Business Principles

Tweetear

The prosperity of Americans is not equally distributed among the population.

According to the Bureau of the Census, between 12 and 15 percent of the population in any given year live in poverty. This means that these people are poorly housed, clothed, and fed. Many live in inner-city slums or in rural areas. Statistics suggest that the richest 20 percent of American families have continued to earn more over the past 30 years, whereas the income of the lowest fifth has remained about the same. Thus, the gap between the rich and poor is widening.

Due to such programs as Social Security, poverty among elderly people is much lower today than previously. However, many children live in poverty because they reside in households where one or more parents do not have the education and skills to hold high-paying jobs. Many parents cannot participate fully in the labor
force because they don’t have access to good-quality, affordable child care. The strongest influence on increased income is increased education.

The government has several programs to reduce poverty. Minimum wage rates, unemployment benefits, financial or food aid, and subsidized medical care provide a basic safety net for the economically disadvantaged. Businesses increasingly offer training programs to provide skills that enable people to find and hold jobs.

Tweetear

As the population grows, so does the labor force. The labor force includes most people aged 16 or over who are available for work, whether employed or unemployed. Of course, many of the people in the labor force may be available for work but are not actively seeking employment, such as students and full-time
homemakers. In a recent year, the Bureau of Labor Statistics reported that the size of the American labor force was almost 140 million. Figure 2-2 shows the growth of the labor force.

The labor participation rate is the percentage of the labor force that is either employed or actively seeking employment. In the last three decades, the labor participation rate increased primarily because many more women took jobs outside the home. In 1975, around 46 percent of women worked outside the home.




By 2005, the figure had risen to nearly 60 percent. Some reasons for the increase are that women have been choosing not to marry, to delay marriage, or to marry and pursue careers before or while raising children. Figure 2-3 shows the trend in the labor participation rates for males and females. The expansion of the economy through much of the 1990s coaxed many people, such as retirees, people with disabilities, and homemakers, to enter the labor force.





 
The growth of the economy, changes in the population and where people live, and technological advances have created a variety of new jobs. One of the great strengths of the American economy has been its ability to create new jobs. Most new jobs are in the service industries, such as computer programming, banking
and insurance, leisure, food services, and health care. The growing use of computers has created a large number of technical jobs in areas such as computer applications and programming. The Internet has influenced how firms conduct business, and e-commerce is rapidly emerging as a new way to sell and buy goods and services. The rapid growth in the computer industry has led to a shortage of qualified workers and, in turn, has led to high wages for those with the necessary education and skills. To meet the demand for such high-tech workers, the government allows firms to hire workers from foreign countries.


Many of the new jobs require more skills, which means workers have to be educated. As a result, more people are going to college or acquiring training in new skills. As technology changes and old jobs disappear, many workers need retraining. At the same time, technology has simplified jobs, such as shortorder cook or bank teller. These jobs now require little training and therefore pay low wages. Some jobs, such as telephone operator, have been eliminated since the work has been automated. A large number of workers are in dead-end jobs and are not earning an adequate income to maintain a reasonable standard of living.

For various reasons, including lack of financial resources, public schools in many areas are failing to provide the quality of education historically expected of high school graduates. High school graduates are particularly deficient in math, computer, social, and communication skills. Businesses are sometimes forced to provide remedial education in basic skills for newly hired workers.

Tweetear

Americans are people on the move. Every year, on average, one out of five Americans changes his or
her address. People move short distances, often from cities to suburbs. They also move long distances,
such as from the Frost Belt, the colder northern half of the country, to the Sun Belt, the warmer southern
half of the nation. As businesses relocate to where customers are located, they affect where other people move to in order to find jobs. For example, factories have relocated to the southeastern states, where wage rates are lower than in the Rust Belt - the north central and northeastern states where the major manufactur-
ing firms once dominated. As illustrated at the beginning of this chapter, the Quest Company decided to move from Ohio to Georgia to lower its labor and other costs.

The continuing movement of people from the city to the suburbs and from the north to the south has led to many unintended consequences. When families and businesses leave cities in large numbers, the cities lose the financial ability to provide high-quality services. As a result, crime and poverty have increased in some large cities. Many southern states such as Georgia and Florida have experienced rapid economic and industrial growth. When businesses move from the Rust Belt, they leave behind unemployed workers, closed factories, decaying towns, and homeless people. However, in recent years, political and business leaders have taken bold steps to revitalize cities and communities in the northern states.

