Business in action

Sponsoring Fdito!J: Edward Byers, Phyllis Kurzer, and Lawrence
E,'diting Supervisor: Nicola von Schreiber
Desi/!,JIand Art Supervisor and (,'over Designer.' Nancy Axelrod
Produ(lion Supetvison: Priscilla Taguer and Mirabel Flores
Photo Fditor: Rosemarie Rossi
Text Designer: Gail Schneider
Cover Photographer: Wolfson Photography, Inc.
Library

of Congress

Cataloging-in-Publication

Wexler

Data

Bittel, Lester R.
Business in action.
Includes index.
1. Business emerprises-U
nited States.
2. Industrial managementUnited States.
I. Burke, Ronald S. II. Bilbrey, Charles P. III. Title.
HF5343.B57
1988
658
87-3134
ISBN 0-07-005565-3

PHOTO CREDITS
Page 3: Mel DiGicomo/lmage
Bank; page 6: Morton Beebe/Image Bank;
page 30: Grafton Marshall Smith/Image Bank; page 56: Peter Arnold, Inc.;
page 74: PepsiCo, Inc.; page 97: Arthur d'Arazien/lmage
Bank; page 100:
International Stock Photo; page 118: Hank Morgan/Rainbow; page 139: The
Bravo Group, Young & Rubicam, Inc.; page 142: Will Faller; page 166: D.
McDonald/The
Stock Shop; page 190: Jules Allen; page 216: Ford Motor
Co.; page 235: Steve Dunwell/lmage
Bank; page 238: Burt Glinn/Magnum;
page 264: Ted Kawaleski/lmage
Bank; page 290: Walter Bibikon/lmage
Bank; page 314: Jules Allen; page 333: Stan Pakllnternational
Stock Photo;
page 336: Richard Hackett; page 356: Richard Hackett; page 382: Bruce
Davidson/Magnum;
page 405: Michael K. Nichols/Magnum;
page 408:
Richard Hackett; page 432: Burt Glinn/Magnum;
page 460: Kilian/Image
Bank; page 483: Frank Whitney/Image
Bank; page 486: Alex Webb/
Magnum; page 508: Marvin E. Neuman/Image
Bank; page 530: Richard
Hackett; page 556: Eli Reed/Magnum.

Imprint 1996
Copyright © 1989 by Glencoe/McGraw-Hill. All rights reserved. Copyright ©

1988, 1984, 1980 by McGraw-Hill, Inc. All rights reserved. Printed in the United
States of America. Except as permitted under the United States Copyright Act of
1976, no part of this publication may be reproduced or distributed in any form or
by any means, or stored in a database or retrieval system, without the prior written
permission of the publisher. Send all inquiries to: Glencoe/McGraw-Hill, 936
Eastwind Drive, Westerville, Ohio 43081.
56789

IO 11 12 13 14 15

VH

ISBN 0-07-005565-3

04 03 02 01 00 99 98 97 96




This third edition of Business in Action further
refines its uniquely flexible, adaptive approach to
the study of business. The textbook has been expanded and enhanced for its use as a fully com prehensive, independent study resource. It now can be
supplemented
by adopting either a traditional student Activity and Study Guide or an experiential business model and student activity guide entitled
SSweetco: Business Model and Activity File. This has as
its core element a simulated model of a realistic
company (SSweetco, the Shenandoah Sweets Company). A comprehensive
package of instructional
resources is also available to help the instructor
achieve his or her course objectives.

THE TEXTBOOK
The uniquely designed textbook is especially
easy to read and comprehend. Each chapter systematically enumerates and links its learning objectives
and chapter overviews with its major descriptive sections and summary highlights. These are arranged in
an easy-to-follow outlining structure to help students in their study. Extensive business examples,
case studies, news reports, role models, and end-ofchapter review questions make this textbook, by itself, a complete and well-rounded
teaching and
learning resource.

