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An Introduction Business

An Introduction to
Business
v. 2.0


This is the book An Introduction to Business (v. 2.0).
This book is licensed under a Creative Commons by-nc-sa 3.0 (http://creativecommons.org/licenses/by-nc-sa/
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ii



Table of Contents
About the Author .................................................................................................................. 1
Acknowledgments................................................................................................................. 2
Dedication............................................................................................................................... 5
Preface..................................................................................................................................... 6
Chapter 1: The Foundations of Business ........................................................................ 11
Introduction ................................................................................................................................................. 13
Getting Down to Business............................................................................................................................ 15
What Is Economics? ..................................................................................................................................... 20
Perfect Competition and Supply and Demand.......................................................................................... 27
Monopolistic Competition, Oligopoly, and Monopoly ............................................................................. 33
Measuring the Health of the Economy ...................................................................................................... 36
Government’s Role in Managing the Economy ......................................................................................... 44
Cases and Problems...................................................................................................................................... 48

Chapter 2: Business Ethics and Social Responsibility ................................................. 53
Misgoverning Corporations: An Overview ................................................................................................ 56
The Individual Approach to Ethics............................................................................................................. 62
Identifying Ethical Issues ............................................................................................................................ 72
The Organizational Approach to Ethics..................................................................................................... 80
Corporate Social Responsibility.................................................................................................................. 85
Environmentalism ....................................................................................................................................... 97
Stages of Corporate Responsibility .......................................................................................................... 104
Cases and Problems.................................................................................................................................... 110

Chapter 3: Business in a Global Environment............................................................. 117
The Globalization of Business ................................................................................................................... 119
Opportunities in International Business ................................................................................................. 131
The Global Business Environment............................................................................................................ 142
Trade Controls............................................................................................................................................ 154
Reducing International Trade Barriers ................................................................................................... 159
Preparing for a Career in International Business................................................................................... 166
Cases and Problems.................................................................................................................................... 169

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Chapter 4: Selecting a Form of Business Ownership ................................................. 175
Factors to Consider .................................................................................................................................... 176

Sole Proprietorship.................................................................................................................................... 179
Partnership ................................................................................................................................................. 182
Corporation ................................................................................................................................................ 187
Other Types of Business Ownership......................................................................................................... 193
Mergers and Acquisitions.......................................................................................................................... 201
Cases and Problems.................................................................................................................................... 205

Chapter 5: The Challenges of Starting a Business ..................................................... 211
What Is an Entrepreneur? ......................................................................................................................... 213
The Importance of Small Business to the U.S. Economy ....................................................................... 222
What Industries Are Small Businesses In? .............................................................................................. 228
Advantages and Disadvantages of Business Ownership......................................................................... 233
Starting a Business..................................................................................................................................... 238
The Business Plan....................................................................................................................................... 248
How to Succeed in Managing a Business ................................................................................................. 256
Cases and Problems.................................................................................................................................... 263

Chapter 6: Managing for Business Success.................................................................. 269
What Do Managers Do?.............................................................................................................................. 271
Planning ...................................................................................................................................................... 273
Organizing .................................................................................................................................................. 283
Directing ..................................................................................................................................................... 298
Controlling.................................................................................................................................................. 302
Managerial Skills........................................................................................................................................ 305
Cases and Problems.................................................................................................................................... 312

Chapter 7: Recruiting, Motivating, and Keeping Quality Employees .................... 321
Human Resource Management................................................................................................................. 323
Developing Employees............................................................................................................................... 332
Motivating Employees ............................................................................................................................... 338
What Makes a Great Place to Work? ........................................................................................................ 346
Performance Appraisal.............................................................................................................................. 358
Labor Unions .............................................................................................................................................. 367
Cases and Problems.................................................................................................................................... 375

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Chapter 8: Teamwork and Communications ............................................................... 381
The Team and the Organization ............................................................................................................... 385
Why Teamwork Works .............................................................................................................................. 393
The Team and Its Members....................................................................................................................... 399
The Business of Communication .............................................................................................................. 410
Communication Channels ......................................................................................................................... 416
Forms of Communication.......................................................................................................................... 429
Cases and Problems.................................................................................................................................... 439

Chapter 9: Marketing: Providing Value to Customers.............................................. 446
What Is Marketing?.................................................................................................................................... 448
The Marketing Mix .................................................................................................................................... 457
Pricing a Product........................................................................................................................................ 467
Placing a Product ....................................................................................................................................... 472
Promoting a Product.................................................................................................................................. 484
Interacting with Your Customers............................................................................................................. 490
The Product Life Cycle............................................................................................................................... 500
The Marketing Environment .................................................................................................................... 505
Careers in Marketing ................................................................................................................................. 517
Cases and Problems.................................................................................................................................... 520

