Course Schedule

This schedule might change, but this is a good overview of the pace.

making ethical decisions and managing a socially responsible business

2.1 Understanding Business Ethics

1. What philosophies and concepts shape personal ethical standards?

Ethics is a set of moral standards for judging whether something is right or wrong. A utilitarianism approach to setting personal ethical standards focuses on the consequences of an action taken by a person or organization. According to this approach, people should act so as to generate the greatest good for the greatest number. Every human is entitled to certain rights such as freedom and the pursuit of happiness. Another approach to ethical decision-making is justice, or what is fair according to accepted standards.

2.2 How Organizations Influence Ethical Conduct

2. How can organizations encourage ethical business behavior?

Top management must shape the ethical culture of the organization. They should lead by example, offer ethics-training programs, and establish a formal code of ethics.

2.3 Managing a Socially Responsible Business

3. What is corporate social responsibility?

Corporate social responsibility is the concern of businesses for the welfare of society as a whole. It consists of obligations beyond just making a profit and goes beyond what is required by law or union contract. Companies may engage in illegal and irresponsible behavior, irresponsible but legal behavior, or legal and responsible behavior. The vast majority of organizations act legally and try to be socially responsible.

2.4 Responsibilities to Stakeholders

4. How do businesses meet their social responsibilities to various stakeholders?

Stakeholders are individuals or groups to whom business has a responsibility. Businesses are responsible to employees. They should provide a clean, safe working environment. Organizations can build employees’ self-worth through empowerment programs. Businesses also have a responsibility to customers to provide good, safe products and services. Organizations are responsible to the general public to be good corporate citizens. Firms must help protect the environment and provide a good place to work. Companies also engage in corporate philanthropy, which includes contributing cash, donating goods and services, and supporting volunteer efforts of employees. Finally, companies are responsible to investors. They should earn a reasonable profit for company owners.

2.5 Trends in Ethics and Corporate Social Responsibility

5. What are the trends in ethics and corporate social responsibility?

Today, corporate philanthropy is shifting away from simply giving to any needy group and is focusing instead on strategic giving, in which the philanthropy relates more closely to the corporate mission or goals and targets donations to areas where the firm operates.

A second trend is toward a new social contract between employer and employee. Instead of the employer having the sole responsibility for maintaining jobs, now the employee must assume part of the burden and find ways to add value to the organization.

As the world increasingly becomes a global community, multinational corporations are now expected to assume a global set of ethics and responsibility. Global companies must understand local customs. They should also involve local stakeholders in decision-making. Multinationals must also make certain that their suppliers are not engaged in human rights violations.

forms of business ownership

4.1 Going It Alone: Sole Proprietorships

1. What are the advantages and disadvantages of the sole proprietorship form of business organization?

The advantages of sole proprietorships include ease and low cost of formation, the owner’s rights to all profits, the owner’s control of the business, relative freedom from government regulation, absence of special taxes, and ease of dissolution. Disadvantages include owner’s unlimited liability for debts and personal absorption of all losses, difficulty in raising capital, limited managerial expertise, difficulty in finding qualified employees, large personal time commitment, and unstable business life.

4.2 Partnerships: Sharing the Load

2. What are the advantages of operating as a partnership, and what downside risks should partners consider?

The advantages of partnerships include ease of formation, availability of capital, diversity of managerial skills and expertise, flexibility to respond to changing business conditions, no special taxes, and relative freedom from government control. Disadvantages include unlimited liability for general partners, potential for conflict between partners, sharing of profits, and difficulty exiting or dissolving the partnership. Partnerships can be formed as either general or limited partnerships. In a general partnership, the operations of the business are controlled by one or more general partners with unlimited liability. The partners co-own the assets and share the profits. Each partner is individually liable for all debts and contracts of the partnership. In a limited partnership, the limited partners are financial partners whose liability is limited to their investment; they do not participate in the firm’s operations.

4.3 Corporations: Limiting Your Liability

3. How does the corporate structure provide advantages and disadvantages to a company, and what are the major types of corporations?

A corporation is a legal entity chartered by a state. Its organizational structure includes stockholders who own the corporation, a board of directors elected by the stockholders to govern the firm, and officers who carry out the goals and policies set by the board. Stockholders can sell or transfer their shares at any time and are entitled to receive profits in the form of dividends. Advantages of corporations include limited liability, ease of transferring ownership, unlimited life tax deductions, and the ability to attract financing. Disadvantages include double taxation of profits, the cost and complexity of formation, and government restrictions.

4.4 Specialized Forms of Business Organization

4. What other options for business organization does a company have in addition to sole proprietorships, partnerships, and corporations?

Businesses can also organize as limited liability companies, cooperatives, joint ventures, and franchises. A limited liability company (LLC) provides limited liability for its owners but is taxed like a partnership. These two features make it an attractive form of business organization for many small firms. Cooperatives are collectively owned by individuals or businesses with similar interests that combine to achieve more economic power. Cooperatives distribute all profits to their members. Two types of cooperatives are buyer and seller cooperatives. A joint venture is an alliance of two or more companies formed to undertake a special project. Joint ventures can be set up in various ways, through partnerships or special-purpose corporations. By sharing management expertise, technology, products, and financial and operational resources, companies can reduce the risk of new enterprises.

4.5 Franchising: A Popular Trend

5. What makes franchising an appropriate form of organization for some types of business, and why does it continue to grow in importance?

Franchising is one of the fastest-growing forms of business ownership. It involves an agreement between a franchisor, the supplier of goods or services, and a franchisee, an individual or company that buys the right to sell the franchisor’s products in a specific area. With a franchise, the business owner does not have to start from scratch but buys a business concept with a proven product or service and operating methods. The franchisor provides use of a recognized brand-name product and operating concept, as well as management training and financial assistance. Franchises can be costly to start, and operating freedom is restricted because the franchisee must conform to the franchisor’s standard procedures. The growth in franchising is attributed to its ability to expand business operations quickly into new geographic areas with limited capital investment.

4.6 Mergers and Acquisitions

6. Why are mergers and acquisitions important to a company’s overall growth?

In a merger, two companies combine to form one company. In an acquisition, one company or investor group buys another. Companies merge for strategic reasons to improve overall performance of the merged firm through cost savings, eliminating overlapping operations, improving purchasing power, increasing market share, or reducing competition. Desired company growth, broadened product lines, and the rapid acquisition of new markets, technology, or management skills are other motives. Another motive for merging is financial restructuring—cutting costs, selling off units, laying off employees, and refinancing the company to increase its value to stockholders.

There are three types of mergers. In a horizontal merger, companies at the same stage in the same industry combine for more economic power, to diversify, or to win greater market share. A vertical merger involves the acquisition of a firm that serves an earlier or later stage of the production or sales process, such as a supplier or sales outlet. In a conglomerate merger, unrelated businesses come together to reduce risk through diversification.

4.7 Trends in Business Ownership

7. What current trends will affect the business organizations of the future?

Americans are getting older but continue to open new businesses, from sole proprietorships to partnerships, corporations to franchise operations. The service sector is booming in efforts to meet the demand for fitness, health, and eldercare.

Other key trends include an escalation of worldwide foreign investment through the number of mergers taking place. All forms of business organization can benefit from outsourcing, tapping into the intellectual capital of developing countries.

MANAGEMENT AND LEADERSHIP

6.1 The Role of Management

1. What is the role of management?

Management is the process of guiding the development, maintenance, and allocation of resources to attain organizational goals. Managers are the people in the organization responsible for developing and carrying out this management process. The four primary functions of managers are planning, organizing, leading, and controlling. By using the four functions, managers work to increase the efficiency and effectiveness of their employees, processes, projects, and organizations as a whole.

