ECN 1015 Business in a Market Economy Lecture Notes
© 2001 Robert R. Schaller using Nickels, W.G., McHugh, J.M., and McHugh, S.M., Understanding Business, Irwin/McGraw-Hill, 1999, 5th Ed., online at http://www.mhhe.com/business/busadmin/ub5e/main.mhtml
Note: these are old notes used for the 5th Edition of the text. They may be used as a basis for the newer, 6th Edition but page numbers, figures, and other text references have changed. See
http://www.mhhe.com/ub6e/ for the 6/e author website.Chapter 1 Today's Business Environment
Entrepreneurship: Herman Cain, Burger King, and Godfather's Pizza
A business is any activity that seeks profit by providing goods and services to others.
Measures of success:
Economics: core of all business decision making:
Factors of production (basic resources):
An entrepreneur is an individual who risks wealth, time, and effort to develop for profit an innovative product or way of doing something [big names like John D. Rockefeller (Standard Oil), Henry Ford, Walt Disney, Bill Gates (Microsoft), and any small businessperson]
Business environment (fig 1.2):
Importance of Quality and Customer Satisfaction
Evolution of American Business:
History of Business in U.S.:
1. Colonial Period (17th-18th century)
- agriculture "farm or starve" hunters/gatherers
2. Industrial Revolution (late 18th century)
- factory system from steam engine and other technologies
- mass production techniques replaced highly skilled craftspeople
3. Laissez-Faire, Entrepreneurial Era (19th century):
- risk taking, entrepreneurship led to growth
- but monopolization of "trusts"
- regulation: Sherman Act and Clayton Act
4. Production Era (early 20th century):
- Taylor's "scientific management"
- "roaring '20s" followed by Great Depression
- labor movement and more regulation
5. Marketing Era (post-WWII):
- customer focus: marketing concept
- Sloan's GM overtakes Henry Ford's production emphasis (more colors than black)
6. Global Era (late 20th century, post-OPEC crisis):
- Japan, Inc. changed the rules
- technology has made the world "smaller" (overnight delivery, Internet)
- services dominate
See end-of-chapter cases:
Chapter 2 Economics: Creating and Distributing Wealth
Rosa Alvardo: Village Banker and Entrepreneur
Economics: study of how society chooses to employ resources to produce and distribute goods and services
Economic system is a nation's system for allocating resources among its citizens (see Fig 2.1):
Foundations (rights) of capitalism:
Market system: the market determines product prices and output through forces of supply and demand:
a. Supply: qty of goods/services businesses are willing to sell at different prices at a specific time (seller, producer, or business)
b. Demand: qty of goods/services consumers are willing to buy at different prices at a specific time (buyer, or consumer)
Know laws (curves) of supply (fig 2.2) and demand (2.3)
Market or Equilibrium Point (fig 2.4): the price and qty combination where supply equals demand ("discovered" price, no price tag ) - like an auction:
a. market forces eliminate surplus or shortage (e.g. ticket scalping).
b. supply, demand, and equilibrium only exist in a market (capitalist) system
c. contrast with communist system (some gov't agency or ministry decides these things)
Competition: the rivalry among businesses to convince consumers to buy their goods/services - four degrees of competition (ECN market models):
1. perfect competition: numerous sellers, standard product, tobacco farmer
2. monopolistic competition: many sellers, product differentiation, hairdresser
3. oligopoly: few sellers, interdependence, orthodontist
4. monopoly: one seller, one product, SMECO (Microsoft is alleged to be one)
Note: patent laws create "short-term" monopolies
Limitations of free-market system: inequality (have's/have nots)
National economic goals (terms):
Measuring economic performance:
Managing the economy (Macroeconomics):
Chapter 3 Competing in Global Markets
Dary Rees is one of thousands of small businesses that have capitalized on the global economy
Going International:
The dynamic global market:
Importance of global marketing (some more facts):
Free trade principles:
Strategies for reaching global markets:
Hurdles of trading in global markets
Trade protectionism:
Major World (Common) Markets:
EuroDisney (now Disney of Paris) -- Mickey Mouse in France?
