide dividends to their stockholders. In addition to the possibility of receiving dividends, the common stockholder hopes that the company's worth will increase. If the company is valued higher, then each share of stock will also be valued higher, thus giving the stockholder a profit upon selling the stock. The second type of corporation ownership is preferred stock. This type of stock does not usually include voting rights, but the shareholders of preferred stock have first claim on the corporation's assets after the company's debts are paid. This benefit is important if the company goes out of business. The most usual type of preferred stock is cumulative preferred stock. With cumulative preferred stock, the stockholders will receive dividends before the common stockholders are offered dividends. A corporation can choose to be private or public. A privately-held corporation is owned by a few individuals or companies that retain ownership control, which can be an advantage. These corporations are also called closed or closely-held. If a company offers its stock for sale to the general public, then it is called a publicly traded company. Advantages of creating a publicly traded company are:

• Increased liquidity

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• Enhanced visibility • Establishment of an independent market value for the company • Flexibility to purchase other companies Disadvantages to creating a publicly traded company are:

• Cost of going public is high • Filing requirements with the SEC are burdensome • Ownership is lost • Management handle increased pressure and publicity • Value of the company's stock is subject to external influences like the economy Shareholders own the corporation, but most of the owners are not involved in its management. The Chief Executive Officer (CEO) is the managing head of the company. He works with other C-level (CXO) executives like the Chief Financial Officer (CFO), Chief Operations Officer (COO), Chief Information Officer (CIO), and others to ensure the corporation runs smoothly and profitably. Choosing to organize a business as a corporation has advantages and disadvantages:

Advantages Disadvantages • Greater financing options • Expanded research and development

capabilities • Limited liability • Liquidity - investors can easily convert stock

to cash • Unlimited life span • Ability to finance internal projects

• Cost of "going public" is high • Burdensome paperwork • Corporations are taxed twice • Must publish financial and operational

information • Pressure to show short-term growth • Less control for owners

There are several special categories of corporations including S corporations, limited liability corporations, subsidiary corporations, parent companies, and holding companies. The advantages of being an S corporation are monetary. Normally a corporation is taxed twice, but an S corporation is taxed like a partnership-only once at the individual rate. Requirements for an S corporation company are:

• Must have less than 76 investors • No investors of the corporation can be nonresident aliens • Must be a U.S. company • Can only issue one class of common stock

• All stock shares the same dividend rights • All stock shares the same liquidation rights • Stock may have different voting rights

Another corporation type is the limited liability company (LLC). This type combines personal liability protection of a corporation with tax advantages of a partnership. Neither the number of shareholders nor management participation is limited. The LLC has a flexible operating agreement that details how the LLC should be managed. A subsidiary company is one owned by another company. The parent company owns the subsidiary. A holding company is a type of parent company that owns other companies for investment, but not management. An alien corporation operates in the U.S. but incorporates in another country. For example, Total is a gasoline company in the U.S. that originates in France; therefore, it is an alien company. If a

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company incorporates in one state, but operates in others, then it is an out-of-state or foreign company. A domestic company is one that operates in one state only. The Board of Directors is a group of people responsible for the company's welfare. They are elected by and representatives of the shareholders. The Board does not manage day-to-day operations. Instead, it sets the goals and strategic direction for the company. From those goals, the executives and managers develop the management plans and short-term objectives. The Board also decides to distribute dividends and votes to allow major investments. Section Outline Corporations

I. Ownership A. Shareholders B. Stock

1. Common 2. Preferred

C. Public versus private ownership II. Advantages III. Disadvantages IV. Special types

A. S Corporation B. Limited liability corporation C. Subsidiary company D. Parent company E. Alien corporation F. Foreign / Out-of-State corporation G. Domestic company

V. Corporate governance A. Chief Executives B. Shareholders C. Board of Directors

Selecting the Proper Form of Business... Section Review 5.3 Understanding Business Combinations

Key Terms

• Merger • Consolidation • Leveraged buyout (LBO) • Economies of scale • Synergies • Acquisition • Culture clash • Hostile takeover • Tender offer • Proxy fight • Raider • Poison pill • Golden parachute • Shark repellant • White knight

Case Studies

• General Motors • Diamler Chrysler • Hewlett-Packard • ITT • Radio Shack • America Online • Tyco International • Warner-Lambert & AHP

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Summary Mergers, acquisitions, buyouts and acquisitions all have the same goal: An individual's or company's purchase of another company. In a merger, one company purchases and absorbs another company, or parts of that company. The absorbed company ceases to exist. In a consolidation, companies combine to create a third company. An acquisition occurs when a company purchases another through obtaining the majority of voting stock. If individuals use borrowed funds to purchase a publicly traded company's stock, then the transaction is called a leveraged buyout (LBO). The lenders expect that the loan to be repaid through company profits or by selling some of the company assets. This transaction usually depletes the cash available for operations because of their cash will be required to make principle and interest payments on the new owner's loan. The numbers of mergers increase when the economy is strong. Companies eliminate unprofitable segments when the economy is poor. There are usually difficulties blending the corporate cultures, called culture clash. There are often struggles for power and problems merging the organizational structures and communication paths. Once the new organization is settled, the larger company has advantages because of its size. These advantages are economies of scale, synergy, or efficiencies, and include:

• Elimination of redundant expenditures • Increased purchasing power • Increased revenue Hostile takeovers are the unwelcome attempts to shift control of a company. A raider is the aggressor in a hostile takeover. There are two types of hostile takeovers: tender offers and proxy fights. In a tender offer, a raider offers to purchase a large amount of voting stock at an inflated price, and then gather enough voting power to force replacement of the board of directors (BOD) and management. In a proxy fight, the raider hopes to sway existing stockholders to agree with the raider's viewpoint. Once he has enough supporters, the raider will force the change of BOD members and management. Of course the raider intends to lead the BOD. A number of strategies are available to discourage hostile takeovers including poison pills, golden parachutes, shark repellants, and white knights.

Strategy Characteristics

Poison pill

• Triggered by takeover attempt • Makes company less valuable in some way - like selling stock below market

value

Golden parachute

• Guarantees executives big compensation packages if they leave as a result of a takeover

• Similar effect to poison pill - company becomes less valuable

Shark repellant • Direct method, but only works if mgmt. has support of stockholders • Large majority of stockholders must approve any takeover attempt

White knight

• Another buyer, one who agrees with current management, steps in to purchase company before the raider can

• White knight then steps aside to allow current management to continue

Taking the company private

• Large investors buy back all publicly traded stock • Investors only offer future stock to select investors

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Strategic alliances are sometimes preferred over mergers, acquisitions, and consolidations because they do not require a long-term commitment. Strategic alliances can give the same effect as mergers because they help the company:

• Gain credibility in a new field • Expand market presence • Gain access to technology • Diversify offerings • Share business practices Section Outline Mergers, consolidations, and acquisitions

I. Differentiating mergers, consolidations, acquisitions, and LBOs II. Hostile Takeovers

A. Tender offer B. Proxy fight

1. Poison pill 2. Golden parachute 3. Shark repellent 4. White knight

III. Strategic alliances and joint ventures

End of Chapter 5 Questions

1. List the three basic forms of business ownership. 2. List five advantages and four disadvantages of forming a sole proprietorship. 3. What are the differences between common and preferred stock from a shareholder's

perspective? 4. Discuss the three groups that govern a corporation and describe the role of each. 5. What are four advantages and three disadvantages of corporations? 6. List six main synergies companies hope to achieve by combining their operations.

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Chapter 6: Understanding the Functions and Roles of Management Section Review 6.1 Key Terms • Management • Role • Interpersonal role • Informational role • Decisional role • Planning • Strategic plan • Vision • Mission statement • Quantitative forecast • Qualitative forecast • Differentiation • Cost leadership • Focus • Goal • Objective • Tactical plan • Operational plan • Crisis management • Organizing • Management pyramid • Top manager • Middle manager • First-line manager

Case Studies

• Nokia • Porsche • FedEx • Edge Learning Institute • American Express • Ford • Bridgestone / Firestone • Jet Blue

Management is the process of coordinating resources to meet organizational goals. Managers fill three general roles: interpersonal, informational, and decisional.

Role Examples

Interpersonal • Leading employees • Attending meetings • Developing relationships

Informational • Interviewing clients, employees, or peers • Reporting progress • Forecasting needs or profits

Decisional • Allocating resources • Solving problems • Negotiating deals

The four basic functions of management are planning, organizing, leading, and controlling. These functions overlap, meaning that one role or task can require more than one function. The first management function is planning. Planning is establishing objectives and goals for an organization, and determining the best ways to accomplish them. Strategic planning establishes the actions and the resource allocation required to accomplish strategic goals developed by top management. When a senior manager is planning strategically, she is making decisions for two to five years in the future. A solid strategic plan answers these questions:

• Where are we going? • What is the environment? • How do we get there? The six steps of strategic planning are:

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1. Developing a clear vision 2. Creating a mission statement 3. Developing forecasts 4. Analyzing the competition 5. Establishing goals and objectives 6. Developing action plans The company vision is a realistic, credible, and achievable view of the future. It is where the leaders want the company to go. The mission statement consists of a few well-written, tightly packed sentences or paragraphs that express that vision. The mission statement focuses employees' attention on the important elements of the organization, and identifies the essence of the organization to outsiders. It is a statement of the organization's purpose, basic goals, and philosophies. Specific components of the mission statement often include the company's:

• Product and/or service • Primary market • Fundamental concern for survival • Growth and profitability • Managerial philosophy • Commitment to quality and social responsibility Creating forecasts is the third step in strategic planning. A forecast is a prediction of future conditions. Developing a forecast is difficult because the manager must make assumptions about not only the company, but also the company's industry and environment, like the economy. For example, very few people in 1998 accurately predicted the state of the economy in 2003. There are two categories of forecasts: quantitative and qualitative. Quantitative forecasts develop by using the past records and tests with complicated statistical estimates. Qualitative forecasts are less tangible. Intuition and consumer research play a major role in qualitative forecasts. To analyze the competition, managers must first identify existing and potential rivals. Once managers determine who the competition is, managers can then evaluate the threats from competition. First, managers examine competencies, strengths, and weaknesses of competitors. Then managers use this information to identify and exploit an advantage over that competition. There are three ways to gain a competitive advantage: cost leadership, focus, and differentiation. The cost leadership strategy focuses on producing and selling products more efficiently and less expensively than others on the market. Using this strategy allows companies to sell products at a lower price than the competition does. An example of cost leadership is Home Depot. The focus strategy concentrates efforts to sell in a specific region or to a specific type of customer. For example, University of Phoenix caters to working adults. Differentiation is showing how the competition's product or service is different and less appealing, or how this organization's product is better. Differentiation is based on:

• Level of service • Level of quality • Product features • New technologies The fifth step in strategic planning is establishing company goals and objectives. Goals are general, long-range targets. If a company has a wish to be the biggest selling firm in its industry, then that is one of their goals. Objectives, on the other hand, are specific, short-range targets. An example of an objective is to increase production of hiking boots 15% at the Denver plant during the next three months. To be effective, goals and objectives should be:

• Solid-can they understand it? • Measurable-how do they mark progress and achievement? • Attainable-can they reach it? • Challenging-must they work hard to reach it? • Relevant-does it relate to the mission statement? • Time-limited-when must they reach it? Once the strategic goals and objectives are set, then the company must develop an action plan-how they will achieve them. There are two types of action plans: operational and tactical. Tactical plans define the actions and the resource

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allocation necessary to reach the tactical objectives. As you know, resource allocation is deciding when and how to use company possessions, time, and employees. Middle managers develop departmental tactical plans for achievements one to three years in the future. Tactical plans support strategic plans, and change more frequently than strategic plans. Operational plans cover achievements less than one year away. First-line managers and supervisors develop these plans to achieve objectives that support the tactical plans. Even expert forecasters cannot predict all future circumstances. To survive these unexpected incidents, managers develop guidelines for crisis management. Crisis management is the system for minimizing damage from a threatening situation. For example, hospital administrators develop plans for catastrophic events like major earthquakes, hurricanes, and airplane crashes. The goal of crisis management is to keep operations running smoothly during and after a crisis. The second management function is organizing. Organizing is the process of arranging resources to carry out the organization's plans. Organizing is difficult because of the company's constantly changing environment, industry, and faces. Since each week managers face new challenges, the function of organizing is never complete. The first task is to organize the corporate management structure. The management pyramid is a three-tiered division of the organizational structure. The top tier is comprised of top managers. Top managers are those who are responsible for setting strategic goals. They have the most power and responsibility in the organization. Top management includes C-level executives and vice presidents. The second tier in the management pyramid consists of middle managers. These people develop plans to implement the goals of top management and coordinate the work of first-line managers. Senior managers, and divisional managers fall into this category. An example of a middle manager is a bank branch manager. Middle managers function as team leaders in some organizations. The third tier, or bottom level of the pyramid is reserved for first-line managers. This includes department managers, some team managers, office managers, and supervisors. These people implement the plans developed by the top two tiers of managers. An example of a first-line manager is the Accounting department manager. Section Outline I. Introduction

A. Interpersonal roles B. Informational roles C. Decisional roles

II. The planning function

A. Understanding the strategic planning process 1. Develop a clear vision 2. Translate the vision into a mission statement 3. Develop forecasts

a. Qualitative b. Quantitative

4. Analyze the competition a. Differentiation b. Cost leadership c. Focus

5. Establish company goals and objectives B. Develop action plans

1. Tactical 2. Operational

C. Planning for a crisis III. Organizing function-Levels of Corporate hierarchy

A. Top managers B. Middle managers C. First-line managers

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Understanding the Functions and Roles... Section Review 6.2 Four Basic Functions of Management The Leading and Controlling Functions

Key Terms

• Leading • Motivating • EQ • Autocratic leaders • Democratic leaders • Laissez-faire leaders • Contingency leadership • Coaching • Mentor • Corporate structure • Corporate culture • Controlling • Quality • Standards • Qualitative • Quantitative • Control cycle • TQM • Participative management • Customer focus • Benchmarking

Case Studies

• eBay • Sunbeam • Rhone-Poulenc • Nokia • Geon • BWA

Summary Leading is the third function of management. It is the process of guiding and motivating people to work toward organizational goals. Meeting the needs of today's diversified groups is more difficult than satisfying the homogeneous groups of previous generations. Managers that excel at leading are able to influence and motivate employees through words and actions. Motivation is giving employees reason to perform at top quality and capacity while moving toward goals. Leaders often have effective interpersonal skills and high emotional quotients (EQs). The characteristics of a high EQ include:

• Self-awareness • Self-regulation • Motivation • Empathy • Social skill There are three leadership styles: autocratic, democratic, and laissez-faire. Today, democratic and laissez-faire leadership styles are gaining popularity. All leaders exhibit characteristics from one or more of these types.

Leadership Type Characteristic

Autocratic

• Makes decisions alone • Effective in quick decision-making • Discourages innovation and empowerment • Hands-on approach

Democratic

• Delegates authority • Makes slower decisions • Invites assistance for decision-making • Teamwork encouraged

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Laissez-faire

• Takes role of consultant • Fails if workers don't have same goals and standards as organization • Free-reign leadership - hands-off approach • Innovation is encouraged

Leadership style occurs along a continuum, ranging from boss-centered to employee-centered. If managers exercise greater authority, they are moving toward boss-centered leadership. If the manager allows employees to function independently, the manager is taking the employee-centered leadership approach. If a leader chooses the leadership type based on what is most appropriate for the situation, she is exhibiting contingency leadership. This is the most effective leadership style. Managers today are adopting two techniques to help their employees: mentoring and coaching. Coaching is helping employees reach their highest potential by:

• Meeting with them regularly • Discussing problems that hinder their ability to work effectively • Offering suggestions • Offering encouragement to overcome problems Mentoring embodies all the characteristics of coaching, and then takes an additional step. Mentors are experienced managers or employees with a wide network of industry colleagues who can explain office politics, serve as a role model for appropriate business behavior, and help other employees negotiate the corporate structure. Mentors are not necessarily direct supervisors. In fact, some agree that mentors are more effective if they are not in the direct chain of command with the mentee. Many business groups offer mentorship programs. SCORE, discussed in Chapter Four, is a form of a mentorship program. Managing change and building a strong organizational culture are two important managerial tasks. According to one study, about 70% of all change initiatives fail. Much of that failure is due to lack of preparation. Change in the workplace scares some employees and meets with resistance, so it is important to prepare employees for the change. Cultivating constant change on a small scale can prepare employees for larger changes. Regular and frequent communication is the key in change preparation. This helps build trust long before major change occurs. The organizational culture, or corporate culture, is a set of shared values and norms that support the management system and guide workplace behavior. Corporate culture influences how employees treat and react to one another. Controlling is the fourth management function. Controlling is the process of measuring progress against goals and objectives. Managers then correct deviations if the results are not as expected. Standards are the criteria for measuring the performance of the organization. How the actual product or service measures against that standard is the quality. The control cycle is important to the controlling function. The control cycle has four basic steps: 1. Set standards 2. Measure performance 3. Compare performance with standards 4. Take corrective action if needed The control cycle uses two types of performance measures: qualitative and quantitative. Quantitative measures are specific and numerical based. Qualitative measures are subjective, relying on opinion and intuition. The controlling function is important to total quality management (TQM). TQM is both a philosophy and a comprehensive, strategic management approach that builds quality into every process to improve customer satisfaction. The goal of TQM is to encourage continuous breakthrough improvements. There are four key elements in TQM: employee involvement, customer focus, benchmarking, and continuous improvement.