6.2 Planning

2. What are the four types of planning?

Planning is deciding what needs to be done, identifying when and how it will be done, and determining who should do it. Managers use four different types of planning: strategic, tactical, operational, and contingency planning. Strategic planning involves creating long-range (one to five years), broad goals and determining the necessary resources to accomplish those goals. Tactical planning has a shorter time frame (less than one year) and more specific objectives that support the broader strategic goals. Operational planning creates specific standards, methods, policies, and procedures that are used in specific functional areas of the organization. Contingency plans identify alternative courses of action for very unusual or crisis situations.

6.3 Organizing

3. What are the primary functions of managers in organizing activities?

Organizing involves coordinating and allocating a firm’s resources in order to carry out its plans. It includes developing a structure for the people, positions, departments, and activities within the firm. This is accomplished by dividing up tasks (division of labor), grouping jobs and employees (departmentalization), and assigning authority and responsibilities (delegation).

6.4 Leading, Guiding, and Motivating Others

4. How do leadership styles influence a corporate culture?

Leading is the process of guiding and motivating others toward the achievement of organizational goals. Managers have unique leadership styles that range from autocratic to free-rein. The set of attitudes, values, and standards of behavior that distinguishes one organization from another is called corporate culture. A corporate culture evolves over time and is based on the accumulated history of the organization, including the vision of the founders.

6.5 Controlling

5. How do organizations control activities?

Controlling is the process of assessing the organization’s progress toward accomplishing its goals. The control process is as follows: (1) set performance standards (goals), (2) measure performance, (3) compare actual performance to established performance standards, (4) take corrective action (if necessary), and (5) use information gained from the process to set future performance standards.

6.6 Managerial Roles

6. What roles do managers take on in different organizational settings?

In an informational role, the manager may act as an information gatherer, an information distributor, or a spokesperson for the company. A manager’s interpersonal roles are based on various interactions with other people. Depending on the situation, a manager may need to act as a figurehead, a company leader, or a liaison.

6.7 Managerial Skills

7. What set of managerial skills is necessary for managerial success?

Managerial skills fall into three basic categories: technical, human relations, and conceptual skills. Specialized areas of knowledge and expertise and the ability to apply that knowledge make up a manager’s technical skills. Human relations skills include the ability to understand human behavior, to communicate effectively with others, and to motivate individuals to accomplish their objectives. Conceptual skills include the ability to view the organization as a whole, understand how the various parts are interdependent, and assess how the organization relates to its external environment.

6.8 Trends in Management and Leadership

8. What trends will affect management in the future?

Three important trends in management today are preparing for crises management, the increasing use of information technology, and the need to manage multinational cultures. Crisis management requires quick action, telling the truth about the situation, and putting the best people on the task to correct the situation. Finally, management must learn from the crisis in order to prevent it from happening again. Using the latest information technology, such as dashboard software, managers can make quicker, better-informed decisions. As more companies “go global,” the need for multinational cultural management skills is growing. Managers must set a good example, create personal involvement for all employees, and develop a culture of trust.

DESIGNING ORGANIZATIONAL STRUCTURES

7.1 Building Organizational Structures

1. What are the traditional forms of organizational structure?

Firms typically use traditional, contemporary, or team-based approaches when designing their organizational structure. In the traditional approach, companies first divide the work into separate jobs and tasks. Managers then group related jobs and tasks together into departments. Five basic types of departmentalization are commonly used in organizations:

• Functional: Based on the primary functions performed within an organizational unit

• Product: Based on the goods or services produced or sold by the organizational unit

• Process: Based on the production process used by the organizational unit

• Customer: Based on the primary type of customer served by the organizational unit

• Geographic: Based on the geographic segmentation of organizational units

7.2 Contemporary Structures

2. What contemporary organizational structures are companies using?

In recent decades, companies have begun to expand beyond traditional departmentalization methods and use matrix, committee, and team-based structures. Matrix structures combine two types of traditional organizational structures (for example, geographic and functional). Matrix structures bring together people from different functional areas of the organization to work on a special project. As such, matrix organizations are more flexible, but because employees report to two direct supervisors, managing matrix structures can be extremely challenging. Committee structures give authority and responsibility to a group rather than to an individual. Committees are part of a line-and-staff organization and often fulfill only an advisory role. Team-based structures also involve assigning authority and responsibility to groups rather than individuals, but, different from committees, team-based structures give these groups autonomy to carry out their work.

7.3 Using Teams to Enhance Motivation and Performance

3. Why are companies using team-based organizational structures?

Work groups share resources and coordinate efforts to help members better perform their individual duties and responsibilities. The performance of the group can be evaluated by adding up the contributions of the individual group members. Work teams require not only coordination but also collaboration, the pooling of knowledge, skills, abilities, and resources in a collective effort to attain a common goal. Four types of work teams are used: problem solving, self-managed, cross-functional, and virtual teams. Companies are using teams to improve individual and group motivation and performance.

7.4 Authority—Establishing Organizational Relationships

4. What tools do companies use to establish relationships within their organizations?

The managerial hierarchy (or the management pyramid) comprises the levels of management within the organization, and the managerial span of control is the number of employees the manager directly supervises. In daily operations, individuals in line positions are directly involved in the processes used to create goods and services. Individuals in staff positions provide the administrative and support services that line employees need to achieve the firm’s goals. Line positions in organizations are typically in areas such as production, marketing, and finance. Staff positions are found in areas such as legal counseling, managerial consulting, public relations, and human resource management.

7.5 Degree of Centralization

5. How can the degree of centralization/decentralization be altered to make an organization more successful?

In a highly centralized structure, top management makes most of the key decisions in the organization, with very little input from lower-level employees. Centralization lets top managers develop a broad view of operations and exercise tight financial controls. In a highly decentralized organization, decision-making authority is pushed down the organizational hierarchy, giving lower-level personnel more responsibility and power to make and implement decisions. Decentralization can result in faster decision-making and increased innovation and responsiveness to customer preferences.

7.6 Organizational Design Considerations

6. How do mechanistic and organic organizations differ?

A mechanistic organization is characterized by a relatively high degree of work specialization, rigid departmentalization, many layers of management (particularly middle management), narrow spans of control, centralized decision-making, and a long chain of command. This combination of elements results in a tall organizational structure. In contrast, an organic organization is characterized by a relatively low degree of work specialization, loose departmentalization, few levels of management, wide spans of control, decentralized decision-making, and a short chain of command. This combination of elements results in a flat organizational structure.

7.7 The Informal Organization

7. How does the informal organization affect the performance of a company?

The informal organization is the network of connections and channels of communication based on the informal relationships of individuals inside the organization. Informal relationships can be between people at the same hierarchical level or between people at different levels and in different departments. Informal organizations give employees more control over their work environment by delivering a continuous stream of company information throughout the organization, thereby helping employees stay informed.

7.8 Trends in Organizational Structure

8. What trends are influencing the way businesses organize?

Reengineering is a complete redesign of business structures and processes in order to improve operations. The goal of reengineering is to redesign business processes to achieve improvements in cost control, product quality, customer service, and speed.

The virtual corporation is a network of independent companies (suppliers, customers, even competitors) linked by information technology to share skills, costs, and access to one another’s markets. This network structure allows companies to come together quickly to exploit rapidly changing opportunities.

Many companies are now using technology to create virtual teams. Team members may be down the hall or across the ocean. Virtual teams mean that travel time and expenses are eliminated and the best people can be placed on the team regardless of where they live. Sometimes, however, it may be difficult to keep virtual team members focused and motivated.

