Describe how companies reduce costs through contract manufacturing and outsourcing.
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Exploring BusinessExploring Business
Exploring BusinessExploring Business
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U N I V E R S I T Y O F M I N N E S O T A L I B R A R I E S P U B L I S H I N G E D I T I O N , 2 0 1 6 . T H I S E D I T I O N A D A P T E D F R O M A W O R K O R I G I N A L L Y P R O D U C E D I N 2 0 1 0 B Y A P U B L I S H E R W H O H A S R E Q U E S T E D T H A T I T N O T R E C E I V E
A T T R I B U T I O N . M I N N E A P O L I S , M N
Exploring Business by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.
Publisher Information x
Chapter 1: The Foundations of Business
1.1 Introduction 2 1.2 Getting Down to Business 4 1.3 What Is Economics? 9 1.4 Perfect Competition and Supply and Demand 15 1.5 Monopolistic Competition, Oligopoly, and Monopoly 21 1.6 Measuring the Health of the Economy 24 1.7 Government’s Role in Managing the Economy 31 1.8 Cases and Problems 35
Chapter 2: Business Ethics and Social Responsibility
2.1 Misgoverning Corporations: An Overview 40 2.2 The Individual Approach to Ethics 46 2.3 Identifying Ethical Issues 54 2.4 The Organizational Approach to Ethics 61 2.5 Corporate Social Responsibility 65 2.6 Environmentalism 76 2.7 Stages of Corporate Responsibility 82 2.8 Cases and Problems 87
Chapter 3: Business in a Global Environment
3.1 The Globalization of Business 94 3.2 Opportunities in International Business 103 3.3 The Global Business Environment 113 3.4 Trade Controls 123 3.5 Reducing International Trade Barriers 127
3.6 Preparing for a Career in International Business 133 3.7 Cases and Problems 135
Chapter 4: Selecting a Form of Business Ownership
4.1 Factors to Consider 140 4.2 Sole Proprietorship 142 4.3 Partnership 146 4.4 Corporation 151 4.5 Other Types of Business Ownership 156 4.6 Mergers and Acquisitions 162 4.7 Cases and Problems 166
Chapter 5: The Challenges of Starting a Business
5.1 What Is an Entrepreneur? 173 5.2 The Importance of Small Business to the U.S. Economy 182 5.3 What Industries Are Small Businesses In? 188 5.4 Advantages and Disadvantages of Business Ownership 193 5.5 Starting a Business 197 5.6 The Business Plan 204 5.7 How to Succeed in Managing a Business 211 5.8 Cases and Problems 217
Chapter 6: Managing for Business Success
6.1 What Do Managers Do? 223 6.2 Planning 225 6.3 Organizing 233 6.4 Directing 245 6.5 Controlling 249 6.6 Managerial Skills 252 6.7 Cases and Problems 258
Chapter 7: Recruiting, Motivating, and Keeping Quality Employees
7.1 Human Resource Management 266 7.2 Developing Employees 275 7.3 Motivating Employees 280 7.4 What Makes a Great Place to Work? 287 7.5 Performance Appraisal 297 7.6 Labor Unions 305
7.7 Cases and Problems 312
Chapter 8: Teamwork and Communications
8.1 The Team and the Organization 317 8.2 Why Teamwork Works 324 8.3 The Team and Its Members 330 8.4 The Business of Communication 339 8.5 Communication Channels 346 8.6 Forms of Communication 356 8.7 Cases and Problems 363
Chapter 9: Marketing: Providing Value to Customers
9.1 What Is Marketing? 369 9.2 The Marketing Mix 377 9.3 Pricing a Product 385 9.4 Placing a Product 389 9.5 Promoting a Product 400 9.6 Interacting with Your Customers 405 9.7 The Product Life Cycle 413 9.8 The Marketing Environment 418 9.9 Careers in Marketing 428 9.10 Cases and Problems 431
Chapter 10: Product Design and Development
10.1 What Is a Product? 436 10.2 Where Do Product Ideas Come From? 441 10.3 Identifying Business Opportunities 446 10.4 Understand Your Industry 450 10.5 Forecasting Demand 453 10.6 Breakeven Analysis 457 10.7 Product Development 460 10.8 Protecting Your Idea 466 10.9 Cases and Problems 468
Chapter 11: Operations Management in Manufacturing and Service Industries
11.1 Operations Management in Manufacturing 473 11.2 Facility Layouts 480 11.3 Managing the Production Process in a Manufacturing Company 484
11.4 Graphical Tools: PERT and Gantt Charts 489 11.5 The Technology of Goods Production 493 11.6 Operations Management for Service Providers 496 11.7 Producing for Quality 505 11.8 Cases and Problems 511
Chapter 12: The Role of Accounting in Business