Chapter 10: Product Design and Development ........................................................... 526
What Is a Product? ..................................................................................................................................... 527
Where Do Product Ideas Come From? ..................................................................................................... 533
Identifying Business Opportunities ......................................................................................................... 537
Understand Your Industry ........................................................................................................................ 541
Forecasting Demand .................................................................................................................................. 545
Breakeven Analysis .................................................................................................................................... 550
Product Development ................................................................................................................................ 554
Protecting Your Idea.................................................................................................................................. 560
Cases and Problems.................................................................................................................................... 562

Chapter 11: Operations Management in Manufacturing and Service Industries 568
Operations Management in Manufacturing............................................................................................ 570
Facility Layouts .......................................................................................................................................... 579
Managing the Production Process in a Manufacturing Company ........................................................ 583
Graphical Tools: PERT and Gantt Charts ................................................................................................. 588
The Technology of Goods Production...................................................................................................... 592
Operations Management for Service Providers...................................................................................... 595
Producing for Quality ................................................................................................................................ 605
Cases and Problems.................................................................................................................................... 612

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Chapter 12: The Role of Accounting in Business........................................................ 618
The Role of Accounting ............................................................................................................................. 620
Understanding Financial Statements ...................................................................................................... 626
Accrual Accounting.................................................................................................................................... 641
Financial Statement Analysis.................................................................................................................... 653
The Profession: Ethics and Opportunities ............................................................................................... 667
Cases and Problems.................................................................................................................................... 676

Chapter 13: Managing Financial Resources ................................................................ 685
The Functions of Money ............................................................................................................................ 686
Financial Institutions................................................................................................................................. 691
The Federal Reserve System ..................................................................................................................... 701
The Role of the Financial Manager .......................................................................................................... 707
Understanding Securities Markets .......................................................................................................... 719
Financing the Going Concern ................................................................................................................... 728
Careers in Finance...................................................................................................................................... 733
Cases and Problems.................................................................................................................................... 737

Chapter 14: Personal Finances ....................................................................................... 746
Financial Planning ..................................................................................................................................... 760
Time Is Money ............................................................................................................................................ 776
The Financial Planning Process................................................................................................................ 782
A House Is Not a Piggy Bank: A Few Lessons from the Subprime Crisis............................................... 796
Cases and Problems.................................................................................................................................... 807

Chapter 15: Managing Information and Technology ................................................ 809
Data versus Information............................................................................................................................ 811
Managing Data............................................................................................................................................ 819
Types of Information Systems .................................................................................................................. 824
Computer Networks and Cloud Computing ............................................................................................ 832
Data Communications Networks .............................................................................................................. 840
Security Issues in Electronic Communication ........................................................................................ 848
Careers in Information Management ...................................................................................................... 858
Cases and Problems.................................................................................................................................... 860

Chapter 16: The Legal and Regulatory Environment of Business .......................... 864
Law and the Legal System ......................................................................................................................... 867
Criminal versus Civil Law.......................................................................................................................... 873
Negligence Torts ........................................................................................................................................ 881
Product Liability......................................................................................................................................... 889
Some Principles of Public Law .................................................................................................................. 906
Cases and Problems.................................................................................................................................... 927

vi


About the Author
Karen Collins
Dr. Karen Collins is associate professor of accounting at
Lehigh University in Bethlehem, Pennsylvania. She has
a Ph.D. in accounting from Virginia Tech. Dr. Collins
coordinates the college's freshman-level Introduction to
Business course. Exploring Business has evolved based on
Dr. Collin’s innovative and successful approach to
Lehigh’s Introduction to Business course. She was
honored with an Innovation in Teaching Award for the
course from the Middle Atlantic Association of Colleges
and Business Administration.
Dr. Collins’s research interests include upward mobility
of women in accounting, quality of life issues, stress, and ethnic diversity in the
accounting profession. She has published articles in journals such as Accounting,
Organizations and Society, Accounting Horizons, Journal of Accountancy, Journal of
Vocational Behavior, and Journal of Occupational Health Psychology.
Dr. Collins has won numerous teaching awards while at Lehigh, including the
Deming Lewis Faculty Award (for the faculty member who had the strongest
influence on the ten-year graduating class); the Faculty Recognition Award (from
the Dean of Students Office); and the Andersen Consulting Faculty Fellowship for
Excellence in Teaching.