Outsourcing business functions—both globally and domestically—continues to be a regular business practice for companies large and small. Companies choose to outsource either as a cost-saving measure or as a way to gain access to needed human resource talent and innovation. To be successful, outsourcing must solve a clearly articulated business problem. In addition, managers must use outsourcing providers that fit their company’s actual needs and strive to engage these providers as strategic partners for the long term. A recent phenomenon known as the gig economy has taken on more importance as it pertains to the U.S. labor force and outsourcing. More people are working as freelancers on a per-project basis, either because they can’t get hired as full-time employees or because they prefer to work as self-employed individuals.

Global mergers raise important issues in organizational structure and culture. The ultimate challenge for management is to take two organizations and create a single, successful, cohesive organization.

MANAGING HUMAN RESOURCES

8.1 Achieving High Performance through Human Resources Management

1. What is the human resource management process, and how are human resource needs determined?

The human resource management process consists of a sequence of activities that begins with the job analysis and HR planning; progresses to employee recruitment and selection; then focuses on employee training, performance appraisal, and compensation; and ends when the employee leaves the organization.

Creating a strategy for meeting human resource needs is called human resource planning, which begins with the job analysis. Job analysis is a process of studying a job to determine its tasks and duties for setting pay, determining employee job performance, specifying hiring requirements, and designing training programs. Information from the job analysis is used to prepare a job description, which lists the tasks and responsibilities of the job. A job specification describes the skills, knowledge, and abilities a person needs to fill the job described in the job description. By examining the human resource demand forecast and the internal supply forecast, human resource professionals can determine if the company faces a personnel surplus or shortage.

8.2 Employee Recruitment

2. How do firms recruit applicants?

When a job vacancy occurs, most firms begin by trying to fill the job from within the ranks of their own employees, known as the internal labor market. If a suitable internal candidate is not available, the firm turns to the external labor market. Firms use local media to recruit nontechnical, unskilled, and nonsupervisory workers. To locate highly trained recruits, employers use college recruiters, executive search firms, job fairs, and company websites to promote job openings. During the job search process, firms present an accurate and positive image of the company to those being recruited, called recruitment branding.

8.3 Employee Selection

3. How do firms select qualified applicants?

The selection process helps identify the candidates in the applicant pool who possess the best qualifications for the open position. Typically, an applicant submits an application or résumé and then receives a short, structured interview. If an applicant makes it past the initial screening, he or she may be asked to take an aptitude, personality, or skills test. The next step is the selection interview, which is an in-depth discussion of the applicant’s work experience, skills and abilities, education, and career interests. If the applicant passes the selection interview, most firms conduct background checks and talk with their references. Physical exams and drug testing may also be part of the selection process.

8.4 Employee Training and Development

4. What types of training and development do organizations offer their employees?

Training and development programs are designed to increase employees’ knowledge, skills, and abilities in order to foster job performance improvements. Formal training (usually classroom in nature and off-the-job) takes place shortly after being hired. Development programs prepare employees to assume positions of increasing authority and responsibility. Job rotation, executive education programs, mentoring, and special-project assignments are examples of employee development programs.

8.5 Performance Planning and Evaluation

5. How are performance appraisals used to evaluate employee performance?

A performance appraisal compares an employee’s actual performance with the expected performance. Performance appraisals serve several purposes, but are typically used to determine an employee’s compensation, training needs, and advancement opportunities.

8.6 Employee Compensation and Benefits

6. What are the types of compensation and methods for paying workers?

Direct pay is the hourly wage or monthly salary paid to an employee. In addition to the base wage or salary, direct pay may include bonuses and profit shares. Indirect pay consists of various benefits and services. Some benefits are required by law and include unemployment compensation, worker’s compensation, and Social Security. Many employers also offer benefits not required by law. These include paid vacations and holidays, pensions, health and other insurance, employee wellness programs, and college tuition reimbursement.

8.7 The Labor Relations Process

7. What is a labor union and how is it organized, what is collective bargaining, and what are some of the key negotiation issues?

A labor union is an organization that represents workers in dealing with management over disputes involving wages, hours, and working conditions. A company is unionized through an organizing drive that begins either inside, with a small group of existing employees, or outside, with an established union that targets the employer. When the union gets signed authorization cards from 30 percent of the firm’s employees, the NLRB conducts a union certification election. A majority vote is needed to certify the union as the exclusive bargaining agent. The union and the employer then begin collective bargaining and have one year in which to reach an agreement.

Collective bargaining is the process of negotiating, administering, and interpreting labor agreements. Both union and management negotiators prepare a bargaining proposal. The two sides meet and exchange demands and ideas. Bargaining consists of compromises and concessions that lead to a tentative agreement. Top management then approves or disapproves the agreement for the management team. Union members vote to either approve or reject the contract. The key issues included in a union contract are wage increases, fringe benefits, and job security.

8.8 Managing Grievances and Conflicts

8. How are grievances between management and labor resolved, and what tactics are used to force a contract settlement?

In most labor agreements, the grievance procedure consists of three or four steps. In the initial step, the employee files a grievance; this is an oral and/or written presentation to the supervisor and may involve a union steward as representative of the grievant. Steps two and three involve meetings of the employee, one or more union officials, the appropriate supervisor, and one or more management officials. If the grievance is not resolved at step three, either party (union or management) can request that an arbitrator, or neutral third party, hear and decide the grievance. The arbitrator reviews the grievance at a hearing and then makes the decision, which is presented in a document called the award.

When a union contract expires and a new agreement has not been reached, the union may impose economic pressure on the firm. These tactics may take the form of strikes, boycotts, picketing, or corporate campaigns. Similarly, employers may implement lockouts, hire replacements, or move production to another facility to place pressure on a union to accept a new contract.

8.9 Legal Environment of Human Resources and Labor Relations

9. What are the key laws and federal agencies affecting human resource management and labor relations?

A number of federal laws (listed in Table 8.6) affect human resource management. Federal law prohibits discrimination based on age, race, gender, color, national origin, religion, or disability. The Americans with Disabilities Act bans discrimination against disabled workers and requires employers to change the work environment to accommodate the disabled. The Family and Medical Leave Act requires employers, with certain exceptions, to provide employees up to 12 weeks of unpaid leave a year. The leave can be for the birth or adoption of a child or due to serious illness of the worker or a family member.

Federal agencies that deal with human resource administration are the EEOC, OSHA, the Office of Federal Contract Compliance Programs (OFCCP), and the Wage and Hour Division of the Department of Labor. The EEOC and OFCCP are primary agencies for the enforcement of employment discrimination laws, OSHA enforces safety regulations, and the Wage and Hour Division enforces the minimum wage and related laws. Many companies employ affirmative action and safety officers to ensure compliance with antidiscrimination and workplace safety laws. The Wagner and Taft-Hartley Acts govern the union-management relationship, in part through the functions performed by the National Labor Relations Board. The law gives workers the right to form and join labor unions and obligates the employer to deal with the union fairly.

8.10 Trends in Human Resource Management and Labor Relations

10. What trends and issues are affecting human resource management and labor relations?

Human resource managers recognize that diverse workforces create an environment that nurtures creative decision-making, effective problem-solving, more agility in adapting to change, and a strong competitive advantage. Therefore, firms are becoming committed to recruiting and hiring a diverse workforce. To maximize efficiency, many firms are outsourcing HR functions and using technology to reduce costs and improve efficiency. Firms are also striving to hire employees who possess qualities that match those of the corporate culture. Although labor unions have faced declining membership in the last several decades, enrollment of service workers into labor unions may increase as low-wage earners seek improved working conditions, pay, and health benefits.