Tweetear

The nature of the population has been changing, too. Currently, more than 80 percent of Americans can be racially classified as Caucasian. Because of higher birth rates among nonwhite Hispanics and African-Americans, and recent immigration, their proportions in the population have been growing. This growing
diversity of the workforce increases the need for better cross-cultural communication and sensitivity to the interests and concerns of various groups.

Changes in the birth rate have caused shifts in the number of people in different age groups. For example, because of the high birth rate during 1945–1965, there are more people in the 42–62 age group. Because of this baby boom, the number of people aged 55 and over today has increased substantially. The lowbirth-rate period that followed the boomer period is called the baby bust period.


The baby bust period has created a shortage of young workers, called “busters.” This shortage will con-
tinue to create serious problems, especially when the boomers retire in large numbers.

Businesses must be prepared to offer the kinds of goods and services needed by people of different age
and racial groups. For instance, because of the increase of Spanish-speaking people, some newspapers
and magazines publish Spanish-language editions.

As people live longer, food companies continue to develop special foods and products for the elderly.

Tweetear

The population of the United States has grown steadily over the years, as shown in Figure 2-1. The growth rate is largely determined by the birth rate, the death rate, and the level of immigration into the country.

Generally, as the standard of living increases, the birth rate falls, and this has been the case in the United States. At the same time, because of better health care and an improved public health system,
people are living much longer.

Much of the population increase takes place through immigration. The United States annually accepts more legal immigrants than any other country in the world, with large numbers coming from Asian and Latin American nations. Many immigrants also enter the country illegally to seek a better life.

Tweetear

The gross domestic product (GDP) of a country cannot increase unless there are enough people to provide the necessary labor and to purchase the goods and services produced. Population statistics enable businesses to plan how much and what kinds of goods and services to offer. However, the GDP of a country
must grow at a faster rate than its population in order to improve living standards. Both the size and the characteristics of the population are important in business planning. Information about the size and characteristics of the

American population can be found at the Web site of the U.S. Census Bureau, www.census.gov.

GROWING POPULATION

CHANGING POPULATION

MOVING POPULATION

 

 

Tweetear

Since its establishment more than 225 years ago, the United States has become the world’s leading economic, technical, and political power. The country has the world’s largest economy and relies on highly sophisticated and modern means of production, transportation, and communication. Americans enjoy a very
high standard of living. All these achievements can be attributed to the enormous resources that the country possesses: the ingenuity of its people, a democratic form of government, a social system that rewards individual initiative, and public policies that encourage innovation.

Despite the many successes, problems persist with regard to discrimination, crime and violence, environmental protection, ethical conduct, and social responsibility. Because businesses are a part of the total society in which they operate, social changes affect how they operate. Similarly, businesses affect society in different ways, as Tyler Eastman will soon discover. Thus, one cannot study business principles and management without also having an understanding of the social forces that shape business.

People are a firm’s most important resource. A recent study of top managers found that finding and retaining qualified workers was more important than finance, technology, product innovation, or international business. The workers help businesses achieve their organizational goals. The challenges faced by businesses are closely interwoven with those experienced by the workers.

In particular, such issues as those caused by changes in population and lifestyles have a direct bearing on business operations and on the well-being of the nation.

Tweetear

Whether you plan to operate a business of your own, move into a top management position in a large company, or work as a valuable and valued employee for a company, you benefit from being well informed about the production, marketing, and financial activities of the business. As an owner, you must have a complete understanding of all phases of business operations, including employee relations and government regulations. This knowledge will also give you many advantages as an employee in organizations that empower their personnel to take greater responsibility for managing their own work and participating in employee teams.

Moreover, if you expect to become a supervisor or an executive of a company, you must fully grasp how the activities of all departments are coordinated in a smoothly operating business. Even organizations that are not profit-making businesses, such as the government and charitable organizations, operate in a manner similar to businesses. Business knowledge will help you contribute as an employee or as a manager in these organizations as well.

Tweetear

Sometimes large businesses are not viewed as places that encourage the creativity that leads to new ideas and opportunities. Some talented employees leave to start their own businesses when they believe they are not able to use all of their talents.

