Summary Introduction to Business Chapters 1,3,7,8,9,13,16 – Chapter 1 – Taking Risks and Making – StudeerSnel

Chapter 1 – Taking Risks and Making Profits within the Dynamic Business

Environment

Entrepreneurship and Wealth Building
Business: any activity that seeks to provide goods and services to others while operating
at a profit.
Goods: tangible products (e. computers, food)
Services: intangible products (e. health insurance, education)

› Once you have developed the right goods/services, based on consumer wants and
needs, you need to reach customers through media they prefer.
› Successfully filling a market need enables you to make money
Entrepreneur: person who risks time and money to start and manage a business

Revenues, Profits, and Losses
 Revenue: total amount of money a business takes in during a given period of time by
selling goods and services
 Profit: the amount of money a business earns above and beyond what it spends on
salaries and other expenses
 Loss: when a business’s expenses are more than its revenues

Matching Risk with Profit
Risk: the chance an entrepreneur takes of losing time and money on a business that may not
profitable
 Not all businesses make the same amount of profit – those that take more risk may
make more profit

Standard of Living and Quality of Life
– The wealth businesses generate and the taxes they pay help everyone in their
communications (e. for hospitals, schools, roads)
– Nation’s businesses are part of an economic system that contributes to the standard of
living and quality of life for everyone in the country.

Standard of living: the amount of goods and services people can buy with the money they have
 Prices for goods/services vary among countries due to higher taxes and stricter
government regulations
Quality of life: general well-being of a society in terms of its political freedom, natural
environment, education, health care, safety, amount of leisure, and rewards that add to the
satisfaction and joy that other goods and services provide.
 Maintaining a high quality of life requires combined efforts of businesses, nonprofit
organizations, and government agencies
 Working to build a higher standard of living may lower the quality of life if it means less
time with family or more stress

Responding to the Various Business Stakeholders
Stakeholders: all the people who stand to gain or lose by the policies and activities of a business
and whose concerns the business needs to address.
 Customers
 Employees
 Stockholders
 Suppliers

 Dealers (retailers)
 Bankers
 Surrounding
community
 Media

 Environmentalists
 Government
leaders

• Primary challenge to recognize and respond to the needs of all stakeholders
  Outsourcing: contracting with other companies to do some or all the functions of a firm.
  » Loss of jobs to overseas competitors

» Outsourcing decisions based on all factors (to please all stakeholders)
» Insourcing: setting up production facilities within the home country

Using Business Principles in Nonprofit Organizations
An organization whose goals do not include making a personal profit for its owners or organizers.
 Use financial gains to meet their social or educational goals
 Social entrepreneurs: people who use business principles to start and manage not-for-
profits and help address social issues

Entrepreneurship Versus Working for Others
Two ways to succeed in business:
1. Rise through the ranks of large companies
› No entrepreneurial risk and company provides benefits
2. Become an entrepreneur
› Freedom to make your own decision, opportunity, and possible wealth
› Risk of failure and no benefits
› Increasing amount of minority groups and women who own businesses

The Importance of Entrepreneurs to the Creation of Wealth
Factors of production: resources used to create wealth.
 Land (or natural resources)
 Labor
 Capital (machines, tools, buildings etc.)

 Entrepreneurship
 Knowledge – information technology

 Combination of entrepreneurship and the effective use of knowledge to grow businesses
and increase wealth.
 The business environment encourages or discourages entrepreneurship

The Business Environment

The Economic and Legal Environment
The economic system and the way government works with/against businesses can strongly
impact level of risk.
› Policies in favor of businesses – minimal spending, taxes and regulations
› Allow private ownership of businesses to promote entrepreneurship
› Minimize interference with the free exchange of goods and services
› Lessen risks of entrepreneurship by passing laws that enable businesspeople to write
enforceable contracts (e. Uniform Commercial Code)

Business
Management
and Job
Creation

Economic/Legal Environment

• Freedom of ownership
• Contract laws
• Elimination of corruption
• Tradable currency
• Minimum taxes and regulation

Technological
Environment

• Information technology
• Databases
• Barcodes
• The Internet

The Competitive Environment

• Customer Service
• Stakeholder recognition
• Employee service
• Concern for the environment