1


Acknowledgments
The author would like to thank the following colleagues who have reviewed the text
and provided comprehensive feedback and suggestions for improving the material:





































Tim Allwine, Lower Columbia College
Douglas Antola Crowe, Bradley University
Vondra Armstrong, Pulaski Technical College
April Bailey, Shippensburg University of Pennsylvania
Michael Baran, South Puget Sound Community College
Ruby Barker, Tarleton State University
Murray Brunton, Central Ohio Technical College
Laura Bulas, Central Community College
Leon Chickering, South Puget Sound Community College
Glenn Doolittle, Santa Ana College
Amy Epplin, Rend Lake College
Andrea Foster, John Tyler Community College
Joseph Fox, Asheville-Buncombe Technical Community College
Leatrice Freer, Pitt Community College
George Generas, University of Hartford
Connie Golden, Lakeland Community College
David Gilliss, San Jose State University
Alfredo Gomez, Broward College
Madeline Grant, Santa Ana College
Graham Harvey, Athivia College
Graham Henning, Adelphi University
Gail Jacobs, LA College International
Francis Krcmarik, Mott Community College
Elaine Madden, Anne Arundel Community College
Timothy March, Kaskaskia College
Marian Matthews, Central NM Community College
Gina McConoughey, Illinois Central College
Tom McFarland, Mt. San Antonio College
Bill McPherson, Indiana University of Pennsylvania
Diane Minger, Cedar Valley College
Jennifer Morton, Ivy Tech Community College of Indiana
John Olivo, Bloomsburg University of Pennsylvania
Lauren Paisley, Genesee Community College
Col. Stephen Pomeroy, Norwich University
Anthony Racka, Oakland Community College
Nancy Ray-Mitchell, McLennan Community College

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Acknowledgments









P. Gerard Shaw, Dean College
Martin St. John, Westmoreland County Community College
John Striebich, Monroe Community College
Frank Titlow, St. Petersburg College
Bob Urell, Irvine Valley College
Dean Williamson, Brewton-Parker College #2004
John Wolford, LaBrae High School

In addition, a select group of instructors assisted the development of this material
by actually using it in their classrooms. Their input, along with their students’
feedback, has provided us critical confirmation that the material is effective and
impactful in the classroom:












Nikolaos Adamou, Borough of Manhattan CC
April Bailey, Shippensburg University of Pennsylvania
Michael Davis, Yavaipai College
Andrea Foster, John Taylor Community College
Frank Markham, Mesa State
Donn Miller-Kermani, Florida Institute of Technology
Diane Minger, Cedar Valley College
Tony Racka, Oakland Community College
P. Gerard Shaw, Dean College
Dean Williamson, Brewton-Parker College
David Woolgar, Santa Ana College

I am sincerely grateful to a great team of individuals at Unnamed Publisher who
made working on this project an enjoyable experience. Special thanks to Jeff
Shelstad and Eric Frank for their confidence in me and in the project and to Sharon
Koch-Schwarzmiller for her enthusiasm. Thanks to my project manager, Becky
Knauer, for her hard work, dedication to quality, constant support, and positive
attitude. Thanks also to several very special friends who made substantial
contributions to the textbook project: Ron Librach, Joseph Manzo, Judy Minot, and
Eleanore Stinner.
Thanks to the members of the Introduction to Business faculty team at Lehigh
University who are a constant source of ideas and advice. Their excitement about
the course and dedication to our students create a positive and supportive teaching
environment. I enjoy the hours we spend in the “bullpen” sharing teaching tips,
brainstorming ways to improve the course, and just having fun.

3


Acknowledgments

Finally, I thank my husband, Bill, my sons, Don and Mark, and their wives, Courtney
and Tara, for their support and encouragement during this project. They’re the best
of my world.

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Dedication
This book is dedicated to Jayden, Jack, Rowan, and Brooke who always bring joy to
my heart and a smile to my face.

5


Preface
My desire in writing this text was to provide faculty with a fully developed teaching
package that allows them to enhance student learning and introduce students to
business in an exciting way. Exploring Business is designed to be a powerful but simpleto-use teaching tool. I’ve devised a broad range of features that allow instructors to
introduce students to business in an exciting way, but also worked to fashion
material that’s straightforward, current, relevant, and easy to teach from. The text
is purposely brief and covers business essentials without burdening students or
faculty with unnecessary detail.

What’s New in the Second Edition
Given the dynamic nature of business today, it is essential that introduction-tobusiness texts stay current, and this was the goal of the second edition. The
coverage in each chapter was updated to reflect today’s environment in business.
This was accomplished by updating the chapter content, tables, figures, exercises,
problems, and cases. Numerous business examples were added to the text and
several new topics that are crucial to business today were introduced, including
sustainability, serial entrepreneurship, social media marketing, and cloud
computing.