To keep their businesses on the cutting edge and to encourage their creative employees, some larger employers are supporting intrapreneurs. An intrapreneur is an employee who is given funds and freedom to create a special unit or department within a company in order to develop a new product, process, or service. Although the main company finances the new venture, intrapreneurs enjoy the freedom of running their operations with little or no interference from upper managers.

Some of the largest corporations in the United States provide intrapreneurship opportunities that allow valuable employees to provide the company with innovative products and services. IBM and other major corporations such as 3M (which makes Scotch tape, Post-it Notes, and a variety of other products) and General Electric have also captured the innovative and entrepreneurial talents of employees.

Employees benefit because they risk neither their salaries nor their savings to launch a new business.

Employers benefit by keeping creative employees who might have started successful competing businesses. Furthermore, employers and consumers benefit because new and better products, processes, and services are introduced at a quickened pace through intrapreneurships.

In recent years, businesses that struggled for survival in a global economy looked for ways to increase employee productivity and commitment.

Two methods were sharing profits with employees and offering employees the opportunity to become
owners of the company through the purchase of stock. These programs provide an extra incentive
for employees to increase their efficiency and effectiveness. As a business becomes more successful and profits increase, the employees benefit by receiving a percentage of those profits or a higher value for the stock they own. Companies benefit by obtaining funds from employees who buy shares and by having a loyal, productive workforce.

Tweetear

Anyone who starts a business has a responsibility to the entire community in which the business operates. Customers, employees, suppliers, and even competitors are affected by a single business. Therefore, a business that fails creates an economic loss that is shared by others in society. For example, an unsuccessful business probably owes money to other firms that will also suffer a loss because they cannot collect. In fact, a business that cannot collect from several other businesses may be placed in a weakened financial condition and it, too, may fail. Successful businesses also have economic and social responsibilities.

Source: Adapted from Business Failure Record. The Dun & Bradstreet Corporation, 1992.

The privilege of operating a business with the potential of making a profit also carries a number of obligations to a variety of groups that serve and are served by the company. Many years ago, an executive of a major business association described the many responsibilities of business owners:

• TO CUSTOMERS: That they may have the best at the lowest cost, consistent with fairness to all those engaged in production and distribution

• TO EMPLOYEES: That their welfare will not be sacrificed for the benefit of others, and in their employment relations, their rights will be respected

• TO MANAGEMENT: That it may be recognized in proportion to its demonstrated ability, considering always the interest of others

• TO COMPETITORS: That there will be avoidance of every form of unfair competition

• TO INVESTORS: That their rights will be safeguarded and they will be kept so informed that they can exercise their own judgment respecting their interests

• TO THE PUBLIC: That the business will strive in all its operations and relations to promote the general welfare and observe faithfully the laws of the land.

Just as every business has an obligation to the community, the community has an obligation to each business. Society should be aware that owners face many risks while trying to earn a fair profit on the investment made in the business.

Consumers should realize that the prices of goods and services are affected by expenses that arise from operating a business. Employees should realize that a business cannot operate successfully, and thereby provide jobs, unless each worker is properly trained and motivated to work. The economic health of a community is improved when groups in the community are aware of each other’s obligations.

Tweetear

The success of a business depends greatly on managerial effectiveness. If a business is well managed, it will likely earn an adequate income from which it can pay all expenses and earn a profit. If it does not earn a profit, it cannot continue for long. An entrepreneur assumes the risk of success or failure.

Risk -  the possibility of failure - is one of the characteristics of business that all entrepreneurs must face. Risk involves competition from other businesses, changes in prices, changes in style, competition from new products, and changes that arise from economic conditions. Whenever risks are high, the risk of business
failure is also high.

Businesses close for a number of reasons. One out of every four to five businesses fails within three years, and about half cease operations within six to seven years. However, those figures include firms that voluntarily go out of business, such as by selling to someone else or by changing the type of ownership. The results of one study indicated that only 18 percent of all small firms failed within eight years of opening, whereas 28 percent closed voluntarily. The reported causes of business failure are shown in Figure 1-4. Most often, economic and financial factors cause businesses to fail.

Tweetear

For the person with an entrepreneurial spirit, a popular way to launch a small business is through a franchise. A franchise is a legal agreement in which an individual or small group of investors purchases the right to sell a company’s product or service under the company’s name and trademark. Wireless Zone, Supercuts, and Bruegger’s Bagels are examples of franchises operated by small-business owners under such agreements. The two parties to a franchise agreement are the franchisor, the parent company of a franchise agreement that provides the product or service, and the franchisee, the distributor of a franchised product or service.