Social Environment

• Diversity
• Demographic changes
• Family changes

The Increase in the Number of Older Citizens
 Seniors represent a lucrative market
for companies involved with food
service, transportation, education etc.
 they are the richest demographic
group in the U.
 Businesses that cater to older
consumers will have the opportunity
for exceptional growth as the market is
huge

 Retirees will drain the economy of
wealth
 Paying Social Security to senior
citizens in the future will draw huge
amounts of money from the working
population

The Increase in the Number of Single-Parent Families
Single parents, including those forced by welfare rules to return to work after a certain benefit
period, have encouraged businesses to implement programs such as family leave and flextime.

The Global Environment
Surrounds all other environmental influences, two important changes include the growth of global
competition and the increase of free trade among nations.
› Globalization has grown due to the development of efficient distribution systems and
communication advances.
– Improved living standards
– Increasing competition from China and India

War and Terrorism
› Some businesses (e. making bullets) benefit while others lose workers to the military
› Threat of war leads the government to spend even more money on the military – slowing
down business growth
› Threat of terrorism adds to organizational costs (e. insurance)
› Foster global economic growth among both profit-making and nonprofit organizations to
lessen international tensions – businesses benefit from a peaceful and prosperous world

How Global Changes Affect You
› New jobs created in manufacturing and service industries due to expanding markets
› Global competition – be prepared for the markets of tomorrow (continuous learning)

The Ecological Environment
Climate change: movement of the temperature of the planet up or down over time
Greening: trend towards saving energy and producing products that cause less harm to the
environment.

The Evolution of U. Businesses
Skilled people out of work due to increased global competition and higher productivity.

Progress in the Agricultural and Manufacturing Industries
 Millions of small farms have been replaced by some huge farms, some merely large
farms, and some small but highly specialized farms – U. agricultural workers are the
most productive in the world
 Elimination of jobs in farming and manufacturing due to increased productivity and the
evolution of technology
 Many workers from the industrial sector found jobs in the growing service sector

Progress in Service Industries
» Fastest-growing firms provide services in areas such as law, health, entertainment etc.
» Service industry has generated almost all increases in employment (e. every new
retailer store will require management and employees)

» More high-paying jobs in the service sector – people must remain flexible.

Balance of payments: difference between money coming into a country (from exports) and money
leaving the country (for imports) plus money flows coming into or leaving a country from other
factors (tourism, foreign investment etc.)
– Favorable: more money flowing in than out
– Unfavorable: more money flowing out than in

Global trade must be conducted fairly.
 Dumping: selling products in a foreign country at lower prices than those changed in the
producing country (predatory pricing)
– Reduces surplus products in foreign markets
– Gain foothold in a new market
– Governments may offer financial incentives to certain industries to sell goods in
global markets for less than they sell at home.

Strategies For Reaching Global Markets

 Chosen strategy must suit a business’ goals.

Amount of commitment, control, risk, and profit
potential

Licensing
A firm (the licensor) allows a foreign company (the licensee) to produce its product/use trademark in
exchange for a fee (a royalty).
 Interested companies send representatives to foreign company to set up operations
 Licensor may assist licensee in areas such as distribution, promotion and consulting
 Also used in the service industry
– Firm can gain revenues it would not
otherwise have generated
– Licensees must purchase materials
from the licensing firm (provides
revenue)
– Licensors spend little/no money to
product and market their products

 Firm must grant licensing rights to
its product for an extended period –
when profit is experienced, a large
part must be given to licensee
 Licensing firm is selling its expertise
(danger of licensee producing
similar products)

Exporting
 Exporting to meet increasing global competition
 EAC’s provide hands-on exporting assistance and trade finance to support small/medium
businesses
 Indirect exporting through export-trading companies
– Assist in negotiating and establishing trading relationships
– Matches buyers/sellers from different countries
– Deal with foreign customers officers, documentation, warehousing, billing etc.

Franchising

Licensing Exporting Franchising manufacturingContract

International joint
ventures and
strategic alliances

Foreign direct
investment

Contractual agreement whereby someone with a good idea for a business sells others the rights to use
the business name and sell a product/service in a given territory in a specified manner.

