Business 70 Midterm 1 PDF

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Chapter 1- Business in a Changing World ● Business- an organization put together to earn a profit ○ profit= $ sale - $ to make ○ Products- goods/services that provide benefits and satisfaction ■ Tangible goods, services, and ideas ● Nonprofit organizations- use fundraising, management, marketing & finance to reach goals ● Stakeholders- have a stake in the success and outcome of a business ○ Customers, investors, employees, government, society ● Economics- how resources are distributed -> goods & services ○ Resources: natural, human, financial, intangible ● *Economic systems- how a society distributes resources to produce goods & services ○ Communism- government runs everything ■ High prices, low living standards, goods shortages, no freedom ○ Socialism- government owns basic industries but promotes entrepreneurship ■ High taxes and unemployment ○ Capitalism- free market/enterprise ■ Modified capitalism- government intervenes and regulates business (to an extent) ● equilibrium- price at which the # of products supplies = # of products customers are willing to buy ● *Competition- the rivalry among businesses for consumers’ dollars ○ Pure competition- the market structure that exists when there are many small businesses selling one standardized product ○ Monopolistic competition- fewer businesses than in a pure competition and the differences among goods they sell are small ○ Oligopoly- the market structure that exists when there are very few businesses selling a product ■ Ex: airlines ○ Monopoly- the market structure that exists when there is only one business providing a product in a given market ■ Monopolies are illegal in the U.S. ● Economic expansion- economy is growing and people are spending more money ○ May lead to inflation- continuing rise in prices ○ Low unemployment ● Economic contraction- slowdown of economy due to a decline in spending

○ May lead to a recession- decline in production, employment, and income ■ High unemployment ■ Severe recession -> depression -> unemployment rises, spending declines, business output declines ● Deflation- rising unemployment stifles demand, forcing prices to go down Measuring the Economy: ● GDP (Gross Domestic Product)- sum of all goods and services in a country produced in a year ○ Includes intellectual property (ex: patents) ○ Does not include overseas profits ○ Measured in quarters ● Budget Deficit- nation spends more than it takes in from taxes ○ Remedies: raising taxes, reducing spending ○ U.S.’ at an all time high Evaluating our Economy: ● Trade balance- the difference between our exports and our imports ○ Negative balance: trade deficit ■ No real effect on the economy but viewed as unhealthy ● Customer price index- measures changes in prices of goods and services purchased for consumption by typical urban households ● Per capita income- income level of “average” Americans ● Unemployment rate- indicates how many working-age Americans are not working who otherwise want to work ● Inflation- monitors price increases in consumer goods and services over specified periods of time ● Worker productivity- amount of goods & services produced for each hour worked ● Standard of living- refers to the level of wealth and material comfort people have available to them ● Open economy- economic activities occur between the country and international community ○ Growth in GDP and jobs *American Economy: ● Early economy ○ Agricultural ○ Everything people needed was produced at home ● Industrial Revolution ○ New technologies and factories

○ Material, machines, and workers combined ● Manufacturing and Marketing economies ○ Assembly line production & concern with consumer needs ● Service and digital economy ○ U.S. is a service economy ○ Technology is leading us into a digital economy Chapter 4- Starting and Growing a Business ● Small business- any business < 500 people ○ Make up 99.7% OF U.S. businesses ● Sole proprietorship- businesses owned and operated by 1 individual ○ Most common form of business in the U.S. ○ Many focus on services ○ Nearly ¾ of U.S. companies ○ Typically employ < 50 people ○ Advantages: ■ Ease and cost of formation ■ Secrecy ■ Owner keeps profits ■ Flexibility and control ■ Minimal government regulations ■ Taxes paid once ○ Disadvantages: ■ Unlimited liability ■ Scarce external funding ■ Need skilled owners ■ Higher taxation ■ Success tied to owner ■ Lack of qualified employees ● Partnership- association of 2 or more persons who carry on as co-owners of a business for profit ○ *General partnership- complete sharing in both the management and liability of a business ○ Limited Partnership- general partner assumes unlimited liability and limited partner’s liability is limited to his or her investment in the business ○ Articles of Partnership- legal documents that set forth basic agreement between partners ■ Protect partners ○ Advantages:

■ Easy to organize ■ Capital and credit availability ■ Knowledge and skills combined ■ Swift decision making ■ Few government regulations ○ Disadvantages: ■ Unlimited liability ■ Responsible for each other’s decisions ■ Difficult to sell partnership interest ■ Not easy to get external funding  rganizations ○ Partnerships are quasi-taxable o ● Corporation- legal entity, created by the state, whose assets and liabilities are separate from its owners ○ Can own and transfer property ○ Can enter into contracts ○ Can sue and be sued in court ○ Account for the majority of all U.S. sales and incomes ○ Stock- shares of the corporation that may be bought or sold ■ Can also be gifted or inherited ○ Dividends- profits of a corporation that are distributed in the form of cash payments to the stockholders ■ Paying dividends will raise stockholder value ○ Incorporators- create the corporation ■ Following state procedure of chartering the corporation ■ File legal articles  of incorporation with the state ■ State issues a legal corporate charter to the company ■ Owners establish bylaws and a board of directors ○ Types of corporations: ■ Domestic corporations- business conducted within a state ■ Foreign corporation- business conducted outside the state ■ Alien corporation- business conducted outside the nation ○ Private corporation: ■ Owned by 1 or fewer people ■ No stock sold to the public ■ Don't have to disclose financial information to the public ○ Initial Public Offering (IPO)- selling of a corporation’s stock on public markets for the first time ■ Private corporation wants to go public to raise capital and expand ○ Public corporation- anyone may buy, sell, or trade its stock

■ Quasi-public- owned and operated by government ● Provides a service but often operates at a loss ■ Non-profit- focuses on providing a service rather than making a profit ● Not owned by the government ○ Board of directors- elected by stockholders ■ Oversee the general operation of the corporation ■ Set the corporation’s long-range objectives ■ Liable for mismanagement or misuse ■ Meet objectives on schedule ○ Employee-owned business- employees own 51% or more of business (stocks & bonds) ● Advantages of corporations: ○ Limited liability ○ Ease of transfer of ownership ○ Perpetual life ○ Easy to secure funding ○ Expansion potential ● Disadvantages: ○ Double taxation ○ Expensive to form ○ Information is publicly disclosed ○ Disagreements *slide 25: Essay question ● Preferred stock- a stock whose owners have a claim to profits before other stockholders do (don’t have to have a say in running the company) ○ Money is more secure ● Common stock- stock whose owners have voting rights in the corporation yet they don’t receive preferential treatment with dividends ○ May vote by proxy ○ Have preemptive right- they can buy any new shares of stock that the company issues ● Other types of business ownership: ○ Joint-venture- partnership established for a specific project or for a limited time ■ Used for ventures that require a large investment

○ S-Corporation- corporation taxed as though it were a partnership with restrictions on shareholders ■ Eliminates double taxation and returns limited liability ■ Limited to 75 employees ■ Popular w entrepreneurs ■ Can issue stock ○ Limited Liability Company (LLC)- provides limited liability and taxation like a partnership with fewer restrictions on members ■ *Can’t issue stock ○ Cooperatives or Co-ops- composed of individuals or small businesses banded together to reap the benefits of a larger organization ■ Ex: ACE Hardware ● *Merger- the combination of two companies (usually corporations) to form a new company ○ Horizontal merger- firms that make and sell similar products to the same customers merge ■ Ex: 2 defense contractors merging ○ Vertical merger- companies operating at different but related levels of an industry merge ■ Ex: if Burger King were to purchase a large potato farm ○ Conglomerate merger- firms in unrelated industries merge ■ Ex: Amazon *slide 31: ● Corporate raider- company or individual who wants to acquire/take over another company and first offers to buy or sell all of its stock at a premium in a tender offer ● Shark repellent- management requires a large majority of stockholders to approve a takeover ○ Stated in bylaws ● Poison pill- the firms allows stockholders to buy more shares of a stock at lower prices than the current market value to head off a hostile takeover ● White knight- a more acceptable firm that is willing to acquire a threatened company ● Acquisition- the purchase of one company by another, usually by buying its stock Chapter 5- Small Business, Entrepreneurship, and Franchising ● Entrepreneurship- the process of creating and managing to achieve desired objectives ○ Many new small businesses