12.1 The Role of Accounting 517 12.2 Understanding Financial Statements 523 12.3 Accrual Accounting 537 12.4 Financial Statement Analysis 547 12.5 The Profession: Ethics and Opportunities 559 12.6 Cases and Problems 566
Chapter 13: Managing Financial Resources
13.1 The Functions of Money 572 13.2 Financial Institutions 577 13.3 The Federal Reserve System 585 13.4 The Role of the Financial Manager 592 13.5 Understanding Securities Markets 601 13.6 Financing the Going Concern 608 13.7 Careers in Finance 612 13.8 Cases and Problems 615
Chapter 14: Personal Finances
14.1 Financial Planning 633 14.2 Time Is Money 645 14.3 The Financial Planning Process 650 14.4 A House Is Not a Piggy Bank: A Few Lessons from the Subprime Crisis 662 14.5 Cases and Problems 671
Chapter 15: Managing Information and Technology
15.1 Data versus Information 674 15.2 Managing Data 681 15.3 Types of Information Systems 686 15.4 Computer Networks and Cloud Computing 693 15.5 Data Communications Networks 700 15.6 Security Issues in Electronic Communication 707
15.7 Careers in Information Management 715 15.8 Cases and Problems 717
Chapter 16: The Legal and Regulatory Environment of Business
16.1 Law and the Legal System 721 16.2 Criminal versus Civil Law 725 16.3 Negligence Torts 731 16.4 Product Liability 738 16.5 Some Principles of Public Law 752 16.6 Cases and Problems 770
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is made available under the terms of a Creative Commons Attribution-NonCommercial-ShareAlike license.
Chapter 1: The Foundations of Business
1.2 Getting Down to Business
1.3 What Is Economics?
1.4 Perfect Competition and Supply and Demand
1.5 Monopolistic Competition, Oligopoly, and Monopoly
1.6 Measuring the Health of the Economy
1.7 Government’s Role in Managing the Economy
1.8 Cases and Problems
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
(Hilsenrath, et. al., 2008). 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 lines1. 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 (Gallagher, 2008). 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.
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“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).
Gallagher, D., “Analyst says Apple is cutting back production as economy weakens,” MarketWatch, November
3, 2008, http://www.marketwatch.com/news/story/apple-cutting-back-iphone-production/
story.aspx?guid=%7B7F2B6F99-D063-4005-87AD-D8C36009F29B%7D&dist=msr_1 (accessed January 21,
Hilsenrath, J., 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).
1 . 1 I N T R O D U C T I O N • 3
1.2 Getting Down to Business
1. Identify the main participants of business, the functions that most businesses perform, and the external forces that influence business activities.
A business 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 profit.
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).
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) organizations 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 ActivitiesBusiness 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
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
Functional Areas of BusinessFunctional Areas of Business
Hospitals specialize in an intangible product—health care.
ReSurge International – CC BY-NC-ND 2.0.
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.
Managers are responsible for the work performance of other people. Management 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
1 . 2 G E T T I N G D O W N T O B U S I N E S S • 5
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.
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 manager. This individual is also
responsible for ensuring that products are of high quality.
Marketing 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
Managers need accurate, relevant, timely financial information, and accountants provide it. Accountants 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 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.
Figure 1.2 Business and Its Environment
6 • E X P L O R I N G B U S I N E S S
External Forces that Influence Business ActivitiesExternal 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 (Baron, 2006). 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.)