 Popular in domestic and international markets – not limited to large franchisors
 Products/services should be adapted to the countries they serve

Contract Manufacturing

A foreign country’s production of private-label goods to which a domestic company then attaches its own

brand name or trademark (part of outsourcing).
 Companies can experience new markets without incurring heavy start-up costs
– If successful, company will penetrate new market with low risk
 Used to temporarily meet an unexpected increase in orders
 Low labor costs

International Joint Ventures and Strategic Alliances
Joint venture: partnership in which two or more companies join to undertake a major product
 Often mandated by governments
 Created to increase global footprint, aid future growth, or to create a unique business

• Shared technology and risk
• Shared marketing and management
  expertise
• Entry into markets where foreign
  companies are often not allowed
  unless goods are produced locally.

 One partner can use the learned
technology/practices and use it to
their own advantage
 Shared technology may become
obsolete
 Joint venture may become too large

Strategic alliance: long-term partnership between two or more companies to help each company
build competitive market advantages
 Don’t share costs, risks, management, or profits
 Provide broad access to markets, capital, and technical expertise
 Effectively link firms from different countries or sizes

Foreign Direct Investment
The buying of permanent property and businesses in foreign nations.

Foreign subsidiary: company owned in a foreign country by another company – parent company
 Operates like a domestic firm (business functions under control of the subsidiary’s
management)
 Must observe legal requirements of the home country and the host country

• Company maintains complete
  control over any
  technology/expertise it
  possesses

 Need to commit funds and
technology within foreign
boundaries
 If relationship with host country
falters, the firms assets could be
expropriated (taken over by
foreign government)

Multinational company: manufactures and markets products in many different countries and has
multinational stock ownership and management.
 Typically large organizations (e. Nestlé)
 Only firms that have manufacturing capacity or other physical presence in different
nationals is truly multinational

Physical and Environmental Forces
 Ineffective international distribution in development countries (primitive transportation, storage)
 Technological difference (residential electric systems, internet etc.)
– Tough environment for business/e-commerce

Trade Protectionism
The use of government regulations to limit the import of goods/services

 Allows domestic producers to survive and grow – producing more jobs
 Political economy – close ties between politics (government) and economics
 Mencantilism: favorable balance of trade resulting in flow of money to the country selling the most
globally

Tariffs: taxes on imports, making them more expensive to buy
– Protective tariffs: raises the retail price of imported products so that domestic products
are more competitively priced (save jobs and keep industries from closing down)
– Revenue tariffs: raise money for the government
– Non-tariff barriers: not as specific, but can be detrimental

Import quota: limits the number of products in certain categories a nation can export
– Protects domestic companies and jobs
– Export of specific products is also prohibited (e. weapons)

Embargo: complete ban on the import/export of a certain product or stopping of all trade with a
particular country (e. the U. embargo against Cuba)

The World Trade Organization
 General Agreement on Tariffs and Trade: reduces trade restrictions on goods, services, ideas
and cultural programs
 World Trade Organization: mediates trade disputes among nations
– Oversees cross-border trade issues and global business practices
– Trade disputes represented by member nations
– Decisions made within a year – member nations can appeal a decision
– Legal/Regulatory differences often impede trade expansion
– Wide gap between developing and industrial nations

Common Markets (trading bloc)
Regional group of countries with a common external tariff, no internal tariffs, and coordinated laws to
facilitate exchange among members
 EU sees continued economic integration as the major way to compete for global business
– Common currency to eliminate conversions
 Others include Mercosur (South America), ASEAN (Southeast Asia) and COMESA (Africa)

The North American and Central American Free Trade Agreements
NAFTA: free-trade area among the U., Canada and Mexico (for job/market opportunities)
1. To eliminate trade barriers and facilitate cross-border movement of goods/services
2. Promote conditions of fair competition
3. Increase investment opportunities
4. Provide effective protection and enforcement of IFR
5. Establish a framework for further regional trade cooperation
6. Improve working conditions in North America

• Trade has expanded significantly
• Open new markets, lower tariffs and ease
  regulations

 Jobs lost in the manufacturing sector
 Illegal immigration and bad working
conditions

The Future of Global Trade
BRIC: the economies of Brazil, Russia, India and China (areas of opportunity)
– Brazil and Russia are expected to dominate global business as suppliers of raw
materials
– China and India will be the leading global suppliers of manufactured goods/services
– Brazil’s rapidly growing consumer market is a target for major exporters

The Challenge of Offshore Outsourcing
The process whereby one firm contracts with other companies in primarily low-wage global markets, to do
some or all of its functions.

