An introduction to business-v1.2

An Introduction to
Business
v. 1.0


This is the book An Introduction to Business (v. 1.0).
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ii


Table of Contents
About the Author .................................................................................................................. 1
Acknowledgments................................................................................................................. 2
Dedication............................................................................................................................... 5
Preface..................................................................................................................................... 6
Chapter 1: The Foundations of Business ........................................................................ 11
Introduction ................................................................................................................................................. 14
Getting Down to Business............................................................................................................................ 16
What Is Economics? ..................................................................................................................................... 22
Perfect Competition and Supply and Demand.......................................................................................... 29
Monopolistic Competition, Oligopoly, and Monopoly ............................................................................. 35

Measuring the Health of the Economy ...................................................................................................... 38
Government’s Role in Managing the Economy ......................................................................................... 47
Cases and Problems...................................................................................................................................... 51

Chapter 2: Business Ethics and Social Responsibility ................................................. 56
Misgoverning Corporations: An Overview ................................................................................................ 59
The Individual Approach to Ethics............................................................................................................. 64
Identifying Ethical Issues ............................................................................................................................ 71
The Organizational Approach to Ethics..................................................................................................... 79
Corporate Social Responsibility.................................................................................................................. 84
Environmentalism ....................................................................................................................................... 96
Stages of Corporate Responsibility .......................................................................................................... 101
Cases and Problems.................................................................................................................................... 106

Chapter 3: Business in a Global Environment............................................................. 113
The Globalization of Business ................................................................................................................... 115
Opportunities in International Business ................................................................................................. 126
The Global Business Environment............................................................................................................ 136
Trade Controls............................................................................................................................................ 148
Reducing International Trade Barriers ................................................................................................... 153
Preparing for a Career in International Business................................................................................... 159
Cases and Problems.................................................................................................................................... 162

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Chapter 4: Selecting a Form of Business Ownership ................................................. 168
Factors to Consider .................................................................................................................................... 170
Sole Proprietorship.................................................................................................................................... 173
Partnership ................................................................................................................................................. 176

Corporation ................................................................................................................................................ 181
Other Types of Business Ownership......................................................................................................... 187
Mergers and Acquisitions.......................................................................................................................... 195
Cases and Problems.................................................................................................................................... 199

Chapter 5: The Challenges of Starting a Business ..................................................... 205
What Is an Entrepreneur? ......................................................................................................................... 207
The Place of Small Business in the Business Landscape ........................................................................ 216
What Industries Are Small Businesses In? .............................................................................................. 222
Advantages and Disadvantages of Business Ownership......................................................................... 227
Starting a Business..................................................................................................................................... 232
The Business Plan....................................................................................................................................... 241
How to Succeed in Managing a Business ................................................................................................. 249
Cases and Problems.................................................................................................................................... 256

Chapter 6: Managing for Business Success.................................................................. 262
What Do Managers Do?.............................................................................................................................. 264
Planning ...................................................................................................................................................... 266
Organizing .................................................................................................................................................. 276
Directing ..................................................................................................................................................... 290
Controlling.................................................................................................................................................. 294
Managerial Skills........................................................................................................................................ 297
Cases and Problems.................................................................................................................................... 304

Chapter 7: Recruiting, Motivating, and Keeping Quality Employees .................... 313
Human Resource Management................................................................................................................. 316
Developing Employees............................................................................................................................... 325
Motivating Employees ............................................................................................................................... 331
What Makes a Great Place to Work? ........................................................................................................ 339
Performance Appraisal.............................................................................................................................. 351

Labor Unions .............................................................................................................................................. 360
Cases and Problems.................................................................................................................................... 368

iv


Chapter 8: Teamwork and Communications ............................................................... 374
The Team and the Organization ............................................................................................................... 377
Why Teamwork Works .............................................................................................................................. 385
The Team and Its Members....................................................................................................................... 391
The Business of Communication .............................................................................................................. 402
Communication Channels ......................................................................................................................... 408
Forms of Communication.......................................................................................................................... 421
Cases and Problems.................................................................................................................................... 431

Chapter 9: Marketing: Providing Value to Customers.............................................. 438
What Is Marketing?.................................................................................................................................... 439
The Marketing Mix .................................................................................................................................... 448
Pricing a Product........................................................................................................................................ 457
Placing a Product ....................................................................................................................................... 462
Promoting a Product.................................................................................................................................. 474
The Product Life Cycle............................................................................................................................... 482
The Marketing Environment .................................................................................................................... 486
Careers in Marketing ................................................................................................................................. 498
Cases and Problems.................................................................................................................................... 501