MOTIVATING EMPLOYEES

9.1 Early Theories of Motivation

1. What are the basic principles of Frederick Taylor’s concept of scientific management?

Scientific management is based on the belief that employees are motivated by economic incentives and that there is “one best way” to perform any job. The four basic principles of scientific management developed by Taylor are as follows:

1. Develop a scientific approach for each element of a person’s job.

2. Scientifically select, train, teach, and develop workers.

3. Encourage cooperation between workers and managers so that each job can be accomplished in a standard, scientifically determined way.

4. Divide work and responsibility between management and workers according to who is better suited to each task.

9.2 The Hawthorne Studies

2. What did Elton Mayo’s Hawthorne studies reveal about worker motivation?

The pride that comes from special attention motivates workers to increase their productivity. Supervisors who allow employees to have some control over their situation appeared to further increase the workers’ motivation. The Hawthorne effect suggests that employees will perform better when they feel singled out for special attention or feel that management is concerned about employee welfare.

9.3 Maslow's Hierarchy of Needs

3. What is Maslow’s hierarchy of needs, and how do these needs relate to employee motivation?

Maslow believed that each individual has a hierarchy of needs, consisting of physiological, safety, social, esteem, and self-actualization needs. Managers who accept Maslow’s ideas attempt to increase employee motivation by modifying organizational and managerial practices to increase the likelihood that employees will meet all levels of needs. Maslow’s theory has also helped managers understand that it is hard to motivate people by appealing to already-satisfied needs.

9.4 McGregor's Theories X and Y

4. How are McGregor’s Theories X and Y and Ouchi’s Theory Z used to explain worker motivation?

Douglas McGregor influenced the study of motivation with his formulation of two contrasting sets of assumptions about human nature—designated Theory X and Theory Y. Theory X says people don’t like to work and will avoid it if they can. Because people don’t like to work, they must be controlled, directed, or threatened to get them to make an effort. Theory Y says that people want to be self-directed and will try to accomplish goals that they believe in. Workers can be motivated with positive incentives. McGregor personally believed that Theory Y assumptions describe most employees and that managers seeking to motivate subordinates should develop management practices based on those assumptions.

William Ouchi’s Theory Z combines U.S. and Japanese business practices. Theory Z emphasizes long-term employment, slow career development, and group decision-making. The long-term decline of the Japanese economy has resulted in most U.S. firms moving away from Japanese management practices.

9.5 Herzberg's Motivator-Hygiene Theory

5. What are the basic components of Herzberg’s motivator-hygiene theory?

Frederick Herzberg’s studies indicated that certain job factors are consistently related to employee job satisfaction whereas others can create job dissatisfaction. According to Herzberg, motivating factors (also called satisfiers) are primarily intrinsic job elements that lead to satisfaction, such as achievement, recognition, the (nature of) work itself, responsibility, advancement, and growth. What Herzberg termed hygiene factors (also called dissatisfiers) are extrinsic elements of the work environment such as company policy, relationships with supervisors, working conditions, relationships with peers and subordinates, salary and benefits, and job security. These are factors that can result in job dissatisfaction if not well managed. One of the most interesting results of Herzberg’s studies was the implication that the opposite of satisfaction is not dissatisfaction. Herzberg believed that proper management of hygiene factors could prevent employee dissatisfaction, but that these factors could not serve as a source of satisfaction or motivation.

9.6 Contemporary Views on Motivation

6. What four contemporary theories on employee motivation offer insights into improving employee performance?

According to expectancy theory, the probability of an individual acting in a particular way depends on the strength of that individual’s belief that the act will have a particular outcome and on whether the individual values that outcome. Equity theory is based on individuals’ perceptions about how fairly they are treated compared with their coworkers. Goal-setting theory states that employees are highly motivated to perform when specific goals are established and feedback on progress is offered. Reinforcement theory states that behavior is a function of consequences; that is, people do things because they know other things will follow.

9.7 From Motivation Theory to Application

7. How can managers redesign existing jobs to increase employee motivation and performance?

The horizontal expansion of a job, which involves increasing the number and variety of tasks that a person performs, is called job enlargement. Increasing task diversity can enhance job satisfaction, particularly when the job is mundane and repetitive in nature. Job enrichment is the vertical expansion of an employee’s job to provide the employee with more autonomy, responsibility, and decision-making authority. Other popular motivational tools include work-scheduling options, employee-recognition programs, empowerment, and variable-pay programs.

9.8 Trends in Employee Motivation

8. What initiatives are organizations using today to motivate and retain employees?

Today firms are using several key tactics to motivate and retain workers. First, companies are investing more in employee education and training, which makes employees more productive and confident in their jobs. Second, managers are giving employees the opportunity to participate in the ownership of the company, which can strongly increase employee commitment. Employers are providing more work-life benefits to employees, and a small but growing percentage of companies is offering employees paid sabbaticals in addition to regular vacation and sick time. As the composition of the workforce changes, it is becoming increasingly important for companies to understand how to manage knowledge workers. One method of doing this is establishing communities of practice that enable workers to share expertise across the organization. Finally, managers in today’s business environment need to pay special attention to managing absence rates and employee (and management) turnover.

ACHIEVING WORLD CLASS OPERATIONS MANAGEMENT

10.1 Production and Operations Management—An Overview

1. Why is production and operations management important in both manufacturing and service firms?

In the 1980s, many U.S. manufacturers lost customers to foreign competitors because their production and operations management systems did not support the high-quality, reasonably priced products consumers demanded. Service organizations also rely on effective operations management in order to satisfy consumers. Operations managers, the personnel charged with managing and supervising the conversion of inputs into outputs, work closely with other functions in organizations to help ensure quality, customer satisfaction, and financial success.

10.2 The Production Process: How Do We Make It?

2. What types of production processes do manufacturers and service firms use?

Products are made using one of three types of production processes. In mass production, many identical goods are produced at once, keeping production costs low. Mass production, therefore, relies heavily on standardization, mechanization, and specialization. When mass customization is used, goods are produced using mass-production techniques up to a point, after which the product or service is custom-tailored to individual customers by adding special features. When a firm’s production process is built around customization, the firm makes many products one at a time according to the very specific needs or wants of individual customers.

10.3 Location, Location, Location: Where Do We Make It?

3. How do organizations decide where to put their production facilities? What choices must be made in designing the facility?

Site selection affects operating costs, the price of the product or service, and the company’s ability to compete. In choosing a production site, firms must weigh the availability of resources—raw materials, manpower, and even capital—needed for production, as well as the ability to serve customers and take advantage of marketing opportunities. Other factors include the availability of local incentives and the manufacturing environment. Once a site is selected, the firm must choose an appropriate design for the facility. The three main production facility designs are process, product, and fixed-position layouts. Cellular manufacturing is another type of facility layout.

10.4 Pulling It Together: Resource Planning

4. Why are resource-planning tasks such as inventory management and supplier relations critical to production?

Production converts input resources, such as raw materials and labor, into outputs, finished products and services. Firms must ensure that the resources needed for production will be available at strategic moments in the production process. If they are not, productivity, customer satisfaction, and quality may suffer. Carefully managing inventory can help cut production costs while maintaining enough supply for production and sales. Through good relationships with suppliers, firms can get better prices, reliable resources, and support services that can improve production efficiency.