 ‘Second wave’ of offshoring – from product assembly to design/architecture
 Education and training are essential to preserve the skill premium and remain competitive

• Less-strategic tasks can be outsourced
  globally so that companies can focus on
  areas in which they can excel and grow
• Outsourced work allows companies to
  create efficiencies that in fact let them hire
  more workers
• Consumers benefit from lower prices due to
  effective use of global resources and
  developing nations grow, fueling global
  economic growth

 Jobs may be lost permanently and wages
fall due to low-cost competition offshore
 Offshore outsourcing may reduce product
quality, causing permanent damage to
reputation
 Communication among company members,
with suppliers, and with customers is more
difficult

 Internal strengths and weaknesses
 Success factors affecting industry participants
 State of the economy and other environments
 Major competitors
 Profitable or non-profitable products and consumers
 Personal development and social objectives

Strategic planning: determines the major goals of the organization and the policies and strategies
for obtaining and using resources to achieve those goals.
 Policies: broad guidelines for action
 Strategies: determine best way to use resources
 Top managers make decisions regarding customers, production and competition
 Planning becomes more difficult due to rapidly changing environment

Tactical planning: process of developing detailed, short-term statements about what is to be
done, who is to do it, and how it is to be done.
 Lower-level management decide on plans to meet strategic objectives (e. setting
annual budgets)

Operational planning: process of setting work standards and schedules necessary to implement
the company’s tactical objectives
 Focuses on specific supervisors, department managers, and individual employees

Contingency planning: process of preparing alternative courses of action the firm can use if its
primary plans don’t achieve organizational objectives
 Rapidly changing economic/competitive environments require alternative plans
 Crisis planning: anticipates sudden changes in the environment

Leaders of market-based companies simply set direction.
– They want to stay flexible, listen to customers, and seize opportunities
– Opportunities must fit into overall goals and objectives to remain focus

Decision Making: Finding the Best Alternative
Choosing among two or more alternatives.

Rational decision-making model:
1. Define the situation
2. Describe and collect needed information
3. Develop alternatives
4. Develop agreement among those involved
5. Decide which alternative is best
6. Do what is indicated (begin implementation)
7. Determine whether the decision was a good one, and follow up.

Problem solving: solving everyday problems (less formal than decision making/quicker
action)
– Brainstorming: coming up with as many solutions as possible in a short period of time
with no censoring of ideas
– PMI: listing pluses, minuses and implications – ensure pluses > minuses

Organizing: Creating a Unified System

Organizational chart: shows relationships among people and divides the organization’s work

Task and Skills at Different
Levels of Management
 Top management needs people who are visionaries, planners, organizers, coordinators,
communicators, morale builders, and motivators.
1. Technical skills: ability to perform tasks in a specific discipline or department
2. Human relations skills: communication and motivation – enable managers to work
through and with people (coaching, morale building, delegating etc.)
3. Conceptual skills: picturing the organization as a whole and seeing relationships
among its various parts (planning, organizing, problem analysis, coordinating etc.)
 First line managers: technical > human relations > conceptual
 Middle managers: conceptual = human relations = technical
 Top managers: conceptual > human relations > technical

Staffing: Getting and Keeping the Right People
Recruiting, hiring, motivating and retaining the best people available to accomplish the company’s
objectives.
 Appropriate incentives must be offered
 Critical in high-tech companies – primary capital equipment is brainpower
 People must be treated well and rewarded fairly

Leading: Providing Continuous Vision and Values
Leaders embrace and manage change, whereas managers strive to produce order and stability.