In a typical franchise agreement, the franchisee pays an initial fee-often $100,000 or more-o the franchisor, and a percentage-usually 3 to 8 percent-of sales. In return, the franchisee gets assistance in selecting a location for the store or building and exclusive rights to sell the franchised product or service in a specified geographic area. The franchisor also provides tested policies and procedures to follow as well as special training and advice in how to operate the franchise efficiently. These services are particularly valuable to inexperienced business owners. They give a franchise business a far greater chance of success than a firm starting on its own has. Although 5 to 10 percent of franchised businesses fail, the failure rate is far lower than the failure rate of nonfranchised new businesses.

Prospective franchisees should carefully check out the franchisor. Fraudulent dealers have deceived many innocent people. Franchise agreements may require franchisees to buy all items needed to operate the business from the franchisor, often at a price substantially higher than available elsewhere. Some franchisors
have been charged with allowing other franchisees to open businesses too close to each other, reducing the amount of possible revenues. To avoid these problems, some states have passed laws to protect franchisees.

Potential franchisees should seek the help of lawyers and accountants and even experienced business-people before signing franchising agreements.


In spite of the possible dangers, the number of franchises has grown steadily. Although they make up fewer than 5 percent of all businesses, there are more than 500,000 franchise businesses in the United States. Figure 1-3 lists the variety of businesses operating under franchise agreements. Franchising is especially popular in the retail and service industries. Franchise businesses account for over 35 percent of all retail and service revenues each year.

Tweetear

It is the tradition of this country to encourage individuals to become entrepreneurs.

Few government controls, for example, prevent a person from launching a new business. Almost anyone who wishes to do so may start a business. Some require almost no money to start and can be operated on a part-time basis. As a result, many new businesses spring up each year.

These new businesses may have physical facilities, such as a store in a mall or a small rented space used for manufacturing or service activities. On the other hand, new business owners may work from home offices or even operate businesses that exist only on the Internet.

Small business is a term used to describe companies that are operated by one or a few individuals. Small businesses have always been an important part of our economy. By far the largest number of businesses operating in the United States are considered small, and about half of all employed people work for small businesses. In a recent economic slowdown when many large firms were laying off thousands of workers, small businesses were hiring in large numbers. Often the new entrepreneurs were highly skilled managers who had been displaced by large firms that were down-sizing. During that time, the number of applicants hired by small firms exceeded the number laid off by large firms. It is often believed that small businesses pay lower wages than larger businesses. Contrary to that belief, many of these small firms, especially those providing technical and professional services, were offering high-paying jobs.

Many small businesses are one-person or family operations with only a few employees. Examples include restaurants, gift shops, gas stations, and bakeries.

Computers have made it possible for small businesses to operate from homes and on the Internet. For example, consultants working from their homes can do much of their work by e-mail with clients, and craftspeople can offer their products for sale on the Internet, without the expense of a storefront.

Most large businesses today began as very small businesses. Because they were well managed and supplied products and services consumers desired, they grew larger and larger. For example, Subway began as a small business and now has over 25,000 restaurants in 83 countries. The first Kinko’s copy center was
opened by a new college graduate in 1970 to serve students and faculty at the University of California at Santa Barbara. Due to its popularity and success,  it expanded into more than 1,200 locations with 20,000 employees. In 2003, it was purchased by FedEx for over $2 billion.

Tweetear

The successful growth of business in the United States has resulted from many factors. Two reasons for business growth are the strong desire by individuals to own their own businesses and the ease with which a business can be started.

Someone who starts, manages, and owns a business is called an entrepreneur.

POPULARITY OF SMALL BUSINESS

GROWTH OF FRANCHISE BUSINESS

RISKS OF OWNERSHIP

OBLIGATIONS OF OWNERSHIP

INTRAPRENEURSHIP

STUDYING BUSINESS PRINCIPLES AND MANAGEMENT

 

 

 

 

 

Tweetear

A second measure of a nation’s wealth is the individual well-being of its citizens. Although GDP figures are helpful in judging the overall growth of an economy, such figures by themselves tell little about the economic worth of individuals.

However, the U.S. Department of Commerce gathers information that reveals the financial well-being of U.S. citizens.

