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Nickels * McGraw-Hill/Irwin Understanding Business, 8e McHugh * McHugh Managing Within The Dynamic Business Environment: Taking Risks and Making Profits * CHAPTER ** 1 1-1 © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Business & Entrepreneurship • • • • Business Profit Entrepreneur Match Risk With Profit – Revenue – Loss • Standard of Living/Quality of Life • Stakeholders • Nonprofit Organizations Objectives of Business Survival Growth Profit Social Responsibility Creating Wealth: Factors of Production • • • • • Land Labor Capital Entrepreneurship Knowledge Business Environment Global Business Social Economic & Legal Technology Competitive Economic & Legal Environment $ Minimum taxes and regulations $ Freedom of ownership $ Contract laws $ Tradable currency $ Elimination/minimization of corruption Technological Environment • Productivity • E-Commerce • Responsiveness to Customer Competitive Environment • Customer Expectations • Restructure/Empower Social Environment • Diversity/Multicultural • Aging/Graying of Indonesia • Two-Income Families • Single-Parent Families 21st Century Diversity Issues • Race • Age • Gender • Language • Ethnicity • Religion • Disability • Sexual Source: U.S. Equal Employment Opportunity Commission Orientation Global Environment • International Competition and Free Trade • Improvements in Transportation Communication • War & Terrorism • Global Changes and Evolution of American Business • • • • Agricultural Manufacturing Service Industries Future??? Trends in Business • Rise of Information & Communication Technology • Self-Directed, Empowered Employees • Communication Skills • Globalization • Decision-Making Skills • Doing Business 24/7 • Teamwork • Educated Consumers • Aging Workforce • Increasing Diversity • Leadership • Continual Learning • Pyramid vs. Web Source: Keying In- Newsletter of the National Business Education Association, March 2003 How Economics Affects Business: The Creation and Distribution of Wealth Nickels * McGraw-Hill/Irwin Understanding Business, 8e McHugh * * CHAPTER ** 2 McHugh 1-14 © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Economics: Create Wealth • Study of how society chooses to employ resources to produce goods & services and distribute them among competing groups/individuals • Micro v. Macro • Resource Development Four “What’s” of an Economic System $ What is produced? $ What amount is produced? $ What is the method of output distribution? $ What is the rate of economic growth? Adapted from: Edwin Mansfield Economics (New York: W.W. Norton, 1976), p.8 Economic Theories • Thomas Malthus (Early 1800s) – “Dismal Science” – Too many people • Adam Smith (1776) – Freedom is vital – “Invisible Hand” Circular Flow Model Three Economic Systems Mixed Socialism (Highly Controlled) (Little Control) Communism Capitalism Free-Market Capitalism • Private Property • Business Ownership/ Profits • Freedom of Competition • Freedom of Choice Supply Curve High Price(P) S Low Quantity(S) High Demand Curve High Price(P) D Low Quantity(D) High Equilibrium Point Surplus High Market Equilibrium Price S Low Shortage Quantity D High Free-Market Competition Monopolistic Oligopoly Competition One Many Perfect Competition Monopoly Sellers Limits of Free-Markets • Inequality of Wealth- Causes National & World Tension • Greed Compromises Ethics • Limitations Push Country towards Socialism = Government Regulation Socialism • Private & Public Ownership • Some Choices are Limited • Creates Social Equality • Reduces Individual Incentive - Brain Drain Communism • Public Ownership – • Almost all major factors of production Central Planning/Controlled Economy • Shortages of food and other products may develop • Lack of motivation to work hard for business people Mixed Economies • Free-Market Economy = Capitalism • Command Economy – Socialism – Communism • Trend Results in Blend/Mix – Capitalism > Socialism – Socialism > Capitalism U.S. Economy • • • • Key Economic Indicators Productivity in the U.S. Productivity in the Service Sector Business Cycles – Recession – Depression – Recovery • Stabilization – Fiscal Policy – National Debt • Economic Growth through Monetary Policy Key Economic Indicators • Gross Domestic Product (GDP) • Unemployment Rate • Price Indexes – Consumer Price Index (CPI) – Producer Price Index (PPI) What Makes Up The Consumer Price Index? Recreation Apparel 5% 6% Medical Care/ Insurance 7% Medical Care 6% Other 5% Housing & Util. 39% Food & Beverage 16% Transportation 18% Source: U.S. Bureau of Labor Statistics Choosing a Form of Business Ownership Nickels * McGraw-Hill/Irwin Understanding Business, 8e McHugh * * CHAPTER ** 5 McHugh 1-32 © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Basic Forms of Business Ownership Type of Ownership Number Sales Sole Proprietorship 72% 6% Partnership 8% 13% Corporation 20% 81% Source: US Internal Revenue Service Sole Proprietorship Advantages • Ease of start/end • Be your own boss • Pride of ownership • Leave a legacy • Retain profit • No special taxes Disadvantages • Unlimited liability • Limited financial resources • Management difficulty • Time commitment • Few fringe benefits • Limited growth • Limited life span New Forms of Partnerships • Master Limited Partnership –Traded Publicly –Taxed As A Partnership • Limited Liability Partnership Partnership Advantages Disadvantages • More financial resources • Unlimited liability • Shared management • Division of profits • Longer survival • No Special Taxes • Disagreements among partners • Difficult to terminate Corporations • Private: Not Traded on Any Stock Exchange • Public: Shares are Traded on One or More Stock Exchanges • Non-Profit: Performs Public Service, Has Special Tax Considerations to Encourage Formation Corporation Advantages Disadvantages • Limited liability • More money for investment • Size • Perpetual life • Ease of ownership change • Ease of drawing talented employees • Separation of ownership/mgmt. • Extensive paperwork • Double taxation • Two tax returns • Size • Termination difficult • Conflict with Stockholder & Board • Initial cost How Owners Affect Management Limited Liability Companies Advantages • Limited Liability • Tax Choice • Flexible Ownership Rules • Flexible Profit & Loss Distribution • Operating Flexibility Disadvantages • No Stock • Limited Life Span • Fewer Incentives • Taxes • Paperwork Types of Mergers Horizontal Vertical Conglomerate No Relationship between companies Why Mergers Don’t Work! • Companies Overpay to Acquire Another Firm • Acquiring Company Overestimates Cost Savings and Synergies • Managers Disagree About Integrating Operations • Obsession with Cost Cutting Hurts Business, Costing Top Employees & Customers Franchise System • Franchise Agreement • Franchisor • Franchisee Franchise Contract Franchisor, Inc. Branded Product/Service Performance Monitoring $$$$$ Franchisee Franchisor • Assigns Territory • May Provide Financial Aid/Advice • Offers Merchandise/ Supplies at Competitive Price • Provides Training/Support • Business Expansion Using O.P.M. Franchisee • Pays Up-Front Costs • Makes Monthly Payment to Franchisor • Runs Business by Franchisor’s Rules/Procedures • Buys Materials from Franchisor/ Approved Supplier Franchises Advantages • Management & marketing assistance • • • Personal ownership • Lower failure rate Recognized name Financial advice & assistance Disadvantages • • • • • • High start-up costs Shared Profit Management regulation Coattail effects Restrictions on selling Fraudulent franchisors Cooperatives • Farm Cooperative • Owned & Controlled by People Who Use It • Pool of Resources • Economic Power