Communicate a vision and rally others around that vision:
– Openly sensitive to the concerns of followers, give them responsibility, and win
their trust.
– Influence the action of others
Establish corporate values:
– Concern for employees, customers, the environment and product quality
– Honest and forward looking leaders
Promote corporate ethics:
– Unfailing demand for honestly and fair treatment – ethical decision making
– Social concern for employees and others
Embrace change:
– Transform the way the company does business – more effective and efficient
Stress accountability and responsibility:

Top Management

• President/company executives who develop strategic plans
• CEO: introduces change into the organization
• COO: puts changes into effect (structuring work, controlling operations
  etc.)
• CFO: obtaining funds, planning budgets, collecting funds etc.
• CIO/CKO: getting the right information to other managers to make the
  right decisions
  Middle management
• General managers, division managers and brand/plant managers
• Responsible for tactiical planning and controlling

Supervisory Management

• Directly responsible for supervising workers and evaluating their daily
  performance
• First-line management

A Key Criterion for Measurement: Customer Satisfaction
 Traditional measures define success in terms of profit or return on investments
 Other purposes include pleasing employees, stakeholders and customers
– External customers: dealers that buy products to sell to others, and ultimate
customers who buy products for their own personal use
– Internal customers: individuals and units within the firm that receive services from
other individuals or units (salespeople are internal customers of the marketing
research people)
 Aim to go beyond simply satisfying customers to ‘delighting’ them

Establish clear standards

• Ties planning to control
  function

Monitor and record performance
– Standards must be specific, attainable
and measurable

• Establish clear procedures for
  monitoring performance

Compare
results against
plans and
standards

Communicate results and
deviations to the appropriate
employees

Taking corrective action when
needed and providing positive
feedback for work well done

Chapter 8 – Structuring Organizations for Today’s Challenges

Everyone’s Reorganizing
 Restructuring due to changing markets (innovation, changing wants/needs of customers)
 Remaining flexible – going back to basic organizational principles and rebuilding the firm
on a sound foundation

Building an Organization from the Bottom Up
The principles of organization are the same regardless of the size of the business.
1. Organizing begins with determining what needs to done
2. Division of labor: assigning tasks according to employee strengths and weaknesses
(sometimes involving job specialization)
3. Departmentalization: setting up teams or departments to do specific tasks (e.
marketing, accounting, production etc.)
4. Assigning authority and responsibility to people
5. Establishing procedures for accomplish the organizational objectives
 Organizational chart shows relationships among people, who is accountable for
the completion of specific work and who reports to whom

The Changing Organization
 Change due to the evolving business environment – more global competition, declining
economy, faster technological change, preservation of the natural environment, and
changing customer expectation.
 Managing change has become critical – restructuring of the organization (in the past,
business were designed more to facilitate management than to please customers)

The Development of Organization Design
 Mass production increased the complexity of production processes/business organization
 Economies of scale: situation in which companies can reduce their production costs if
they can purchase raw materials in bulk; the average cost of goods goes down as
production levels increase

Fayol’s Principles of Organization
– Unity of command: each worker is to report to one boss
– Hierarchy of authority: all workers should know whom to whom they report. Managers
should have the right to give orders and expect others to follow
– Division of labor: functions are divided into areas of specialization (e. production, finance)
– Subordination of individual interests to the general interest: workers are to think of
themselves as a coordinated team. The goals of the team are more important than the
goals of individual workers
– Authority: managers have the right to give orders and the power to enforce obedience
– Degree of centralization: amount of decision-making power vested in top management
should vary by circumstances (e. small and large organizations)
– Clear communication channels: all workers should be able to reach others in the firm
quickly and easily
– Order: materials and people should be placed and maintained in the proper location
– Equity: a manager should treat employees and pears with respect and justice
– Esprit de corps: spirit of pride and loyalty should be created among people in the firm
» Clear lines of authority, written rules and regulations
» Process of rule making has led to rigid organizations unable to respond quickly

Max Weber and Organizational Theory

• Greater specialization

• Closer supervision

• Delayed decision making

• Less responsiveness to customers
  Broad – Reduced costs

• More responsiveness to customers

• Faster decision making

• More empowerment

• Fewer chances for advancement

• Overworked managers

• Loss of control

• Less management expertise

Choosing between Tall and Flat Organization Structures
Tall organizations: various levels of management and a small span of control.
 Inefficiencies in communication, intolerable decision-making
 High costs and large amounts of paperwork
Flat organizations: few layers of management and a broad span of control
 More responsive to customers due to faster decisions
 Managers are saved day-to-day tasks
 Used by large organizations to match the friendliness of small firms