Overview of Textbook Package
I’ve tried to build a textbook package that’s as supportive as possible to both
students and faculty The textbook package supports learning through content and
teaching materials designed to help students master topics and assess their
learning. The sixteen chapters are written using a modular format with selfcontained sections. Each module ends with a detailed summary and relevant
exercises written to assist students as they learn from the text.
Using our make-it-your-own (MIYO) platform, you can easily customize your book
to suit your needs and those of your students. You can reorder, add, or delete
chapters and sections; upload your own word or PDF documents; insert videos; add
discussion questions; and even edit the text at the line level.
As in other Introduction to Business books, this text uses a wide variety of
company-specific examples. However, I improve on the traditional approach by
adding an optional case study of a dynamic organization that can easily be

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Preface

integrated into the text. The company chosen for this purpose is Nike. I have also
included an optional business plan project.
I have designed this textbook package to be flexible and meet the needs of four
groups of instructors—those who want to
• teach the course using the textbook alone;
• teach the course using the comprehensive Nike case (or a company of
their choice);
• teach the course using the optional business plan project; or
• teach the course by incorporating both a company case study and the
business plan project.

Enhanced Learning
“Tell me and I forget. Teach me and I remember. Involve me and I learn.”
I believe that this quote summarizes an important goal of this textbook package: to
encourage students to be active learners. Thus I’ve designed the textbook to facilitate
the attainment of this goal. I strive to enhance student learning through thoughtprovoking questions, problems, and cases that ask students to do more than merely
regurgitate information from the text. Most of these exercises require students to
gather information, assess a situation, think about it critically, and reach a
conclusion. Many are based on current business situations involving well-known
companies of interest to students. Each chapter presents a number of Questions and
Problems as well as five cases on areas of skill and knowledge endorsed by the
Association to Advance Collegiate Schools of Business (AACSB): Learning on the
Web, Career Opportunities, The Ethics Angle, Team-Building Skills, and The Global
View. The questions are challenging and stimulating, and most are appropriate for
in-class discussions. More than 70 percent of our items help students build skills in
areas designated as critical by AACSB, including analytical skills, ethical awareness
and reasoning abilities, multicultural understanding and globalization, use of
information technology, and communications and team-oriented skills. Each
AACSB-inspired exercise is identified by an AACSB tag and a note indicating the
relevant skill area.

Author-Prepared Instructor’s Manual
For the past twelve years, I have been developing, coordinating and teaching an
Introduction to Business course in which first-year students are introduced to
business through the study of Nike and the preparation of a business plan. During

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Preface

this twelve-year period, more than 3,500 students have taken the course. Over the
years, sections of the course have been taught by a mix of permanent faculty,
graduate students, business executives, other adjuncts, and even the dean. Each
semester, I oversee the course and guide approximately ten instructors as they
teach their sections—a task that’s been made possible through the development and
continuous improvement of extensive teaching materials.
Because I feel strongly that well-structured and easily understood teaching
materials are vital to the success of this course, I have personally written the
Instructor’s Manual. In doing this, I relied on the experiences that I’ve gained in
developing these materials for my faculty team. The Instructor’s Manual includes
comprehensive teaching notes that integrate material from the chapter, material
geared toward the optional Nike case study, and material dedicated to the optional
business plan project. The easy-to-use notes include teaching tips and ample inclass activities. The Instructor’s Manual also contains author-prepared solutions to
all questions, problems and cases.

Test Item File and PowerPoint Slides
The teaching package includes an extensive Test Item File designed to assess
students’ understanding of each of the learning objectives. The Test Item File is
grouped by module. In addition, there are about thirty-five to forty PowerPoint
slides per chapter.

Nike: An Integrated Case Study
A Nike case study is available for those instructors who decide to introduce their
students to business using an exciting case—one which is updated yearly. Through
an in-depth study of a real company, students can learn not only about the
functional areas of business, but how these functional areas fit together. Studying a
dynamic organization on a real-time basis allows students to discover the
challenges that it faces and exposes them to critical issues affecting the business,
such as globalization, ethics and social responsibility, diversity, sustainability,
product innovation, supply chain management, social medial marketing, and ebusiness.
Students learn about Nike by reading a case study based on extensive research and
executive interviews. The case is broken down into 26 individual case notes, which
are linked to the appropriate sections of the text. Each provides a real-world
example to help students master a particular business topic. For example, after
reading about the ways companies promote their products, students are directed to
a Nike case note that traces the evolution of the company’s promotional strategies,