Chapter 4 Business Ethics and Social Responsibility
Nancy Bierk's unique hiring practices (hiring heroes) in a new era of social responsibility (a business's concern for the welfare of society as a whole)
Plagiarism and term papers -- see first case on p 116, "Got a Deadline?": there are dozens of internet sites (like
http://www.schoolsucks.com) where you can download a research paper, book report or essay on almost any topic. Most charge a fee ($20) but some are free.Ethical behavior is critical in business:
Ethics (standards of moral behavior) concerned with individual morality within social values and norms:
Studying business ethics may not make you more ethical but hopefully increases awareness
Some ethical issues:
Company Policies:
Influencing factors:
Corporate social responsibility (see fig 4-3):
International considerations (e.g., Nike "sweatshops")
Appendix Legal Environment of Business
Laws are codified rules of behavior enforced by society -- two sources:
Categories of law (basis for business law):
Administrative agencies: state and federal government regulatory functions (e.g., FDA, FTC, EPA)
Important terms:
Contract law:
Damages: compensatory vs. punitive (e.g., Dow Corning silicone breast implant class action award)
Laws to support a market economy (e.g., anti-trust)
Bankruptcy law:
Deregulation means the government withdraws certain laws and regulations that restrict business activity (e.g., airlines, banking); there are +/-'s (see hamburger regulations fig A.6)
Q: Is Microsoft a monopoly? Our economic system rewards success, but penalizes too much of it.
Chapter 5 Forms of Business Ownership
Three major forms of ownership (Tony Conza and Blimpie's, Richard Sears, Dad's Store), plus a 4th:
1. Sole Proprietorship (largest in #'s: 70%)
2. Partnership
3. Corporation (largest in sales $: 70%)
4. Cooperative
Advantages/Disadvantages:
Sole Proprietorship (one owner):
+ being own boss, pride of ownership, keeping profits
+ ease of starting and ending
+ personal tax treatment
(-) unlimited liability
(-) limited financial resources, life span, future growth
(-) overwhelming personal commitment
Partnership (two or more owners):
+ more financial resources
+ shared management and pooled knowledge
+ longer survival
(-) unlimited liability (still)
(-) division of profits
(-) disagreements among partners
(-) difficult to terminate
Types of partnerships:
1. general partnership: partners completely share management of a business
2. limited partnership: at least one limited partner (liability is limited, but can't operate business)
Corporations:
+ more money for investment and growth
+ limited liability
+ separation of ownership (stockholders) and control (management)
+/- size, perpetual life (legal entity)
+/- ease of transfer of ownership
(-) initial cost
(-) paperwork, two tax returns
(-) difficult to terminate
(-) double taxation
S Corporations and LLCs (see fig 5.2 comparison)
Public (stock sold on secondary mkt) vs. Private (stock held internally) Corporations
Additional terms:
Cooperatives pp 155-156 (agreements to work together, "members" share profits), examples:
Mergers (union) and Acquisitions (outright purchase):
Franchise: an arrangement (license) to sell another's products or to use another's name in business:
Evolution of franchising, 3 general types:
1. manufacturer licenses retail stores to sell certain brand-name products (auto dealerships)
2. producer licenses distributors to sell a specific product to retailer (independent soft drink bottlers)
3. franchiser simply supplies brand names, techniques, etc., rather than a specific product (McDonald's)
Advantages/Disadvantages:
+ widespread exposure: nationally recognized name
+ personal ownership
+ lower failure rate than independently owned small business
+ management, marketing, and financial assistance
(-) large start-up costs (franchising fees)
(-) shared profit (royalties)
(-) management regulation (not totally your "own boss")
(-) coattail effects (Jack-in-the-Box) and some fraud
Chapter 6 Entrepreneurship and Starting a Small-Business
Frederick Smith, a "C" paper, and Federal Express
Are you ready to be an entrepreneur? (see appendix)
What is Entrepreneurship?
Who are entrepreneurs?
Other approaches:
Small Business
What is a Small Business (per SBA)? any business independently owned and operated, not dominant its market, and meets certain standards of size.
Environmental changes affecting small business:
Reasons for Failure (also see p 172):
Reasons for Success (also see p 173):
What are examples of local small businesses that have succeeded or failed?
Getting started:
Getting help:
Chapter 7 Management, Leadership, Employee Empowerment
New Approach to Management: manager no longer the "boss" or controller, "Organization Man," or he/him (e.g., Lynn Mercer)
What's different today?