With increased income, an average family improves its level of living. Over 65 percent of all families live in homes they own. Many families now own items that less than 50 years ago were considered luxuries by most households. For example, almost all homes have refrigerators and more than one television. Sixteen percent of homes have two or more refrigerators and over one-third own a large-screen television. The number of homes with access to cable or satellite televisions has grown rapidly, with over 75 percent having that type of access. Over half of all adults in the United States carry cell phones today and some families give cell phones to their children before they are 10 years old.

In addition to consumer products, Americans also invest money in self-improvement, including education, exercise and fitness, and personal-care products. They participate in life-enrichment activities by attending the theater and concerts and by traveling in this country and abroad. Despite these large expenditures on material goods and services, Americans also put some of their money into savings. The amount of savings varies from year to year, with total annual savings by Americans averaging over $100 billion.

Even though the typical American has done well financially compared to people in other countries, economic and social problems still exist. For example, slow economic periods may create job shortages, layoffs, and reduced incomes. Some people cannot find employment because of inadequate skills or reductions in the supply of jobs caused by business failures or relocation of companies to other states and other countries. When incomes drop, it becomes more difficult to buy homes, to send children to college, and to save for retirement. Increasing costs for medical care, insurance, gasoline, and electricity put pressures on many people, especially those with low or fixed incomes. Although the United States is a prosperous nation, many people live in poverty. In recent years, over 10 percent of all American families had incomes below the poverty level of about $18,000 for a family of four. Among the results of poverty are poor housing conditions, inadequate nutrition, and lack of access to health care and quality education. You will learn more
about these and similar problems in later chapters. The health and well-being of both a country’s businesses and its citizens are important to its long-term success.

Tweetear

The chief measure of a nation’s economic wealth is the gross domestic product (GDP). The GDP is the total market value of all goods and services produced in a country in a year. Whenever products or services are purchased, the total dollar amount is reported to the federal government. The GDP of the United States is
compared from year to year and is also compared with the GDP of other countries. These comparisons provide an ongoing measure of economic success.

Certain types of transactions, however, are never included in the GDP. These transactions are not recorded because they are unlawful or do not occur as part of normal business operations. For example, when a student is hired by a homeowner to mow lawns, formal business records are not normally prepared and the
income is usually unrecorded. Some adults work part- or full-time for cash and never report that income or pay taxes on it. When drugs or counterfeit merchandise are sold illegally, such transactions are of course unreported. Income that escapes being recorded in the GDP is referred to as the underground economy.

Business transactions that occur in the underground economy have increased in recent years in relation to the total GDP. Estimates range between 5 percent of the GDP during a brisk economy to 20 percent during a slow economy. The size of the underground economy concerns government officials due to its illegal nature and because the activities are not taxed although the people involved still require government services.

In 2005, the total known and recorded GDP for the United States reached the staggering $12.4 trillion mark, as shown in Figure 1-2. As a comparison, the GDP of the United States is slightly more than the combined total GDP of the 25 countries that make up the European Union (EU). The only single country that comes close to America in terms of GDP is China. That country’s rapidly growing economy produces a GDP now totaling over $8 trillion. The rate of growth and the current size of the U.S. GDP indicate, in a rather striking way, its economic strength.

Tweetear

Overall, the United States is a prosperous nation. Much of its prosperity is due to business growth. Around the world, people admire and envy this country’s economic strength. Let’s look at two ways in which a nation measures its economic wealth and its benefits to citizens.

GROSS DOMESTIC PRODUCT

INDIVIDUAL WELL-BEING

Tweetear

Companies can satisfy customers in many ways. Most buyers want a high-quality product at the lowest possible price and immediate help when trouble occurs with a product. Successful firms in recent years
have introduced innovative ways to meet customer expectations. Not only pizza businesses make home deliveries; now many furniture companies make deliveries to the customer’s home on the day of purchase. United Parcel Service and Federal Express not only make door-to-door deliveries but also pick up packages to be shipped from customers’ homes. Best Buy offers home repairs of computers and other electronic equipment using their Geek Squad.

Dell Computer Corporation, however, was the first to do what everyone said would surely fail—sell computers using a toll-free phone number. Michael Dell, the founder of the firm, was told that people want to see, touch, and try highly technical products before they buy. However, those critics were proven wrong.