Organization and Contents
The textbook has been carefully reorganized into 7
major units and 24 chapters. Each unit is an independent entity. Therefore an instructor can tailor
the sequence of units and contents to match his or
her own course of study.
The textbook has been substantially revised and
updated. Chapter 4, on small business, has been
expanded, providing more in-depth coverage of entrepreneurship
and franchising. Unit 3, "Marketing
of Products and Services," now includes a separate
10) on "Pricing Strategies for
chapter (Chapter

Profit." The importance of computers and technology in our rapidly changing information economy is
recognized in Chapter 12 titled "Information
and
Compurer
Systems. " Chapter
15 dealing with
human relations now includes an expanded discussion of productivity.

Textbook Features
Each chapter of the textbook integrates a set of
learning devices that promote an understanding
of
how business operates.
PICTOGRAPHS. Pictographs are previews, or advance summaries, of the chapter presented in pictures and words. They are used to simplify and
speed up the absorption of complex ideas. Similar
illustrations are widely used in news magazines,
such as U.S. News and World Report, to convey ideas
readily and save readers precious time.
LEAD ARTICLES AND PHOTOGRAPHS. Each chapter is introduced by an article and related color photograph dealing with an issue, trend, company practice, or development
in business.
Each article,
rewritten from popular business sources, serves as a
springboard and dramatic lead-in to the subject matter and issues raised in a chapter.
KEY TERMS. Significant terms are highlighted in
bold type at their point of definition in the textbook.
They are also listed in the Review Questions at the
end of each chapter with convenient cross-referencing to the pages on which they are defined.
TABLES AND FIGURES. Tables presenting arrays of
data, and figures that illustrate concepts and ideas,
are widely used throughout the text.
ACTION BRIEFS. Short anecdotes are interspersed
in the margins of the text, providing a representative
sampling of business practices, commendable
or
otherwise. There are over a hundred Action Briefs
throughout the text; most are new to this edition.
BILLBOARDS. These features are found in specially chosen chapters of the text. Billboards are divided into two parts: readings that focus on business

vi
issues, and Profiles. The readings are based mainly
on current events. They focus primarily on thoughtprovoking, business-related
social issues and aim to
stimulate students to form their own opinions about
those issues. Profiles are vignettes that highlight the
role, characteristics,
and contributions of men and
women who are succeeding in the business world.
KEY CONCEPTS. At the end of each chapter, the
ideas presented in the pictographs and main headings are summarized. The concepts are keyed by
number to the pictographs,
objectives,
and the
major text headings-a
system that helps link all
major learning elements together.
REVIEW QUESTIONS. Each chapter concludes with
a list of questions testing students' understanding of
text material.
CASE CRITIQUES. Each chapter is supplemented
with two documented and/or hypothetical case studies illustrating practical applications of key concepts
and key terms. These case studies are designed to
encourage students to develop critical judgments in
assessing business actions.
TECHNOLOGY IN THE WORKPLACE. Also, at the
end of each unit is another special feature: Technology in the Workplace provides a sampling of how
careers and work are changing because of the development of new technologies, such as robotics, electronic mail, compact disks, and, of course, computers.

SUPPLEMENTS AND
INSTRUCTIONAL -RESOURCES
The following ancillaries are available with Business in A{tion, Third Edition.

SSweetco: Business Model
and Activity File
Using this simulation and practicum, students can
become involved in the creation, operation, and
growth
of
Shenandoah
Sweets
Company
(SSweetco), a candy manufacturer and retailer. Assignments in the practicum-which
are completely
correlated with the textbook-enable
students to
experience firsthand how the concepts presented in
the text are put to work in the real world. Students
assume 32 career roles for the simulated business.
Assigned activities require students to answer questions, solve problems, make calculations, complete
typical business forms, and analyze and make deci-

Preface

sions in case studies involving SSweetco and Valleyville, its associated business community.