Manager's challenge: do more with less in the midst of continual change (while the ground is moving)
Management defined: the process used to accomplish organizational goals through planning, organizing, leading, and controlling (POLC) people and other organizational resources (fig 7.1)
Planning (selecting a course of action in advance):
- long-term (strategic): 1-5 years out
- intermediate (tactical): within 1 year
- short-term (operational): weekly
Organizing: structuring resources and activities to accomplish objectives (e.g., baseball team, see Ch 8)
Organizational structure and hierarchy (fig's 7.3, 7.4 traditional pyramid structure):
Empowering workers (turning org chart on its head, fig 8.8)
Controlling involves evaluating and adjusting activities to keep plan on course (e.g., performance appraisals, see fig 7.5)
Leading (Directing): leading and motivating employees to achieve objectives (see Ch 10)
Management Skills:
Chapter 8 Organizing a Customer-Driven Business
Hewlett-Packard learns from reengineering (now two companies: HP and Agilent Technologies), so does NAWCAD Pax River
http://www.nawcad.navy.mil/Organizational structure determines the roles, responsibilities, and pattern of interdependent relationships within an organization as determined by:
Organizational design:
Span of control: number of people supervised by one manager:
Departmentalization: grouping of jobs into logical working units, usually called departments, units, groups, or divisions (fig 8.3, know +/-):
Distributing Authority:
Organization models/types (see fig 8.4):
TQM, continuous improvement, reengineering:
Organizational culture: widely shared values, beliefs, and norms within an organization that provide meaning/purpose ("glue"):
Informal organization: personal/social relationships that evolve in the work environment and transcend the formal organization:
Extra credit for next exam (5 points): write a 1 pg essay describing both a visible and invisible aspect of organizational or corporate culture; use specific examples and base it on your own experience (your work or school).
Chapter 9 Using the Latest Production Technology
The Production Process (fig 9.1):
Site Selection:
Production Processes:
History of Manufacturing:
Modern Production Techniques:
Control Procedures:
Chapter 10 Motivating Employees and Building Self-Managed Teams
Herb Kelleher of Southwest Airlines is not your average CEO
Motivation ultimately comes from within (see attachment and note who wrote it), but external factors are also important (see Subway p 299):
Motivation in the Workplace -- an Evolution:
Contemporary Theories of Employee Motivation:
1. physiological (food, shelter, clothing)
2. security (protection from physical and economic harm)
3. social (companionship, acceptance, belonging)
4. esteem (self-respect/respect from others)
5. self-actualization (self-fulfillment)
1. hygiene factors relate to the work setting -- don't necessarily motivate, but their absence may be a source of dissatisfaction (Maslow's lower level needs)
2. motivation factors relate to the content of the work and include achievement, recognition, involvement, the work itself -- promote higher levels of performance (Maslow's higher level needs)
Strategies for Enhancing Job Satisfaction and Motivation:
Goal-setting theory: people more likely to be motivated when they participate in setting goals
New Concepts:
Chapter 11 Human Resource Management
Diversity in the workplace (and in society more broadly) matters:
Human Resource Management (see fig 11.1 flowchart) and the HR challenge (see pp 317-318):
Job analysis: evaluation of duties/qualities required by a job (fig 11.2):
Staffing the Organization:
1. internal (inexpensive approach)
2. external (more expensive than hiring from within) -- Note: for managerial and professional positions, "headhunters" usually used but see Ben & Jerry's
Training (employees) and Development (of managers):
Contingent Work Force:
Performance appraisal (fitness report)
Compensation includes: wages, salary, commissions, bonuses, profit sharing and other incentives (see pp 331-332)
Benefits (fringe benefits): nonwage forms of compensation provided to employees (pension plans, health and life insurance, sick-leave and vacation pay, credit unions, etc.)