TQM Element Description

Employee involvement

• Involves every employee in quality assurance • Participative management-sharing ideas at all levels

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• People are the true drivers of improvement

Customer focus • Finding out what customers want • Develops long-term relationships with customers

Benchmarking

• Compares company's processes with industry standards • Rates manufacturing process, product development, distribution, and more • Analyzes role models to gain knowledge and techniques to improve company's products and services

Continuous improvement

• Ongoing effort to reduce defects, cut costs, slash production and delivery times, and offer innovative products • Small incremental changes will accumulate to big improvements

Section Outline I. Leading

A. What makes a good leader 1. Self-awareness 2. Self-regulation 3. Motivation 4. Empathy 5. Social skills

B. Adopting an effective leadership style 1. Autocratic 2. Democratic 3. Contingency

C. Coaching and mentoring D. Managing change E. Building a strong organizational culture

1. Company values 2. People 3. Community involvement 4. Communication 5. Employee performance

II. Controlling A. The control cycle

1. Level of quality 2. Setting standards 3. Measuring performance 4. Correct performance 5. Plan adjustment

B. Total quality management 1. Employee involvement 2. Customer focus 3. Benchmarking 4. Continuous improvement

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Understanding the Functions and Roles... Section Review 6.3 Management Skills

Key Terms

• Interpersonal skills • Technical skills • Communication • Administrative skills • Project management skills • Conceptual skills • Decision making

Case Studies

• Old Navy

Summary Managers use many skills to perform their jobs. There are three categories of management skills: interpersonal skills, technical skills, and conceptual skills. Interpersonal skills are required to understand other people and to interact effectively with them. Whenever managers communicate, negotiate, interact, or encourage, they are using interpersonal skills. Communication, one of the interpersonal skills, is the most persuasive. It allows a manager to perceive stockholders' needs, and increase productivity for that manager and the company. These skills are important to all levels of management and are the most important. The second management skills category is technical skill. This is the ability and knowledge to perform the mechanics of a particular job. Technical skills are most important at the lower levels of management. Included in the category of technical skills are administrative skills. Administrative skills are technical skills in gathering, data analysis, planning, and organizing. One example of administrative skills is project management (PM). PM is becoming a very important part of management that focuses on schedules, budgets, resource allocation, and timelines. Conceptual skills are the third category of management skills. Conceptual skill is the ability to understand the relationships of parts to a whole. These skills are particularly important to higher-level managers. Whenever a manager acquires and analyzes information, or develops plans to reach organizational goals, the manager is using conceptual skills. A key activity included under conceptual skills is decision-making. Decision-making is the process of: 1. Identifying a point where a decision should be made 2. Analyzing the problem 3. Weighing the alternatives 4. Choosing one of the alternatives 5. Implementing that alternative 6. Evaluating the results Section Outline I. Interpersonal II. Technical

A. Administrative B. Project management

III. Conceptual

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A. Recognize need for decision B. Identifying, analyzing and defining the opportunity C. Generating alternatives D. Selecting an alternative and implementing it E. Evaluating results

End of Chapter 6 Questions

1. What is the purpose of a mission statement? 2. Identify and explain the three types of managerial skills. 3. Define the four basic management functions. 4. What is the role that goals and objectives play in management? 5. Describe three leadership styles and explain why no one style is best 6. Briefly explain how total quality management (TQM) is changing the way

organizations are managed.

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Chapter 7: Organizing to Facilitate Teamwork and Communication Section Review 7.1 Specialization and Chain of Command

Key Terms

• Organizational structure • Organizational chart • Formal organization • Informal organization • Work specialization • Chain of command • Responsibility • Accountability • Authority • Delegation • Line organization • Line & staff organization • Span of control • Span of management • Flat organization • Tall organization • Centralization • Decentralization

Case Studies

• Wainwright Industries • British Petroleum • General Motors • U.S. Army • Catholic Church • General Electric The organizational structure is the framework that enables employees to work together productively. It allows adequate management to be provided for each group. Because of the organizational structure, employees know where to report and whom to ask for help. Often a company exhibits the formal organizational structure on an organizational chart. This is a diagram that traditionally shows boxes to indicate functions, with connecting lines to indicate relationships. The relationships can also be called the chain of command. This shows flow of authority, accountability, and responsibility. Authority is the power granted by the job description to make decisions, take actions, and allocate resources. Accountability is the duty to inform and update supervisors. Responsibility is the obligation to perform the job requirements and meet objectives. There are two common chain of command systems: line organizations, and line-and-staff organizations. If there is one clear chain of command with a clear line of authority from top to bottom, it is a line organization. This is the simplest. If there are functional groups like Human Resources and Consulting that support all departments, and the non-functional groups have the clear chain of command, then this is a line-and-staff organization. In a typical chart showing a line organization you will usually see the executive positions at the top of the organizational chart with span of management responsibility decreasing down the page. Small organizations normally have very simple organizational charts. Each person in the company is represented by a separate box. These charts may also indicate a function, like accounting, but do not clarify that the whole accounting department consists of one clerk. In the diagram below, there is the CEO who also takes the role of sales, and two employees. Larger organizations hide detail by grouping positions and teams, rather than showing individual jobs, based on work specialization. In this way, a very complicated organizational structure can appear simplistic to the casual viewer.

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The manager's supervisory responsibility is the span of control. If there are few levels of hierarchy, and managers have many employees to supervise, then this is a flat organization. If the organizational structure has many layers, often including departments, regions, areas, and divisions, each manager has few employees to supervise, and the employees are highly specialized, this is a tall organization. If work specialization is too narrowly defined, the employees become bored and production decreases. If work specialization is not defined narrowly enough, then production can decrease. Decision-making is either centralized or decentralized. When decision-making is reserved for the top layers of the organization, it is centralized. Strong authority should be concentrated at the top when a maintained focus on immediate goals is important. If managers delegate responsibility, allowing employees to make decisions, they are operating in a decentralized environment. Employees who are highly skilled generally require less supervision than others. There is another organizational structure that cannot be found on an organizational chart. It is called the informal organization. This is the network of interactions in the company. Alliances and rivalries are often evidence of this structure. Section Outline I. Organizational chart

A. Formal organization B. Informal organization

II. Work specialization III. Chain of Command

A. Line organization B. Line-and-staff organization C. Span of management

1. Flat organization 2. Tall organization

D. Centralization versus Decentralization Organizing and Working in Teams Section Review 7.2 Designing an Effective Organizational Structure Horizontal and Vertical Organizations

Key Terms

• Vertical organization • Departmentalization • Product division • Departmentalization by division • Process-complete • Process division • Departmentalization by function • Departmentalization by network • Departmentalization by matrix • Customer division • Virtual organization • Geographic division

Case Studies

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• Quaker Oats • Acer America • Black & Decker • Xerox

Summary Vertical organizations are traditional organizational hierarchies. Most companies choose this form of organization. Bureaucracies are typical vertical structures, also called tall organizations. In vertical organizations, silos of information often develop. It is difficult to encourage communication among these areas. Traditionally the FBI, CIA, INS, and Border Patrol have been information silos-rarely sharing relevant information among departments. President Bush created the Homeland Security Agency to give these departments a common parent in hopes of facilitating communication between them. It is too early to evaluate whether this action will produce desired results or only create a larger bureaucracy. Grouping in a vertical organization is organized by logical groups and subsets of those groups. This is also called departmentalization. There are four common types of departmentalization: function, division, matrix, and network. Departmentalization by function is highly centralized and specialized. A company that groups by function will have departments like Human Resources, Accounting, and R&D. Large companies are finding the disadvantages outweigh the advantages for them, so they are moving away from this departmentalization type to better compete with smaller companies. Advantages of departmentalization by function:

• Uses resources efficiently • Develops in-depth skills • Unifies top management's direction Disadvantages of departmentalization by function:

• Increases communication barriers among departments • Slows response to changes • Reduces effectiveness of planning for markets and products • Overemphasizes work specialization and narrowed focus • Reduces awareness of overall company goals If a company has groups based on customer type, product, major steps in a production process, or location, they are using departmentalization by division. These divisions contain all of the resources needed to meet their goals. For example, they will have support personnel that focuses only on one division's support needs. Advantages of departmentalization by division:

• React quickly to change • Deliver better service to customers • Top managers can focus on problem areas Disadvantages of departmentalization by division:

• Duplicated resources and functions increase company costs • Emphasizes division goals over company-wide goals • Increases competition between divisions

Type Division Description

Product • Grouping by product or product group • Each department can manage all activities to develop, produce, and deliver a particular product line

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Process • Also called process-complete • Based on major steps of a production process

Customer Division

• Grouped to best satisfy similar customers • Most customer-centric among departmentalized divisions

Geographic • Based on location of operations • Responds more easily to local customs, preferences and needs

Departmentalization by matrix brings a group of functional specialists together who share responsibility to achieve a goal. This group of specialists is considered a project team. This type of departmentalization allows a company to share resources among functions. Matrix departmentalization helps big companies function like little companies. Consistent communication is essential. Disadvantages can be divided authority between department managers and team leaders that can lead to power struggles. Departmentalization by network incorporates the use of workers outside of the company. Giving tasks to external companies is considered outsourcing. This creates a virtual organization, or a group that is linked by electronic communication like email and EDI. The biggest advantage is flexibility. A disadvantage could include the use of proprietary information outside of the company. Companies should ensure that copyrights and confidentiality agreements are in place. The objective of horizontal organizations is to create and deliver something of value to the customer. Horizontal organizations are the most customer-centric of all organizations. The biggest benefit of horizontal organizations is increased flow of information and communication between departments. Section Outline I. Vertical organization

A. Departmentalization by function B. Departmentalization by division

1. Product divisions 2. Process divisions 3. Customer divisions 4. Geographic divisions

C. Departmentalization by matrix D. Departmentalization by network

II. Horizontal organizations

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Organizing and Working in Teams

Section Review 7.3 Working in Teams (part one): Defining teams

Key Terms

• Team • Problem-solving team • Self-managed team • Functional team • Cross-functional team • Virtual team • Quality circle • Functional team • Command team • Vertical team • Horizontal team • Task force • Special-purpose team • Committee • Free riders • Groupthink • Synergy

Case Studies

• Microsoft • Mervyns • Land Rover • SEI Investments • Food Lion • Harley-Davidson • Pillsbury • Boeing • Saint Francis Hospital • American Express

Summary When two or more people collaborate to achieve a specific goal, they are functioning as a team. Teams rely on the concept of synergy-teammates can accomplish together more than they would individually. Leadership for teams is often appointed by senior management, or they can emerge naturally through teammate interaction. To make a team environment successful, clear objectives must be identified in advance. Management often gives teams incentives to perform. Examples of incentives are stock options, profit sharing, vacation days, and performance bonuses. Use of teams is increasing. Teams can be temporary or permanent, formal or informal. Eight team types are listed in the table below, but the five most common types of teams are problem-solving teams, self-managed teams, functional teams, cross-functional teams and virtual teams. The unusual aspect about team types is that a particular team can be listed in more than one of these eight categories: Advantages of teams:

• Interaction of teammates creates synergy resulting in better solutions • Increases acceptance of decisions • Improves creativity and energy of teammates • Fulfills employees' need for group acceptance • Reduces employees' boredom and stress • Increases employees' self-worth and dignity • Often increases efficiency and decreases costs for organization • Increases organizational flexibility and ability to compete Possible disadvantages of teams:

• Power in organization can be shifted • Fewer supervisors and managers are needed • Free-riders-teammates that do not contribute to team effort

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• Groupthink-pressures to conform to team values and decisions can intimidate teammates. Consequently, some options are discounted prematurely

Team Type Description

Problem-solving or Quality circle

• Comprised of five to 12 employees from a single department • Meet voluntarily to find ways to improve quality, efficiency, or the work environment • Recommend solutions submitted to management

Self-managed

• Manage an entire process or operation • Control the pace of their own work and priority of work assignments • Have little supervision • Can choose their own teammates

Functional or command or vertical

• Comprised of employees from a single functional department • Can include employees from several levels such as staff and managers • Based on organization's vertical structure

Cross-functional or horizontal

• Comprised of employees from different functional areas • Have different skills • Generate ideas to coordinate organizational units • Aid in development of company-wide policies

Task force • Comprised of employees from different departments • Temporarily work together to achieve goal

Special-purpose • Comprised of employees outside of formal hierarchy organization • Meet as temporary team • Is used when creative freedom is needed

Committee • Comprised of long-term team • Deals with regularly occurring events

Virtual

• Comprised of employees from different geographic areas • Rarely meet in person • Communicate through email, telecom and online conferences • Must be proficient in time and project management

Section Outline I. What is a team II. Types of teams

A. Problem solving teams / Quality circles B. Functional teams / Command teams / Vertical teams C. Cross functional teams / Horizontal teams

1. Task force 2. Special purpose 3. Committee

D. Virtual teams III. Advantages and disadvantages of teams

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Organizing and Working in Teams

Section Review 7.4 Working in Teams (part 2) - Characteristics and Development

Key Terms

• Task specialist role • Socio-emotional role • Dual roles • Non-participators • Forming • Storming • Norming • Performing • Adjourning • Cohesiveness • Norms • Conflict • Avoidance • Defusion • Confrontation

Case Studies

• Saturn

Summary A team's size affects its performance capabilities. For most projects, a team consisting of five to 12 members is optimal. If a group is too small, it will not have incentive to explore alternatives. If a group is too big, there is chaos. Members will find it difficult to bond, or find common interests and experiences that can make the team cohesive. Further, some members will feel excluded from decision-making, and therefore see no need to participate. There are four roles that team members take: task specialist, dual, nonparticipator, and socioemotional roles. If a member actively participates in accomplishing tasks, that person will take either the task specialist or dual role. Task specialists never get involved with team dynamics. They take the work-focused approach. The socioemotional and dual roles are engaged in social behavior. These teammates want to satisfy the needs of other teammates. The dual role team member usually makes an effective leader. The opposite of a dual role teammate is a non-participator. It is neither task nor social behavior motivated, and is not an encouraged role. It is important that the team does not have all teammates taking any one role. For example, if a team is comprised of all socioemotional members, then the teammates are happy, but no task work is completed. As a result, the team goals would not be reached. Teams that are effective also have these common elements:

• Clear sense of purpose • Open and honest communication • Creative thinking • Focused approach • Decisions by consensus There are five stages of team development: forming, storming, norming, performing, and adjourning. Teams usually work through the stages in order. As they move through the stages, teammates become more committed to team goals, and other team members. This is called developing cohesiveness. If there is an outside influence that requires high performance, for example competition with another team, then cohesiveness will likely be extremely high. A team with members comfortable with their individual abilities can be less cohesive by comparison. As cohesiveness increases, so does work quality. Along the path of development, teams create informal standards of conduct that guide team behavior-norms. These informal standards govern expected quality and acceptable actions and conduct. Norms can be established from the company's behavior standards, cultural standards, and teammates' explicit statements. In the second stage of team development-storming-team conflicts are likely to arise. Conflict can have positive or negative consequences for the team. If it takes attention away from important issues related to the team goals, then it

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is destructive. If it helps the team to establish priorities, objectives, or leadership structure, then it can be positive. There are several causes for team conflict:

• Competition for scarce resources • Responsibilities • Poor or inadequate communication • Differences in attitudes, values, or personalities • Power struggles There are three styles of resolving team conflict mentioned in your textbook. The first style of resolving team conflict is defusion. Attention is detracted from the differences by emphasizing similarities between the affected teammates. If the issue is difficult to resolve, then the entire team may be asked to give their opinions. For a particularly troublesome issue, responsibilities may be redefined or a manager might be consulted. The second type of team conflict is confrontation. The goal of this style is to talk through all conflicts as soon as they arise. Avoidance is the last way to handle team conflict. In this method, the problem is ignored. Instead of choosing between team conflict resolution styles, most leaders would prefer to prevent conflicts from arising. Conflicts can be minimized by:

• Establishing clear goals • Considering each team member • Identifying responsibility boundaries • Facilitating open, clear communication

Development Stage Description

Forming • Orientation period

Storming

• Member roles are established • Conflict and disagreement are common • Alliances are formed • Mission is evaluated

Norming • Conflicts resolved • Standards develop • Leader is acknowledged

Performing • Members are committed to team goals • Problems are solved • Maturity is evident

Adjourning • Issues are completed • Reviews are performed • Team is dissolved

Section Outline I. Characteristics of effective teams

A. Member roles 1. Task specialist role 2. Socio-emotional role 3. Dual roles 4. Non-participators

B. Characteristics 1. Clear purpose 2. Open communication 3. Creative thinking

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4. Focused 5. Decision by consensus

II. Five stages of team development A. Forming B. Storming C. Norming D. Performing E. Adjourning

III. Team conflict

A. Causes of team conflict B. How to resolve team conflict

End of Chapter 7 Questions

1. Discuss the function of a company's organization structure. 2. What are the concepts of accountability, authority, and delegation? 3. Define four types of departmentalization. 4. Are there any advantages or disadvantages of working in teams? If so explain… 5. Describe the five primary formats of cross-functional teams.

