Business Principles

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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.

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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.

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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.

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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.

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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

 

 

 

 

 

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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.