Employee Assistance Programs (EAPs) for:
Flextime, compressed workweek, job-sharing, etc. (see Ch 10)
Promoting, terminating, retiring (note "glass ceiling")
Legal and Ethical employment considerations:
1. Equal Employment Opportunity Commission (EEOC) is the federal enforcement agency
2. Employers cannot impose sex distinctions in job specifications, job descriptions, and newspaper ads
3. affirmative action programs and reverse discrimination
- Americans with Disabilities Act (1992)
- Family and Medical Leave Act (1993)
- Age Discrimination in Employment Act (1967)
- Equal Pay Act (1963)
- Fair Labor Standards Act (1938)
- Occupational Safety and Health Act (1970)
Chapter 12 Employee-Management Issues and Relationships
"Chainsaw Al" goes from hero to goat in 2 years at Sunbeam:
About 14% of labor force (<10% in private industry) is union; labor unions still very influential, but losing membership (see
attached article)A labor union is a group of workers who have joined together to increase their power to bargain with employers
Types of Unions:
1. craft unions: specific craft or trade (painters, carpenters, and electricians) regardless of industry (skilled labor)
2. industrial unions: specific industry (autos, steel, mining -- semi- and unskilled labor)
History of labor unions in America:
1790-1930s Repression (common law conspiracy doctrine)
1930s-1947 Encouragement (Wagner Act)
1947-Date Intervention (Taft-Hartley Act)
Industrial Revolution brought about large factories and division of labor (specialization)
+ technological progress, improved standard of living
- long working hours, unsafe working conditions
o dissatisfied workers banded together to force management to improve working conditions and raise wages
a. early unionization efforts were loosely knit local groups (craft unions) to provide support to members and their families
b. Knights of Labor -- first national labor union (1869)
c. American Federation of Labor (AFL) (craft union) formed in 1886 by Samuel Gompers
d. in 1935 Congress of Industrial Organizations (CIO) (industrial union) split off from AFL, focused on industries such as mining, steel, autos, communications, newspapers -- grew in power until it rivaled the AFL
e. In 1955 the AFL and CIO joined to become AFL-CIO (most union members are affiliated with AFL-CIO)
Evolutionary labor-management legislation:
a. Norris-LaGuardia Act (1932) -- limited employers from seeking injunctions (court orders) to prohibit striking, picketing, or other union membership activities; outlawed yellow-dog contracts and blacklists
b. Wagner Act (also called the National Labor Relations Act) of 1935 recognized employees' right to negotiate with employers and thus legalized collective bargaining
- set up the NLRB to supervise union elections and police management policies regarding unions
c. Fair Labor Standards Act (1938) was not a "union" law per se, but reflects the national influence of union movement:
- established minimum wage
- set a maximum workweek
- mandated overtime pay
- outlawed child labor
d. Taft-Hartley Act of 1947 was pro-management, focused on the rights of management and regulated certain labor practices (see fig 12.4):
- declared the closed shop illegal
- did not outlaw union shops, but allowed states to outlaw them via right-to-work laws (MD and most "northern" states haven't passed, see fig 12.5)
- agency shops not affected -- nonmembers required to pay the union a fee equivalent to union dues
- clarified injunctions and established "cooling-off periods" to help resolve differences
e. Landrum-Griffin Act (1959) was pro-union members; guarantees all members the right to vote in union elections, speak at union meetings, and see union financial reports
Unionization (De)certification process -- N/A
Collective bargaining: on-going negotiation process between management and unions to uphold contract terms:
- dispute resolution -- management and labor may interpret contracts differently, sometimes causing disputes:
a. grievance, a formal written complaint by an employee or union
b. The employee files complaint with the shop steward, the union's representative
When bargaining fails:
union tactics:
- strike (includes sympathy and wildcat)
- picketing
- boycott (primary and secondary)
- cooling-off period
management tactics:
- yellow-dog contracts (now illegal)
- lockout
- injunction
- strikebreakers (scabs)
3rd party:
- mediation
- arbitration (voluntary and binding)
Unionism today:
- declining membership trend (see fig 11.1)
- reasons: global competition, change to services economy, givebacks, increased social responsibility, anti-union strategies
- future uncertain, but recent resurgence in union activism (Teamsters, MLB, etc.), also in non-traditional groups (women, white-collar, govt, service industries, and small businesses)
Controversial employee-management issues:
Chapter 13 Marketing: Building Customer and Stakeholder Relationships
Chris Zane of Zane's Cycles: relationship marketing is about keeping a customer for life:
Marketing: process of determining customer wants and needs and then providing customers with goods and services that meet or exceed their expectations:
Marketing process (fig 13.1):
The marketing concept: customer orientation, service orientation, and profit orientation -- evolution of contemporary marketing from production, selling, marketing, and relationship:
Marketing strategy (railroads lacked in "Marketing Myopia" -- see fig 13.2 concentric circles):
Marketing Mix (the 4 P's) -- see chps 14-16:
Market Research: the study of consumer needs and wants (Rogaine video):
Understanding consumer behavior (psychology/sociology) and decision-making:
Target marketing and market segmentation:
Consumer vs business-to-business (B2B) marketing:
Extra credit for Exam 4 (10 points): article review of Levitt's "Marketing Myopia" handout -- summarize five (5) major points in article and discuss a modern-day example of a business that has suffered or avoided marketing myopia.