Michael Dell, who had always looked for easier and faster ways to get things done, got an idea while in college that he believed would serve the computer customer well. He would provide customers with a
catalog of computers and computer parts. When they knew what they wanted, they could call his toll-free number, place the order with a credit card, and expect to have the computer shipped directly to their
homes or offices within a brief period. Dell worked with computer parts suppliers and assemblers to quickly build the specific computer for each customer once the order was received. Because he didn’t incur the expense of maintaining a physical store or a large inventory of parts and supplies, Dell was able to keep prices low.

To further make customers happy, he provided a guarantee, and later an extended repair contract offering efficient mail-in or local service if anything went wrong. The idea worked beyond anyone’s imagination. Within a few years, his business was profitable and growing rapidly. With the development of the Internet as a method for customers to quickly locate and purchase products, Dell extended its direct sales efforts through an interactive website. Dell is now one of America’s largest firms, with computers sold around the world using many of the same ideas that Michael Dell created in 1983, when the business was launched.

Many other computer firms have copied his low cost, fast service, and customer satisfaction guarantee and have initiated direct-sales efforts. Many other firms in different businesses soon adopted Michael Dell’s ideas to gain the effectiveness and efficiency that lead to satisfied customers.

Tweetear

Not only must firms do the right things, such as offering high-quality products, but they must also produce their products efficiently. Efficiency is measured by output—the quantity produced within a given time.

Productivity, on the other hand, refers to producing the largest quantity in the least amount of time by using efficient methods and modern equipment. Workers are more productive when they are well equipped, well trained, and well managed.

Employee productivity in the United States has grown over the years in manufacturing firms, but the growth has not been as rapid as in a few other industrialized nations.

Efficiency—including improved productivity—can be achieved in three ways:

1. Specialization of effort
2. Better technology and innovation
3. Reorganization of work activities

SPECIALIZATION In any business with more than a few employees, work can be performed more efficiently by having workers become specialists. In a large automobile repair shop, for example, not all workers are general mechanics. Rather, some workers specialize in body repair work whereas others specialize in repairing transmissions or engines. When workers specialize, they become expert at their assigned tasks. As a result, specialization improves quality while increasing the amount produced. Because specialization improves efficiency, it is no wonder that businesses hire or train employees for many specialized jobs.

Efficiency can also be improved through mass production. Mass production is a manufacturing procedure actually started in the early 1900s. It combines the use of technology, specialized equipment, and an assembly line. Employees perform efficient repetitive assembly methods to produce large quantities of identical goods. Through mass production, the cost of goods manufactured decreases because it is possible to produce more items in less time. Today, computer-driven equipment and robots make it possible to mass-produce large numbers of items with fewer workers.

TECHNOLOGY AND INNOVATION Efficiency can also be improved through the application of advanced technology. Technology includes equipment, manufacturing processes, and materials from which products are made. Because of new discoveries and inventions, better-quality goods and services are built at a faster pace and often at a lower cost. Improved materials, for example, may weigh less, last longer, and permit faster product assembly. Examples of new technology are found in everyday items such as cars, clothing, computers, and electronic appliances.

Advanced technology helps companies stay ahead of competitors. And because technology has a significant impact on productivity, businesses spend billions of dollars annually on inventing, buying, and using new technology.

REORGANIZATION OF WORK The third and quite challenging way to increase efficiency is through reorganizing the way work gets done. From the late 1970s through the early 1990s, companies experienced slow growth, for reasons related to the U.S. and worldwide economy. However, one key reason for the slow growth arose from the competition from other industrialized nations. The typical reaction to slow growth caused by global competition was to try to cut back on production costs by laying off workers. A business would downsize by reducing the amount and variety of goods and services produced and the number of employees needed to produce them. By laying off workers, dropping unprofitable products, or even increasing the use of technology, firms were able to cut their costs. But the problem of producing the right products inexpensively still existed. Better ways were needed to compete with foreign firms, many of which had lower labor costs and equal or better quality and productivity. Some firms boldly decided to move in a direction that was similar to tearing down the business and rebuilding it.

Many firms arrived at the conclusion that employees were their most important resource. Further, managers learned that by empowering workers, the firm could  become more productive. Empowerment is letting workers participate in determining how to perform their work tasks and offer ideas on how to improve the work process of the company. Empowerment dramatically changed the role of the worker.

In the past, workers performed narrow tasks on assembly lines and had little decision-making power. After empowering workers, firms found that the quality of work often improved, as did the efficiency of production. Although better-trained and highly skilled workers were required, fewer managers were needed.
Companies were able to reduce the number of levels of management by pushing down the day-to-day decisions directly to workers rather than to managers. Workers were taught to use computers, to work in teams, and to be responsible for quality.