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Chapter 8: Producing Quality Goods and Services Organizing and Working in Teams Section Review 8.1

Key Terms

• Production • POM • Analytic system • Synthetic system • Mass production • Mass customization • Conversion process • Inputs • Transformation • Outputs

Case Studies

• Harley-Davidson • Anderson Windows • Meridian Golf

Whenever supplies are transformed into either a product or service, production has taken place. Naturally, the goal for production is to transform resources into a good or service for which there is a demand. Production and operations management (POM) refers to all activities involved in making goods or services. POM is not only production, but also the coordination of supplies, workers, facilities, transportation, and other related areas. Of course POM uses the four functions of management. The supplies, materials, time, energy, and labor a manufacturer takes to make a product are called inputs. The manufacturing process is called transformation because the manufacturer or service provider is changing-transforming or converting (conversion process) inputs into outputs. Outputs are the finished product or service. There are two types of conversion: analytic and synthetic. The analytic conversion system takes an input and transforms it into several outputs. If a dairyman takes a gallon of cream and converts it into a quart of milk and a pound of butter to sell, then he has only changed the form of the raw material; therefore, he used the analytic conversion system to create two products. The more common conversion system is synthetic. In the synthetic conversion system, several types of inputs are combined to create a single product. For example, a baker uses milk, cream, butter, flour, baking soda, and eggs to create a cake. This baker used the synthetic conversion process. An automobile manufacturer also uses a synthetic conversion process. The conversion process for a service operation is similar to that of a goods-producing operation in that both convert inputs to outputs. Production of service is more labor intensive, and has greater customer interaction.

Conversion Process Step Example

Input

• Land • Labor • Capital • Materials • Time • Information • Energy

Transformation

• Procedures • Assembly • Technology • Knowledge • Personal contact

Output • Goods • Services

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Large companies often produce large amounts of one product to sell at multiple locations. This is called manufacturing in "mass"-either mass production or mass customization. Mass production is using the same formula and format to produce one product. If every item mass manufactured looked and functioned exactly the same, it was mass produced. An example of mass production is the manufacturing of egg cartons. Each 12-count egg carton that one manufacturer produces functions exactly the same as the others produced. The first egg carton that was manufactured on Tuesday looks exactly like the hundredth egg carton that was manufactured that day. When Henry Ford manufactured the first Model-T automobiles he was quoted as saying, "You can have it in any color, as long as it's black." That is a classic mass production quote. Goods production results in higher output uniformity than service production. Now let's consider Dell's computer manufacturing. Each computer produced has the same basic parts, but each is customized based on what the customer wanted. For example one customer may want a bigger screen, while another customer would rather have more storage space. Since Dell produces its computers in mass but also customizes them, they are using mass customization. This is also considered "adding the personal touch." Mass customization produces customized goods or services through mass production techniques. A mass made-to-order product is also called batch-of-one. Mass customization is possible because of the advances in digital technology. Section Outline I. What is Production II. What is the conversion process

A. Analytic system B. Synthetic system

III. Mass production versus mass customization Producing Quality Goods and Services

Section Review 8.2 Designing and Improving Production

Key Terms

• Production forecast • Capacity • Capacity planning • Regional cost • Lead time • Production costs • Facility layout • Process layout • Functional layout • Product layout • Assembly-line layout • Cellular layout • Fixed-position layout • Routing • Scheduling • MPS • Gantt chart • PERT • Critical path • Optimistic estimate • Pessimistic estimate • Most likely estimate • Expected time estimate • Slack time • Dispatching • Robots • CAD • CAE • CIM • Hard-wired • Setup costs • FMS • AGV • Job shops • EDI

Case Studies

• Carnival • Green Gear Cycling • Chrysler • Boeing • Flexible manufacturing • Carrier

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Summary Production forecasts are estimates of how much of a company's goods and services must be produced to meet future demand. These forecasts are used to budget, plan, and schedule how to use resources they need to create the product. Creating the production forecast is one of the first steps a company should take to design their manufacturing process. Once a company determines how much future demand there will be, then they will measure that against how much they are capable of producing-the capacity. Capacity planning shows how the resources a company has can be used to meet the forecasted customer demand. To get a complete picture of capacity planning the company must consider many variables. For this reason, it can involve some of the most difficult decisions for production management. This planning is particularly difficult because:

• Accurate predictions of demand shifts are difficult to anticipate • Once long-term decisions are made, they are difficult to change • The potential of excess capacity and what to do with it must be addressed Where should a company locate its facilities? For a goods manufacturer, the primary consideration is low production costs. Each company should consider regional costs and availability of:

• Land • Construction • Labor • Taxes • Energy • Living standards • Transportation and shipping Service producers must look for a location close to their target customers. There are a number of customer-driven factors that they must consider. Market research will help them evaluate their potential customers. After the company decides on the facility location, then it must design how to arrange its facility-the facility layout. At first this may not seem like a task as important as production forecasts or capacity planning, but for a manufacturer, the facility layout can mean the difference between profit and loss. If the layout is designed effectively, then the product can be produced more quickly and efficiently. There are four typical layouts: process layouts, product layouts, cellular layouts, and fixed-position layouts.

Layout Description Process or Functional

Concentrates everything needed to complete one phase of processing in one place, including: personnel, specialized equipment, and resources.

Product or Assembly-line

Main production proceeds along a line of workstations. Materials and sub-assemblies feed into the line at several points. Flow of production is continuous. Services can also be organized by product.

Cellular Groups dissimilar machines into work centers. Allows for flexibility. Similar shapes or processing requirements are processed together.

Fixed-position Product is stationary, equipment and personnel come to the product. Used for very large objects like bridges and service production like consulting.

Routing is the determination of what steps should be performed in what order to produce the good or service. It is the path the work will take through the production facility. Scheduling is deciding how long each operation time takes. Issuing work orders and schedules to department heads and supervisors is called dispatching. A master production schedule (MPS) schedules what work will be completed. There are two tools that are commonly used in planning: Gantt charts and PERT charts. Gantt charts are a visual representation, in bar chart format, used to control schedules by showing how long each part of a process should take and when it should take place.

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PERT charts help a manager determine the optimal order of activities, expected time for project completion, and best use of resources. The longest possible path through the process is the critical path. PERT gives four projected times to project completion: most optimistic estimate, pessimistic estimate, most-likely estimate, and expected time estimate. Free time in the schedule is called slack time. Computers and robots have dramatically changed the face of production. Robots are any programmable machine that can complete a variety of tasks by working with tools and materials. They are often used for repetitive, strenuous, or dangerous tasks. There are four major improvements that computers have brought to the manufacturing area: computer-aided design, computer-aided engineering, computer-aided manufacturing, and computer-integrated manufacturing. Computer-aided design (CAD) uses computer graphics and mathematical modeling in the development of products. Prior to CAD, changes in design were time-consuming and costly. Designs can now be evaluated easily, and this allows faulty designs to be quickly eliminated prior to production implementation. Computer-aided engineering uses computers to test products without building an actual model. Virtual reality shows designers how finished products will look and operate before costly physical models are developed. Computer-aided manufacturing (CAM) is often coupled with the aided design: CAD/CAM. CAM uses computers to control production equipment. Using these systems together can allow geographically dispersed employees to work cooperatively. The highest level of computerization in operations management is computer-integrated manufacturing (CIM). All elements of production are integrated into one automated system. This includes design, engineering, testing, production, inspection, and materials handling. This helps control the facility by linking people, machines, information, and decisions. Traditional automated manufacturing equipment is only capable of handling one specific task. This makes it fixed or hard-wired. Each time a company must change a process, it faces setup costs. A more recent production system uses computer-controlled machines that can adapt to various versions of the same operation. This is called flexible manufacturing system (FMS). This links many programmable machines by conveyors called automatic guided vehicles (AGVs). Because each machine can change tools automatically, only a few signals from a central computer are required, dramatically reducing setup time and costs. Small machine shops that make dissimilar items or produce them at an irregular rate-job shops-are particularly suited for FMS. Electronic Data Interchange (EDI) is another technological development that has improved manufacturing. This transmits documents electronically using a specific format. This standardization saves time and paperwork between facilities or companies. More recently, a computer formatting called XML promises even further compatibility, standardization, and flexibility of formatted documents by using tags that identify data fields. Section Outline I. Designing the production process

A. Forecasting demand B. Planning for capacity C. Choosing a facility location

1. Regional costs 2. Transportation cost

D. Designing a facility layout 1. Process or functional layout 2. Product or assembly-line layout 3. Cellular layout 4. Fixed-position layout

E. Scheduling work 1. Master production schedule (MPS) 2. Gantt chart 3. Program evaluation and review technique (PERT)

II. Improving production through technology A. Computer-aided design and computer-aided engineering

B. Computer-aided manufacturing and computer integrated manufacturing C. Flexible manufacturing systems D. Electronic information systems

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Producing Quality Goods and Services

Section Review 8.3 Managing Production and Supply Chain; Outsourcing Manufacturing

Key Terms

• Purchasing • Inventory control • JIT • MRP • Perpetual inventory • MRP II • ERP • Quality control • Quality assurance • SQC • SPC • ISO 9000 • World class manufacturer • Inventory • Malcolm Baldrige Award • OEM • CEM • Supply chain • Supply chain management

Case Studies

• Toyota • Koley's Medical Supply • Allen-Edmonds • Chek Lap Kok • Trident • Honda • CEM • Volkswagen • Harley-Davidson • Solectron

Summary Operations management takes control after the designs and forecasting is complete. Managing and controlling the production process involves inventory management and quality assurance. Inventory consists of goods kept in stock for the production process or for sales to final customers. Managing that inventory effectively keeps the business profitable. Having too much inventory wastes money that could be earning interest in an investment. Having too little inventory will compromise the production process. A company must have enough supplies on hand to cover the period that elapses between placing the supply order and receiving materials. This is the lead-time. Purchasing raw materials, parts, components, supplies, and finished products needed to produce goods or services increases inventory. Inventory control:

• Determines the right qualities of supplies and products required • Tracks where those items are located There are three common inventory control systems: just-in-time, material requirements planning, and manufacturing resource planning. Perpetual inventory and ERP are variations of these systems.

Inventory Control System Description

Just-in-Time (JIT)

• Goal is to have only the right amounts of materials arrive at precisely the times they are needed and no sooner • Eliminates inventory and reduces waste • Places heavy burden on suppliers • Lean production achieved-do more with less • Reduced cycle time • Product factors affecting JIT include seasonal availability, unusual weights and sizes, and perishable products

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Material Requirements Planning (MRP)

• Method of getting the correct materials where they are needed, on time, and without carrying unnecessary inventory • Managers use computer programs to calculate when certain materials will be required, when they should be ordered, and when they should be delivered • Used by both large and small operations

Perpetual Inventory • A modified MRP systems • Computers monitor inventory levels and automatically generate POs when needed

Manufacturing Resource Planning (MRPII)

• Allows managers companywide to develop plans based on the same data • Tracks each step of production • Runs simulations that allow managers to test alternative strategies • Inputs include plans from marketing, management, finance, production, and inventory • Outputs include MPS, MRP, marketing forecasts, engineering plans, financial reports, and personnel planning

Enterprise Resource Planning (ERP)

• An extension of MRPII • Scope includes customer and supplier information • Improves production processes

Standards define the characteristics, functions, and degree of excellence (quality) a company requires for a finished, marketable product. A company's standards can be based on high or low quality products. Low quality or substandard products do not meet a company's minimum standards. Quality is subjective. One person may consider an item high quality, while another will call it substandard. A company should maintain the same quality level on their products to assure customers that level will remain consistent each time they purchase. If a product has inconsistent quality, then customers lose trust in the company. The customers will find an alternative product that is reliable. Managers must define measures of quality so that each employee that rates the product will do so consistently. There are two methods to measure quality: quality control and quality assurance. Both goods and services can benefit from these methods. Quality control is the routine checking and testing of a finished product for quality against an established standard. Quality assurance is more extensive than quality control, and is preemptive. Quality assurance (QA) is the system of policies, practices, and procedures implemented throughout the company to create and produce quality goods and services. The goal of QA is to make the manufacturing process consistent so that the final product is consistent. QA often includes statistical quality control (SQC). Managers can manage all phases of the production process to see if the process is functioning normally. SQC uses statistical process control (SPC) in implementation. SQC uses SPC as a procedure to take random samples of the process, and then put the results on a map called a control chart. Managers then can create estimates and identify any problems. Kaizen is continuous improvement involving all employees. The International Organization for Standardization (ISO) has established standards of quality through recordkeeping. The most commonly discussed standard is ISO 9000. Many industries rely on this standard. If a company wants to do business in Europe, it will most likely need the ISO certification. The latest versions of the ISO 9000 series focus on customer satisfaction and continuous improvement. "World-class manufacturers" is a phrase used to describe the level of quality and operational effectiveness that puts a company among the top performers in the world. In addition to ISO, there are other top quality awards. The Deming Prize is awarded in Japan and the Malcolm Baldrige National Quality Award is competition in the U.S. The supply chain is all aspects related to the process that begins with the raw materials and goes up through delivering the finished product. The supply chain includes not only manufacturing, but also includes interaction and processes at suppliers, partners, distributors, and related organizations that affect the creation and distribution of a product. Supply chain management is integrating all the facilities, functions, and processes associated with the production of goods and services, from suppliers to consumers to achieve maximum effectiveness and efficiency. It is

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a large and complex job. Companies use ERP to track the supply chain activities. Outsourcing is paying another company to perform tasks normally performed within the company. Contract electronic manufacturers (CEM) and original equipment manufacturers (OEM) are two types of manufacture outsourcing. There are advantages to outsource manufacturing:

• Allows companies to redirect the capital and resources spent on manufacturing to new product research and development, marketing, and customer service • Leverages contract manufactures that are industry specialists that have established high-tech facilities, thereby reducing startup costs Section Outline I. Managing and controlling the production process

A. Inventory management 1. Just-in-Time systems (JIT) 2. Material Requirements Planning (MRP) 3. Manufacturing Resource Planning (MRP II)

B. Quality Assurance 1. Statistical quality control and continuous improvement 2. Global quality standards

II. Managing the supply chain III. Outsourcing the manufacturing function

End of Chapter 8 Questions

1. Explain what operations managers do. 2. Outline the key tasks involved in designing a production process. 3. What is the role of computers and automation technology in production? 4. Explain the strategic importance of managing inventory. 5. Distinguish the difference among MRP,MRP II, and JIT systems. 6. Thoroughly explain the differences between quality control and quality assurance.

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Chapter 9: Motivating Today's Work Force and Handling Employee- Management Relations Section Review 9.1

Key Terms

• Morale • Motivation • Behavior modification

• Human relations • Positive reinforcement • Negative reinforcement

• MBO • Scientific management • Maslow's Hierarchy of Needs

• Hygiene factors • Motivators • Self-actualization

• Theory X • Theory Y • Theory Z

Case Studies

• UPS

Summary Employees need to feel valued, challenged, and respected. For employees, clear indicators are pay and benefits. A measure of employees' satisfaction is morale. Morale is the attitude individuals have toward their jobs and employers. High morale - a positive attitude - helps employees perform at higher levels. Creating an environment that promotes a positive attitude toward the job and employers is difficult. This chapter focuses on human relations. Human relations are the interactions among people to achieve both organizational and personal needs. A common motivator for employees is behavior modification. This is the systematic use of rewards and punishments to change human behavior. Two types of behavior modification are positive reinforcement and negative reinforcement. Positive reinforcement is associated with rewards. This can include receiving a bonus for a job done well. Negative reinforcement allows people to avoid unpleasant consequences by behaving in the desired way. For example, the threat of losing income will discourage most employees from breaking company rules. Negative reinforcement is much less effective than positive reinforcement. Negative reinforcement lowers morale, while positive reinforcement raises morale. Management by objectives (MBO ) is a motivational tool that structures and evaluates objective achievement. This system involves employees in their goal setting and evaluation. Employees participate in each of the MBO steps:

• Setting objectives for individual and department • Planning actions that will help to meet those objectives • Implementing those plans • Reviewing performance to see if those objectives were achieved There are several theories of motivation. Engineer Frederick Taylor developed scientific management . He studied employees at work. Since Taylor believed that money was the sole motivator for employees, he developed a piecework system. In this system, the more work an employee performed, the more that employee earned. Scientific management does not include other important motivators like personal satisfaction, initiative, and enrichment. There are four other theories described in your book that do consider additional motivators. Abraham Maslow developed a hierarchy, called Maslow's Hierarchy of Needs, to classify human needs. Maslow believes the manager should determine on which level the employee is, so the manager can properly motivate the

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employee. It is important to understand that people can be motivated by more than one level at a time. Many people are motivated by several levels.