Chapter 14 Developing and Pricing Products (first 2 P's)
Toro has a reputation for quality, but was traditionally limited in its seasonal product mix (lawn mowers) -- now adding value
Procter & Gamble (P&G) has earned the position of largest consumer products firm in the U.S. through brand loyalty -- hard to achieve, very hard to keep
Product: good, service, or idea with tangible and intangible attributes providing features and benefits:
Product Mix vs Product Line vs Product Item
P&G product lines (fig 14.1):
|
Bar Soaps |
Detergents |
Cleaners |
Diapers |
|
Camay |
Tide |
Comet |
Pampers |
|
Ivory |
Ivory Snow |
Mr. Clean |
Luvs |
|
Safeguard |
Cheer |
Spic & Span |
|
|
Lava, etc. |
Bold |
Top Job |
|
Classifying Consumer Products:
Classifying Industrial (B2B) Products (fig 14.2) include production vs support goods and services
Packaging and Labeling:
Branding: symbols and names to identify products
New Product Development Process:
1. idea generation (see fig 14.5)
2. screening and analysis (Tom Hanks in "Big")
3. development (prototype)
4. testing (test marketing McRib sandwiches)
5. commercialization (full-scale marketing)
International challenge:
Product Life Cycle (see fig 14.7 -- know 4 stages):
a. introduction (consumer awareness limited, limited sales, nonexistent or negative profits)
b. growth (rapid sales increase, profits appear)
c. maturity (industry sales peak and then decline, profits peak early, then continue to decline due to competition and heavy marketing of "new and improved" products)
d. decline (sales and profits continue to decline)
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Determining Prices: price is probably the most flexible variable in the marketing mix
Pricing Objectives:
Price-setting tools:
Pricing strategies:
Other pricing tactics (not in book):
Nonprice competition (who cuts your hair - or fixes your car - and why?):
Chapter 15 (old Ch18) Distributing Products (3rd "P" is Place'ment')
"Avon Calling" now in China, Brazil, Mexico, and many foreign markets -- direct selling, the oldest form of retailing, still works!
Distribution Mix: combination of distribution channels by which a firm gets its products to end users
Intermediaries (middlemen): bridge the gap between the producer of the product and the ultimate user of the product (fig 18.3):
- wholesalers sell to other middlemen (e.g., retailers)
- retailers sell directly to consumers
Distribution Channel: network of interdependent marketing organizations that direct the flow of products from producers to end users (fig 18.1):
- direct (consumer and industrial)
- nondirect (via intermediaries)
- role of sales agents and brokers
Distribution Strategies: intensity of market coverage -- number/variety of product outlets:
- intensive distribution (convenience product)
- selective distribution (shopping product)
- exclusive distribution (specialty product)
Channel Integration: coordinating activities of the various stages in the marketing channel:
- avoids channel conflict
- establishes channel leadership (captain)
- vertical marketing system (VMS): combines planned distribution systems under one management (vertically integrated):
- corporate VMS (The Limited, Radio Shack)
- contractual VMS (franchise - McDonald's, IGA)
- administered VMS (Xerox, appliances)
Wholesaling: includes all marketing transactions for resale or use in making other products:
- merchant wholesalers: buy and resell products, assume risk of ownership, and store and deliver inventories (Little Debbie Snack Cakes):
- full-service vs limited-function (drop shipper, rack jobbers)
- agents and brokers: don't take title
Retailing: focuses on selling products to consumers for personal use (see tab 18.1):
- product-line retailers:
- department stores (J.C. Penney's -- tab 18.2)
- supermarkets (Safeway)
- hypermarkets (Super Kmart in Prince Frederick: large and practices scrambled merchandising)
- specialty stores (The Gap: narrow but deep product assortment)
- bargain retailers:
- discount houses (Kmart, Wal-Mart -- tab 18.3)