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Preface

including its well-known sports-marketing efforts. After reading chapter materials
on the pros and cons of doing business in a global environment, students can read a
Nike case note that examines both the benefits that Nike derives from its
international operations and the responsibilities that it has to the countries in
which it operates.
We help students expand their understanding of Nike by providing four awardwinning videos featuring key company executives discussing specifically chosen
topics: the company’s history, its corporate-responsibility challenges and
initiatives, its commitment to product innovation, and its carefully orchestrated
entrance into the soccer-shoe market. We structured interview questions to elicit
information that will be valuable to students in mastering particular topics, and
we’ve selected and organized footage to capture students’ attention. Instructors can
show the 15-minute videos in class or ask students to watch them online. Discussion
questions, written by the author, aid classroom discussions on the topics covered in
the videos. Each chapter also contains a multi-part question on one of the Nike case
notes covered in the chapter. These questions require students to think about the
case and present their opinions on the issues covered. In addition to these
questions, the test item file contains multiple-choice questions keyed to the Nike
cases.
Current (and sometimes controversial) topics can be woven into the class through
Nike-related memo or e-mail writing (or debating) assignments accompanying each
chapter. These assignments, which are updated frequently, provide students with
an opportunity to strengthen their writing skills and form opinions on current
issues affecting Nike. One assignment, for example, asks students to deliver an
opinion on Nike’s failure (until recently) to connect with female consumers.
Another asks students to discuss Nike’s use of celebrity athletes in light of recent
scandals involving several of its athletes. Once the memos themselves have been
composed, they underpin excellent in-class discussions or debates. In fact, as an
alternative to having students write memos, instructors might ask students to
research the topic and come to class prepared to debate the pertinent issues.
I’ve found that, by studying Nike, students willingly participate in classroom
discussions. Why? Because Nike is on just about everybody’s radar screen. Students
enjoy discussing the opportunities and challenges faced by Nike and speculating on
what the company intends to do about them, now and in the future.

Business Plan Project
I’m convinced that having students develop a business plan as a component of an
Introduction to Business course has considerable academic value. A business plan

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Preface

project introduces students to the excitement and challenges of starting a business
and helps them discover how the functional areas of business interact. Thus this
textbook package includes an optional business plan project that’s fully integrated
into the book. The business plan project is modeled after one used and refined by
me and my teaching team over the past twelve years. During this time period, more
than 800 student teams have prepared and presented business plans using this
approach.
If their instructor elects to assign the business plan project, students begin the
project early in the course by reviewing a document describing the business plan
project. In chapters that follow, students are asked to complete another section of
the 10-part business plan project. By the time they’ve reached the end of the course
they’re shown how to integrate each of these individual sections into a final version
of the plan. Because the project is carefully coordinated with the presentation of
course materials, students are able to apply what they’re learning, as they’re
learning it, to the practical process of preparing a business plan.
Because I understand that preparing the financial section of the business plan can
be difficult for students, we furnish students with an Excel template that simplifies
the process of preparing financial reports for their proposed businesses. They don’t
even need to be competent in Excel to use it; it’s designed to be simple to use, and
we provide detailed instructions.

Introduction to Business Community
Those teaching Introduction to Business come from varied backgrounds but share
common goals of exciting students about business and sparking their interest in
future business courses. I wrote this text to provide members of this community
with a fully developed teaching package that enhances the learning environment
and helps them introduce students to business in an exciting way. My hope is that
by sharing my materials, experiences and approach to teaching with others, they
will enjoy the course as much as I do.

Karen Collins

10


Chapter 1
The Foundations of Business
Why Is Apple Successful?
In 1976 Steve Jobs and Steve Wozniak created their first computer, the Apple I.This
vignette is based on an honors thesis written by Danielle M. Testa, “Apple, Inc.: An
Analysis of the Firm’s Tumultuous History, in Conjunction with the Abounding
Future” (Lehigh University), November 18, 2007. They invested a mere $1,300 and
set up business in Jobs’s garage. Three decades later, their business—Apple Inc.—has
become one of the world’s most influential and successful companies. Did you ever
wonder why Apple flourished while so many other young companies failed? How
did it grow from a garage start-up to a company generating $65 billion in sales?
How was it able to transform itself from a nearly bankrupt firm to a multinational
corporation with locations all around the world? You might conclude that it was the
company’s products, such as the Apple I and II, the Macintosh, or more recently its
wildly popular iPod, iPhone, and iPad. Or you might decide that it was its people: its
dedicated employees and loyal customers. Perhaps you will decide it was
luck—Apple simply was in the right place at the right time. Or maybe you will
attribute the company’s success to management’s willingness to take calculated
risks. Perhaps you will attribute Apple’s initial accomplishments and reemergence
to its cofounder, the late Steve Jobs. After all, Jobs was instrumental in the original
design of the Apple I and, after being ousted from his position with the company,
returned to save the firm from destruction and lead it onto its current path.
Before we decide what made Apple what it is today and
what will propel it into a successful future, let’s see if
you have all the facts about the possible choices: its
products, its customers, luck, willingness to take risks,
or Steve Jobs. We’re confident that you’re aware of
Apple’s products and understand that “Apple customers
are a loyal bunch. Though they’re only a small
percentage of all computer users, they make up for it
with their passion and outspokenness.”Ellen Lee,
“Faithful, sometimes fanatical Apple customers
continue to push the boundaries of loyalty,” San
Francisco Chronicle, March 26, 2006. We believe you can
understand the role that luck or risk taking could play
in Apple’s success. But you might like to learn more

11


Chapter 1 The Foundations of Business

about Steve Jobs, the company’s cofounder and former
CEO, before arriving at your final decision.