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○ Easier to obtain technology by a small business ○ Social entrepreneurs- use entrepreneurship to address social problems Small business- any independently owned and operated business that isn’t dominant in its competitive area ○ Employees < 500 people ○ 99.7% of all employer firms are small firms Small Business Administration (SBA)- an independent agency of the federal government that offers managerial and financial assistance to small businesses Women-owned business: ○ Responsible for employing 7.7 million workers ○ Contribute $1.3 trillion in sales ○ Women own more than 9 million nationwide 89.5% of all firms are 0-19 employees Innovation ○ Small businesses produce more than half of all innovations ○ Small firms make up approximately 2% of franchises ○ Entrepreneurs provide fresh ideas ■ Usually have greater flexibility Small businesses are found in nearly every industry ○ Retail and wholesaling ■ Retailers- acquire goods from producers or wholesalers and sell them to consumers ■ Wholesalers- supply products to industrial, retail, and institutional users for resale or for use in making products ○ Services ■ Service sector includes businesses that do not actually produce tangible goods (80% of U.S. jobs) ■ Affects individuals whose skills are not required by large firms ○ Manufacturing ■ Manufacturing goods can provide unique opportunities for small business (like consuming products for customers) ■ Small manufacturers excel at customization ○ High technology ■ High tech describes businesses that depend heavily on advanced scientific and engineering knowledge ■ 43% of high tech jobs are with small businesses ■ Require greater capital and have higher initial startups ○ Relatively easy to enter and requiring low initial financing Successful traits of young entrepreneurs:

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○ Intuitive, productive, resourceful, charismatic, innovative, risk-taker, persistent, friendly Sharing economy- an economic model involving the sharing of underutilized resources ○ Entrepreneurs earn income by renting out an underutilized resource (lodging or vehicles) ■ Ex: uber & airbnb ○ “Gig economy” ○ Workers: independent contractors or employees? Advantages of Small business ownership: ○ Independence ○ Costs (lower startup costs) ○ Flexibility ○ Focus ○ Reputation ○ Can be your own boss Disadvantages of small business ownership: ○ High stress level ○ High failure rate ■ 50% fail within the first 5 years ○ Undercapitalization- lack of funds ○ Managerial inexperience/incompetence ○ Can’t cope with growth ■ Growth may require surrendering direct authority Starting a business: ○ 1- Start with a concept or general idea ○ 2- Create a business plan ○ 3- Devise a strategy to guide planning and development ○ 4- Make decisions ■ Form of ownership ● Sole proprietorship ● Partnership ● Corporation ■ Financing ● Financial resources: ○ Cash money ○ Obtain capital ● Financing options: ○ Equity financing

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○ Debt financing (banks or SBA) ■ Acquiring existing business or start new ■ Buy a franchise Business plan- a precise statement of the rationale for a business and a step-by-step explanation of how it’ll achieve its goals Equity financing ○ Owner uses real personal assets instead of borrowing funds from outside sources to get started ○ Useful personal assets (computer, desks, furniture, car, or truck) as part of owner’s ownership interest Venture capitalists- persons or organizations that agree to provide some funds for a new business in exchange for an ownership interest or stock ○ Hope to purchase stock at a low price and sell the stock for profit when business succeeds ○ Owner has to share business profits Angel investors- find businesses in which to invest ○ Usually experienced and successful people and investors ○ Startup has to meet standards before being considered for investment ○ High-risk level without real evidence of success(to venture capitalists) ○ Affluent people who invest their own money (may or may not have investing experience) Debt financing: ○ Collateral- a financial interest in the property or fixtures of the business, to guarantee payment of the debt ○ Mortgage- may have to provide personal property as collateral ○ Line of credit- agreement by which a financial institution promises to lend a business a predetermined sum on demand ○ Trade credit- suppliers allow a business to take possession of needed goods and services and pay for them at a later time ○ Bartering- trading their own products for the goods and services offered by other businesses Starting from scratch vs buying an existing business: ○ From scratch: ■ Can be expensive ■ Requires a lot of promotional efforts to familiarize customers with a business ○ Existing business: ■ Built-in customer, supplier, and distributor network ■ Entrepreneur takes on any problems the business already has