Activity and Study Guide
For instructors who favor traditional teaching approaches, this self-study guide offers chapter-bychapter learning objectives, summaries of key concepts, and vocabulary and concept review questions.

It also includes cases for analysis and interpretation,
and supplementary
readings. Self-check
answer
keys are provided for the student.

Computer Applications for
Introduction to Business, IBM PC __
These are easy-to-use, easy-to-operate,
computerbased applications. Students assume the roles of
employees and managers for SSweetco and help it
solve typical business problems. At a basic, easy-tofollow level they learn to use modern productivity
tools-spreadsheet
and database
programs-to
make decisions in such areas as marketing, production, finance, and human resources management.
No previous background in computers is needed. A
booklet containing the narrative and background information for the computer activities is available for
the student. This single IBM disk program includes
all the spreadsheet and database files needed to operate the software and the "data" files students use
and manipulate in order to help solve the four decision-making
applications.
(The spreadsheet
and
database programs are derived from the McGrawHill Integrated
Software Series.) An Instructor's
Manual and Key provides useful teaching guidelines. Instructors who use either experiential or traditional approaches can make effective use of these
applications.

Computerized Test Bank, IBM PC __

This microcomputer test bank with over 1,400 objective questions provides a quick and easy means of
generating tests. Instructors have the option of adding or deleting questions to the test bank. Thus the
test bank can be tailored to the instructor's particular
classroom needs.

Course Management

Kit

This boxed set of instructional resources provides
course management materials in a "unitized" format
that makes them easy to use. An introductory booklet includes suggestions for teaching the course,


Preface
course schedules, a bibliography, and a list of suggested audiovisual materials. Seven additional booklets-one
for each unit of the text-offer
textmanagement
and enrichment
suggestions, printed
tests, readings, and strategies for integrating text
chapters with the student study supplements. A set

vi i
of overhead transparencies
ther aid to instruction.

is also provided as a fur-

Lester R. Bittel

Ronald S. Burke
Charles P. Bilbrey


The authors acknowledge the invaluable advice and
guidance provided by those people in the academic
ranks who served as reviewers or consultants for this
and other editions of the work. Their ideas and suggestions have profoundly shaped the pedagogy, format, features, and content of the text and the various components of the Business in Action teaching
and learning system.
Special thanks are extended to Professor Abu
Selimuddin of Berkshire Community College for
any number of his creative ideas that have found
their way into the text; Professor A. H. Friedman

of J. Sargeant Reynolds Community College for
his

considerable

advice

on

economics

a coauthor of the second edition of this program.
Perhaps most important of all was the contribution
of MurielAlbers Bittel, who served all three authors
so well as the coordinating editor for the massive
flow of manuscript as this project evolved.

List of Reviewers/Consultants
James Alston
Rappanock Community College

Richard M. Kotz, Jr.
American Institute of Business

Teresa Kay Avila
College of Business
Ball State University

Andrew M. McKee
North Country Community College

Dr. Robert S. Bulls
J. Sargeant Reynolds Community College
Dr. Helen Diamond
Citrus College
Frieda Ford
Indiana Vocational Technical College
Marvin Keefer
Academic Dean,
Commonwealth College
Margaret Knight
Dean,
Rutledge College

content;

Gregory C. Dellinger for his library search for techno logical and computer-related
materials; Professor
W. L. Safford of Rowan Technical College; and
R. Lawrence LaForge, who contributed so much as

Donald Park
American Institute of Commerce
Glenn S. Smith
Eastern Arizona College
Charles Trester
Northeast Wisconsin Technical Institute
William J. VanDeVeer
Mohave Community College
Kenneth D. Wagner
The Bradford School


.

Guidelines for Study With Business tn Action
The following steps constitute an effective way
to study the materials in each chapter. The key to
effective study is making maximum use of the numbers that identify each pictograph, objective, major
text heading, and key concept. If you are not already
familiar with these features, you should read the discussion of "Textbook Features" starting on page v
of the Preface.