Chapter 10: Product Design and Development ........................................................... 506
What Is a Product? ..................................................................................................................................... 507
Where Do Product Ideas Come From? ..................................................................................................... 513
Identifying Business Opportunities ......................................................................................................... 517

Understand Your Industry ........................................................................................................................ 521
Forecasting Demand .................................................................................................................................. 525
Breakeven Analysis .................................................................................................................................... 530
Product Development ................................................................................................................................ 534
Protecting Your Idea.................................................................................................................................. 540
Cases and Problems.................................................................................................................................... 543

Chapter 11: Operations Management in Manufacturing and Service Industries 549
Operations Management in Manufacturing............................................................................................ 550
Facility Layouts .......................................................................................................................................... 558
Managing the Production Process in a Manufacturing Company ........................................................ 562
Graphical Tools: PERT and Gantt Charts ................................................................................................. 567
The Technology of Goods Production...................................................................................................... 571
Operations Management for Service Providers...................................................................................... 574
Producing for Quality ................................................................................................................................ 583
Cases and Problems.................................................................................................................................... 590

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Chapter 12: The Role of Accounting in Business........................................................ 595
The Role of Accounting ............................................................................................................................. 596
Understanding Financial Statements ...................................................................................................... 600
Accrual Accounting.................................................................................................................................... 612
Financial Statement Analysis.................................................................................................................... 623
Challenges Facing the Accounting Profession ........................................................................................ 638
Cases and Problems.................................................................................................................................... 644

Chapter 13: Managing Financial Resources ................................................................ 653
The Functions of Money ............................................................................................................................ 654

Financial Institutions................................................................................................................................. 659
The Federal Reserve System ..................................................................................................................... 669
The Role of the Financial Manager .......................................................................................................... 676
Understanding Securities Markets .......................................................................................................... 688
Financing the Going Concern ................................................................................................................... 697
Careers in Finance...................................................................................................................................... 702
Cases and Problems.................................................................................................................................... 705

Chapter 14: Personal Finances ....................................................................................... 714
Financial Planning ..................................................................................................................................... 725
Time Is Money ............................................................................................................................................ 740
The Financial Planning Process................................................................................................................ 746
A House Is Not a Piggy Bank: A Few Lessons from the Subprime Crisis............................................... 760
Cases and Problems.................................................................................................................................... 771

Chapter 15: Managing Information and Technology ................................................ 773
Data versus Information............................................................................................................................ 774
Managing Data............................................................................................................................................ 782
Types of Information Systems .................................................................................................................. 787
Computer Networks................................................................................................................................... 795
Data Communications Networks .............................................................................................................. 798
Security Issues in Electronic Communication ........................................................................................ 806
Careers in Information Management ...................................................................................................... 815
Cases and Problems.................................................................................................................................... 817

Chapter 16: The Legal and Regulatory Environment of Business .......................... 821
Law and the Legal System ......................................................................................................................... 824
Criminal versus Civil Law.......................................................................................................................... 830
Negligence Torts ........................................................................................................................................ 838
Product Liability......................................................................................................................................... 846

Some Principles of Public Law .................................................................................................................. 862
Cases and Problems.................................................................................................................................... 883

vi


About the Author
Karen Collins
Dr. Karen Collins is associate professor of accounting at
Lehigh University in Bethlehem, Pennsylvania. She has
a Ph.D. in accounting from Virginia Tech. Dr. Collins
coordinates the college's freshman-level Introduction to
Business course. Exploring Business has evolved based on
Dr. Collin’s innovative and successful approach to
Lehigh’s Introduction to Business course. She was
recently honored with an Innovation in Teaching Award
for the course from the Middle Atlantic Association of
Colleges and Business Administration (AACSB).
Dr. Collins’s research interests include upward mobility
of women in accounting, quality of life issues, stress, and ethnic diversity in the
accounting profession. She has published articles in journals such as Accounting,
Organizations and Society, Accounting Horizons, Journal of Accountancy, Journal of
Vocational Behavior, and Journal of Occupational Health Psychology.
Dr. Collins has won numerous teaching awards while at Lehigh, including the
Deming Lewis Faculty Award (for the faculty member who had the strongest
influence on the ten-year graduating class), in 2003; the Faculty Recognition Award
(from the Dean of Students Office), also in 2003; and the Andersen Consulting
Faculty Fellowship for Excellence in Teaching, 1998–99 and 1999–2000.