Needs level Characteristics

Self-actualization

• Focus on fulfillment • Highest level of needs hierarchy

Esteem • Job title, recognition, promotion, benefits,

perks

Social • Work companions, relationships

Security • Insurance, retirement, family

Physiological • food, shelter, salary • Lowest level of needs hierarchy

Frederick Herzberg developed the Two-Factor Theory. He categorizes two factors associated with satisfaction: hygiene factors and motivators. Herzberg's hygiene factors are the aspects of the work environment that are associated with dissatisfaction. For example, he theorizes that an employee's compensation can be a hygiene factor. If pay is not adequate, it increases dissatisfaction. He believes that overcompensation cannot increase satisfaction - only eliminate the dissatisfaction. Herzberg's hygiene factors are similar to Maslow's lower level needs. Herzberg's motivators are aspects that can increase motivation. Herzberg's motivators include aspects such as achievement, recognition, and responsibility. His motivators strongly resemble Maslow's higher-level needs in the hierarchy. Douglas McGregor developed two management assumptions: Theory X and Theory Y. Theory X is a negative characterization of employees. Think of it as a big red letter X . In Theory X, McGregor states that employees are essentially lazy and must be forced to work. Successful motivation occurs only through extrinsic rewards. Theory X emphasizes authority. Theory Y has a positive view of employees. In Theory Y, McGregor believes that people want responsibility, are committed to goals, and consider work as essential to life. Theory Y emphasizes growth and self-direction. McGregor believes that while some employees require Theory X tactics, most operate best under Theory Y. William Ouchi developed Theory Z. This is a human relations approach that encourages treating all employees like family. Theory Z is the core idea behind self-directed work teams, quality circles, and other forms of participative management. Section Outline Understanding human relations Motivating Employees I. What is motivation

A. Behavior modification 1. Positive reinforcement 2. Negative reinforcement

B. MBO

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II. Theories of motivation

A. Maslow's Hierarchy of Needs B. Herzberg's Two-Factor theory C. McGregor's Theory X and Theory Y D. Ouchi's Theory Z

Motivating Today's Workforce and... Section Review 9.2 Keeping Pace with Today's Workforce

Key Terms

• Downsizing • Rightsizing • QWL

• Job enrichment • Job redesign • Burnout

• ADEA • Glass ceiling • Sexism

• Sexual harassment • Flextime • Telecommuting

• Job sharing • Attrition • Workplace diversity

Case Studies

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• Life saver • UPS • Cisco

• 3M • Marriot • Dewey & Levin

• Merrill Lynch • GeniusBabies • HP

• Pitney Bowes

Summary Some of the biggest problems that managers face are staffing issues. This includes finding and keeping employees, while rightsizing the company. Today, skilled labor is in demand. Unfortunately, there is also a shortage of skilled labor. The baby-boomers are aging, and more parents are opting to stay at home rather than competing in the job market. Though the number of college-educated people has doubled since the 1980s, the numbers still may not be adequate for the increasingly service-oriented economy in the U.S. Downsizing is the lowering the number of employees in a company. Organizations use layoffs and attrition to downsize. Rightsizing is determining the optimum number of employees with the right skills to benefit the company. This realigns the workforce into business growth areas. Upsizing is adding employees to key areas. Attrition is an unforced reduction of employees through resignation or retirement. Upsizing and downsizing create rightsizing. All of this job instability leads to reduced employee loyalty. In previous generations, companies acted as guardians for employees. They provided a secure place to work until retirement, then provided a pension to help cover costs after they retired. This does not often hold true today. The increased insecurity is also leading to employee stress. If employees consistently work overtime, they can develop burnout. Burnout is mental exhaustion that comes from prolonged stress or frustration. People that have burnout lack motivation and have lower productivity. Severe burnout can lead to clinical depression. Common causes of burnout are:

• Overwork • Job insecurity • Technological advances • Information overload A survey from Jobtrak.com found that 42% of all job seekers listed work-life issues as the most important when determining which new job to take. When there is balance between work, family, and recreation, employees are more productive and have higher morale. To appeal to those employees that value work-life as the top issue, Employers offer:

• Child-care assistance • Family leave • Flexible work schedules • Telecommuting QWL (quality of work life) is the overall environment that results from job and work conditions. There are two ways to improve QWL: job enrichment and job redesign. Job enrichment is reducing work specialization and making work more meaningful by adding to the responsibilities of each job. Job redesign is designing a better fit between employees' skills and their work to increase job satisfaction. Demographic challenges, including workforce diversity and gender-related issues, are changing the workforce. There are two things affecting workplace diversity . Legal and illegal immigrants comprise 13% of the nation's workforce. This is the highest percentage since the 1930s. The U.S. population is aging. The baby boomer generation is nearing retirement, and they make up 84% of the nation's workforce. Experts predict that most baby boomers will not retire until they are 70+ years old. Older employees usually require a higher salary, yet they find it more difficult to keep up with technological changes compared to their younger coworkers. Characteristics of younger workers include:

• More flexibility

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• More accepting of new technology • Better at learning new skills The Age Discrimination in Employment Act (ADEA) protects workers over 40 against discrimination. Administrator of this act is the Equal Employment Opportunity Commission (EEOC). They report that age discrimination claims are on the rise. According to one recent survey, older workers have these qualities:

• More experienced • Better judgment • Greater commitment to quality • More likely to show up on time • Less likely to quit Companies are helping employees become more accepting of diversity changes by implementing diversity initiatives including employee sensitivity or awareness training. This helps employees become aware of and help eliminate any discrimination issues. Gender-related issues are another change in the workforce. On average, women make 76% of what men make. Contrary to expectations, in the 1990s the gap widened. Only 12.5% of the senior executives at Fortune 500 companies are women, though women are 51% of the population. This is the glass ceiling, an invisible barrier of subtle discrimination that keeps women and minorities out of top business jobs. Sexism is gender discrimination, while sexual harassment is an unwelcome sexual advance, request for sexual favors, or other verbal or physical conduct of a sexual nature within the workplace. Approximately 21% of women and 7% of men reported being sexually harassed at work. Defined by EEOC, sexual harassment can be either:

• An obvious request for sexual favors with implicit reward or punishment related to work • Subtle creation of a sexist environment where employees feel uncomfortable Employers can defend against lawsuits if they have in place a:

• Written policy communicated to all employees • Education program • Clear policy for reporting incidents • Enforcement of the policy Alternative work arrangements are another way for companies to boost employee satisfaction. The most popular are flextime, telecommuting, and job sharing. Flextime allows employees a flexible arrival and departure time schedule. The company has core hours of mandatory attendance for all employees. Telecommuting is having the option to work at home. Often this includes communication with the office through email, telephone, and web conferences. Between 20-58% of the employers are offering some form of telecommuting. Those that telecommute boast job performance improvement up to 20%. Job sharing splits a single full-time job with benefits between two employees. Employees who have demanding personal issues, like young children, can continue to contribute to the company while meeting other obligations. Companies offer this option to valued, existing employees. Approximately 37% of employers offer this arrangement. Section Outline Keeping pace with today's workforce I. Staffing Challenges

A. Shortage of skilled labor B. Rightsizing

1. Employee loyalty 2. Employee burnout

C. Quality of work life

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II. Demographic changes

A. Workforce diversity 1. Influx of immigrants 2. Aging population 3. Diversity initiatives

B. Gender related issues 1. The glass ceiling 2. Sexual harassment

III. Alternative work arrangements A. Flextime

B. Telecommuting C. Job sharing

Motivating Today's Workforce and... Section Review 9.3 Working with Labor Unions

Key Terms

• Labor union • Collective bargaining • Mediation

• Arbitration • Strike • Picketing

• Boycott • Strikebreaker / Scab • Slowdown

• Sickout • Lockout • Injunction

Case Studies

• UPS • Wal-Mart • General Motors

• Cesar Chavez & UFW • United Airlines • American Airlines

Summary Labor unions are organizations of employees formed to protect and advance their members' interests. Labor unions in the U.S. are responsible for workers' compensation, child labor laws, overtime rules, minimum wage laws, and severance pay. Management discourages labor unions because unions often cause increased labor costs, and additional bureaucracy. Employees are more likely to join unions if they are dissatisfied with job conditions, think unionization can help, and do not mind the negative stereotypes associated with unions. Joining a union gives employees bargaining power. Many people believe that unions discourage initiative and individuality. A defense for management against unions is to pay employees fairly and treat them with respect. Collective bargaining is the process used by unions and management to negotiate employee contracts with management. The most common length of union contract is three years. The collective bargaining process involves four steps: 1. Preparing to meet

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• Union negotiators determine needs of, and stance for, employees • Management tries to anticipate union's demands and plan of action 2. Meeting • Both sides present demands • Union may call for a strike vote 3. Reaching an agreement • If bargaining is successful, then tentative agreement is reached • Union calls for vote of members on agreement 4. Voting and ratification • If members approve agreement, then union reps sign agreement • Otherwise, negotiators return to the meeting step for additional bargaining Labor negotiations are normally resolved quickly, but if negotiations between management and the union reach a point where neither side is moving, then the group might consider mediation. Mediation is the process for resolving a labor-contract dispute in which a neutral third party meets with both sides and attempts to steer them toward a solution. Both sides usually respect a mediator. The mediator can offer suggestions, but cannot require compliance. If the group needs a legally binding settlement, they may submit to arbitration. Arbitration is the process for resolving a labor-contact dispute in which an impartial third party studies the issues and makes a binding decision. There are two types of arbitration: compulsory and voluntary. If a government agency requires this arbitration, it is compulsory arbitration. If the group decides to summon an arbitrator, it is voluntary arbitration . Either management or the union may exert or want to exert additional pressure on the opposite side to leverage their negotiating power. Each side has separate tactics. The labor union's tactics include strikes, boycotts, publicity, slowdowns, and sickouts. Management's options include strikebreaking, lockouts, and injunctions. A strike is a temporary work stoppage by employees who want management to accept the union's demands. A major part of a strike includes picketing. Picketing is a strike activity in which union members march before company entrances to persuade non-striking employees to walk off the job and to persuade customers and others to cease doing business with the company. As a counteraction to a strike, management may replace the striking workers with strikebreakers . These are nonunion workers hired to replace striking workers. Union members call these people scabs . Another counteraction to a strike is management obtaining an injunction. This is a legal requirement directed by the court to prohibit certain actions by striking workers. Injunctions may require that strikers return to work. If a union is not ready to resort to the drastic option of a strike, it may call for a sickout or a slowdown. A sickout occurs when the majority of union members stay home from work for one or a few days, claiming illness. The union hopes the management will see how important the union employees are to the operation, and how devastating it would be if they were not available. In a slowdown , all union employees come to work, but they greatly reduce their productivity by slowing down all activities. This is the same type of threat as a sickout; both tactics are a threat of strike. Management can respond to a slowdown, sickout, or strike with a lockout. In this approach, management prevents union members from entering a business in order to force union acceptance of management's last contract proposal. A lockout is legal under these conditions:

• Union and management have come to an impasse in negotiations • It is a defense of a legitimate bargaining position • The company can hire temporary replacements as long as it has no anti-union motivation • Negotiations have been amicable The labor union may also use indirect tactics like boycotting or publicity. With these tactics, unions are attacking the company, rather than the negotiations. They are difficult for management to counteract. Boycotting is a union activity in which members and sympathizers refuse to buy or handle the product of a target company. The labor union can launch a publicity campaign, also called a corporate campaign, against the company or those affiliated with the company. These campaigns might include:

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• Sending a warning to investors about a company's financial worth • Staging rallies during peak business hours • Sending letters to charitable groups questioning the executives' motives • Handing out leaflets that allege safety violations • Distributing leaflets that allege health violations • Stimulating negative stories in the press Section Outline Working with Labor Unions I. Collective bargaining process

A. Meeting and reaching an agreement B. Exercising options when negotiations break down

1. Labor options a. Strike b. Boycott c. Publicity

2. Management options a. Strikebreakers b. Lockouts c. Injunctions

II. The labor movement today End of Chapter 9 Questions

1. Identify three important theories of employee motivation. 2. List four staffing challenges employers are facing in today's workplace. 3. What are three demographic challenges employers are facing in today's workplace? 4. There are three popular alternative work arrangements companies are offering their

employees discuss them. 5. Name three options that unions have when negotiations with management break down. 6. Identify three options management can exercise when negotiations with the union break

down.

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Chapter 10: Managing Human Resources Managing Human Resources Section Review 10.1 Planning for a Company's Staffing Needs

Key Terms

• HRM • Outsourcing • Job analysis

• Job description • Job specification • Part-time employee

• Temporary employee • Permatemps

Case Studies

• Starbucks

Summary Human Resource Management (HRM) is a specialized function of planning how to find employees, oversee their training, evaluate, and compensate them. HR departments are responsible for these six roles:

• Planning for staffing needs • Recruiting and hiring • Training and development • Appraising performance • Administering compensation and benefits • Overseeing changes in employment status Planning for staffing needs is the first of the six HR roles. It is important to keep the number of employees level with the work demand. Employing too few workers will result in customer dissatisfaction. Having too many employees reduces profit, and may result in layoffs. The planning function has two steps:

1. Forecasting

• Demand • Supply

2. Evaluating job requirements

• Perform job analysis • Write job descriptions • Write job specifications

Forecasting demand calculates the number and kind of employees that the company will require. Forecasting supply is estimating the availability of employees with the skills that the company needs. A company may find what they need among current employees. If the supply is not present within the company, then the HR manager must decide how to recruit employees. Options to traditional hiring of full-time employees are hiring temporary employees, hiring part-time employees, or outsourcing. Temporary employees are people hired by the company for a limited time to perform specific tasks.

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Once the tasks are complete, the company's obligation to those employees is complete. The Bureau of Labor Statistics forecasts the temporary market will grow 200% from 1997 to 2006. Technical fields comprise the fastest growing segment of temporary employees. Temporary employees include systems analysts, technical writers, accountants, doctors, recruiters, CEOs, and other diverse positions. In the mid-1990s, companies used temporary workers to fill occasional vacancies; today temporary workers are included in long-term plans. Some companies routinely require candidates to work on a contract or temporary basis before hired for full-time permanent employment. Almost 30% of workers employed by temp (temporary) agencies remain on job assignments for a year or more. These people are permatemps. Permatemps often perform the same work as permanent employees, but do not qualify for benefits like insurance. Outsourcing, first discussed in Chapter Eight, is another alternative to hiring full-time, permanent employees. The second step in human resource planning is evaluating job requirements. HR management studies the needs to determine the tasks required for each job. This is job analysis. HR representatives ask supervisors and current staff these questions to analyze job requirements:

• What is the purpose of the job? • What tasks are involved in the job? • What qualifications and skills are required? • Where will the work be performed? • How much public contact will be needed? • What is the level of stress the employee should expect? Once HR completes the job analysis, then HR develops a job description. This is a statement of the tasks involved in the job, and the expected work conditions. The HR will develop a statement describing the kind of person who would be best for a given job - including the skills, education, and previous experience that the job requires. This is the job specification . Section Outline I. Understanding what human resources managers do II. Planning for a company's staffing needs

A. Forecasting supply and demand 1. Part-time and temporary employees 2. Outsourcing

B. Evaluating job requirements

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Section 10.1 - Planning for a Company's Staffing Needs Key Terms

• HRM • Outsourcing • Job analysis

• Job description • Job specification • Part-time employee

• Temporary employee • Permatemps Case Studies

• Starbucks Summary Human Resource Management (HRM) is a specialized function of planning how to find employees, oversee their training, evaluate, and compensate them. HR departments are responsible for these six roles:

• Planning for staffing needs • Recruiting and hiring • Training and development • Appraising performance • Administering compensation and benefits • Overseeing changes in employment status Planning for staffing needs is the first of the six HR roles. It is important to keep the number of employees level with the work demand. Employing too few workers will result in customer dissatisfaction. Having too many employees reduces profit, and may result in layoffs. The planning function has two steps:

1. Forecasting

• Demand • Supply

2. Evaluating job requirements

• Perform job analysis • Write job descriptions • Write job specifications

Forecasting demand calculates the number and kind of employees that the company will require. Forecasting supply is estimating the availability of employees with the skills that the company needs. A company may find what they need among current employees. If the supply is not present within the company, then the HR manager must decide how to recruit employees. Options to traditional hiring of full-time employees are hiring temporary employees, hiring part-time employees, or outsourcing. Temporary employees are people hired by the company for a limited time to perform specific tasks. Once the tasks are complete, the company's obligation to those employees is complete. The Bureau of Labor Statistics forecasts the temporary market will grow 200% from 1997 to 2006. Technical fields comprise the fastest growing segment of temporary employees. Temporary employees include systems analysts, technical writers, accountants, doctors, recruiters, CEOs, and other diverse positions. In the mid-1990s, companies used temporary workers to fill occasional vacancies; today temporary workers are included in long-term plans. Some companies routinely require candidates to work on a contract or temporary basis