• 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 . 2 G E T T I N G D O W N T O B U S I N E S S • 7
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.
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.
Baron, D., “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).
8 • E X P L O R I N G B U S I N E S S
1.3 What Is Economics?
1. Define economics and identify factors of production.
2. Explain how economists answer the three key economics questions.
3. Compare and contrast economic systems.
To appreciate how a business functions, we need to know something about the economic environment in which
it operates. We begin with a definition of economics and a discussion of the resources used to produce goods and
Resources: Inputs and OutputsResources: Inputs and Outputs
Economics is the study of the production, distribution, and consumption of goods and services. Resources are the
inputs used to produce outputs. Resources may include any or all of the following:
• Land and other natural resources
• Labor (physical and mental)
• Capital, including buildings and equipment
Resources are combined to produce goods and services. Land and natural resources provide the needed raw
materials. Labor transforms raw materials into goods and services. Capital (equipment, buildings, vehicles, cash,
and so forth) are needed for the production process. Entrepreneurship provides the skill and creativity needed to
bring the other resources together to produce a good or service to be sold to the marketplace.
Because a business uses resources to produce things, we also call these resources factors of production. The
factors of production used to produce a shirt would include the following:
• The land that the shirt factory sits on, the electricity used to run the plant, and the raw cotton from which
the shirts are made
• The laborers who make the shirts
• The factory and equipment used in the manufacturing process, as well as the money needed to operate the
• The entrepreneurship skill used to coordinate the other resources to initiate the production process and the
distribution of the goods or services to the marketplace
Input and Output MarketsInput and Output Markets
Many of the factors of production (or resources) are provided to businesses by households. For example,
households provide businesses with labor (as workers), land and buildings (as landlords), and capital (as
investors). In turn, businesses pay households for these resources by providing them with income, such as wages,
rent, and interest. The resources obtained from households are then used by businesses to produce goods and
services, which are sold to the same households that provide businesses with revenue. The revenue obtained
by businesses is then used to buy additional resources, and the cycle continues. This circular flow is described
in Figure 1.3 “The Circular Flow of Inputs and Outputs”, which illustrates the dual roles of households and
• Households not only provide factors of production (or resources) but also consume goods and services.
• Businesses not only buy resources but also produce and sell both goods and services.
Figure 1.3 The Circular Flow of Inputs and Outputs
1 0 • E X P L O R I N G B U S I N E S S
The Questions Economists AskThe Questions Economists Ask
Economists study the interactions between households and businesses and look at the ways in which the factors of
production are combined to produce the goods and services that people need. Basically, economists try to answer
three sets of questions:
1. What goods and services should be produced to meet consumers’ needs? In what quantity? When should
they be produced?
2. How should goods and services be produced? Who should produce them, and what resources, including
technology, should be combined to produce them?
3. Who should receive the goods and services produced? How should they be allocated among consumers?
1 . 3 W H A T I S E C O N O M I C S ? • 1 1
Economic SystemsEconomic Systems
The answers to these questions depend on a country’s economic system—the means by which a society
(households, businesses, and government) makes decisions about allocating resources to produce products and
about distributing those products. The degree to which individuals and business owners, as opposed to the
government, enjoy freedom in making these decisions varies according to the type of economic system. Generally
speaking, economic systems can be divided into two systems: planned systems and free market systems.
Planned SystemsPlanned Systems
In a planned system, the government exerts control over the allocation and distribution of all or some goods
and services. The system with the highest level of government control is communism. In theory, a communist
economy is one in which the government owns all or most enterprises. Central planning by the government
dictates which goods or services are produced, how they are produced, and who will receive them. In practice,
pure communism is practically nonexistent today, and only a few countries (notably North Korea and Cuba)
operate under rigid, centrally planned economic systems.
Under socialism, industries that provide essential services, such as utilities, banking, and health care, may be
government owned. Other businesses are owned privately. Central planning allocates the goods and services
produced by government-run industries and tries to ensure that the resulting wealth is distributed equally. In
contrast, privately ow
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