1

Acknowledgments
The author would like to thank the following colleagues who have reviewed the text
and provided comprehensive feedback and suggestions for improving the material:
Tim Allwine

Lower Columbia College

Douglas Antola Crowe Bradley University
Vondra Armstrong

Pulaski Technical College

April Bailey

Shippensburg University of Pennsylvania

Michael Baran

South Puget Sound Community College

Ruby Barker

Tarleton State University

Murray Brunton

Central Ohio Technical College

Laura Bulas

Central Community College

Leon Chickering

South Puget Sound Community College

Glenn Doolittle

Santa Ana College

Amy Epplin

Rend Lake College

Andrea Foster

John Tyler Community College

Joseph Fox

Asheville-Buncombe Technical Community College

Leatrice Freer

Pitt Community College

George Generas

University of Hartford

David Gilliss

San Jose State University

Alfredo Gomez

Broward College

Madeline Grant

Santa Ana College

Gail Jacobs

LA College International

Francis Krcmarik

Mott Community College

Elaine Madden

Anne Arundel Community College

Timothy March

Kaskaskia College

Marian Matthews

Central NM Community College

Gina McConoughey

Illinois Central College

Tom McFarland

Mt. San Antonio College

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Acknowledgments

Bill McPherson

Indiana University of Pennsylvania

Diane Minger

Cedar Valley College

Jennifer Morton

Ivy Tech Community College of Indiana

John Olivo

Bloomsburg University of Pennsylvania

Lauren Paisley

Genesee Community College

Anthony Racka

Oakland Community College

Nancy Ray-Mitchell

McLennan Community College

Martin St. John

Westmoreland County Community College

John Striebich

Monroe Community College

Frank Titlow

St. Petersburg College

Bob Urell

Irvine Valley College

Dean Williamson

Brewton-Parker College #2004

In addition, a select group of instructors assisted the development of this material
by actually using it in their classrooms. Their input, along with their students’
feedback, has provided us critical confirmation that the material is effective and
impactful in the classroom:
Nikolaos Adamou

Borough of Manhattan CC

April Bailey

Shippensburg University of Pennsylvania

Michael Davis

Yavaipai College

Andrea Foster

John Taylor Community College

Frank Markham

Mesa State

Donn Miller-Kermani Florida Institute of Technology

Diane Minger

Cedar Valley College

Tony Racka

Oakland Community College

P. Gerard Shaw

Dean College

Dean Williamson

Brewton-Parker College

David Woolgar

Santa Ana College

The authors also appreciate the efforts of a fine group of instructors who have
assisted the project with their work on supplementary materials:

3


Acknowledgments

David Murphy, Madisonville Community College, P. Gerard Shaw, Dean College, and
Diane Minger, Cedar Valley College, collaborated on the Test Item Files and Student

Quizzes.
Chuck Bowles, Pikes Peak Community College, developed the PowerPoint
Presentation Slides.
Kim Richmond, St. Joseph’s University, developed the Video Learning Segments.
I am sincerely grateful to a great team of individuals at Unnamed Publisher who
made working on this project an enjoyable experience. Special thanks to Jeff
Shelstad and Eric Frank for their confidence in me and in the project and to Sharon
Koch for her enthusiasm. Thanks to Joanne Butler and Sharon Hughes for their
dedication to quality and their positive attitudes. Thanks also to several very special
friends who made substantial contributions to the textbook project: Ron Librach,
Joseph Manzo, Judy Minot, and Eleanore Stinner.
Thanks to the members of the Introduction to Business faculty team at Lehigh
University who are a constant source of ideas and advice. Their excitement about
the course and dedication to our students create a positive and supportive teaching
environment. I enjoy the hours we spend in the “bullpen” sharing teaching tips,
brainstorming ways to improve the course, and just having fun.
Finally, I thank my husband, Bill, my sons, Don and Mark, and their wives, Courtney
and Tara, for their support and encouragement during this project. They’re the best
of my world.