Following the iPad’s release in
2010, it has become popular for a
variety of uses including use by
students.

Growing up, Jobs had an interest in computers. He
attended lectures at Hewlett-Packard after school and
worked for the company during the summer months. He ©Thinkstock
took a job at Atari after graduating from high school
and saved his money to make a pilgrimage to India to
search for spiritual enlightenment. Following his India
trip, he attended Steve Wozniak’s “Homebrew Computer
Club” meetings, where the idea for building a personal computer surfaced.Lee
Angelelli, “Steve Paul Jobs,” http://ei.cs.vt.edu/~history/Jobs.html (accessed
January 21, 2012). “Many colleagues describe Jobs as a brilliant man who could be a
great motivator and positively charming. At the same time his drive for perfection
was so strong that employees who did not meet his demands are faced with
blistering verbal attacks.”Lee Angelelli, “Steve Paul Jobs,”
http://ei.cs.vt.edu/~history/Jobs.html (accessed January 21, 2012). Not everyone at
Apple appreciated Jobs’s brilliance and ability to motivate. Nor did they all go along
with his willingness to do whatever it took to produce an innovative, attractive,
high-quality product. So at age thirty, Jobs found himself ousted from Apple by John
Sculley, whom Jobs himself had hired as president of the company several years
earlier. It seems that Sculley wanted to cut costs and thought it would be easier to
do so without Jobs around. Jobs sold $20 million of his stock and went on a twomonth vacation to figure out what he would do for the rest of his life. His solution:
start a new personal computer company called NextStep. In 1993, he was invited
back to Apple (a good thing, because neither his new company nor Apple was doing
well).
Steve Jobs was definitely not humble, but he was a visionary and had a right to be
proud of his accomplishments. Some have commented that “Apple’s most successful
days have occurred with Steve Jobs at the helm.”Cyrus Farivar, “Apple’s first 30
years; three decades of contributions to the computer industry,” Macworld, June
2006, 2. Jobs did what many successful CEOs and managers do: he learned, adjusted,
and improvised.Dan Barkin, “He made the iPod: How Steve Jobs of Apple created the
new millennium’s signature invention,” Knight Ridder Tribune Business News,
December 3, 2006, 1. Perhaps the most important statement that can be made about
him is this: he never gave up on the company that once turned its back on him. So
now you have the facts. Here’s a multiple-choice question that you’ll likely get
right: Apple’s success is due to (a) its products, (b) its customers, (c) luck, (d)
willingness to take risks, (e) Steve Jobs, or (f) some combination of these options.

12


Chapter 1 The Foundations of Business

1.1 Introduction
As the story of Apple suggests, today is an interesting time to study business.
Advances in technology are bringing rapid changes in the ways we produce and
deliver goods and services. The Internet and other improvements in
communication (such as smartphones, video conferencing, and social networking)
now affect the way we do business. Companies are expanding international
operations, and the workforce is more diverse than ever. Corporations are being
held responsible for the behavior of their executives, and more people share the
opinion that companies should be good corporate citizens. Plus—and this is a big
plus—businesses today are facing the lingering effects of what many economists
believe is the worst financial crisis since the Great Depression.Jon Hilsenrath,
Serena Ng, and Damian Paletta, “Worst Crisis Since ’30s, With No End Yet in Sight,”
Wall Street Journal, Markets, September 18, 2008, http://online.wsj.com/article/
SB122169431617549947.html (accessed January 21, 2012). Economic turmoil that
began in the housing and mortgage industries as a result of troubled subprime
mortgages quickly spread to the rest of the economy. In 2008, credit markets froze
up and banks stopped making loans. Lawmakers tried to get money flowing again
by passing a $700 billion Wall Street bailout, yet businesses and individuals were
still denied access to needed credit. Without money or credit, consumer confidence
in the economy dropped and consumers cut back their spending. Businesses
responded by producing fewer products, and their sales and profits dropped.
Unemployment rose as troubled companies shed the most jobs in five years, and
760,000 Americans marched to the unemployment lines.“How the Economy Stole
the Election,” CNN.com, http://money.cnn.com/galleries/2008/news/0810/
gallery.economy_election/index.html (accessed January 21, 2012). The stock market
reacted to the financial crisis and its stock prices dropped by 44 percent while
millions of Americans watched in shock as their savings and retirement accounts
took a nose dive. In fall 2008, even Apple, a company that had enjoyed strong sales
growth over the past five years, began to cut production of its popular iPhone.
Without jobs or cash, consumers would no longer flock to Apple’s fancy retail stores
or buy a prized iPhone.Dan Gallagher, “Analyst says Apple is cutting back
production as economy weakens,” MarketWatch, November 3, 2008,
http://www.marketwatch.com/news/story/apple-cutting-back-iphoneproduction/story.aspx?guid=%7B7F2B6F99-D063-4005-87ADD8C36009F29B%7D&dist=msr_1 (accessed January 21, 2012). Things have turned
around for Apple, which reported blockbuster sales for 2011 in part because of
strong customer response to the iPhone 4S. But not all companies or individuals are
doing so well. The economy is still struggling, unemployment is high (particularly
for those ages 16 to 24), and home prices remain low.