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before hired for full-time permanent employment. Almost 30% of workers employed by temp (temporary) agencies remain on job assignments for a year or more. These people are permatemps. Permatemps often perform the same work as permanent employees, but do not qualify for benefits like insurance. Outsourcing, first discussed in Chapter Eight, is another alternative to hiring full-time, permanent employees. The second step in human resource planning is evaluating job requirements. HR management studies the needs to determine the tasks required for each job. This is job analysis. HR representatives ask supervisors and current staff these questions to analyze job requirements:

• What is the purpose of the job? • What tasks are involved in the job? • What qualifications and skills are required? • Where will the work be performed? • How much public contact will be needed? • What is the level of stress the employee should expect? Once HR completes the job analysis, then HR develops a job description. This is a statement of the tasks involved in the job, and the expected work conditions. The HR will develop a statement describing the kind of person who would be best for a given job - including the skills, education, and previous experience that the job requires. This is the job specification . Section Outline I. Understanding what human resources managers do II. Planning for a company's staffing needs

A. Forecasting supply and demand 1. Part-time and temporary employees 2. Outsourcing

B. Evaluating job requirements

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Managing Human Resources Section Review 10.2 Recruiting, Hiring, and Training New Employees

Key Terms

• Recruiting • Job candidate • Headhunter

• Background check • Immigration Reform and Control Act • Orientation

• Integration

Case Studies

• Southwest Airlines • Delta Airlines • Wal-Mart

• Tires Plus • Circuit City

Summary Recruiting is the process of attracting appropriate applicants to an organization's jobs. This is the second role of HR. Recruiting matches job descriptions and specifications with candidates. Companies with excellent recruiting and retention policies provide nearly 8% higher return to shareholders than to those who have poor HR results. Recruiters are HR specialists who find the right employees for open company positions. Headhunters are recruiters who attract employees away from other firms. The fastest growing method of recruiting is internet advertising. Recruiters use both the company's website, and job posting boards like Monster, FlipDog, CareerBuilder, and Net-temps. Some of the popular methods that recruiters use are:

• Job fairs • Internal searches • Newspaper and internet advertising • Employment agencies • Union hiring halls • College campuses • Career offices • Trade shows • Referrals • Professional organizations The recruiter normally will use several methods to find a good group of prospective employees or candidates. HR can spend months on the six stages of the hiring process.

Stage Description

1. Application

Small number of candidates is selected from the hiring pool. This can be done by HR junior staff or by computer scanning program that searches on keywords.

2. Prescreen • Prescreening questions are asked to clarify background

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and discover any missing information • Communication skills are analyzed • Personality is evaluated • Skills tests may be required • Some candidates are eliminated

3. Interview

• HR conducts an in-depth interview • Higher-level positions may require several interviews with

managers, co-workers, and potential subordinates • This stage can take weeks • Some candidates are eliminated

4. Evaluation • Supervisor evaluates remaining candidates • All but one or two candidates are eliminated

5. Reference check

• Reference checks are performed • Background checks are performed • Credit checks and driving record investigations may be

required • Drug testing may be required

6. Selection • Supervisor selects best candidate • HR makes job offer

Employers are increasing the depth of prescreening employees with background checks. More than one million physical assaults and thousands of assaults occur in the workplace each year. Employers can be liable if they fail to prevent "preventable violence." Common background checks, listed in order of popularity are employment verifications, criminal records checks, drug screens, reference checks, education verifications, and motor vehicle record checks. Employers must follow state and federal regulations in relation to hiring. Employers must ensure compliance with EEOC by avoiding discrimination. The wording of application forms, interviews, and testing processes are some of the covered areas. Unless there is a valid occupational qualification involved, EEOC requires that employers avoid questions related to:

• Marital status • Age • Religious preferences • Citizenship • Sexual preference • Children • Home ownership • Union membership • Physical disability • School graduation dates The Immigration Reform and Control Act of 1986 forbids almost all U.S. companies from hiring illegal aliens. At the same time, this act forbids discrimination based on national origin or citizenship status. Obeying both parts of this act is tricky.

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Some HR managers administer tests to gauge the qualifications of applicants. These tests assess work attitudes, aptitudes, skills, and abilities. Some believe that these tests can be discriminatory. The most common pre-employment testing is the job skills test. Drug presence testing is also common because substance abusers have two to four times as many workplace accidents as people who do not use drugs. Over 40% of industry fatalities link to substance abuse. Other common prescreen tests include IQ testing, personality profiling, physical conditioning testing, mental competency testing, and drug presence testing. The third role of HR is training and development. When employees are first hired, they often attend a session or procedure for acclimating to the organization. This is the orientation program. The orientation can help the employee learn about the company:

• History • Values and culture • Structure and organization • Equal opportunity practices • Safety regulations • Standards of conduct and dress • Compensation and benefits • Work schedules Most companies offer additional training for continuing employees. The more employees participate in training, the more likely they will want to stay, because training gives them a sense of direction and group inclusion. Employees can receive training on soft-skills or technical subjects. HR offers soft-skills training. Another department usually handles the technical training, which can be even more important to the employees' career and integration to the company. Section Outline I. Recruiting, Hiring, and Training New Employees

A. The hiring process 1. Background checks 2. Hiring and the law 3. Testing

B. Training and development Managing Human Resources

Section Review 10.3 Administering Employee Benefits and Compensation

Key Terms

• Performance appraisal • 360-degree review • Compensation

• Wages • Fair Labor Standards Act • Salaries

• Incentives • Bonuses • Commissions

• Profit sharing • Employee benefits • Pension plan

• ESOP • Stock options • FLMA

• EAP • Cafeteria plans • Vest

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Case Studies

• Dell • Black & Decker • Con-Way

• United Airlines

Summary HR managers develop a system to evaluate employees objectively by set standards. This is a performance appraisal . The goal of performance appraisals is to improve employee performance. Employees need fast feedback so they can correct their deficiencies in a timely manner, so managers hold performance appraisals more often than in previous generations. The supervisor is often the only evaluator in performance appraisals, but the 360-degree evaluation provides feedback from peers and subordinates too. The biggest problem of performance appraisals is finding an accurate way to evaluate productivity. This is particularly difficult when employees work in teams. Compensation includes money, benefits, and services paid to employees for their work. Administering compensation and benefits is the fifth role of HRM. Any employee that receives compensation based on the number of hours worked or number of units produced is receiving wages. Employers in the U.S. must comply with the Fair Labor Standards Act of 1938 that sets a minimum hourly wage for most employees, and mandates overtime pay for employees who work longer than 40 hours per week. Most states have minimum wages laws to protect employees not covered by federal laws or that set a higher minimum wage. Fixed weekly, monthly, or yearly cash compensation for work is a salary. Salaried employees do not receive extra compensation for working more than 40 hours per week. Both wages and salaries are supposedly based on the contribution of a particular job to a company. Some CEOs in the U.S. are the best-paid employees on the planet. Incentives are cash payments to employees who produce at an optimal level or whose division produces at or above a preset level. There are three common types of incentive:

• Bonuses - cash payment, in addition to the regular wage or salary, that serves as a reward for achievement • Commissions - payments to employees equal to a certain percentage of sales made • Profit sharing - system for distributing a portion of the company's profits to employees

Employee benefits are compensation other than wages, salaries, and incentive programs. Common employee benefits include:

• Insurance - health, dental, disability • Vacation pay • Paid holidays • Pension plans • Discounts Companies offer benefits either in a fixed package, or as flexible benefits. Flexible benefits or cafeteria plans allow employees to pick which benefits are best for them, based on a maximum cost. Insurance is the most popular employee benefit. Despite that, only about 62% of employees work under a company health plan. The employees who do qualify for benefits often must pay a portion of the insurance premium. Companies often exclude temporary and part-time workers from receiving benefits to save costs. The federal government created the Social Security system after the Great Depression of the 1930s. This created basic support for those people who could not accumulate retirement money. The Social Security tax withheld in most paychecks pays for this benefit. At companies with more than 500 workers, 72% of workers have some form of company-sponsored retirement coverage. Pension plans are the most accepted company-sponsored retirement plan. Three pension plan types are popular: defined contribution plans, defined benefit plans, and 401(k) plans. ERISA is the federal agency that insures assets of pension plans.

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Plan Type Description

Defined contribution

• Similar to savings plan • Provides a future benefit based on annual employer

contributions, employee-matching contributions, and accumulated investment earnings

Defined benefit

• Less popular • Formula-based plans based on employee's retirement

age, final average salary, and years of service

401(k) • Allows eligible participants to contribute pretax dollars to a tax-qualified retirement plan

• Deferral of federal and state income taxes and social security taxes on contributions, up to $10,500, until time of withdrawal

• Employee has burden to set aside money and invest it wisely

• Many employees foolishly invest all into their employer's stock - example: Enron

Another employee benefit that some companies offer is the employee-stock-ownership plan (ESOP ). This program enables employees to become partial owners of the company. The company places a certain amount of its stock in trust for some or all of its employees, with each employee entitled to a certain share. Employees can later purchase the shares at a fixed price. Unfortunately, ESOPs are not effective performance motivators; employees cannot sell their shares until they retire or quit. A stock option is a contract that allows the holder to purchase or sell a certain number of shares of a particular stock at a given (exercise) price during a particular timeframe. Options typically vest, or transfer ownership over five years at a rate of 20% annually. In other words, an employee can purchase another 20% of the stock each year, or in five years the employee can purchase the whole amount they were allotted. If the stock market price exceeds the exercise price, the option holder can exercise the option and sell the stock at a profit. If the stock's price falls below the exercise price, the options are worthless. Stock options cost very little for the company to offer, and provide a long-term incentive to retain employees. Because employees have an interest in making the company succeed, employees will be more productive. Employers with 50 or more employees are required to provide up to 12 weeks of unpaid leave per year for childbirth, adoption, or the care of oneself, a child, a spouse, or a parent with a serious illness according to the Family Medical and Leave Act (FMLA ). The problem is that most people cannot afford this long period of unpaid leave. Other employee benefits related to the family include day-care and eldercare. According to the U.S. Labor Department, 48% of all employers with more than 100 workers now offer Employee Assistance Programs (EAPs). This program provides counseling to employees who need help on issues such as drugs, alcohol, finances, stress, family, and other personal problems. The average cost for EAP services runs from $12 to $20 per employee, but saves between $5 and $16 for each dollar spent in improved safety, productivity, and employee turnover. Section Outline I. Appraising employee performance II. Administering compensation and employee benefits

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A. Wages and salaries B. Incentive program C. Employee benefits and services

1. Insurance 2. Retirement benefits 3. ESOP 4. Stock options 5. Family Benefits 6. Other employee benefits

Managing Human Resources

Section Review 10.4 Overseeing Changes in Employment Status

Key Terms

• Termination • Layoff • Outplacement • Mandatory retirement • Worker buyout

Summary The sixth role for HR management is overseeing changes of employment status. There are four reasons that an employee's status may change. Employees may change positions within the same firm, retire, resign, or be fired.

There are several reasons for employers to fill jobs by promoting or reassigning employees rather than hiring new workers. The results of hiring from within gives a:

• Reward to employees • Productivity boost • Lift to morale • Demonstration that employees can advance The problem with transferring current employees is that those promoted to jobs beyond their capabilities will quit or be fired. For example, a productive technical person may not be suited for managing a technical group, because managing takes another skill set. If promoting the employee is a mistake, then the company risks losing the employee from the ranks. One way for the company to ease the transition from one job to another is to provide training and support. Termination is the dismissal of an employee through layoff or firing. Employers fire workers if they have violated company rules, procedures, or standards. They lay off employees for business or economic reasons. Many companies provide laid off employees with job hunting assistance. This can include outplacement aids like a resume writing course, career counseling, office space, secretarial help, or job skills testing. Some companies avoid large scale layoffs by cutting expenses like eliminating travel, freezing wages, postponing new hiring, implementing job sharing programs, or encouraging early retirement. Others adopt a no layoff, or guaranteed employment policy. Further, employees could move to other functions, accept reduced hours, and/or reduced pay.

The aging U.S. population presents two challenges: to give job opportunities to people who are willing and able to work, but are beyond traditional retirement age; and to find ways to encourage older employees to retire early. Mandatory retirement is the required dismissal of an employee who reaches a certain age. The Age Discrimination in Employment Act of 1967 outlawed discrimination of employees between 40 and 65 years. In 1986, Congress amended the act to also prohibit mandatory retirement for most employees and forbid discontinuing benefit contributions or accruals due to age. Alternatively, employers can offer older employees financial incentives to resign. Incentives

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include enhanced retirement benefits or one-time cash payments. Worker buyout is distribution of financial incentives to employees who voluntarily depart, usually offered to reduce payroll costs. Buying out a worker is more expensive than firing or laying off that employee. Section Outline 1. Overseeing changes in employment status

A. Promoting and reassigning employees B. Terminating employees C. Retiring employees

End of Chapter 10 Review Questions

1. List six main functions of human resources departments. 2. Tell of eight methods recruiters use to find job candidates. 3. Identify the six stages in the hiring process. 4. List seven popular types of employee incentive programs. 5. Name five popular employee benefits. 6. Describe five ways an employee's status may change.

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Chapter 11: Meeting Customers' Needs in the Changing Marketplace Developing Product and Pricing... Section Review 11.1

Key Terms

• Marketing • Customer service • Place marketing

• Cause-related marketing • Permission marketing • Need

• Wants • Exchange process • Transaction

• Utility • Form utility • Time utility

• Place utility • Possession utility • Marketing concept

• Cognitive dissonance • Marketing research • Database marketing

• Reference group • Situational factors • Focus group

• Relationship marketing

Case Studies

• Adobe • Galyan • Capital One

Summary The American Marketing Association defines marketing as planning and executing the conception, pricing, promotion, and distribution of ideas, goods, and services to create and maintain relationships that satisfy individual and organizational objectives. Marketers apply the term product to services, people, causes, organizations, places, and events. For example, place-marketing efforts attract people and organizations to a particular geographic area, and cause-related marketing identifies and markets a social issue, cause, or idea to selected target markets. Not all marketing is uninvited. Permission marketing asks customers for permission before sending them marketing messages. This table describes primary marketing relationships.

Marketing relationship Description

Products

Involves all decisions related to determining product: • Characteristics • Price • Production specifications • Market-entry date • Distribution • Promotion • Sales

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Customers

• Understanding customer needs and buying behavior • Creating customer awareness • Providing customer services • Maintaining relationships after sale is complete

Marketing involves an exchange between two parties - the buying and selling organizations. Marketing plays an important role in society by helping people satisfy their needs and wants, and by helping organizations determine what to produce. There are five core marketing concepts:

• Needs, wants, and demands • Products and services • Values, satisfaction, and quality • Exchange, transaction, and relationships • Markets A need represents the difference between a person's actual state and his or her ideal state. This state is the basic motivation for purchasing. Wants are more specific than needs. Wants are desirable in light of a person's experiences, culture, and personality. For example, you may need a drink, but you want a Pepsi. Perception governs people's wants. A transaction is an exchange between parties. The exchange process offers something of value in return for something else. Whenever a person makes a purchase, that person is casting a vote for that product's popularity. This helps to balance supply and demand. A utility is the power of a good or service to satisfy a human need. There are four utilities: form, time, place, and possession. Form utility occurs when consumer value converts raw materials and other inputs into finished goods and services. A time utility adds consumer value by making a product available at a convenient time. If a product is available in a convenient location, this is the consumer value of place utility . A possession utility is consumer value created when someone takes ownership of a product. A marketing concept is the approach to business management that stresses consumer needs and wants, seeks long-term profitability, and integrates marketing with other functional units within the organization. To implement the marketing concept, companies must have good information about what customers want. Today's customers are:

• Aware of market choices • Sensitive to price • Time sensitive - want fast delivery • Focused on convenience • Not tremendously brand loyal The buyer's decision-making process is predictable. The more expensive a product is, the more time they generally spend in this process. The decision-making process can consist of up to five steps: 1. Need recognition 2. Information search 3. Evaluation of alternatives 4. Purchase 5. Post-purchase evaluation Some consumers may choose to skip steps two and three. Other consumers work through step three and then decide

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to postpone the purchase. After the purchase, all consumers perform some post-purchase evaluation. This can be as simple as determining if the product works or may be much more detailed and include comparisons. After purchasing a product, the consumer may have buyer's remorse. Cognitive dissonance , or buyer's remorse, is the anxiety following a purchase that prompts a buyer to seek reassurance about the purchase. To combat this, marketers try to reinforce sales with guarantees, follow-up letters, and support service. The marketer wants the consumer to make the same choice next time. Factors that influence the buyer's decision process:

• Culture - shared attitudes and beliefs • Social class - different social groups have different standards • Reference groups - those with common interests • Self-image - belief that "you are what you buy" • Situational factors - current priorities Marketing research is the collection and analysis of information for making marketing decisions. Companies research the market to learn of consumers' changing needs. Popular tools of market research are: • Personal observations • Customer surveys • Questionnaires • Experiments • Telephone or personal interviews • Focus groups - focused interviews with 6-10 people Companies also gather customer-related data through database marketing. This is the process of building, maintaining, and using customer databases for the purpose of contacting customers and transacting business. Companies collect information for the databases through two-way, ongoing communication with consumers through email, websites, faxes, and toll-free telephone numbers. Customers, suppliers, and distributors also share information with companies. Relationship marketing is the focus on developing and maintaining long-term relationships with customers, suppliers, and distributors for mutual benefit. Companies work to maintain relationships with current customers because:

• Acquiring a customer can cost five times more • They buy more, and require less support • Satisfied customers are a great advertisement • Dissatisfied customers share bad experiences Shoppers share information with companies each time the shoppers use frequent-shopper discount cards. Each time the shopper shares information, the discount coupons they receive at checkout become more personalized. This is one-to-one marketing . There are four steps to putting an effective one-to-one marketing program together: 1. Identifying customers 2. Differentiating customers 3. Interacting with customers 4. Customizing the product Section Outline I. What is marketing?