4


Dedication
This book is dedicated to Jayden and Jack

5


Preface

My desire in writing this text was to provide faculty with a fully developed teaching
package that allows them to enhance student learning and introduce students to
business in an exciting way. Exploring Business is designed to be a powerful but simpleto-use teaching tool. I’ve devised a broad range of features that allow instructors to
introduce students to business in an exciting way, but also worked to fashion
material that’s straightforward, current, relevant, and easy to teach from. The text
is purposely brief and covers business essentials without burdening students or
faculty with unnecessary detail.
I’ve tried to build a textbook package that’s as supportive as possible to both
students and faculty The textbook package supports learning through interactive
and multimedia content designed to help students not only master topics but assess
their learning. The sixteen chapters are written using a modular format with selfcontained sections which can be reorganized, deleted, added to and even edited at
the sentence level. Each module ends with a detailed summary to assist students as
they learn from the text.
Using our build-a-book platform, you can easily customize your book to suit your
needs and those of your students. An extensive author-prepared instructors’
manual and excellent set of PowerPoint slides provide teaching support to
instructors. A test item file developed using assessment techniques supports faculty
in evaluating student performance.
As in other Introduction to Business books, this text uses a wide variety of
company-specific examples. However, I improve on the traditional approach by
adding an optional case study of a dynamic organization that can easily be
integrated into the text. The company chosen for this purpose is Nike. In the future,
other case-study companies will be added.
I have designed this textbook package to be flexible and meet the needs of three
groups of instructors—those who want to
• teach the course using the textbook alone
• teach the course using the comprehensive Nike case (or a company of
their choice)
• teach the course by incorporating both a company case study and a
business plan project

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Preface

Enhanced Learning
As an epigraph for this book, I’ve chosen a nugget from the treasure trove of
Benjamin Franklin’s considerable educational experience:
“Tell me and I forget. Teach me and I remember. Involve me and I learn.”
I believe that this quote encapsulates an important goal of this textbook package: to
encourage students to be active learners. Thus I’ve designed the textbook to facilitate
the attainment of this goal. I strive to enhance student learning through thoughtprovoking questions, problems, and cases that ask students to do more than merely
regurgitate information from the text. Most of these exercises require students to
gather information, assess a situation, think about it critically, and reach a
conclusion. Many are based on current business situations involving well-known
companies of interest to students. Each chapter presents a number of Questions and
Problems as well as five cases on areas of skill and knowledge endorsed by AACSB:
Learning on the Web, Career Opportunities, The Ethics Angle, Team-Building Skills,
and The Global View. The questions are challenging and stimulating, and most are
appropriate for in-class discussions. More than 70 percent of our items help
students build skills in areas designated as critical by AACSB, including analytical
skills, ethical awareness and reasoning abilities, multicultural understanding and
globalization, use of information technology, and communications and teamoriented skills. Each AACSB-inspired exercise is identified by an AACSB tag and a
note indicating the relevant skill area.

Author-Prepared Instructor’s Manual
For the past twelve years, I have been developing, coordinating and teaching an
Introduction to Business course in which first-year students are introduced to
business through the study of Nike and the preparation of a business plan. During

this twelve-year period, more than 3,500 students have taken the course. Over the
years, sections of the course have been taught by a mix of permanent faculty,
graduate students, adjuncts, and even the dean. Each semester, I oversee the course
and guide approximately ten instructors as they teach their sections—a task that’s
been made possible through the development and continuous improvement of
extensive teaching materials.
Because I feel strongly that well-structured and easily understood teaching
materials are vital to the success of this course, I have personally written the
Instructor’s Manual. In doing this, I relied on the experiences that I’ve gained in
developing these materials for my faculty team. The Instructor’s Manual includes
comprehensive teaching notes that integrate material from the chapter, material

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Preface

geared toward Nike, and material dedicated to the business plan project. The easyto-use notes include teaching tips and ample in-class activities. The Instructor’s
Manual also contains author-prepared solutions to all questions, problems and
cases.

Test Item File and PowerPoint Slides
The Test Item File contains approximately 150 questions per chapter. Each question
is fully referenced to corresponding learning objectives, AACSB objectives, page
references, and difficulty level. There are about 35 to 40 PowerPoint slides per
chapter. To provide teaching support to instructors, each of the slides is linked to
the teaching notes contained in the Instructor’s Manual.