10.5 Production and Operations Control

5. How do operations managers schedule and control production?

Routing is the first step in scheduling and controlling production. Routing analyzes the steps needed in production and sets out a workflow, the sequence of machines and operations through which a product or service progresses from start to finish. Good routing increases productivity and can eliminate unnecessary cost. Scheduling involves specifying and controlling the time and resources required for each step in the production process. Operations managers use three methods to schedule production: Gantt charts, the critical path method, and PERT.

10.6 Looking for a Better Way: Improving Production and Operations

6. How can quality-management and lean-manufacturing techniques help firms improve production and operations management?

Quality and productivity go hand in hand. Defective products waste materials and time, increasing costs. Poor quality also leads to dissatisfied customers. By implementing quality-control methods, firms can reduce these problems and streamline production. Lean manufacturing also helps streamline production by eliminating unnecessary steps in the production process. When activities that don’t add value for customers are eliminated, manufacturers can respond to changing market conditions with greater flexibility and ease.

10.7 Transforming the Factory Floor with Technology

7. What roles do technology and automation play in manufacturing and service-industry operations management?

Many firms are improving their operational efficiency by using technology to automate parts of production. Computer-aided design and manufacturing systems, for example, help design new products, control the flow of resources needed for production, and even operate much of the production process. By using robotics, human time and effort can be minimized. Factories are being automated by blending computers, robots, and machinery into flexible manufacturing systems that require less labor to operate. Service firms are automating operations too, using technology to cut labor costs and control quality.

10.8 Trends in Production and Operations Management

8. What key trends are affecting the way companies manage production and operations?

Data show the U.S. economy steaming steadily ahead, but dramatic advances in technology, predicted worker shortages, and global competition create challenges for the future. How will companies balance their technology and workforce needs? Will the United States maintain its lead in the ongoing war for leadership in innovation? And what should it be doing to convert today’s students into tomorrow’s innovators and scientists? Surveys indicate that finding qualified workers continues to be a major concern facing U.S. industry today. If the United States is to maintain its competitive edge, more private and federal investment is needed for science and research. And what of the increasingly crucial role of technology? These are some of the trends facing companies today.

CREATING PRODUCTS AND PRICING STRATEGIES

11.1 The Marketing Concept

1. What is the marketing concept and relationship-building?

Marketing includes those business activities that are designed to satisfy consumer needs and wants through the exchange process. Marketing managers use the “right” principle—getting the right goods or services to the right people at the right place, time, and price, using the right promotional techniques. Today, many firms have adopted the marketing concept. The marketing concept involves identifying consumer needs and wants and then producing products (which can be goods, services, or ideas) that will satisfy them while making a profit. Relationship marketing entails forging long-term relationships with customers, which can lead to repeat sales, reduced costs, and stable relationships.

11.2 Creating a Marketing Strategy

2. How do managers create a marketing strategy?

A firm creates a marketing strategy by understanding the external environment, defining the target market, determining a competitive advantage, and developing a marketing mix. Environmental scanning enables companies to understand the external environment. The target market is the specific group of consumers toward which a firm directs its marketing efforts. A competitive advantage is a set of unique features of a company and its products that are perceived by the target market as significant and superior to those of the competition.

11.3 Developing a Marketing Mix

3. What is the marketing mix?

To carry out the marketing strategy, firms create a marketing mix—a blend of products, distribution (place) systems, prices, promotion, and people. Marketing managers use this mix to satisfy target consumers. The mix can be applied to nonbusiness as well as business situations.

11.4 Buyer Behavior

4. How do consumers and organizations make buying decisions?

Buyer behavior is what consumers and businesses do in order to buy and use products. The consumer purchase decision-making process consists of the following steps: recognizing a need, seeking information, evaluating alternatives, purchasing the product, judging the purchase outcome, and engaging in post-purchase behavior. A number of factors influence the process. Cultural, social, individual, and psychological factors have an impact on consumer decision-making. The business purchase decision-making model includes the following steps: need recognition, setting specifications, information search, evaluation of alternatives against specifications, purchase, and post-purchase behavior. The main differences between consumer and business markets are purchase volume, number of customers, location of buyers, direct distribution, and rational purchase decisions. Companies learn more about their target markets by conducting marketing research—the process of planning, collecting, and analyzing data relevant to a marketing decision.

11.5 Market Segmentation

5. What are the five basic forms of consumer and business market segmentation?

Success in marketing depends on understanding the target market. One technique used to identify a target market is market segmentation. The five basic forms of segmentation are demographic (population statistics), geographic (location), psychographic (personality or lifestyle), benefit (product features), and volume (amount purchased).

Business markets may segment based on geography, volume, and benefits, just as consumer markets are. However, organizations might also segment based on use of the product, characteristics of purchasing function, and size of the client or industry, as well as other considerations related to characteristics of business customers.

11.6 What Is a Product?

6. What is a product, and how is it classified?

A product can be a good, service, or idea, along with its perceived attributes and benefits, that creates customer value. Tangible attributes include the good itself, packaging, and warranties. Intangible attributes can include the brand’s image or relational attributes such as the credibility of its service providers. Products are categorized as either consumer products or business-to-business products, which can be commercial, industrial, or services products. Consumer products are bought and used by the end user, sometimes called “the ultimate consumer.” They can be classified as unsought products, convenience products, shopping products, or specialty products, depending on how much effort consumers are willing to exert to get them.

Business-to-business products are those bought by organizations for use in making other products or in rendering services to other organizations and include capital products and expense items.

11.7 Creating Products That Deliver Value

7. How do organizations create new products?

To succeed, most firms must continue to design new products to satisfy changing customer demands. But new-product development can be risky. Many new products fail. The steps in new-product development are setting new-product goals, exploring ideas, screening ideas, developing the concept (creating a prototype and building the marketing strategy), test-marketing, and introducing the product. When the product enters the marketplace, it is often managed by a product manager.

11.8 The Product Life Cycle

8. What are the stages of the product life cycle?

After a product reaches the marketplace, it enters the product life cycle. This cycle typically has four stages: introduction, growth, maturity, and decline (and possibly death). Profit margins are usually small in the introductory phase, reach a peak at the end of the growth phase, and then decline.

Price indicates value, helps position a product in the marketplace, and is the means for earning a fair return on investment. If a price is too high, the product won’t sell well and the firm will lose money. If the price is too low, the firm may lose money even if the product sells well. Prices are set according to pricing objectives.

11.9 Pricing Strategies and Future Trends

9. What strategies are used for pricing products, and what are the future trends?

The two main strategies for pricing a new product are price skimming and penetration pricing. Price skimming involves charging a high introductory price and then, usually, lowering the price as the product moves through its life cycle. Penetration pricing involves selling a new product at a low price in the hope of achieving a large sales volume.

Pricing tactics are used to fine-tune the base prices of products. Sellers that use leader pricing set the prices of some of their products below the normal markup or even below cost to attract customers who might otherwise not shop at those stores. Bundling is grouping two or more products together and pricing them as one. Psychology often plays a role in how consumers view products and in determining what they will pay. Setting a price at an odd number tends to create a perception that the item is cheaper than the actual price. Prices in even numbers denote quality or status. Raising the price so an item will be perceived as having high quality and status is called prestige pricing. Pricing for services is more complicated and is often tailored to specific services for a specific customer.

11.10 Trends in Developing Products and Pricing

10. What trends are occurring in products and pricing?

The internet has given pricing power to both buyers and sellers. A second trend is that many firms are using databases to create one-to-one marketing. Also, the large amount of information that is available to marketers is being mined and analyzed to target specific customers with personalized messages rather than creating one message that is aimed at a broad audience.

distributing and promoting products and services

12.1 The Nature and Functions of Distribution (Place)

1. What is the nature and function of distribution (place)?

Distribution (place) includes the efficient managing of the acquisition of raw materials by the factory and the movement of products from the producer or manufacturer to business-to-business users and consumers. Place includes such activities as location selection, store layout, atmosphere and image-building for the location, inventory, transportation, and logistics. Logistics activities are usually the responsibility of the marketing department and are part of the large series of activities included in the supply chain.