13


Chapter 1 The Foundations of Business

As you go through the course with the aid of this text, you’ll explore the exciting
world of business. We’ll introduce you to the various activities in which
businesspeople engage—accounting, finance, information technology, management,
marketing, and operations. We’ll help you understand the roles that these activities
play in an organization, and we’ll show you how they work together. We hope that
by exposing you to the things that businesspeople do, we’ll help you decide whether
business is right for you and, if so, what areas of business you’d like to study
further.

1.1 Introduction

14


Chapter 1 The Foundations of Business

1.2 Getting Down to Business
LEARNING OBJECTIVE
1. Identify the main participants of business, the functions that most
businesses perform, and the external forces that influence business
activities.

A business1 is any activity that provides goods or services to consumers for the
purpose of making a profit. When Steve Jobs and Steve Wozniak created Apple
Computer in Jobs’s family garage, they started a business. The product was the
Apple I, and the company’s founders hoped to sell their computers to customers for
more than it cost to make and market them. If they were successful (which they
were), they’d make a profit2.
Before we go on, let’s make a couple of important distinctions concerning the terms
in our definitions. First, whereas Apple produces and sells goods (Mac, iPhone, iPod,
iPad), many businesses provide services. Your bank is a service company, as is your
Internet provider. Hotels, airlines, law firms, movie theaters, and hospitals are also
service companies. Many companies provide both goods and services. For example,
your local car dealership sells goods (cars) and also provides services (automobile
repairs).

1. Activity that provides goods or
services to consumers for the
purpose of making a profit.
2. Difference between the
revenue that a company brings
in from selling goods and
services and the costs of
generating this revenue.
3. Organization that has a
purpose other than returning
profits to owners.

Second, some organizations are not set up to make profits. Many are established to
provide social or educational services. Such not-for-profit (or nonprofit)
organizations3 include the United Way of America, Habitat for Humanity, the Boys
and Girls Clubs, the Sierra Club, the American Red Cross, and many colleges and
universities. Most of these organizations, however, function in much the same way
as a business. They establish goals and work to meet them in an effective, efficient
manner. Thus, most of the business principles introduced in this text also apply to
nonprofits.

Business Participants and Activities
Let’s begin our discussion of business by identifying the main participants of
business and the functions that most businesses perform. Then we’ll finish this
section by discussing the external factors that influence a business’s activities.

15


Chapter 1 The Foundations of Business

Participants
Every business must have one or more owners whose primary role is to invest
money in the business. When a business is being started, it’s generally the owners
who polish the business idea and bring together the resources (money and people)
needed to turn the idea into a business. The owners also hire employees to work for
the company and help it reach its goals. Owners and employees depend on a third
group of participants—customers. Ultimately, the goal of any business is to satisfy
the needs of its customers in order to generate a profit for the owners.

Functional Areas of Business
The activities needed to operate a business can be
divided into a number of functional areas: management,
operations, marketing, accounting, and finance. Let’s
briefly explore each of these areas.

Figure 1.1

Management
Managers are responsible for the work performance of
other people. Management4 involves planning for,
organizing, staffing, directing, and controlling a
company’s resources so that it can achieve its goals.
Managers plan by setting goals and developing
strategies for achieving them. They organize activities
and resources to ensure that company goals are met.
They staff the organization with qualified employees
and direct them to accomplish organizational goals.
Finally, managers design controls for assessing the
success of plans and decisions and take corrective action
when needed.

Hospitals specialize in an
intangible product—health care.
© 2010 Jupiterimages
Corporation

Operations

4. Process of planning for,
organizing, directing, and
controlling a company’s
resources so that it can achieve
its goals.
5. Person who designs and
oversees the process that
converts resources into goods
or services.