Nike: An Integrated Case Study
A Nike case study is available for those instructors who decide to introduce their

students to business using an exciting case—one which is in fact updated yearly.
Through an in-depth study of a real company, students can learn not only about the
functional areas of business, but how these functional areas fit together. Studying a
dynamic organization on a real-time basis allows students to discover the
challenges that it faces and exposes them to critical issues affecting the business,
such as globalization, ethics and social responsibility, product innovation, diversity,
supply chain management, and e-business.
Students learn about Nike by reading a case study based on extensive research and
executive interviews. The case is broken down into 26 individual case notes, which
are linked to the appropriate sections of the text. Each provides a real-world
example to help students master a particular business topic. For example, after
reading about the ways companies promote their products, students are directed to
a Nike case note that traces the evolution of the company’s promotional strategies,
including its well-known sports-marketing efforts. After reading chapter materials
on the pros and cons of doing business in a global environment, students can read a
Nike case note that examines both the benefits that Nike derives from its
international operations and the responsibilities that it has to the countries in
which it operates.
We help students expand their understanding of Nike by providing four awardwinning videos featuring key company executives discussing specifically chosen
topics: the company’s history, its corporate-responsibility challenges and
initiatives, its commitment to product innovation, and its carefully orchestrated
entrance into the soccer-shoe market. We structured interview questions to elicit
information that will be valuable to students in mastering particular topics, and

8


Preface

we’ve selected and organized footage to capture students’ attention. Instructors can

show the 15-minute videos in class or ask students to watch them online. Discussion
questions, written by the author, aid classroom discussions on the topics covered in
the videos. Each chapter also contains a multi-part question on one of the Nike case
notes covered in the chapter. These questions require students to think about the
case and present their opinions on the issues covered. In addition to these
questions, the test item file contains multiple-choice questions keyed to the Nike
cases.
Current (and sometimes controversial) topics can be woven into the class through
Nike-related memo-writing (or debating) assignments accompanying each chapter.
These assignments, which are updated frequently, provide students with an
opportunity to strengthen their writing skills and form opinions on current issues
affecting Nike. One assignment, for example, asks students to deliver an opinion on
Nike’s failure (until recently) to connect with female consumers. Another asks
students to discuss Nike’s use of celebrity athletes in light of recent scandals
involving several of its athletes. Once the memos themselves have been composed,
they underpin excellent in-class discussions or debates. In fact, as an alternative to
having students write memos, instructors might ask students to research the topic
and come to class prepared to debate the pertinent issues.
I’ve found that, by studying Nike, students willingly participate in classroom
discussions. Why? Because Nike is on just about everybody’s radar screen. Students
enjoy discussing the opportunities and challenges faced by Nike and speculating on
what the company intends to do about them, now and in the future.

Business Plan Project
I’m convinced that having students develop a business plan as a component of an
Introduction to Business course has considerable academic value. A business plan
project introduces students to the excitement and challenges of starting a business
and helps them discover how the functional areas of business interact. Thus this
textbook package includes an optional business plan project that’s fully integrated
into the book. The business plan project is modeled after one used and refined by

me and my teaching team over the past twelve years. During this time period, more
than 800 student teams have prepared and presented business plans using this
approach.
If their instructor elects to assign the business plan project, students begin the
project early in the course by reviewing a document describing the business plan
project. In chapters that follow, students are asked to complete another section of
the 10-part business plan project. By the time they’ve reached the end of the course

9


Preface

they’re shown how to integrate each of these individual sections into a final version
of the plan. Because the project is carefully coordinated with the presentation of
course materials, students are able to apply what they’re learning, as they’re
learning it, to the practical process of preparing a business plan.
Because I understand that preparing the financial section of the business plan can
be difficult for students, we furnish students with an Excel template that simplifies
the process of preparing financial reports for their proposed businesses. They don’t
even need to be competent in Excel to use it; it’s designed to be simple to use, and
we provide detailed instructions.

Introduction to Business Community
Those teaching Introduction to Business come from varied backgrounds but share
common goals of exciting students about business and sparking their interest in
future business courses. I wrote this text to provide members of this community
with a fully developed teaching package that enhances the learning environment
and helps them introduce students to business in an exciting way. My hope is that
by sharing my materials, experiences and approach to teaching with others, they

will enjoy the course as much as I do.