Weighing the Advantages and Disadvantages of Departmentalization
Divides the organization into separate units (e. functions) and groups workers according to their
skills, expertise, or resource use so they can specialize and work together more effectively.
–
Advantages Disadvantages

• Employees develop skills in depth and
  progress within a department as they master
  more skills

• Company can achieve economies of scale by
  centralizing all the resources it needs and
  locate various experts in that area

• Employees can coordinate work within the
  function, and top management can easily direct
  and control various departments’ activities

• Departments may not communicate well

• Employees may identify with their
  department’s goals rather than the
  organizations

• Slow response to external changes

• People may not be trained to take different
  managerial responsibilities; rather, they tend
  to become narrow specialists

• Department members may engage in
  groupthink and may need input from outside
  to become more create

Looking at Alternative Ways to Departmentalize
› By product (e. textbooks, technical books) – results in good customer relations
› By customer group (e. consumer market, hospitals, doctors) – specialization
› By geographic location – consumers vary greatly by region
› By process – enables employees to do a better job because they can focus on learning
few critical skills
 Departmentalization depends on the nature of the product and the customers
 Hybrid forms: combination of departmentalization techniques

Organizational Models
Business community is in a period of transition; traditional models are giving way to new
structures which can be unsettling for employees and managers, and can cause problems/errors.

Line Organizations
Direct two-way lines of responsibility and authority, and communication running from the top to
the bottom of the organization, with all people reporting to only one supervisor.
» Often used in the military and small organizations
» No specialists who provide managerial support
» No legal department, accounting department, human resources department or
information technology department
» Line managers can issue orders, enforce discipline, and adjust the organization

» Disadvantages of being too inflexible, having too few specialists to advise people, and
of having lengthy lines of communication in large organizations – they may be unable
to handle complex decisions and paperwork

Line-and-Staff Organizations (to minimize disadvantages of simple line organizations)
Line personnel: responsible for directly achieving organizational goals – including production
workers, marketing personnel, and distribution people
› Have formal authority to make policy decisions
Staff personnel: advise and assist line personnel in meeting their goals – including marketing
research, legal advising, information technology, and human resource management
› Advise line personnel and influence their decisions
› Strengthen the line positions and are like well-paid consultants

 Work well in organizations with a stable environment and slow product development
 Clear lines of authority and relatively fixed organization structures are assets that ensure
efficient operations

Matrix-Style Organizations
Specialists from different parts of the organization work together temporarily on specific projects,
but still remain part of a line-and-staff structure.
– A project manager can borrow people from different departments to help design and
market new product ideas.
– Used in the aerospace industry and areas such as baking, management consulting firms,
accounting firms, ad agencies, and school systems.

Advantages Disadvantages
› Gives managers flexibility in assigning people to
projects
› Encourages interorganizational cooperation and
teamwork
› Creative solutions to product development
problems
› Efficient use of organizational resources

› Costly and complex
› May confuse employees about where their loyalty
belongs- with the project manager or with the
functional unit
› Requires good interpersonal skills and
cooperative employees and managers to avoid
communication problems
› Only a temporary solution to a long-term problem

Cross-Functional Self-Managed Teams
Groups of employees from different departments who work together on a long-term basis.
 Self-managed: empowered to make decisions without management approval
 Removes barriers among design, engineering, marketing, distributions etc.
 Interfirm: members come from two or more companies
 Works best when leadership is shared

Going Beyond Organizational Boundaries
Cross-functional teams that include customers, suppliers, and distributors go beyond
organizational boundaries.
» May share market information across national boundaries
» Government coordination may assist projects – breaking the barrier between
governments and business
Managing the Interactions Among Firms
Networking: using communications technology and other means to link organizations and allow
them to work together on common objectives.

Transparency ad Virtual Organizations
Real time: the present moment or the actual time in which something takes place
 Internet has allowed companies to send real-time data to organizational partners