- off-price stores (Ross, Marshall's)
- catalog showrooms (Service Merchandise)
- factory outlets (Ocean City/Rehobeth Beach)
- warehouse clubs (Sam's Club, BJ's)
- convenience stores (7 Eleven -- emerging "minimarts" such as Charlotte Hall Shell)
- nonstore retailing ('90s shopping):
- mail order or catalog marketing
- video and electronic shopping (home shopping network, Internet)
- telemarketing
- direct selling (door-to-door)
Wheel of Retailing: new retailers continually enter the market as low-status, low-margin, low-price operators (Sears -> Kmart -> Wal-Mart)
Physical Distribution: transporting products from producer to consumer:
- customer-service operations (order processing)
- warehousing operations:
- private vs public warehouses
- storage warehouse vs distribution center
- transportation modes (+/- fig 18.4)
- types of carriers:
- common carrier
- freight forwarder
- contract carrier (owner-operator)
- private carrier
The Rise and Fall of Price Club: first warehouse club
Chapter 16 (old Ch17) Promoting Products (4th P)
"Intel Inside" has become an effective promotional campaign, but early Pentium chip problems created a public relations nightmare for Intel
Promotion is any technique designed to sell a product:
- communicates product uses, features, benefits
- a form of persuasion to influence purchase
- adds value to the purchase (sales promotions)
Promotional Objectives (see fig 17.1):
- communicating information (1,500 exposures/day)
- product positioning (Mountain Dew, Lava, Camay)
- adding value (benefits over features)
- controlling sales volume (Grandparents' Day)
Promotional Strategies:
- pull strategy: designed to appeal directly to consumers who will demand (pull) product from retailers (advertising, sales promotions)
- push strategy: motivates middlemen to push the product down to their customers (personal selling)
The Promotional Mix consists of advertising, personal selling, sales promotions, publicity and PR (fig 17.2):
Advertising: paid, nonpersonal communication used by an identified sponsor to inform an audience about a product:
- approaches:
- persuasive advertising (competitive)
- comparative advertising (Pepsi challenge)
- reminder advertising (maintain brand loyalty)
- advertising media (tab 17.1):
- newspapers (most widely used, especially local)
- television (wide coverage, but expensive)
- direct mail ("junk mail" is most cost-effective)
- radio (inexpensive and highly selective)
- magazines (highly segmented)
- outdoor advertising (political campaign signs)
- other channels (Yellow Pages, flyers, etc.)
- types (fig 17.5):
- brand (includes product primary demand: Dairy Council's "Milk Does a Body Good")
- advocacy (political campaigns)
- institutional (promotes firm's image or vision: Benetton's global social concerns)
- regulation:
- FTC, Wheeler-Lea Act "truth in advertising"
- NARB self-regulation
Personal Selling: salesperson communicates one-on-one with potential customers:
- most direct and flexible method, but also most costly
- many products require personal selling, especially large purchases (home or car)
- emergence of telemarketing
- retail vs industrial selling
- personal selling tasks (types of salespersons):
- order takers -- inside and outside (catalog sales)
- creative selling (traditional retail sales)
- missionary selling (technical and other support)
- personal selling process:
1. prospecting, qualifying (to avoid "cold calling")
2. approaching
3. presenting and demonstrating (the "pitch")
4. handling objections
5. closing ($)
6. following up
Sales Promotions: stimulates short-term consumer purchases or increases cooperation within distribution channel (distributors, agents, etc.) -- major types:
- coupons (Sunday paper, only 2% redeemed)
- point-of-purchase displays (Little Debbie's)
- purchasing incentives (includes premiums -- green stamps, and free samples -- laundry detergent)
- trade shows (FOSE)
- contests and sweepstakes (Publisher's Clearinghouse)
- new form: specialty advertising (T-shirts, coffee cups, etc.)