Karen Collins

10


Chapter 1
The Foundations of Business
Why Is Apple Successful?
In 1976 Steve Jobs and Steve Wozniak created their first computer, the Apple I.This
vignette is based on an honors thesis written by Danielle M. Testa, “Apple, Inc.: An
Analysis of the Firm’s Tumultuous History, in Conjunction with the Abounding
Future” (Lehigh University), November 18, 2007. They invested a mere $1,300 and
set up business in Jobs’s garage. Three decades later, their business—Apple Inc.—has
become one of the world’s most influential and successful companies. Did you ever
wonder why Apple flourished while so many other young companies failed? How
did it grow from a garage start-up to a company generating $24 billion in sales?
How was it able to transform itself from a nearly bankrupt firm to a multinational
corporation with locations all around the world? You might conclude that it was the
company’s products, such as the Apple I and II, the Macintosh, or more recently its
wildly popular iPod and iPhone. Or you might decide that it was its people: its
dedicated employees and loyal customers. Perhaps you will decide it was
luck—Apple simply was in the right place at the right time. Or maybe you will
attribute the company’s success to management’s willingness to take calculated
risks. Perhaps you will attribute Apple’s initial accomplishments and reemergence
to its cofounder, Steve Jobs. After all, Jobs was instrumental in the original design of
the Apple I and, after being ousted from his position with the company, returned to
save the firm from destruction and lead it onto its current path.
Before we decide what made Apple what it is today and what will propel it into a

successful future, let’s see if you have all the facts about the possible choices: its
products, its customers, luck, willingness to take risks, or Steve Jobs. We’re
confident that you’re aware of Apple’s products and understand that “Apple
customers are a loyal bunch. Though they’re only a small percentage of all
computer users, they make up for it with their passion and outspokenness.”Ellen
Lee, “Faithful, sometimes fanatical Apple customers continue to push the
boundaries of loyalty,” San Francisco Chronicle, March 26, 2006. We believe you can
understand the role that luck or risk taking could play in Apple’s success. But you
might like to learn more about Steve Jobs, the company’s cofounder and CEO, before
arriving at your final decision.

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Chapter 1 The Foundations of Business

Growing up, Jobs had an interest in computers. He attended lectures at HewlettPackard after school and worked for the company during the summer months. He
took a job at Atari after graduating from high school and saved his money to make a
pilgrimage to India to search for spiritual enlightenment. Following his India trip,
he attended Steve Wozniak’s “Homebrew Computer Club” meetings, where the idea
for building a personal computer surfaced.Lee Angelelli, “Steve Paul Jobs,”
(accessed November 2, 2008). “Many
colleagues describe Jobs as a brilliant man who can be a great motivator and
positively charming. At the same time his drive for perfection is so strong that
employees who do not meet his demands are faced with blistering verbal
attacks.”Lee Angelelli, “Steve Paul Jobs,” />(accessed November 2, 2008). Not everyone at Apple appreciated Jobs’s brilliance
and ability to motivate. Nor did they all go along with his willingness to spend
whatever it took to produce an innovative, attractive, high-quality product. So at
age thirty, Jobs found himself ousted from Apple by John Sculley, whom Jobs
himself had hired as president of the company several years earlier. It seems that

Sculley wanted to cut costs and thought it would be easier to do so without Jobs
around. Jobs sold $20 million of his stock and went on a two-month vacation to
figure out what he would do for the rest of his life. His solution: start a new
personal computer company called NextStep. In 1993, he was invited back to Apple
(a good thing, because neither his new company nor Apple was doing well).
Steve Jobs is definitely not humble, but he is a visionary
and has a right to be proud of his accomplishments.
Some have commented that “Apple’s most successful
days have occurred with Steve Jobs at the helm, both in
the early days with the original Macintosh and more
recently with the first iMac and the iPod.”Cyrus Farivar,
“Apple’s first 30 years; three decades of contributions to
the computer industry,” Macworld, June 2006, 2. Jobs did
what many successful CEOs and managers do: he
learned, adjusted, and improvised.Dan Barkin, “He
made the iPod: How Steve Jobs of Apple created the new
millennium’s signature invention,” Knight Ridder Tribune
Business News, December 3, 2006, 1. Perhaps the most
important statement that can be made about him is this:
he never gave up on the company that once turned its
back on him. So now you have the facts. Here’s a
multiple-choice question that you can’t get wrong:
Apple’s success is due to (a) its products, (b) its
customers, (c) luck, (d) willingness to take risks, (e)
Steve Jobs, or (f) some combination of these options.