A. Role of marketing in society 1. Exchanges and transactions 2. The four utilities

B. The marketing concept

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1. Understanding today's customers a. Buyer's decision process b. Factures that influence the buyer's decision

2. Marketing research and customer databases 3. Building relationships with customers

Developing Product and Pricing... Section Review 11.2 Planning Your Market Strategies

Key Terms

• Strategic marketing planning • Market share • Marketing strategy

• Market • Market segmentation • Demographics

• Geographic segmentation • Psychographics • Geodemographics

• Behavioral segmentation • Target markets • Positioning

• Marketing mix • Product • Price

• Distribution channels • Promotion

Case Studies

• Pep Boys • Motorola

• Southwest Airlines • General Motors

Summary The purpose of strategic marketing planning is to help identify and create a competitive advantage. A competitive advantage differentiates the product from rivals and makes the product more appealing to target customers. Once the strategic marketing planning is complete, HR managers organize the data into a marketing plan. Strategic marketing planning has three actions: 1. Examine current market situation 2. Assess opportunities and set objectives 3. Develop market strategy to reach objectives The first action in strategic marketing planning - investigating the current market situation - has four tasks:

• Review of performance • Evaluation of competition • Examination of internal strengths and weaknesses • Analysis of external environment

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Once reviewing performance and evaluating competition is complete, the next step is to examine internal strengths and weaknesses. This task tells marketing where the product needs improvement and what strengths to capitalize on. Internal analysis will tell the business whether to limit itself to opportunities where it already has strengths or to challenge itself to reach higher goals by gaining new strengths. Understanding strengths and weaknesses is also important for global expansion. The last task for investigation of the current market situation is to analyze the external environment. The external environment includes all influences beyond control of the product's supporters. External environment factors include: 1. Economic conditions 2. Natural environment 3. Social and cultural trends 4. Laws and regulations 5. Technology The second action in strategic marketing planning is to assess opportunities and set objectives. Marketing classifies opportunities into four types: 1. Market penetration - selling more of existing product in existing market 2. Product development - creating new products for current markets 3. Geographic expansion - Selling existing product in new markets 4. Diversification - Creating new products for new markets The opportunity assessment portion of action two is complete. Now the business must set objectives that are specific and measurable. The organization's portion of the total sales in a market is the market share. The ultimate goal for marketing is to increase market share. The third action in strategic marketing planning is to develop the marketing strategy, or the overall plan for marketing the product. To develop the marketing strategy the marketer must make three crucial decisions:

• How to divide the market into segments and niches • Which target markets to choose and what position to establish in those markets • How to develop a marketing mix as a pathway to markets A market is the people or businesses that need or want a product, and have the money to buy it. Market segmentation is a dividing of a total market into smaller, relatively homogeneous groups. Its objective is to group customers with similar characteristics, behavior, and needs. Firms target each market segment by offering products priced, distributed, and promoted differently. Further segmentations are called micro segments or niche markets. Marketers use these six factors to segment markets:

Market segmentation factor Description

Demographics

• Statistical analysis of a population • Subdivide customers according to age, sex,

income, etc. • Recent studies show demographics is a poor

behavior predictor

Geographics • Segmenting customers according to

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geographic location • Cities, counties, neighborhoods, states, or

countries can be the division

Psychographics

• Focuses on psychological traits • Issues examined are brand loyalties, habits,

preferences, values, and self-concept

Geodemographics

• Combines geographical data with demographic data to develop profiles of neighborhood segments

• Forty neighborhood types are identified uses ZIP codes

• System known as PRIZM

Behavior

• Categorization of customers according to their relationship with products or response to product characteristics

• Personal surveys are collected from new customers

Usage

• Commonly used in internet sites • Categorizes by session length, time per page,

category concentration, etc

Once marketers identify, then segment, the market, they can choose the target markets. Marketers choose markets by examining the:

• Size of market • Competition • Sales and profit potential • Compatibility with company resources and strengths • Costs • Growth potential • Risks Using promotion, product, distribution, and price to differentiate a good or service from those of competitors in the mind of the prospective buyer is positioning. Three popular strategies for reaching target markets are:

• Undifferentiated marketing - mass marketing ignores differences among buyers • Differentiated marketing - sells a variety of products to several target customers. Requires substantial resources • Concentrated marketing - targets only one market. The best strategy if funds are short The next task is to develop a marketing mix. The marketing mix is the four key elements of marketing strategy: product, price, distribution (place), and promotion - the four Ps.

Marketing Mix Element Characteristics

Products • Includes the product itself, brand name, design,

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packaging, services, quality, and warranty • Products can be tangible or intangible

Price

• Price paid by consumer for product • Determines the amount of income the company

will generate from sales of the product • Differentiates product from competition

Distribution, place, marketing channel or distribution channel

• Includes organized network of firms that move product from producer to consumer

• Directly affects all other marketing decisions

Promotion

• Includes all activities to communicate and promote products to the target market, including advertising, selling, public relations (PR), and sales promotion

• Can take form of direct or indirect communication

• Most often associated with marketing • Has profound impact on product's performance

Section Outline I. Planning your marketing strategies

A. Step 1: Examining your current marketing situation 1. Reviewing performance 2. Evaluating competition 3. Examining internal strengths and weaknesses 4. Analyzing the external environment

B. Step 2: Developing your marketing strategy 1. Dividing markets into segments 2. Choosing target markets 3. Positioning products 4. Developing the marketing mix

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Developing Product and Pricing... Section Review 11.4 Developing Pricing Strategies

Key Terms

• Price fixing • Price discrimination • Deceptive pricing

• Price elasticity • Skimming • Cost-based pricing

• Price-based pricing • Penetration pricing • Discount pricing

Case Studies

• Amazon.com • Adobe systems • Hyundai

Summary A company's pricing decision is influenced by:

• Manufacturing and selling costs • Competition • Needs of wholesalers and retailers who distribute the product • Marketing objectives • Government regulations • Consumer perceptions • Consumer demands Government regulations regarding product pricing include three classes: price fixing, price discrimination, and deceptive pricing. Price fixing is an agreement among two or more companies supplying the same type of products as to the prices they will charge. Price discrimination is the practice of unfairly offering attractive discounts to particular customers. Deceptive pricing is pricing schemes that are misleading. Price sensitivity is the measure of changes in price based on demand. Common pricing approaches are cost-based, price-based, skimming, penetration, and discounting.

Pricing approach Description

Cost-based or cost-plus

• Cost of producing good plus markup • Ignores demand and competitor pricing • Sacrifice of profit opportunity • Many companies fail from under-pricing with this

method

Price skimming

• Charging a high price for a new product during introductory phase, then reducing price later

• Recovers product development price quickly • Makes sense if 1) product's quality and image support a

higher price and 2) competitors cannot easily enter the

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market with competing products and undercut price

Pricing penetration

• Introducing a new product at a low price to build sales volume quickly

• Discourages competition • Can help expand the entire product category by attracting

customers who normally wouldn't buy • Makes the most sense if market is highly price sensitive

Price discounts

• Offering a reduction in price • Offered on temporary basis • Can start price wars • Builds loyalty among price-conscious consumers

Section Outline I. Developing pricing strategies

A. Cost-based and price-based pricing B. Price skimming C. Penetration pricing D. Price discounts

End of Chapter 11 Questions

1. Explain what marketing is. 2. Are there any benefits of learning about your customers? If so, name them. 3. List five factors that influence the buyer's purchase decision. 4. Identify the three steps in the strategic marketing planning process 5. Define market segmentation and review five factors used to identify segments 6. Identify the four basic components of the marketing mix

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Chapter 12: Developing Product, Pricing, and Promotional Strategies Developing Distribution and Promotional... Section Review 12.1

Key Terms

• Distribution strategy • Marketing intermediaries • Wholesalers

• Retailers • Distribution mix • Intensive distribution

• Selective distribution • Exclusive distribution

Case Studies

• REI • Black & Decker • Prentice Hall

Summary Distribution (place) is the third element in the marketing mix. The distribution strategy is a firm's overall plan for moving products to intermediaries and final customers. The companies that do not sell directly to the customer use middlemen. Marketing intermediaries are businesspeople and organizations that move goods and services from manufacturer to consumer. There are two types of intermediaries: wholesalers and retailers. Wholesalers sell to other firms for resale or for organizational use. Their customers either use the products or resell them to consumers. Retailers sell goods and services to individuals for their own use rather than for resale. Both wholesalers and retailers create these forms of utility: place utility, time utility, and possession utility. These marketing intermediaries:

• Provide an efficient process for transferring products from the producer to the customer • Reduce number of transactions • Ensure that goods and services are available at a convenient time and place for consumers • Match buyers and sellers • Provide market information • Provide promotional and sales support • Gather an assortment of goods • Transport and store the product • Assume risks • Provide financing The distribution mix is a combination of intermediaries and channels a producer uses to get a product to end users. The mix a company uses depends on the kind of product and the marketing practices of the industry. Building of an effective channel takes years. Channels for consumer goods are longer than those channels for organizational goods. The four primary channels for consumer goods are:

• Producer to consumer • Producer to retailer to consumer • Producer to wholesaler to retailer to consumer • Producer to agent/broker to wholesaler to retailer to consumer

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When establishing marketing channels, companies must consider four key factors: market coverage, cost, control, and channel conflict. Market coverage is the number of wholesalers or retailers that carry a product. There are three market coverage strategies. Intensive distribution is the market coverage strategy that tries to place a product in as many outlets as possible. Convenience products use this strategy. The second market coverage strategy is selective distribution. This strategy uses a limited number of outlets to distribute a product. This is best for shopping products. Exclusive distribution gives intermediaries exclusive rights to sell a product in a specific geographic area. Specialty products often choose this strategy. Cost is the second factor to consider when establishing market channels. By using intermediaries, manufacturers do not need large sales forces, warehouses, or transportation vehicles. This reduces product costs. Control, the third factor of establishing market channels, determines where, when, for how much, and to whom products are sold. Longer distribution channels mean less control for the manufacturer. Control is critical for reputation. High-priced specialty products are not going to benefit from selling products in low-price discount outlets. All channel partners should work together to create success for the product. Since each individual also has their own interests and businesses to represent, there can be conflicts. Channel conflicts can occur when: • Markets are saturated with intermediaries • Suppliers provide inadequate product support • Companies sell products via multiple channels that are each competing for buyers • Producers sell the product directly on the Internet Section Outline I. Developing distribution strategies

A. Understanding the role of marketing intermediaries B. Selecting your marketing channels

1. Length of distribution channels 2. Factors that influence channel selection

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Developing Distribution and Promotional... Section Review 12.2 Developing Distribution Strategies II

Key Terms

• Physical distribution • Logistics • Warehouse

• Distribution centers • Materials handling

Case Studies

• National Semiconductor • Provident

Summary Physical distribution includes all activities required to finish products from the producer to the consumer. Moving and distributing goods are important to success of the company. More encompassing, logistics is the planning, movement, and flow of goods and related information through the supply chain. The target for logistics is to move products quickly at a low cost while ensuring customer satisfaction. There are six steps in the physical distribution process: forecasting, order control, inventory control, warehousing, materials handling, and outbound transportation. All of the steps are interconnected so a change to one step will affect all others.

• Direct interaction with the customer • Affects customer service and reputation

Inventory control

• How much product to keep on hand • When to replenish supply of goods in inventory • How to allocate products to customers if orders exceed supply

Warehousing

• Warehouses can be holding facilities or distribution centers • Distribution centers are command posts for moving products to

customers - collected, stored, sorted, coded, and prepared for redistribution

Materials handling • Movement of goods within and between distribution centers • Includes storage methods and inventory tracking

Outbound transportation

• Cost of transportation is biggest single cost • Includes rail, truck, ship, plane, and pipeline • Factors considered are financing, sales, inventory size, speed, speed,

perishability, dependability, flexibility, and convenience.

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Section Outline I. Developing distribution strategies

A. Managing physical distribution 1. Order processing 2. Inventory control 3. Warehousing 4. Materials handling 5. Outbound transportation

B. Incorporating the Internet into your distribution strategies

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Developing Distribution and Promotional... Section Review 12.3 Developing Promotional Strategies I

Key Terms

• Promotional strategy • Persuasive advertising • Reminder advertising

• Push strategy • Pull strategy

Case Studies

• Webvan

Summary Promotional strategy is a statement or document that defines the direction and scope of the promotional activities that a company will use to meet its marketing objectives. The steps for developing a promotional strategy are:

• Setting promotional goals • Choosing the optimal market approach • Selecting promotional mix • Fine-tuning product mix Companies use promotion to achieve three basic goals: to inform, to persuade, and to remind.

Promotional goal Description

Inform

Potential customers need to know:

• Where items can be purchased • How much item costs • How to use the product

Persuade

• People need to be encouraged to purchase something new or switch brands

• Persuasive advertising - designed to encourage product sampling and brand switching

Remind

• Remind customer of product's availability and benefits • Reminders stimulate additional purchases • Reminder advertising - Intended to remind existing

customers of a product's availability and benefits

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An appropriate promotional strategy will accomplish these objectives:

• Attract new customers • Increase usage among existing customers • Aid distributors • Stabilize sales • Boost brand-name recognition • Create sales leads • Differentiate the product • Influence decision makers The product's nature, price level, and life cycle phase will affect which promotional strategy to choose. The first consideration is the product's nature. Organizational goods and consumer products usually require different promotional mixes because the audiences' wants are different. Personal selling is required to communicate the features of unfamiliar or sophisticated products, but familiar objects like toothbrushes need no personal contact. Direct, personal contact is important also in promoting customized services. The consumers want to believe that the seller understands their unique needs. The second influence on a promotional mix is price. Inexpensive items sold to a mass-market use advertising and sales promotion because of their low cost per unit. Personal selling is better suited for products with high price per unit. Higher priced items usually have a higher profit margin that will accommodate the added expense of personalized attention. The third influence on the promotional mix is the product's position in the life cycle.

• Introduction - Aimed at early adopters, these promotions inform the consumers about the new product. The goal is to build the distribution network so promotions are intensive. Awareness builds through selective advertising, sales promotion, and public relations.

• Growth - This stage builds upon the initial audience acceptance. Advertising and sales promotions broaden to reach a wider audience. Personal selling continues to expand the distribution network.

• Maturity - Since competition is at peak levels, the aim is to differentiate the product. Advertising dominates the promotional mix. Sales promotion is an important secondary tool, particularly for low-priced products.