● Franchising ○ Franchise- license to sell another’s products or to use another’s name in business ○ Franchiser- company that sells a franchise ○ Franchisee- purchaser of a franchise ○ Advantages: ■ Training and support ■ Brand-name appeal ■ Standardized policy of goods and services ■ National advertising ■ Financial assistance ■ Proven products ■ Centralized buying power ■ Site selection and territorial protection ■ Greater chances for success ○ Disadvantages: ■ Fees and profit sharing ■ Standardized operations ■ Restrictions on purchasing ■ Limited product line ■ Possible market saturation ■ Less freedom (decisions) ● Demographic trends: ○ Baby-boomer generation= 75 million Americans ■ Wealthy, not actively pursued by business owners ■ Travel, financial planning and health care will continue to grow ○ millennials/gen y= 83 million americans ■ Concerned with advancement, recognition, improved capabilities ■ Need direct, timely feedback and recognition ● Untapped market for small businesses: ○ Growing trend: increased # of immigrants in the U.S. ○ Latino population= biggest & fastest growing minority ● Tech & Economic trends: ○ Internet usage -> new opportunities ○ Increase in service exports ■ Options to expand abroad ○ Economic turbulence -> opportunities and threats ■ Can resist quickly to change and stay close to customers ○ Deregulation of the energy market and alternative fuels

● Intrapreneurs- [in large firms]- take responsibility for the development of innovations within the organizations ● Small business owners can get help Chapter 6- The Nature of Management ● Management- a process designed to achieve an organization’s objectives by using its resources effectively and efficiently ○ Effectively- having the intended result ○ Efficiently- accomplishing the objectives with a minimal amount of resources ● Managers- make decisions about the use of resources and who are concerned with planning, organizing, staffing, directing, and controlling the organization’s activities to reach its objectives ● Organizations must acquire resources to effectively pursue its objectives and coordinate their use to turn out financial goods and services ○ Employees ■ Help a firm attain objectives ■ Recruit, train, compensate, and provide benefits to faster loyalty ○ Acquiring supplies ■ Ensuring products are available to customers ■ Global markets -> different suppliers ○ Financial resources ■ Pay for essential activities ■ Funding: owners, shareholders, banks, etc. ● Management functions: ○ Planning activities to achieve objectives ○ Organizing resources and activities to achieve objectives ○ Staffing with qualified people ○ Directing employee’s activities ○ Controlling activities to keep it on course ● Planning- process of determining the organization’s objectives and deciding how to accomplish them ○ First function of management ○ Mission- statement of fundamental purpose and basic philosophy (public or private) ○ Goals- results company wants to achieve ○ Objectives- measurable statements on common issues ■ Profit, efficiency, growth

● Organizing- structuring of resources and activities to accomplish objectives in an efficient and effective manner ○ Improves communication ○ Creates synergy ○ Line of authority ○ Avoid duplication of resources ○ Speed up decision making ● Staffing- hiring of people to carry out the work of an organization ○ Manager’s duties: ■ Recruiting ■ Determining necessary skills for jobs ■ Motivating and training ■ Determining pay and benefits ■ Preparing employees ● Directing- motivating and leading employees to achieve organizational objectives ○ Motivate through recognition and appreciation ○ Ask workers to contribute ideas ● Controlling- process of evaluating and correcting activities to keep the organization on course ○ Measuring performance ○ Comparing performance with standards/objectives ○ Identifying deviations from standards ■ Investigating causes ○ Taking corrective action ○ Helps managers assess the success of their plans ● Strategic plans: ○ Come from top-management ○ Establish long-term objectives and overall strategy or course of action to fulfill mission ○ Ex: plans to issue stock, purchase companies, add products ● Tactical and Operational plans ○ Tactical ■ short-range ■ To implement strategic plans’ activities and objectives ■ Help adapt to changing market/company’s performance ○ Operational ■ Very short-term ■ Specify actions to achieve tactical plan

● **Retail store example ○ 5 year strategic plan to invest $5 billion in 500 new retail stores may develop 5 tactical plans(1  yr each) specifying: ■ How much to spend to set up each new store ■ Where to locate ■ When to open each store ○ Operational plans may specify schedule for: ■ Opening 1 new store ■ Hiring and training new employees ■ Obtaining merchandise ■ Opening for business ● Crisis management/contingency planning- element in planning that deals with potential disasters (product tampering, oil spills, fire, earthquake, computer virus, airplane crash) ○ 25% of businesses fail to reopen after a natural disaster ● Management functions: ○ Downsizing- the elimination of a significant # of employees from an organization ■ Production, sales, and tech positions can be outsourced to other countries( low labor costs) ■ Loss of jobs; lowered morale ■ Quickly reduces costs ● Levels of management: ○ Top managers- the president and other executives of a business (CEO, COO, CFO) who have overall responsibility ■ Publicly owned corporations: CEO’s boss= board of directors ■ *diverse work environment -> be...