Publicity and Public Relations:
- publicity: information about a company or product transmitted through the mass media:
- "free" but usually not repeated
- more credible than advertising since "news"
* may be good or bad
- public relations: company-influenced publicity
- large organizations have PR departments
- controlled forms of publicity:
- feature articles (ECN 1015 article reviews)
- press release
- press conference
Special Considerations:
- global perspective
- small business
Does "The United Colors of Benetton" take institutional advertising too far?
Chapter 17 Using Technology to Manage Information
The widespread use of the Internet epitomizes the influence of rapid technological change on business and society:
Moore's Law and semiconductor technology: basis for all of this (see p 511): chip density (and capability) doubles every 18 months
History of computer systems:
Data vs Information:
Marriage of Information and Communications Technology:
Effects of Information Technology on Management:
+ increases accuracy and productivity
+ allows work at home (telecommute, telework)
Final note: computers are a tool, not a replacement for managers/workers
Chapter 18 Financial Information and Accounting
Finance and accounting skills are essential in business -- take accounting courses while you have the opportunity. Many in business today don't have good accounting or financial skills:
Accounting: a system for recording, classifying, summarizing, and interpreting financial information
Areas/uses of accounting (see fig 18.2):
Types of accountants:
Double-entry accounting: the system of recording and classifying business transactions in accounts that maintain the balance of the accounting equation (T-accounts, debits = credits):
Financial Statements:
Revenue
- Expenses*
-------------
Net Income (profit or loss)
* cost of goods sold vs operating expenses (overhead) will determine gross ve net margin (income)
|
Assets = |
Liabilities + Owners' Equity |
|
Current assets* (cash, |
Current liabilities |
|
A/R, inventory) |
(A/P, notes payable) |
|
Fixed assets (property, |
Long-term liabilities |
|
plant, equipment, also |
(long-term debt) |
|
tangible, intangible) |
Owner's equity (net worth) |
|
|
common stock, ret. earnings) |
|
Total assets = |
Total liabilities and OE |
* liquidity is how easily asset accounts can be converted into cash
Fundamental accounting equation example:
|
Assets = |
Liabilities + Owners' Equity |
|
things of value = |
claims on (who owns) things |
|
example: |
[non-owners + owner] |
|
150,000 house = |
100,000 loan + 50,000 equity |
Other terms/issues:
Chapters 19 Financial Management (to be provided)
Chapter 20 (old Ch22) Securities Markets: Financing and Investing
Over two years, Snapple goes public, stock goes wild, then profits drop, stock plunges, and Quaker acquires them. Marvel Comics (end of chapter) goes through similar wild ride -- lesson: securities trading is very rewarding and risky!
Securities Markets: stocks and bonds are called securities because they are secured (asset-based) claims of investors
Equity vs Debt:
- in the U.S., stock means equity or ownership in a corporation
- debt is a loan or "IOU" -- bonds may be issued by corporations, governmental bodies, etc.
Primary vs Secondary Markets:
- primary distribution is the initial sale of securities, either privately or publicly:
- issuer uses the funds (capital) raised by the sale to expand production, further research, build bridges or schools, etc.
- new securities typically involve underwriting or investment banking
- face value of a share of stock at the time it is originally issued is called par value
- secondary markets: most securities are negotiable, the initial buyer may reoffer the securities for sale:
- securities exchanges (e.g., stock markets)
- when an investor buys 100 shares of GM on the NYSE, the proceeds do not go to GM, but rather to the investor who sold the shares
- share price in this case is known as the market value
Classes of Secondary Markets:
1. securities exchanges:
- national exchanges include the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) in New York
- regional exchanges include the Midwest Stock Exchange (Chicago), Pacific Stock Exchange (San Francisco and Los Angeles), and others
- stocks are traded on exchanges through brokers
2. over-the-counter (OTC) market: securities transactions that don't take place on an exchange
- tend to be smaller and less well-known than the established listed corporations (e.g., so-called "penny stocks")
- traditionally, the OTC market was an informal telephone network of competing dealers
- in 1970 the National Association of Securities Dealers Activated Quotations (NASDAQ) electronic trading system was introduced
- Today, NASDAQ surpasses the share volumes of all domestic exchanges, including the NYSE
Common vs. Preferred Stock:
- holder of common stock owns a portion of the corporation
- preferred stock usually carries with it no ownership rights, but entitles the holder to preference for dividends over common stockholders:
- typically, the share price of a preferred stock (pf) is less than a comparable common stock, but the dividend amount is greater
- many investors treat preferred stock like a "junior bond"
Bonds: generally a much safer investment than stock since a legally-binding IOU with interest, but not a guarantee (e.g., junk bonds -- see tab 22.1):
- U.S. government bonds (T bills, Treasury notes, etc.)