• Decline - Advertising and selling focuses only on loyal customers. Activity declines. The market approach should consider if the focus on marketing efforts will be toward intermediaries or customers. An intermediary focus should use a push strategy. This strategy is a promotional approach designed to motivate wholesalers and retailers to push a producer's products to end users. A customer focus should use a pull strategy. This strategy stimulates customer demand, which then exerts pressure on wholesalers and retailers to carry a product. Section Outline I. Promotional strategies

A. Setting your promotional goals B. Analyzing product variables C. Deciding on your market approach

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Developing Distribution and Promotional... Section Review 12.4 Developing Promotional Strategies II Key Terms • Personal selling • Advertising • Promotional mix

• Direct mail • Telemarketing • Direct marketing

• Institutional advertising • National advertising • Product advertising

• Cooperative advertising • Media • Local advertising

• Sales promotion • Consumer promotion • Media mix

• Point-of-purchase display • Cross-promotion • Coupons

• Specialty advertising • Trade promotions • Premiums

• Public relations • News release • Trade allowance

• IMC • News conference

Case Studies

• Gillette • Schering-Plough • Owens-Corning

• Glaxo Wellcome PLC • Ben & Jerry's • Floorgraphics

• Bridgestone/Firestone

Summary As we discovered in the last section, many factors influence the promotional mix. Marketers use five activities to reach customers: personal selling, advertising, direct marketing, public relations, and sales promotion. The combination of these activities is the promotional mix. Personal selling is any in-person communication between a seller and one or more potential buyers. This can include communication face-to-face, by telephone, or through interactive media. The purpose of this communication is to make sales and build relationships. Because this is immediate interaction with the customer, the seller can adjust the message based on the audience's specific needs, interests, concerns, and reactions. The disadvantage is the high cost. For face-to-face selling, the cost averages $170 per visit. Lower priced items may take one sales call, but the high-end items sold to organizations may take several calls over months. There is a seven-step method to personal selling:

• Prospecting • Preparing • Approaching • Presenting • Handling objections • Closing • Following up Advertising and direct marketing are two common promotional mix elements. Advertising is paid, non-personal communication to a target market from an identified sponsor using mass communications channels. Direct marketing is communication other than personal sales contacts designed to affect a measurable response in the form of an order,

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a request for further information, or a visit for product information. Both advertising and direct marketing have three objectives:

• Create product awareness • Create and maintain the product's image • Stimulate customer demand Section Outline I. Developing promotional strategies

A. Selecting your promotional mix 1. Personal selling 2. Advertising and direct marketing 3. Direct marketing vehicles 4. Advertising categories 5. Sales promotion

a. Customer promotion b. Trade promotion

6. Public relations B. Integrating your marketing communication

End of Chapter 12 Questions

1. Describe each of the four stages in the life cycle of a product. 2. What are three levels of brand loyalty? 3. List seven factors that influence pricing decisions. 4. Identify the five basic categories of promotion. 5. Explain the use of integrated marketing communications. 6. What are the differences between push and pull strategies of promotion?

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Chapter 13: Developing a Distribution Strategy Managing Financial Information and... Section Review 13.1 What is Accounting?

Key Terms

• Accounting • Financial accounting • Management accounting

• Bookkeeping • Cost accounting • Tax accounting

• Financial analysis • Private accounting • Controller

• CPA • CMA • Public accountants

• Audit • GAAP • Internal auditors

• IAS • FASB

Case Studies

• PeopleSoft • Andersen

Summary Accounting is the measuring, interpreting, and communicating financial information to support internal and external decision-making. Bookkeeping is the clerical aspect of accounting, including recordkeeping. There are two purposes of accounting:

Accounting division Purpose

Managerial accounting

Helps managers and owners plan and control a company's operation

Financial accounting

Helps outsiders evaluate a business:

• Suppliers and lenders want to know if business is creditworthy

• Investors and shareholders want to know business profit potential

• Government agencies want to evaluate tax accounting

For accounting information to be useful, it must be accurate, objective, consistent over time, and comparable to information supplied by other companies. The controller is the highest-ranking accountant in a company, responsible for overseeing all accounting functions. There are several accounting specialties:

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Accountant type Description

Cost accountant Focuses on the calculation of manufacturing and storage costs of products for use or sale in a business

Tax accountant Focuses on tax preparation and tax planning

Private accountant or corporate accountant

In-house accountant employed by organizations and businesses other than a public accounting firm

Public accountant Professional who provides accounting services to other businesses and individuals for a fee - they are independent of their clients

CPA

Professionally licensed accountant who has met certain requirements for education (120 to 150 semester hours of college-level course work) and experience and who pass a comprehensive examination

CMA An accountant who has fulfilled the requirements for certification as specialist in management accounting

Auditor Person who evaluates the fairness and reliability of a client's financial statements

Financial analyst Person who evaluates a company's performance and analyzes the costs and benefits of a strategic action

Publicly traded companies in the U.S. file audited financial statements with the SEC (Securities and Exchange Commission). The people performing the audits are external auditors or CPAs. GAAP (generally accepted accounting principles) are the professionally approved U.S. standards and practices used by accountants in the preparation of financial statements. For SEC consideration, GAAP is used. Using this standard makes it possible to compare one company with another. The Financial Accounting Standards Board (FASB ) is responsible for establishing GAAP. Foreign companies that list their securities on a U.S. stock exchange must convert their financial statement to GAAP. The international organization that sets global accounting rules, called International Accounting Standards Committee (IASC), sets global standards until 2001. Now, the International Accounting Standards Board (IASB) develops international accounting standards. Accountants working with financial data consider three basic concepts: fundamental accounting equation, double-entry bookkeeping and the matching principle. The accounting equation is: Assets - Liabilities = Owner's equity The double-entry bookkeeping system is a way of recording financial transactions. It requires two entries for every transaction so that the accounting equation stays in balance. The matching principle requires that expenses incurred in producing revenue be deducted from the revenues that they generate during an accounting period. This gives an accurate picture of the profitability of a business. Accountants match revenues to expenses by using the accrual basis of accounting. When a sale takes place, accountants record revenue. Expenses are recorded when they occur, instead of when they are paid. This focuses on the economic substance of the event instead of the movement of cash. Public companies are required to keep books on the accrual basis. Alternatively, the cash basis accounting method records revenue when the company receives payment or when the company pays an expense. Personal checkbooks work on the cash basis method. Depreciation is the accounting procedure for systematically spreading the cost of a tangible asset over its estimated useful life. New cars depreciate significantly as soon as the new owner drives it home. This means that if the new car owner would try to resell the car one day after purchase, she could not expect to receive the same value as she paid.

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Section Outline I. What is accounting?

A. What accountants do B. Rules of accounting

1. How strict is GAAP? 2. The changes ahead

II. What are the Fundamental Concepts? A. The accounting equation

B. Double-entry bookkeeping and the matching principle Managing Financial Information and... Section Review 13.2 How are Financial Statements Used?

Key Terms

• Close the books • Balance sheet • Calendar year

• Fiscal year • Current assets • Fixed assets

• Current liabilities • Long-term liabilities • Lease

• Owner's equity • Retained earnings • Income statement

• Revenues • Expenses • Net income

• Cost of goods sold • Gross profit • Selling expenses

• General expenses • Statement of cash flows • Trend analysis

• Ratio analysis • Profitability • Return on sales

• ROI • Earnings per share • Liquidity ratios

• Working capital • Current ratio • Quick ratio

• Activity ratios • Inventory turnover ratio • Accounts receivable turnover ratio

• Debt ratio • Debt-to-total-assets ratio

Case Studies

• Computer Central

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Summary The accounting process consists of the following steps: 1. Transaction occurs which is 2. Recorded in journal then summarized to 3. Prepare budgets, reports, and financial statements after closing the books Closing the books is the act of transferring net revenue and expense account balances to retained earnings for the period. Once the books are closed, then accountants can make sense of the numbers by creating financial statements. There are three primary reports:

• Balance sheet • Income statement • Cash flow

These three documents provide information about an organization's financial strength and ability to meet current obligations, the effectiveness of its sales and collection efforts, and its effectiveness in managing its assets. Organizations and individuals use financial statements to:

• Spot opportunities • Discover problems • Make business decisions • Assess a company's past performance • Calculate an organization's current condition • Evaluate a company's future prospects The balance sheet is a statement of a firm's financial position on a particular date. The balance sheet is also a statement of financial position. It shows the balance between the assets on one side of the equation, the liabilities and owners equity on the other side. A change on one side of the equation balances a change on the other side. Normally companies prepare a balance sheet once a year. This occurs at the end of the calendar year, or the company's fiscal year. A fiscal year is 12 consecutive months beginning on the same month each year. The federal government's fiscal year begins in September. Reading the balance sheet can tell you:

• The size of the company • The major assets owned • Any asset changes occurring recent periods • How company's assets are financed • Any major changes that have occurred in the company's debt and equity in recent periods An asset is something owned by the company that can generate income. This could be cash, inventory, supplies, real estate, equipment, etc. There are two types of assets: current assets and fixed assets. A current asset is cash or another item that can convert to cash within one year. A fixed asset is a long-term investment in buildings, equipment, furniture, and any other tangible property to help run the business for a period longer than one year. The balance sheet lists assets in descending order of liquidity, so current assets appear before fixed assets. The balance sheet shows liabilities after the assets because they represent claims against the company's assets. Liabilities appear in order of the due date; therefore, a liability due next month appears above one that is due next year. There are two types of liabilities: current and long-term. Each category shows a subtotal. The differentiation between current and long-term liabilities is the one-year mark. Current liabilities are due in less than one year. One current liability category is accounts payable. This is the money the company owes its suppliers, as well as money it owes vendors for miscellaneous services. Another current liability is short-term financing which consists of trade credit and commercial paper. Current liabilities also include accrued expenses. Long-term liabilities include loans, leases, and bonds. A lease is a contract that obligates the user of an asset to make payments to the owner of the asset in exchange for using it.

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Owners' equity is the third component of the basic accounting equation. When added to liabilities, it will equal the assets. Sole proprietorships list owner's equity under the owner's name with the amount. Small partnerships list each partner's share of the business separately, and large partnerships list the total of all partners' shares. Shareholders' equity for a corporation presents the amount of common stock that is outstanding. Shareholders' equity includes retained earnings - the portion of the shareholders' equity earned by the corporation but not distributed to its owners in the form of dividends. Retained earnings build the cash reserves for future asset purchase, and finance future growth. The income statement is the financial record of a company's revenues, expenses, and profits over a given period, usually a year. The income statement summarizes revenues and expenses. Revenue is the amount earned from sales of goods or services and inflow from miscellaneous sources such as interests, rent, and royalties. Expense is the cost created in the process of generating revenue. Expense and income tax subtracted from revenues show the actual profit - the net income . Expense is the cost of doing business. It includes both direct costs and indirect costs. The statement of cash flows shows how much cash the company generated over time and where it went. It reveals the increase or decrease in the company's cash for the period and summarizes the sources of that change. There are three parts in the statement of cash flows:

• Cash flows from operating activities • Cash flows from investing activities • Cash flows from financing activities Trend analysis is comparing financial data from one year to another. Using ratio analysis is one way to spot trends. Ratio analysis is the quantitative measure to evaluate a firm's financial performance. There are three key concepts: no individual ratio can show the financial picture of a company, ratios only give a general picture of the company's financial health, and ratio results should measure near industry averages. There are four financial category ratios:

• Profitability - Ratios that measure overall financial performance of a firm • Liquidity - Ratios that measure a firm's ability to meet its short-term obligations when they are due • Activity - Ratios that measure the effectiveness of the firm's use of its resources • Leverage or debt - Ratios that measure a firm's reliance on debt financing of its operations

Financial Ratio Formula Description

Accounting equation Assets = Liabilities + Owners' equity

• Assets - Anything of value owned by company • Liabilities - Claims against assets • Owners equity - Amount belonging to owner

after obligations are met

Return on sales or profit margin Net income / Net sales

• Most common profitability ratio • How well a company generated profits out of

sales

Return on equity or Return on investment (ROI) Net income / Total owners equity

• Profitability ratio • Net income earned on owner's investment

Earnings per share Net income / total owners' equity

• Profitability ratio • Profit earned per share outstanding

Current ratio Net income / avg. # of shares outstanding

• Liquidity ratio • Whether a company can pay bills

Working capital • Liquidity ratio

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Current assets - current liabilities • How much cash is available for expenses • Can be misleading as it may include value of

slow-moving inventory

Quick ratio or Acid ratio Current assets - (Inventory / current liabilities)

• Liquidity ratio • Whether a company can pay bills without

selling inventory • Total of 1.0 is ok, 2.0 is a safe risk for short-

term credit

Cost of goods sold (COGS) Beginning inventory + Net purchases - Ending inventory

• Activity ratio • Cost of producing or acquiring a company's

products for sale during a given period

Inventory turnover COGS / Average inventory

• Most common activity ratio • The ideal ratio varies between industries • How well a company manages inventory

Accounts receivable turnover Sales / Average accounts receivable

• Activity ratio • How well current credit and collection policies

are working

Debt to equity Total liabilities / Total equity

• Leverage ratio • Lenders believe the lower the ratio, the more

secure the company • Low level of debt represents low growth rate • How much business is financed by debt and

equity

Debt to total assets Total liabilities / Total assets

• Leverage ratio • Should not exceed 50 percent of total assets

value • What percentage of total funds is provided by

creditors

Section Outline I. How are financial statements used?

A. Understanding financial statements 1. Balance sheet

a. Assets b. Liabilities c. Owners' equity

2. Income statement 3. Statement of cash flow

B. Analyzing financial statements

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1. Trend analysis 2. Ratio analysis 3. Types of financial ratios

a. Profitability ratios b. Liquidity ratios c. Activity ratios d. Debt ratios

Managing Financial Information and... Section Review 13.3 What Does Financial Management Involve?

Key Terms

• Financial management • Financial plan • Marketable securities

• Working capital accounts • Budget • Financial control

• Capital investments • Capital budgeting

Case Studies

• PeopleSoft

Summary The major responsibilities of financial managers are to develop a financial plan, improve cash flow, develop budgets, set financial controls, and budget capital. is the effective acquisition and use of money. In order to manage finances properly, a company must have a financial plan. This is a forecast of financial requirements and the future financing sources. Financial management focuses on cash flows. Companies with relatively high accounting profits generally have relatively high cash flows. Financial managers improve a company's cash flow by monitoring the working capital accounts :

• Cash • Inventory • Accounts receivable • Accounts payable Common techniques used to improve cash flows in working capital accounts are: • Shrinking accounts receivable collection periods

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• Dispatching bills on a timely basis • Paying bills no earlier than necessary • Controlling level of inventory • Investing excess cash to earn interest Aggressive financial managers also use these electronic cash management techniques: • Move cash between accounts on a daily basis • Invest excess cash on hand in short-term investments called marketable securities Marketable securities include stocks, bonds, money-market funds, and other investments that can convert into cash quickly. They are interest-bearing or dividend-paying investments. Marketable securities are usually contingency funds. Most managers invest these funds in relatively risk-free investments like government securities or well-grounded companies. Financial managers are also accountable for developing a budget. This is a planning and control tool reflecting expected revenues, operating expenses, and cash receipts and outlays. It is the financial blueprint. Accountants provide most data for the budgets because they understand the company's operating costs. Once the financial manager develops the budget, the manager compares actual results to projections. The variances give the manager an idea of what corrective action, or financial control, to take. The master operating budget: • Sets a standard for expenditures • Provides guidelines for controlling costs • Offers an integrated and detailed plan for the future Capital budgeting is the process for evaluating proposed investments in select projects that provide the best long-term financial return. Financial managers do this to develop capital budgets and plan for the firm's capital investments. Before the financial manger makes investments, the manager must decide:

• Whether to make capital investments • Which capital investments to make • How to finance those investments made Section Outline I. What does financial marketing involve?

A. Developing and implementing a financial plan B. Monitoring cash flow C. Developing a budget

End of Chapter 13 Questions

1. Explain what a distribution channel is. 2. Discuss how the internet is influencing distribution channels. 3. Differentiate between selective and exclusive distribution strategies. 4. Explain how wholesalers and retailers function as intermediaries. 5. Describe the growth in non-store retailing and identify common types of non-store

retailers. 6. List the five major modes of transportation used in physical distribution.

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Chapter 14: Analyzing and Using Financial Information Understanding Banking and Securities

Section Review 14.1 Money and Financial Institutions

Key Terms

• Money • Currency • Demand deposits

• Time deposits • Checks • Credit cards

• Debit cards • Smart cards • NOW account

• Passbook savings account • CD • Money-market

• Commercial banks • Thrifts • Credit unions

• Finance companies • Insurance companies • Brokerage firms

• Line of credit • ATM • EFT

• Community bank

Case Studies

Currency includes bills and coins that make up a country's cash money, while money is anything generally accepted as a means of paying for goods and services. Money exists in three forms: currency, demand deposit, and time deposit. To be an effective medium of exchange, money must have these characteristics:

• Divisible • Portable • Durable • Difficult to counterfeit • Stable value Checking accounts are demand deposit - money that customers use anytime, whereas time deposits are bank accounts that pay interest and require advance notice before customers can withdraw the money. Savings accounts are time deposit accounts. Money in savings accounts can be withdrawn at any time, but may be subject to fees. The most common type of savings account is the statement savings account, also called the passbook savings account. This type of account earns nominal interest, but offers the most flexibility for users. A money-market savings account earns more interest, but has restrictions such as a limited number of withdrawals per month. A certificate of deposit (CD) earns even more interest than a money-market account, but again it has more restrictions. Money in a CD remains for a set period. Early withdrawal presents a penalty fee. Credit cards are small plastic pieces that allow users to buy products immediately with a short-term loan. For that convenience, credit card companies charge a high interest and annual fees for any balance remaining in the account after the monthly books close. Another alternative to currency is a debit card. It looks like a credit card, but functions like a check. It immediately debits the checking account for the purchase. A smart card is the newest addition to card convenience. In addition to tracking checking account balances, a debit card can contain information like the customer's address, frequent flyer account, or health insurance records. It stores this information on a chip embedded in the card. There are two types of financial institution: deposit institutions and non-deposit institutions. Deposit institutions accept deposits from customers or members, and they offer checking and savings accounts, loans, and other banking services. Non-deposit institutions offer specific financial services but do not accept deposits. In the past, each

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category was strictly defined, but the Depository Institutions Deregulation and Monetary Control Act of 1980 deregulated banking and made it possible for all financial institutions to offer a wider range of services. This blurred the differentiation between institutions.