Distribution channels are the series of marketing entities through which goods and services pass on their way from producers to end users. Distribution systems focus on the physical transfer of goods and services and on their legal ownership at each stage of the distribution process. Channels reduce the number of transactions and ease the flow of goods.

12.2 Wholesaling

2. What is wholesaling, and what are the types of wholesalers?

Wholesalers typically sell finished products to retailers and to other institutions, such as manufacturers, schools, and hospitals. The two main types of wholesalers are merchant wholesalers and agents and brokers. Merchant wholesalers buy from manufacturers and sell to other businesses. Agents and brokers are essentially independents who provide buying and selling services. They receive commissions according to their sales and don’t take title (ownership) of the merchandise.

12.3 The Competitive World of Retailing

3. What are the different kinds of retail operations?

Some 15 million Americans are engaged in retailing. Retailing can be either in-store or nonstore. In-store retail operations include department stores, specialty stores, discount stores, off-price retailers, factory outlets, and catalog showrooms. Nonstore retailing includes vending machines, direct sales, direct-response marketing, home shopping networks, and internet retailing. The most important factors in creating a store’s atmosphere are employee type and density, merchandise type and density, fixture type and density, sound, and odors.

12.4 Using Supply Chain Management to Increase Efficiency and Customer Satisfaction

4. How can supply-chain management increase efficiency and customer satisfaction?

The goal of supply-chain management is to coordinate all of the activities of the supply-chain members into a seamless process, thereby increasing customer satisfaction. Supply-chain managers have responsibility for main channel strategy decisions, coordinating the sourcing and procurement of raw materials, scheduling production, processing orders, managing inventory, transporting and storing supplies and finished goods, and coordinating customer-service activities.

12.5 Promotion Strategy

5. What is promotion, and what are the key elements of a promotional mix?

Promotion aims to stimulate demand for a company’s goods or services. Promotional strategy is designed to inform, persuade, or remind target audiences about those products. The goals of promotion are to create awareness, get people to try products, provide information, keep loyal customers, increase use of a product, identify potential customers, and even teach clients about potential services.

The unique combination of advertising, personal selling, sales promotion, public relations, social media, and e-commerce used to promote a product is called the promotional mix. Advertising is any paid form of nonpersonal promotion by an identified sponsor. Personal selling consists of a face-to-face presentation in a conversation with a prospective purchaser. Sales promotion consists of marketing activities—other than personal selling, advertising, and public relations—that stimulate consumers to buy. These activities include coupons and samples, displays, shows and exhibitions, demonstrations, and other selling efforts. Public relations is the marketing function that links the policies of the organization with the public interest and develops programs designed to earn public understanding and acceptance. IMC is being used by more and more organizations. It is the careful coordination of all of the elements of the promotional mix to produce a consistent, unified message that is customer focused.

12.6 The Huge Impact of Advertising

6. How are traditional advertising media selected?

Cost per contact is the cost of reaching one member of the target market. Often costs are expressed on a cost per thousand basis. Reach is the number of different target customers who are exposed to a commercial at least once during a specific period, usually four weeks. Frequency is the number of times an individual is exposed to a message. Media selection is a matter of matching the advertising medium with the target audience. Technology continues to drive many of the recent changes to traditional advertising strategies.

12.7 The Importance of Personal Selling

7. What is personal selling?

About 6.5 million people in the United States are directly engaged in personal selling. Personal selling enables a salesperson to demonstrate a product and tailor the message to the prospect; it is effective in closing a sale. Professional salespeople are knowledgeable and creative. They also are familiar with the selling process, which consists of prospecting and qualifying, approaching customers, presenting and demonstrating the product, handling objections, closing the sale, and following up on the sale.

12.8 Sales Promotion

8. What are the goals of sales promotion, and what are several types of sales promotion?

Immediate purchase is the goal of most sales promotion, whether it is aimed at consumers or the trade (wholesalers and retailers). The most popular sales promotions are coupons, samples, product placement, premiums, contests, and sweepstakes. Trade shows, conventions, and point-of-purchase displays are other types of sales promotion.

12.9 Public Relations Helps Build Goodwill

9. How does public relations fit into the promotional mix?

Public relations is mostly concerned with getting good publicity for companies and other organizations. Publicity is any information about a company or product that appears in the news media and is not directly paid for by the company. Public relations departments furnish company speakers for business and civic clubs, write speeches for corporate officers, and encourage employees to take active roles in civic groups. These activities help build a positive image for an organization and create buzz, which is a good backdrop for selling its products.

12.10 Trends in Social Media

10. What is social media, and how does it affect promotion?

Social media is a relatively new marketing channel that includes platforms such as Facebook, Twitter, LinkedIn, Pinterest, and Instagram. The phenomenon of social media has created a business climate in which thousands of impressions (marketing messages) can be achieved with one creative social media post. Social media is a hugely powerful tool for marketers. It has it challenges, though, because a social media post that goes viral can close down a business, even if it is not true. That’s what makes social media the newest challenge/opportunity for marketers. The internet and new technology are having a major impact on promotion and promotion expenditures. Traditional media are losing advertising funds to the internet. Many companies are now creating blogs to get closer to customers and potential customers. Podcasts offer advertisers a new medium to reach consumers. Streaming video and videos uploaded to YouTube are also important social media channels.

12.11 Trends in E-Commerce

11. What is e-commerce, and how does it affect promotion?

E-commerce refers to the development and maintenance of a company’s website and the facilitation of commerce on the website, such as the ability for customers to order products on line, to get questions answered about products, and for the company to introduce new products and ideas. E-commerce can include special components designed specifically for separate target market segments, such as information boxes or games.

The ease of use and ability to comparison-shop is driving millions of people to the internet to purchase goods and services. Major retailers such as Walmart are quickly increasing their web presence in an effort to stay relevant in this ever-changing business environment and to attract even more loyal customers who have made the switch to doing most of their shopping on line.

using technology to manage information

13.1 Transforming Businesses through Information

1. How has information technology transformed business and managerial decision-making?

Businesses depend on information technology for everything from running daily operations to making strategic decisions. Companies must have management information systems that gather, analyze, and distribute information to the appropriate parties, including employees, suppliers, and customers. These systems are comprised of different types of computers that collect data and process it into usable information for decision-making. Managers tap into databases to access the information they need, whether for placing inventory orders, scheduling production, or preparing long-range forecasts. They can compare information about the company’s current status to its goals and standards. Company-wide enterprise resource planning systems that bring together human resources, operations, and technology are becoming an integral part of business strategy.

13.2 Linking Up: Computer Networks

2. Why are computer networks an important part of today’s information technology systems?

Today companies use networks of linked computers that share data and expensive hardware to improve operating efficiency. Types of networks include local area networks, wide area networks, and wireless local area networks. Intranets are private WANs that allow a company’s employees to communicate quickly with one other and work on joint projects, regardless of their location. Companies are finding new uses for wireless technologies such as tablets, cell phones, and other mobile devices. Virtual private networks give companies a cost-effective secure connection between remote locations by using public networks such as the internet.