Figure 1.1

A new iPhone 3G is displayed at
the Apple store at the Grove

where it went on sale in Los
Angeles, California. New iPhone

12


Chapter 1 The Foundations of Business

buyers, along with owners of the
previous version who were
upgrading to newer software,
experienced massive gridlock on
the phone’s network as millions
attempted to activate or upgrade
service.
Photo by Valerie Macon/Getty
Images

13


Chapter 1 The Foundations of Business

1.1 Introduction
As the story of Apple suggests, today is an interesting time to study business.
Advances in technology are bringing rapid changes in the ways we produce and
deliver goods and services. The Internet and other improvements in
communication now affect the way we do business. Companies are expanding
international operations, and the workforce is more diverse than ever.
Corporations are being held responsible for the behavior of their executives, and

more people share the opinion that companies should be good corporate citizens.
Plus—and this is a big plus—businesses today are facing what many economists
believe is the worst financial crisis since the Great Depression.Jon Hilsenrath,
Serena Ng, and Damian Paletta, “Worst Crisis Since ’30s, With No End Yet in Sight,”
Wall Street Journal, Markets, September 18, 2008, />SB122169431617549947.html (accessed November 2, 2008). Economic turmoil that
began in the housing and mortgage industries as a result of troubled subprime
mortgages quickly spread to the rest of the economy. Credit markets froze up and
banks stopped making loans. Lawmakers tried to get money flowing again by
passing a $700 billion Wall Street bailout, yet businesses and individuals were still
denied access to needed credit. Without money or credit, consumer confidence in
the economy dropped and consumers cut back their spending. Businesses
responded by producing fewer products, and their sales and profits dropped.
Unemployment rose as troubled companies shed the most jobs in five years and
760,000 Americans marched to the unemployment lines.“How the Economy Stole
the Election,” CNN.com, />gallery.economy_election/index.html (accessed November 2, 2008). The stock
market reacted to the financial crisis and its stock prices dropped by 44 percent
while millions of Americans watched in shock as their savings and retirement
accounts took a nose dive. In fall 2008, even Apple, a company that had enjoyed
strong sales growth over the past five years, began to cut production of its popular
iPhone. Without jobs or cash, consumers would no longer flock to Apple’s fancy
retail stores or buy a prized iPhone.Dan Gallagher, “Analyst says Apple is cutting
back production as economy weakens,” MarketWatch, November 3, 2008,
(accessed November 2, 2008).
As you go through the course with the aid of this text, you’ll explore the exciting
world of business. We’ll introduce you to the various activities in which
businesspeople engage—accounting, finance, information technology, management,
marketing, and operations. We’ll help you understand the roles that these activities
play in an organization, and we’ll show you how they work together. We hope that
by exposing you to the things that businesspeople do, we’ll help you decide whether

14


Chapter 1 The Foundations of Business

business is right for you and, if so, what areas of business you’d like to study
further.

1.1 Introduction

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Chapter 1 The Foundations of Business

1.2 Getting Down to Business
LEARNING OBJECTIVE
1. Identify the main participants of business, the functions that most
businesses perform, and the external forces that influence business
activities.

A business1 is any activity that provides goods or services to consumers for the
purpose of making a profit. When Steve Jobs and Steve Wozniak created Apple
Computer in Jobs’s family garage, they started a business. The product was the
Apple I, and the company’s founders hoped to sell their computers to customers for
more than it cost to make and market them. If they were successful (which they
were), they’d make a profit2.
Before we go on, let’s make a couple of important distinctions concerning the terms
in our definitions. First, whereas Apple produces and sells goods (iPhone, iPod, Mac),
many businesses provide services. Your bank is a service company, as is your

Internet provider. Airlines, law firms, movie theaters, and hospitals are also service
companies. Many companies provide both goods and services. For example, your
local car dealership sells goods (cars) and also provides services (automobile
repairs).

1. Activity that provides goods or
services to consumers for the
purpose of making a profit.
2. Difference between the
revenue that a company brings
in from selling goods and
services and the costs of
generating this revenue.
3. Organization that has a
purpose other than returning
profits to owners.

Second, some organizations are not set up to make profits. Many are established to
provide social or educational services. Such not-for-profit (or nonprofit)
organizations3 include the United Way of America, Habitat for Humanity, the Boys
and Girls Clubs, the Sierra Club, the American Red Cross, and many colleges and
universities. Most of these organizations, however, function in much the same way
as a business. They establish goals and work to meet them in an effective, efficient
manner. Thus, most of the business principles introduced in this text also apply to
nonprofits.

Business Participants and Activities
Let’s begin our discussion of business by identifying the main participants of
business and the functions that most businesses perform. Then we’ll finish this
section by discussing the external factors that influence a business’s activities.