1.2 Getting Down to Business

All companies must convert resources (labor, materials, money, information, and so
forth) into goods or services. Some companies, such as Apple, convert resources
into tangible products—Macs, iPhones, iPods, iPads. Others, such as hospitals,
convert resources into intangible products—health care. The person who designs
and oversees the transformation of resources into goods or services is called an
operations manager5. This individual is also responsible for ensuring that products
are of high quality.

16


Chapter 1 The Foundations of Business

Marketing
Marketing6 consists of everything that a company does to identify customers’
needs and designs products to meet those needs. Marketers develop the benefits
and features of products, including price and quality. They also decide on the best
method of delivering products and the best means of promoting them to attract and
keep customers. They manage relationships with customers and make them aware
of the organization’s desire and ability to satisfy their needs.

Accounting
Managers need accurate, relevant, timely financial information, and accountants
provide it. Accountants7 measure, summarize, and communicate financial and
managerial information and advise other managers on financial matters. There are
two fields of accounting. Financial accountants prepare financial statements to help
users, both inside and outside the organization, assess the financial strength of the
company. Managerial accountants prepare information, such as reports on the cost of
materials used in the production process, for internal use only.

Finance
Finance8 involves planning for, obtaining, and managing a company’s funds.
Finance managers address such questions as the following: How much money does
the company need? How and where will it get the necessary money? How and when
will it pay the money back? What should it do with its funds? What investments
should be made in plant and equipment? How much should be spent on research
and development? How should excess funds be invested? Good financial
management is particularly important when a company is first formed, because
new business owners usually need to borrow money to get started.

6. Marketing is the activity, set of
institutions, and processes for
creating, communicating,
delivering, and exchanging
offerings that have value for
customers, clients, partners,
and society at large.
7. Financial advisor responsible
for measuring, summarizing,
and communicating financial
and managerial information.
8. Activities involved in planning
for, obtaining, and managing a
company’s funds.

1.2 Getting Down to Business

17


Chapter 1 The Foundations of Business

Figure 1.2 Business and Its Environment

External Forces that Influence Business Activities
Apple and other businesses don’t operate in a vacuum: they’re influenced by a
number of external factors. These include the economy, government, consumer
trends, and public pressure to act as good corporate citizens. Figure 1.2 "Business
and Its Environment" sums up the relationship among the participants in a
business, its functional areas, and the external forces that influence its activities.
One industry that’s clearly affected by all these factors is the fast-food industry. A
strong economy means people have more money to eat out at places where food
standards are monitored by a government agency, the Food and Drug
Administration. Preferences for certain types of foods are influenced by consumer
trends (eating fried foods might be OK one year and out the next). Finally, a number
of decisions made by the industry result from its desire to be a good corporate citizen.
For example, several fast-food chains have responded to environmental concerns by
eliminating Styrofoam containers.David Baron, “Facing-Off in Public,” Stanford
Business, April 15, 2006, http://www.gsb.stanford.edu/news/bmag/sbsm0308/
feature_face_off.shtml (accessed January 21, 2012). As you move through this text,
you’ll learn more about these external influences on business. (Section 1.3 "What Is
Economics?" will introduce in detail one of these external factors—the economy.)

1.2 Getting Down to Business

18


Chapter 1 The Foundations of Business

KEY TAKEAWAYS
• The main participants in a business are its owners, employees, and
customers.
• Businesses are influenced by such external factors as the economy,
government, consumer trends, and public pressure to act as good
corporate citizens.
• The activities needed to run a business can be divided into five
functional areas:
1. Management involves planning, organizing, staffing,
directing, and controlling resources to achieve
organizational goals.
2. Operations transforms resources (labor, materials, money,
and so on) into products.
3. Marketing works to identify and satisfy customers’ needs.
4. Finance involves planning for, obtaining, and managing
company funds.
5. Accounting entails measuring, summarizing, and
communicating financial and managerial information.

EXERCISES
1. (AACSB) Analysis
The Martin family has been making guitars out of its factory in
Nazareth, Pennsylvania, factory for more than 150 years. In 2004,
Martin Guitar was proud to produce its millionth instrument. Go
to http://www.martinguitar.com to link to the Martin Guitar
Web site and read about the company’s long history. You’ll
discover that, even though it’s a family-run company with a
fairly unique product, it operates like any other company.
Identify the main activities or functions of Martin Guitar’s
business and explain how each activity benefits the company.
2. (AACSB) Analysis
Name four external factors that have an influence on business.
Give examples of the ways in which each factor can affect the
business performance of two companies: Wal-Mart and Ford.

1.2 Getting Down to Business

19


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