13.3 Management Information Systems

3. What types of systems make up a typical company’s management information system?

A management information system consists of a transaction processing system, management support systems, and an office automation system. The transaction processing system collects and organizes operational data on the firm’s activities. Management support systems help managers make better decisions. They include an information-reporting system that provides information based on the data collected by the TPS to the managers who need it; decision support systems that use models to assist in answering “what if” types of questions; and expert systems that give managers advice similar to what they would get from a human consultant. Executive information systems are customized to the needs of top management.

13.4 Technology Management and Planning

4. How can technology management and planning help companies optimize their information technology systems?

To get the most value from IT, companies must go beyond simply collecting and summarizing information. Technology planning involves evaluating the company’s goals and objectives and using the right technology to reach them. IT managers must also evaluate the existing infrastructure to get the best return on the company’s investment in IT assets. Knowledge management focuses on sharing an organization’s collective knowledge to improve productivity and foster innovation. Some companies establish the position of chief knowledge officer to head up KM activities.

13.5 Protecting Computers and Information

5. What are the best ways to protect computers and the information they contain?

Because companies are more dependent on computers than ever before, they need to protect data and equipment from natural disasters and computer crime. Types of computer crime include unauthorized use and access, software piracy, malicious damage, and computer viruses. To protect IT assets, companies should prepare written security policies. They can use technology such as virus protection, firewalls, and employee training in proper security procedures. They must also take steps to protect customers’ personal privacy rights.

13.6 Trends in Information Technology

6. What are the leading trends in information technology?

IT is a dynamic industry, and companies must stay current on the latest trends to identify ones that help them maintain their competitive edge, such as digital forensics, the distributed workforce, and grid computing. With digital forensics techniques, corporations, government agencies, attorneys, and lawmakers can obtain evidence from computers and corporate networks—web pages, pictures, documents, and e-mails. Many knowledge workers now work remotely rather than from an office. Companies adopting the distributed workforce model gain many benefits, such as cost savings, more satisfied and productive employees, and increased employee retention. Cloud computing harnesses the power of computers, online software, and data storage to create a virtual computing environment that is invisible to the user. A company can access the cloud on an as-needed basis instead of investing in its own supercomputer equipment. Outsourcing a portion of the company’s computing needs provides additional flexibility and cost advantages. Companies can also set up internal grids.

using financial information and accounting

14.1 Accounting: More than Numbers

1. Why are financial reports and accounting information important, and who uses them?

Accounting involves collecting, recording, classifying, summarizing, reporting, and analyzing a firm’s financial activities according to a standard set of procedures. The financial reports resulting from the accounting process give managers, employees, investors, customers, suppliers, creditors, and government agencies a way to analyze a company’s past, current, and future performance. Financial accounting is concerned with the preparation of financial reports using generally accepted accounting principles. Managerial accounting provides financial information that management can use to make decisions about the firm’s operations.

14.2 The Accounting Profession

2. What are the differences between public and private accountants, and how has federal legislation affected their work?

Public accountants work for independent firms that provide accounting services—such as financial report preparation and auditing, tax return preparation, and management consulting—to other organizations on a fee basis. Private accountants are employed to serve one particular organization and may prepare financial statements, tax returns, and management reports.

The bankruptcies of companies such as Enron and WorldCom, plus widespread abuses of accounting practices, raised critical issues of auditor independence and the integrity and reliability of financial reports. To set better standards for accounting, auditing, and financial reporting and prevent future accounting irregularities, Congress passed the Sarbanes-Oxley Act in 2002. This Act created an independent board to oversee the accounting profession, set stricter auditing and financial disclosure standards, and placed increased accountability on a company’s senior executives and management. In addition, the law restricts auditors from providing certain types of consulting services to clients. Other organizations such as the SEC, the New York Stock Exchange, and accounting industry professional associations issued new regulations and guidelines related to compliance with the Act.

14.3 Basic Accounting Procedures

3. What are the six steps in the accounting cycle?

The accounting cycle refers to the process of generating financial statements. It begins with analyzing business transactions, recording them in journals, and posting them to ledgers. Ledger totals are then summarized in a trial balance that confirms the accuracy of the figures. Next the accountant prepares the financial statements and reports. The final step involves analyzing these reports and making decisions. Computers have simplified many of these labor-intensive tasks.

14.4 The Balance Sheet

4. In what terms does the balance sheet describe the financial condition of an organization?

The balance sheet represents the financial condition of a firm at one moment in time, in terms of assets, liabilities, and owners’ equity. The key categories of assets are current assets, fixed assets, and intangible assets. Liabilities are divided into current and long-term liabilities. Owners’ equity, the amount of the owners’ investment in the firm after all liabilities have been paid, is the third major category.

14.5 The Income Statement

5. How does the income statement report a firm’s profitability?

The income statement is a summary of the firm’s operations over a stated period of time. The main parts of the statement are revenues (gross and net sales), cost of goods sold, operating expenses (selling and general and administrative expenses), taxes, and net profit or loss.

14.6 The Statement of Cash Flows

6. Why is the statement of cash flows an important source of information?

The statement of cash flows summarizes the firm’s sources and uses of cash during a financial-reporting period. It breaks the firm’s cash flows into those from operating, investment, and financing activities. It shows the net change during the period in the firm’s cash and marketable securities.

14.7 Analyzing Financial Statements

7. How can ratio analysis be used to identify a firm’s financial strengths and weaknesses?

Ratio analysis is a way to use financial statements to gain insight into a firm’s operations, profitability, and overall financial condition. The four main types of ratios are liquidity ratios, profitability ratios, activity ratios, and debt ratios. Comparing a firm’s ratios over several years and comparing them to ratios of other firms in the same industry or to industry averages can indicate trends and highlight financial strengths and weaknesses.

14.8 Trends in Accounting

8. What major trends affect the accounting industry today?

The post-SOX business environment has brought many changes to the accounting profession, including higher standards for audit procedures. In addition, the FASB has made slow but steady progress in making changes related to GAAP; however, the implementation of global accounting standards may not occur anytime soon. Several important trends will continue to impact the accounting industry going forward, including cloud-based services, automation, and staffing challenges, as accountants shift the focus of their practice to one incorporating technological advances and a more comprehensive approach to their companies’ and clients’ overall business environment.

understanding money and financial institutions

15.1 Show Me the Money

1. What is money, what are its characteristics and functions, and what are the three parts of the U.S. money supply?

Money is anything accepted as payment for goods and services. For money to be a suitable means of exchange, it should be scarce, durable, portable, and divisible. Money functions as a medium of exchange, a standard of value, and a store of value. The U.S. money supply consists of currency (coins and paper money), demand deposits (checking accounts), and time deposits (interest-bearing deposits that cannot be withdrawn on demand).

15.2 The Federal Reserve System

2. How does the Federal Reserve manage the money supply?

The Federal Reserve System (the Fed) is an independent government agency that performs four main functions: carrying out monetary policy, setting rules on credit, distributing currency, and making check clearing easier. The three tools it uses in managing the money supply are open market operations, reserve requirements, and the discount rate. The Fed played a major role in keeping the U.S. financial system solvent during the financial crisis of 2007–2009 by making more than $9 trillion available in loans to major banks and other financial firms, in addition to bailing out the auto industry and other companies and supporting congressional passage of Dodd-Frank federal legislation.

15.3 U.S. Financial Institutions

3. What are the key financial institutions, and what role do they play in the process of financial intermediation?

Financial institutions can be divided into two main groups: depository institutions and nondepository institutions. Depository institutions include commercial banks, thrift institutions, and credit unions. Nondepository institutions include insurance companies, pension funds, brokerage firms, and finance companies. Financial institutions ease the transfer of funds between suppliers and demanders of funds.