While practicing empowerment, some managers were also redesigning the work flow throughout their organizations—a concept sometimes called re-engineering.

Instead of typical assembly lines found in factories and offices, production steps were eliminated, abbreviated, or placed entirely in the hands of a team of employ- ees. Customer complaints dropped. Fewer well-trained workers, with the help of advanced technology and streamlined work processes, could better satisfy customers than could more workers using outdated methods and equipment. Most major firms—and many smaller ones—adopted these newer practices and are finding that customer satisfaction has risen along with productivity.

American firms are renewing their position as strong competitors in world business as a result of restructuring their work processes and a more intensive focus on quality and customers’ needs. Empowering workers has contributed a great deal to the rebuilding of the image of American business. U.S. businesses are now doing
the right things well. Furthermore, both large and small businesses are no longer thinking only about customers in their own countries. They see prospective customers located all around the country and around the world. American factories operate in other countries, and businesses in other countries make and sell products in this country. Business today is complex, challenging, and very exciting.

Tweetear

Making the right decisions requires both common sense and skill. Knowing what customers want is critical to business success and to achieving effectiveness. What kind of sleeping bags, for example, will best satisfy the needs of the Inglish family when they take their summer vacation in the mountains? In the early days of manufacturing, customers bought whatever was available because there were few brands, colors, and styles from which to select.

Today, the choices for most products have increased because many businesses provide similar products. Consumers can usually choose among the products offered by both domestic and foreign firms. Domestic goods (products made by firms in the United States) must compete with foreign goods (products made by
firms in other countries).

Businesses today focus efforts on gathering information from consumers, studying their buying habits, testing new products with prospective customers, and adding new features to existing products. New designs, different materials and colors, understandable instructions, and ease of product use are features customers
like. Large businesses spend millions of dollars examining customers’ preferences.

Equally important, businesses also invest heavily in keeping customers satisfied after products are sold. Product guarantees and follow-up with customers to make sure the product is working well help keep customers loyal.

To meet their needs, customers increasingly are concerned about the quality of products they buy. They want
them to work well and last a long time.

A growing emphasis of American producers is to improve the quality of the products they produce. Japanese car makers are an excellent example of how foreign producers captured a large portion of the market worldwide by providing customers with reliable and attractive cars. In the past, American car producers were not meeting quality needs as well as Japanese producers in the view of many buyers. Too many new cars had defects that required numerous trips to car dealers to correct.

On the other hand, Japanese cars had fewer initial problems and required little service.

American producers learned important lessons about quality from the Japanese. Today, American car producers are building products that are equaling their Japanese and European counterparts. American car manufacturers and producers of many other products vigorously stress to their workers the importance of
using procedures that result in the highest quality. The concept is called total quality management (TQM), which is a commitment to excellence that is accomplished by teamwork and continual improvement of work procedures and products. Where TQM is practiced, managers and employees receive a great deal of training on the topic of quality from experts. The result is a return to what customers want—well-made products.

Tweetear

Businesses often study their own operations to determine whether they are doing the right things and doing the right things well. Two terms are used to describe the best business practices. First, effectiveness means making the right decisions about what products or services to offer customers and the best ways to produce and deliver them. Second, efficiency means producing products and services quickly, at low cost, without wasting time and materials. Firms that provide products at the lowest cost while maintaining the quality customers expect will usually succeed.

Some companies are extremely efficient but very ineffective, whereas others are effective but inefficient. Good managers focus on both effectiveness and efficiency and are able to achieve both.

ACHIEVING EFFECTIVENESS

ACHIEVING EFFICIENCY

Tweetear

For hundreds of years, American businesses led the way in producing new goods and services for sale around the world. Consumers worldwide eagerly purchased exciting new products that were invented and made in the United States. Factories hummed with activity, workers from other countries arrived by the thousands to find jobs, and people spent their wages buying the goods that the firms produced.

Many businesspeople and government leaders from foreign countries also arrived to find out how American businesses were managed.

During the past half-century, however, other countries have become more industrialized and have learned how to invent and produce new products for consumers. Often the products were cheaper than similar products produced in the United States and, over time, many of the products were judged to be of equal or better quality. Americans gradually began to purchase these foreign products.