- state and local governments (municipal bonds)
- public utilities (BG&E)
- corporate bonds (IBM)
- related bond terms:
- secured vs unsecured (debentures)
- callable and convertible prior to maturity
- sinking fund (for repayment)
Other Investments:
- mutual funds (portfolio of stocks, bonds, and other short-term investments)
- load vs no-load (NL) funds [commission]
- wide variety of funds based on attitudes toward risk (your pension funds, tab 22.2, fig 22.2)
- commodities (gold, oil, corn, pork bellies, etc.):
- spot (today) vs futures contracts (risk hedge)
- commodities markets (Chicago, etc.)
- note: futures contracts are very risky
- margin: % of price paid in cash (rest is essentially borrowed)
Buying and Selling Securities:
- stock and bond quotations (figs 22.3 & 22.4, daily papers)
- OTC quotations: difference between bid and ask prices is dealers gain
- market indexes (Dow Jones Industrials, S&P 500)
- bull vs bear markets
- placing orders through brokers:
- market order (broker's discretion)
- limit and stop orders (buyer's/seller's discretion)
- round vs odd lots
- margin trading (like commodities)
- short sale (borrowing and selling broker's shares)
Securities Market Regulation:
- Securities and Exchange Commission (SEC)
- program trading (computer models)
- prospectus (registration statement filed with SEC)
- insider trading (Ivan Boesky)
- "blue-sky" laws (registration with state officials)
Chapter 21 Understanding Money and Banking
The S&L crisis of the 1980s taught the entire banking industry a big lesson: there ain't no such thing as a free lunch!
- First Interstate Bancorporation since sold to Wells Fargo, then Home Savings of America
Finance is the study of how to manage money -- the lifeblood of a firm and the economy:
- money: any object which is portable, divisible, durable, and stable, and serves three functions:
- medium of exchange (universally accepted)
- store of value (an asset in itself)
- unit of value (measure of worth)
- historically, many items used for money:
- gold, roanoke, tobacco, wampum beads
- today, fiat or "token" money usually takes the form of currency: paper money and metal coins
The Money Supply (see fig 21.1):
- M-1 includes currency, demand deposits, other checkable deposits
- M-2 or "broad money" includes time deposits, money market mutual funds, and savings deposits
Credit cards are not money -- only short-term loans
U.S. Financial/Banking Institutions:
- commercial banks (national and state chartered)
- set prime rate of interest
- savings and loan associations (S&Ls)
- mutual savings banks
- credit unions (coop: owned/controlled by its depositors/members)
- nondeposit (nonbanking) institutions include insurance co's, pension funds, securities brokerage firms, and finance companies (HFC, Beneficial, Phil's Money Store)
Electronic Banking:
- automated teller machines (ATMs)
- electronic funds transfer (EFT) like direct deposit
- debit cards and point-of-sale systems
- prepaid/smart cards (phone, copy cards, food stamps)
- home banking (via PC)
Banks create money through lending excess reserves from deposits, thus regulation required:
- 1913: Federal Reserve Act (after 1907 panic)
- 1933: deposit insurance (FDIC, FSLIC)
- 1980s: DIDMCA deregulation, S&L crisis
- 1989: SAIF, OTS, RTC (S&L cleanup)
The Federal Reserve System (the Fed):
- independent government agency to regulate banking industry
- structure: N/A except 12 district banks (our district is #5 based in Richmond, see fig 21.3)
- functions:
- government's central bank
- banker's bank
- manage check clearing process
- float: checks written but not yet cleared
- oversight of member banks
- control the money supply (monetary policy)
- reserve requirement
- discount-rate (banker's bank)
- open-market operations
- selective credit controls
The Changing Money and Banking System:
- continuing effects of deregulation (consolidation)
- increased interstate banking (Nations Bank)
- financial supermarkets (Sears)
- international banking/finance:
- U.N. agencies include the World Bank and International Monetary Fund (IMF)
- Discriminatory banking practices are not a new phenomenon!