Business Principles

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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.

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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.

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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

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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.

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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.

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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.

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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

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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.

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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.