Foreign companies learned to produce innovative designs for products ranging from cell phones to MP3 players and flat-screen televisions. American business leaders soon realized it was time for change. They had to find ways to use the abundant resources of the United States and the human talent of their managers and employees to meet the challenge of global competition. Global competition is  the ability of businesses from one country to compete with similar businesses in other countries. One of the biggest challenges facing American businesses today is competing in the global economy.



Business note
Learning a foreign language offers an important career advantage. Most companies that compete in the global economy prefer employees who understand other cultures and can communicate comfortably in their
customers’ language. Use the Internet to identify the languages spoken by the most people around the world. If you chose to learn a second language to help you with an international business career, which one would you choose and why?

Tweetear

An innovation is something entirely new. Innovations affect the kinds of products and services offered for sale by other businesses. For example, clothing used to be made from only natural fibers, such as cotton and wool. Then chemical researchers developed synthetic fibers, such as rayon, nylon, and polyester. Now consumers have more choices in clothing and other fabric products.

 

Innovations also affect business operations. For example, since Apple Computer built one of the first personal computers about 35 years ago, computers operated by individual employees have increasingly influenced the way businesses do business.

Computers help businesses design and manufacture products as well as keep track of billing, inventory, and customer information. Computers are now involved in most key business functions. The Internet is an innovation that has literally changed the relationships between businesses and their customers.

Customers have 24-hour access to businesses without leaving their homes. Small businesses can compete with large businesses for customers from all over the coun- try and even around the world.

Tweetear

An important characteristic of business is that it is dynamic, or constantly changing. To be successful, businesses must react quickly to the changing nature of society. For instance, horses were the principal means of transportation until the invention of steam power. Then, with the emergence of the first cross-country railroad in 1869, goods and services traveled mainly by rail for about 50 years.

When the gasoline engine arrived, travel patterns shifted from train to car, bus, and truck. Shortly thereafter, airplanes glided along at 100 miles an hour but were soon replaced by jets, crisscrossing countries and oceans and carrying people and products to their destinations in a matter of hours.

Tweetear

This book will focus on the various types of businesses and business activities and what it takes to manage a business successfully. But before beginning that study in detail, let’s take a look at the general nature of business.

Generally, there are two major kinds of businesses—industrial and commercial. Industrial businesses produce goods used by other businesses or organizations to make things. Companies that mine coal or ore and that extract oil and gas from the earth provide resources for use by other companies and consumers.

They are important industrial businesses. So are companies that construct buildings, build bridges, manufacture airplanes, or assemble televisions. Farmers and other agricultural producers are considered industrial businesses because they grow crops and raise livestock needed for the food we eat and used in the manufacture of a variety of products we use every day.

Unlike industrial businesses, commercial businesses are engaged in marketing (wholesalers and retailers), in finance (banks and investment companies), and in providing services (medical offices, fitness centers, and hotels) as their primary business activities. Service businesses are a type of commercial business that use mostly labor to offer mostly intangible products to satisfy consumer needs. For example, lawn mowing is a service. Figure 1-1 shows the number of people employed in selected types of production and commercial industries including services.



Industry is a word often used to refer to all businesses within a category doing similar work. For example, the publishing industry includes any business that deals with producing and selling books, magazines, newspapers, and other printed documents prepared by authors. The automotive industry includes all manufacturers of automobiles, trucks, and other vehicles as well as the producers of related automotive products. Even government can be considered an industry, because it provides fire and police protection, libraries and schools, and many other services required by the citizens the government serves. This industry would include all services provided by local, state, and federal governments.

Tweetear

An organization that produces or distributes a good or service for profit is called a business. Profit is the difference between earned income and costs.

Every business engages in at least three major activities. The first activity, production, involves making a product or providing a service. Manufacturing firms create products that customers purchase to satisfy needs, whereas service firms use the skills of employees to offer activities and assistance to satisfy customer needs. Examples of service firms are doctors’ offices, airlines, restaurants, and home repair businesses.

Today the number of service firms far exceeds the number of manufacturing firms. For this reason, it is some- times said that we live in a service society.

The second activity that businesses are involved in is marketing. Marketing includes the activities between business and customers involved in buying and selling goods and services. The third activity, finance, deals with all of the money matters involved in running a business. Whether a business has one worker or thousands of workers, it is involved with production, marketing, and finance.