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Chapter 1 The Foundations of Business

Participants
Every business must have one or more owners whose primary role is to invest
money in the business. When a business is being started, it’s generally the owners
who polish the business idea and bring together the resources (money and people)
needed to turn the idea into a business. The owners also hire employees to work for
the company and help it reach its goals. Owners and employees depend on a third
group of participants—customers. Ultimately, the goal of any business is to satisfy
the needs of its customers.

Functional Areas of Business
The activities needed to operate a business can be
divided into a number of functional areas: management,
operations, marketing, accounting, and finance. Let’s
briefly explore each of these areas.

Figure 1.2

Management
Managers are responsible for the work performance of
other people. Management4 involves planning for,
organizing, staffing, directing, and controlling a
company’s resources so that it can achieve its goals.
Managers plan by setting goals and developing
strategies for achieving them. They organize activities

and resources to ensure that company goals are met.
They staff the organization with qualified employees
and direct them to accomplish organizational goals.
Finally, managers design controls for assessing the
success of plans and decisions and take corrective action
when needed.

Hospitals specialize in an
intangible product—health care.
© 2010 Jupiterimages
Corporation

Operations

4. Process of planning for,
organizing, directing, and
controlling a company’s
resources so that it can achieve
its goals.
5. Person who designs and
oversees the process that
converts resources into goods
or services.

1.2 Getting Down to Business

All companies must convert resources (labor, materials, money, information, and so
forth) into goods or services. Some companies, such as Apple, convert resources
into tangible products—iPhones, iPods, Macs. Others, such as hospitals, convert
resources into intangible products—health care. The person who designs and

oversees the transformation of resources into goods or services is called an
operations manager5. This individual is also responsible for ensuring that products
are of high quality.

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Chapter 1 The Foundations of Business

Marketing
Marketing6 consists of everything that a company does to identify customers’
needs and design products to meet those needs. Marketers develop the benefits and
features of products, including price and quality. They also decide on the best
method of delivering products and the best means of promoting them to attract and
keep customers. They manage relationships with customers and make them aware
of the organization’s desire and ability to satisfy their needs.

Accounting
Managers need accurate, relevant, timely financial information, and accountants
provide it. Accountants7 measure, summarize, and communicate financial and
managerial information and advise other managers on financial matters. There are
two fields of accounting. Financial accountants prepare financial statements to help
users, both inside and outside the organization, assess the financial strength of the
company. Managerial accountants prepare information, such as reports on the cost of
materials used in the production process, for internal use only.

Finance
Finance8 involves planning for, obtaining, and managing a company’s funds.
Finance managers address such questions as the following: How much money does
the company need? How and where will it get the necessary money? How and when

will it pay the money back? What should it do with its funds? What investments
should be made in plant and equipment? How much should be spent on research
and development? How should excess funds be invested? Good financial
management is particularly important when a company is first formed, because
new business owners usually need to borrow money to get started.

6. Set of processes for creating,
communicating, and delivering
value to customers and for
improving customer
relationships.
7. Financial advisor responsible
for measuring, summarizing,
and communicating financial
and managerial information.
8. Activities involved in planning
for, obtaining, and managing a
company’s funds.

1.2 Getting Down to Business

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Chapter 1 The Foundations of Business

Figure 1.3 Business and Its Environment

External Forces That Influence Business Activities
Apple and other businesses don’t operate in a vacuum: they’re influenced by a

number of external factors. These include the economy, government, consumer
trends, and public pressure to act as good corporate citizens. Figure 1.3 "Business
and Its Environment" sums up the relationship among the participants in a
business, its functional areas, and the external forces that influence its activities.
One industry that’s clearly affected by all these factors is the fast food industry. A
strong economy means people have more money to eat out at places where food
standards are monitored by a government agency, the Food and Drug
Administration. Preferences for certain types of foods are influenced by consumer
trends (eating fried foods might be okay one year and out the next). Finally, a
number of decisions made by the industry result from its desire to be a good corporate
citizen. For example, several fast-food chains have responded to environmental
concerns by eliminating Styrofoam containers.David Baron, “Facing-Off in Public,”
Stanford Business, April 15, 2006, />sbsm0308/feature_face_off.shtml. As you move through this text, you’ll learn more
about these external influences on business. (The next section of this chapter will
introduce in detail one of these external factors—the economy.)

1.2 Getting Down to Business

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