Financial institution Description

Commercial bank

• Deposit institution • Profit-oriented • Operates under state or national charter • Makes profit by charging customers fees and interest

rates higher than they pay for the money

Thrift

• Deposit institution • Profit oriented • Savings and loans - use most deposits to make mortgage

home loans • Mutual savings banks - owned by depositors

Credit union

• Deposit institution • Non-profit member-owned organization • Take deposits only from members • Pay favourable interest rates because they are tax-

exempt

Insurance company

• Non-deposit institution • Provides insurance coverage for life, property, and other

potential losses • Invests payments in real estate, construction projects,

and other investments

Pension fund

• Non-deposit institution • Set up by companies to provide retirement benefits for

employees • Money contributed by the company and its employees is

put into securities and other investments

Finance company

• Non-deposit institution • Lends money to consumers and businesses for home

improvements, expansion, purchases, and other purposes

Brokerage firm

• Non-deposit institution • Allows investors to buy and sell stocks, bonds, and other

investments • Many offer checking accounts, high-paying savings

accounts, and loans to buy securities

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Financial institutions offer lines of credit to make money available for use any time after the institution grants the loan. This working capital has a usual term of one year. Banks can cancel line of credit at any time. Three electronically based systems ease banking chores: ATMs, EFTS, and online banking. Deposit institutions offer automatic teller machines (ATMs) for companies to perform basic transactions anytime. Withdrawals and deposits are available anytime. Electronic funds transfer system (EFTS) is another form of electronic banking. This computerized system completes financial transactions. More than one third of all workers use EFTS if their paychecks are direct deposited. The third electronically based system is online banking . Withdrawals, transfers, bill paying, and balance inquiries are common online tasks. This is the most convenient for customers, and the most cost effective for institutions. Nearly 9,000 banks failed during the Great Depression from 1929 to 1934. The Banking Act of 1933 established the Federal Deposit Insurance Company (FDIC) that insures money on deposit, up to $100,000, in U.S. banks. The FDIC collects insurance premiums from member banks and deposits the premiums into the U.S. Treasury's Savings Association Insurance Fund for thrifts, or Bank Insurance Fund for banks. The National Credit Union Association protects deposits in credit unions. In addition to insurance, the federal government has agencies that supervise and regulate banks, and comply with regulations.

• State banking commissions regulate state-chartered banks • Federal Office of the Comptroller of the Currency regulates nationally-chartered banks • Federal office of the thrift supervision regulates thrifts • Federal Reserve System regulates banking system in general The number of U.S. financial institutions has declined since the banking industry deregulation in 1980 - from 14,146 to 8,358. Bank combinations, competitive pressure, and financial problems caused this decline. The 1999 Financial Services Modernization Act repealed the Glass-Steagall Act (Banking Act of 1933) and portions of the 1956 Bank Holding Act that kept banks out of securities and insurance. The repeal of these created both mega-banks offering full service, and community banks concentrating services for a small area. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994reverses legislation dating back to 1927 that restricted consumers from making deposits, cashing checks, and handling banking transactions to one branch of their bank. Section Outline I. Money and financial institutions

A. Characteristics and types of money 1. Checking and savings accounts 2. Credit, debt, and smart cards

B. Financial institutions and services 1. Deposit and non-deposit financial institutions 2. Loans 3. Electronic banking

C. Bank Safety and regulations D. The evolving U.S. banking environment

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Understanding Banking and Securities

Section Review 14.2 Types of Securities Investments

Key Terms

• Securities • Authorized stock • Issued stock

• Unissued stock • Stock split • Par value

• Market value • Book value • Convertible preferred stock

• Cumulative preferred stock • Bond • Principal

• Junk bond • Secured bonds • Debentures

• Convertible bonds • T-bills • Treasury notes

• Treasury bonds • Bond ratings • U.S. savings bond

• Munis • General obligation bond • Revenue bond

• Capital gain • Mutual fund • Money-market fund

Case Studies

• Charles Schwab

Summary Securities are investments such as stocks, bonds, options, futures, and commodities. Consumers now have more options where to purchase these. Authorized stock is the maximum number of ownership shares divided by the corporation's board of directors. There are two types of authorized stock: issued and unissued . Issued stock is the portion of the authorized stock sold to and held by shareholders. Unissued stock is the portion of authorized stock not yet sold to shareholders. When a company wants to make shares of stock more affordable, the company will issue a stock split. This increases the number of shares for each shareholder, and decreases the proportional value of each share. When the company first issues stock, it assigns the value of each share, called the par value . Companies use par value to calculate dividends. Par value is not the same as market value or book value. Market value is the price a share currently sells for, and book valueis the amount of net assets of a corporation represented by one share of common stock. Unlike stocks, bonds are debt financing. An organization borrows funds from an investor and issues a written promise to make regular interest payments and repay the borrowed amount in the future. The amount borrowed is the principle. The issuer pays interest at six-month intervals. Bonds are not guaranteed investments. Interest rates reflect the degree of risk associated with the bond. Higher risk offers higher interest rates. Lowest rated bonds, determined by agencies such as Standard and Poor's (S&P) and AAA (Moody's), are junk bonds. Specific assets back secured bonds . The issuer repays bondholders with these funds from company-backed property or equipment if they do not repay the borrowed amount. Mortgage bonds are one type of secured bond. Debentures are unsecured bonds, only backed by the company's promise, so they are riskier. Investors who choose convertible bonds can exchange them for company stock; the lower risk pays a lower interest rate. U.S. government securities available for investors are Treasury bills (T-bills), treasury notes, and U.S. savings bonds. T-bills are short-term U.S. government bonds repaid in less than one year. They sell at a discount and redeem at face

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value. Treasury notes are intermediate-term U.S. government bonds repaid from one to ten years after initial issue. The government repays treasury bonds more than ten years after issuance. Both treasury notes and treasury bonds pay a fixed amount of interest twice a year. U.S. government securities pay a lower interest rate than corporate bonds because the risk is minimal. These federal securities require no state or local income tax on earned interest. U.S. savings bonds are available in amounts from $50 to $10,000. Series EE savings bonds pay just 50% of the stated value and receive the full face amount in as little as 17 years. Investors can exchange Series EE bonds for series HH bonds. Series I bonds pay interest indexed to the inflation rate. State issued securities are municipal bonds (munis). This raises money for public services. There are two types of munis: general obligation bonds and revenue bonds. Issuers back general obligation bonds by their authority to collect taxes. Issuers back revenue bonds from the projects they are financing. The federal government makes munis tax-exempt if the taxpayer resides in the issuer's state. The returns that investors receive when they sell a security for a higher price than the purchase price are capital gains. Federal and state tax applies to capital gains. In 2002 and 2003, President Bush pressed for capital gains tax relief. Mutual funds are diversified blends of stocks, bonds, and other securities. New investors and those who do not have time to investigate individual securities prefer mutual funds. No-load funds charge no fee to buy or sell shares. Load funds charge investors a commission to buy or sell shares. The most common type of loads are front end and back end. The name indicates when the commission is charged. Investment companies offer two types of mutual funds: open-end funds and closed-end funds. Open-end funds issue additional shares as new investors ask to purchase them. Closed-end fundsraise all their money at once by distributing a fixed number of shares that trade like stocks on major security exchanges. As soon as a designated number of shares sell, the fund closes its books. Investment priorities also differentiate mutual funds. The most popular is a money-market fund. These mutual funds invest in short-term securities and other liquid assets:

• Growth funds - Purchase stocks of rapidly growing companies • Income funds - Buy securities that pay high dividends and interest • Balanced funds - Invest in a carefully chosen mix of stocks and bonds • Sector funds - Invest in companies of a particular industry • Global funds - Purchase foreign and U.S. securities • International funds - Invest in foreign securities • Index funds - Buy stocks of companies with specific market averages Section Outline I. Types of securities investments

A. Stocks 1. Common stock 2. Preferred stock

B. Bonds 1. Corporate bonds 2. U.S. government securities and municipal bonds 3. Mutual funds

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Understanding Banking and Securities

Section Review 14.3 Understanding Banking and Securities

Key Terms

• Primary market • Secondary market • Stock exchange

• OTC market • NASDAQ • Auction exchange

• Stock specialist • ENC • Dealer exchange

• Market makers • Broker • Market order

• Limit order • Stop order • Open order

• Day order • Discretionary order • Margin trading

• Short selling • Bear market • Bull market

• Market indexes • PE ratio • After-hours trading

• Insider trading

Key Terms

None

Summary People purchase stocks, bonds, mutual funds, and other securities on the security market. On the primary market, companies sell securities issued for the first time. Owners trade previously issued stocks and bonds on the secondary market. The secondary market is a stock exchange or securities exchange. The New York Stock Exchange (NYSE) is the Big Board, and it is the world's largest securities exchange trading about 3,000 firms' securities. Many companies list their securities on more than one exchange, so securities listed here may be traded at U.S. regional exchanges. Trading at a regional exchange is trading over-the-counter (OTC). The OTC is a network of dealers who trade securities on computerized linkups rather than a trading floor. The National Association of Security Dealers owns the system that most dealers use, known as the National Association of Securities Dealers Automated Quotations (NASDAQ ). It is the second-largest stock market in the U.S. In 1998, NASD purchased the American Stock Exchange. An auction exchange is a centralized marketplace where specialists trade securities on behalf of sellers. This is, for example, the trading process for the NYSE. All buy and sell orders are funneled through that trading floor. Stock specialists, buyers of last resort, are intermediaries that trade in a particular security on the floor of an auction exchange. These brokers occupy posts on the trading floor, and conduct all trades in specific stocks through a central clearinghouse. If imbalances occur in that stock, the specialists will halt trading to prevent the price from dropping without cause. They also sell stock to customers out of their own inventory. A dealer exchange like NASDAQ functions differently than an auction exchange. All buy and sell orders execute through computers by market makers. These registered representatives trade securities from their own inventories on dealer exchanges, thus making a ready market for buyers and sellers. Electronic communications networks (ECNs) use the Internet to link buyers and sellers. ECNS do not have trading floors, specialists, or market makers. ECNs make money by providing a global place to trade stocks and by collecting commissions on each trade. They are becoming increasingly popular. In 2002, Instinet was the biggest ECN. Over 30% of NASDAQ shares are traded on ECNs. Many brokerage firms use a combination of auction exchanges, dealer exchanges, and ECNs to execute trades. Individuals cannot interact with the market directly; instead, they must use securities brokers . These experts have passed specific tests and are registered to trade securities for investors. Investors pay transaction costs for every buy or sell order. This covers the cost of the broker's commission. Commission sizes vary. A full-service broker provides

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financial management services such as investment counseling and planning. Discount brokers provide limited services and charge lower commissions.

There are five things to consider before investing through the stock market:

• Long-term objectives • Short term objectives • How various securities match objectives and risk attitude • Ways to have the broker trade securities • Ways to place orders

Order to trade securities Description

Market order • Trades securities at the best price that can be

negotiated now

Limit order • Stipulates the highest or lowest price that the

customer is willing to trade securities

Stop order • Sells when the price falls to a particular point • Limits investor's loss

Open order • Does not expire at the end of the trading day

Day order • Automatically expires at the end of the trading day

Day trading • Stock trader that holds position for minutes, rather

than a day or more

Discretionary order • Allows the broker when to trade a security

Margin trading

• Borrows money from brokers to buy stock • Interest is paid on borrowed money • Broker has stock as collateral • Federal Reserve Board establishes margin

requirements • Margin trading has increased risk

Short selling

• Sells stock borrowed from a broker • Intends to buy stock back later at a lower price, then

keeps the profit • Risky strategy, much opportunity for loss

Many investors are choosing to trade online. Convenience, control, and lower commissions are the main advantages of online trading. The top five consumer complaints filed with the SEC against online brokers include:

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• Failure to process orders or delay in executing orders • Difficulty in accessing one's account or contacting a broker • Errors in processing orders • Execution of orders at higher prices than posted on the website • Errors and omissions in account records and documents Before choosing to invest, it is important to investigate the market conditions. The easiest way to investigate is to watch the newspaper, special interest publications, and general business publications. The next consideration is the general direction of stock prices. Rising prices indicate a bull market; whereas bear marketshave falling prices. If the market has fallen or risen for a long period, it may be subject to a correction. Market indexes are measures of market activity calculated from the prices of a selection of securities. Watching these indexes will help you decide if the market is bullish or bearish. The most often talked about market index is the Dow Jones Industrial Average (DJIA). This tracks 30 blue-chip stocks of well-established companies. Each stock represents a different sector of the economy. Supporters say the Dow's stocks serve as a general barometer of market conditions. Recently the creators of the Dow, the Wall Street Journal, replaced Chevron, Goodyear, Sears, and Union Carbide with Microsoft, Intel, Home Depot and SBC. Critics say the Dow:

• Is too narrow • Is too susceptible to short-term swings • Lacks the right stocks • Gives too much weight to higher-priced shares Another popular index is Standard and Poor's 500 Stock Average (S&P 500). This tracks performance of 500 stocks. The index weighs market value, not stock price, so large companies carry more weight than smaller companies do. The broadest U.S. index is the Wilshire 5000 Index, covering 7,000 stocks. The NASDAQ Composite Index tracks more than 3,000 over-the-counter stocks, including many high-tech stocks. Foreign market indexes include Japan's Nikkei 225 Index and the UK's FT-SE 100 Index. In addition to tracking market conditions, it is important to track specific stocks of interest. Major daily newspapers include stock quotation reports. Included in the stock quotation report are the 52-week high selling price, 52-week low selling price, stock name, stock symbol, dividend, yield, P/E ratio, volume, highest and lowest price paid during the day, the closing price, and the net change in price over the previous session day. Prior to 2000, the securities markets quoted prices in fractions as small as 1/16. Now, it is much easier to comprehend with decimal entries and price stocks in smaller increments of 1/100. The price-earnings ratio, or P/E ratio, included in the stock quotation report divides a stock's market price by its prior year's earnings per share. Some investors also calculate a forward P/E ratio using expected year earnings in the ratio's denominator. If the P/E ratio is well below the industry norm, either the company is in trouble, or it is an undiscovered prize with a relatively low stock price. It is important to consult the company's annual report and SEC filings . Investors can track bonds and mutual funds in the daily newspaper or online site too. Bond information includes the company, current yield, volume, close, and net change. Mutual fund information contains net asset value; company name; fund name; total returns for the current month, and over one, three, five, and ten years; maximum initial sales commission based on the prospectus; and the annual expenses shown as a percentage based on the fun annual report. The securities industry is adapting to technological advances and increased need for speed. The NYSE created Direct Plus, which automatically executes trading orders for up to 2,099 shares in five seconds. There is also a push for round-the-clock trading instead of the traditional 9:00 am to 4:00 pm eastern zone trading. After-hours trading or extended-hours trading refers to the purchase and sale of publicly traded stocks after the major stock markets close. Many exchanges now offer after-hour trading through ECNs. The biggest advantage of extended-hours is that it accommodates traders who live in other time zones. The biggest disadvantage is reduced volume. The SEC oversees the securities market. Companies must meet certain requirements including registering reports and papers. Every year the SEC screens over 15,200 annual reports, 40,000 investor complaints, 14,000 prospectuses (a legal statement describing the objectives of an investment) and 6,500 proxy statements (shareholders written authorization giving someone else the authority to cast the vote). On the SEC website, Edgar is a database of corporate filings. The SEC adopted regulated fair disclosure (FD) to create a level playing field for all investors. This regulation mandates any news with potential to affect stock prices. This regulation prohibits companies from selectively disclosing market-sensitive information to some parties ahead of regular investors. There are two types of common securities fraud. Insider trading is using nonpublic material to make an investment profit. In 2002, the SEC accused Martha Stewart of insider trading. Acquisition companies must pay higher-than-

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expected premiums to buy a target company when leaks trigger a run-up of the target's stock price. Accounting fraud , like that in companies like Enron and WorldCom, is the other common type of securities fraud. Section Outline I. Securities markets

A. Securities exchanges B. How to buy and sell securities

1. Security brokers 2. Orders to buy and sell securities

C. Hw to analyze financial news 1. Watching market indexes and averages 2. Interpreting the financial news

D. Industry challenges E. Regulation of securities markets

1. SEC filing requirements 2. Regulation fair disclosure 3. Securities fraud

End of Chapter 14 Questions

1. Discuss how managers and outsiders use financial information. 2. Describe what accounts do. 3. What is the basic accounting equation and explain the purpose of double entry

bookkeeping? 4. List the three major financial statements and discuss how companies and

stakeholders use them 5. Explain the purpose of ratio analysis and list the four main categories of ratios. 6. What are four main activities performed during the financial planning process?