15.4 Insuring Bank Deposits

4. How does the Federal Deposit Insurance Corporation (FDIC) protect depositors’ funds?

The Federal Deposit Insurance Corporation insures deposits in commercial banks through the Bank Insurance Fund and deposits in thrift institutions through the Savings Association Insurance Fund. Deposits in credit unions are insured by the National Credit Union Share Insurance Fund, which is administered by the National Credit Union Administration. The FDIC sets banking policies and practices and reviews banks annually to ensure that they operate fairly and profitably.

15.5 International Banking

5. What role do U.S. banks play in the international marketplace?

U.S. banks provide loans and trade-related services to foreign governments and businesses. They also offer specialized services such as cash management and foreign-currency exchange.

15.6 Trends in Financial Institutions

6. What trends are reshaping financial institutions?

There will be a continued focus on regulatory and compliance issues, especially after the recent financial crisis, as well as on operational efficiency and technological advances. Banks will continue to tackle customer engagement and technology initiatives, as consumers will control more than 85 percent of their ongoing relationships with banks and other financial institutions. Fintech services will continue to disrupt the banking industry and will enable some banks to increase innovation and streamline operational efficiencies. Mobile financial apps will continue to provide banks with a strategic advantage, as well as enable them to collect and utilize customer data as part of their overall business strategy. Finally, online payment platforms will play an integral role in the banking and financial sector, as consumers’ expectations continue to drive innovation in the banking industry.

understanding financial management and securities markets

16.1 The Role of Finance and the Financial Manager

1. How do finance and the financial manager affect the firm’s overall strategy?

Finance involves managing the firm’s money. The financial manager must decide how much money is needed and when, how best to use the available funds, and how to get the required financing. The financial manager’s responsibilities include financial planning, investing (spending money), and financing (raising money). Maximizing the value of the firm is the main goal of the financial manager, whose decisions often have long-term effects.

16.2 How Organizations Use Funds

2. What types of short-term and long-term expenditures does a firm make?

A firm incurs short-term expenses—supplies, inventory, and wages—to support current production, marketing, and sales activities. The financial manager manages the firm’s investment in current assets so that the company has enough cash to pay its bills and support accounts receivable and inventory. Long-term expenditures (capital expenditures) are made for fixed assets such as land, buildings, equipment and information systems. Because of the large outlays required for capital expenditures, financial managers carefully analyze proposed projects to determine which offer the best returns.

16.3 Obtaining Short-Term Financing

3. What are the main sources and costs of unsecured and secured short-term financing?

Short-term financing comes due within one year. The main sources of unsecured short-term financing are trade credit, bank loans, and commercial paper. Secured loans require a pledge of certain assets, such as accounts receivable or inventory, as security for the loan. Factoring, or selling accounts receivable outright at a discount, is another form of short-term financing.

16.4 Raising Long-Term Financing

4. What are the key differences between debt and equity, and what are the major types and features of long-term debt?

Financial managers must choose the best mix of debt and equity for their firm. The main advantage of debt financing is the tax-deductibility of interest. But debt involves financial risk because it requires the payment of interest and principal on specified dates. Equity—common and preferred stock—is considered a permanent form of financing on which the firm may or may not pay dividends. Dividends are not tax-deductible.

The main types of long-term debt are term loans, bonds, and mortgage loans. Term loans can be unsecured or secured and generally have maturities of 5 to 12 years. Bonds usually have initial maturities of 10 to 30 years. Mortgage loans are secured by real estate. Long-term debt usually costs more than short-term financing because of the greater uncertainty that the borrower will be able to make the scheduled loan payments.

16.5 Equity Financing

5. When and how do firms issue equity, and what are the costs?

The chief sources of equity financing are common stock, retained earnings, and preferred stock. The cost of selling stock includes issuing costs and potential dividend payments. Retained earnings are profits reinvested in the firm. For the issuing firm, preferred stock is more expensive than debt because its dividends are not tax-deductible and its claims are secondary to those of debtholders but less expensive than common stock. Venture capital is often a source of equity financing for young companies.

16.6 Securities Markets

6. How do securities markets help firms raise funding, and what securities trade in the capital markets?

Securities markets allow stocks, bonds, and other securities to be bought and sold quickly and at a fair price. New issues are sold in the primary market. After that, securities are traded in the secondary market. Investment bankers specialize in issuing and selling new security issues. Stockbrokers are licensed professionals who buy and sell securities on behalf of their clients.

In addition to corporate securities, investors can trade U.S. government Treasury securities and municipal bonds, mutual funds, futures, and options. Mutual funds are managed by financial-service companies that pool the funds of many investors to buy a diversified portfolio of securities. Investors choose mutual funds because they offer a convenient way to diversify and are professionally managed. Exchange-traded funds (ETFs) are similar to mutual funds but trade on stock exchanges similar to common stock. Futures contracts are legally binding obligations to buy or sell specified quantities of commodities or financial instruments at an agreed-on price at a future date. They are very risky investments because the price of the commodity or financial instrument may change drastically. Options are contracts that entitle the holder the right to buy or sell specified quantities of common stock or other financial instruments at a set price during a specified time. They, too, are high-risk investments.

16.7 Buying and Selling at Securities Exchanges

7. Where can investors buy and sell securities, and how are securities markets regulated?

Securities are resold in secondary markets, which include both broker markets and dealer markets. The broker market consists of national and regional securities exchanges, such as the New York Stock Exchange, that bring buyers and sellers together through brokers on a centralized trading floor. Dealer markets use sophisticated telecommunications networks that link dealers throughout the United States. The NASDAQ and over-the-counter markets are examples of dealer markets. In addition to broker and dealer markets, electronic communications networks (ECNs) can be used to make securities transactions. In addition to the U.S. markets, more than 60 countries have securities exchanges. The largest non-U.S. exchanges are the London, Tokyo, Toronto, Frankfurt, Hong Kong, and Taiwan exchanges.

The Securities Act of 1933 requires disclosure of important information regarding new securities issues. The Securities Exchange Act of 1934 and its 1964 amendment formally empowered the Securities and Exchange Commission and granted it broad powers to regulate the securities exchanges and the dealer markets. The Investment Company Act of 1940 places investment companies such as companies that issue mutual funds under SEC control. The securities markets also have self-regulatory groups such as the Financial Industry Regulatory Authority (FINRA) and measures such as “circuit breakers” to halt trading if the S&P 500 Index drops rapidly.

16.8 Trends in Financial Management and Securities Markets

8. What are the current developments in financial management and the securities markets?

The role of the CFO has continued to expand since the passage of the Sarbanes-Oxley Act, with CFOs taking the central role in overseeing corporate compliance with the act and reestablishing public trust. CFOs must look outward and be business focused. Most CFOs are promoting strategic finance and encouraging finance staff to be team players who work closely with business units to achieve corporate goals.

Competition among the world’s major securities exchanges has changed the composition of the financial marketplace. The NYSE and NASDAQ went head to head in the United States. The NYSE became a for-profit company, acquired Archipelago, an electronic exchange, and merged with Euronext to form the first transatlantic exchange. NASDAQ also expanded by acquiring its own ECN and buying a 25 percent stake in the London Stock Exchange, which continues to look for a potential buyer.

YOUR CAREER IN BUSINESS

• 17.1 Learn the Basics of Business

• 17.2 Developing Interpersonal Skills Is Key to Your Success

• 17.3 Make Your Future Happen: Learn to Plan

• 17.4 Going to College Is an Opportunity of a Lifetime—Never Drop Out

• 17.5 Get Your Career Off on the Right Track

• 17.6 Self-Test Scoring Guidelines