STEP ,. Study the pictograph. Spend two or three
minutes to be sure you get the whole picture. Then
read the learning objectives that precede each chapter.

STEP 2. Now skim through the entire chapter
reading only the main headings and subheadings.
These headings provide an outlining structure for
each chapter. They reinforce and extend the ideas
presented in the pictograph. (These headings also
may be used as your outline structure for notetaking
from the text.)
STEP 3. Read the Key Concept summaries and
glance at the list of key terms at the end of the chapter. Be alert for definitions of these terms as you
read the chapter.
These first three steps, which make up a
"three-part linked learning system," will help you
quickly summarize the basic concepts in a chapter
by skimming it in about 10 to 15 minutes. You are
now prepared to read the chapter for details that will
help you flesh out the Key Concepts.
STEP 4. Read the chapter

carefully for detail.
Devote an hour or more to this. Keep notes of important facts. Write down the definition of any terms
that are necessary for understanding
the topics
under discussion. Key terms are in bold type for ease
of identification.
As you read each chapter for detail, be certain to
study each table and figure to be sure of its meaning.
Also read the Action Briefs in the margins of the text

to get a feel for what actually occurs in business
opposed to what ought to happen.

as

STEP 5. Answer the Review Questions. It is a
good idea to make a note of the pages on which the
answer appears.
STEP 6. Read each of the Case Critiques. Try to
make a connection between what has occurred in
the cases and what you have just read in the text.
Answer the questions associated with each case.
If your instructor has assigned the Activity and Study
Guide, move to the corresponding
chapter in that
supplement and complete the assignments provided
there. Be sure to self-check your answers to identify
content areas that require further study.
Only if your instructor has assigned material from the student supplement, SSweetco: Business Model and Activity
File for Business in Action, Third Edition, should you
continue with Steps 7 and 8 in the study plan as described
below.

STEP 7. If your instructor has included the
SSweetco supplement
in your course materials,
move to the corresponding chapter in the activities
section of SSweetco: Business Model and Activity File.
Read the performance objectives that precede the
two levels of achievement. Then complete the exercises and activities for the first level of achievement,
the "Application Level."
STEP 8. Proceed to the next, higher level of

achievement,
"Analysis and Interpretation,"
by
completing the decision-making
and case problem
assignments.
Rigorous follow-through on these study procedures
will lead to good study habits that can have a positive effect on what you learn in this introductory
business course and may, as a result, help to improve your grades.




The Roles of
Business Enterprise
in Society
Learning Objectives
The purpose of this chapter is to define business in the United
States, describe its characteristics and the conditions under which it
operates, and summarize its development.
As evidence of general comprehension, after studying this chapter
you should be able to:
1. Define a business enterprise and distinguish among private,
nonprofit, and public enterprises.
2. Discuss the three major functions of business in society.
3. Explain the process of converting resources and adding utility.
4. Recognize the threefold classification of business enterprises by
type and activity, and identify the groupings under the Standard
Industrial Classification system (SIC).

5. Explain the meaning of risk and uncertainty in business.
6. Recall the major stages in the development of modern American

business.

7. Identify the five environments in which the business system
operates.
If your class is using SSweetco: Business Model and Activity File,
see Chapter 1 in that book after you complete this chapter. There
you will find exercises and activities to help you apply your
learning to typical business situations.
4




Chapter 1 The Roles of Business Enterprise in Society

1 THE BUSINESS ENTERPRISE
A private, profit-motivated means of
satisfying human needs
An activity that satisfies human needs and wants by providing goods
or services for private profit is called a business enterprise. From a
cookie-vending cart in Los Angeles to General Motors in Detroit, every
business (1) satisfies needs, (2) provides goods and services, and (3) does
so with the intention of making a profit. A fundamental characteristic of
American business is that it uses private money and resources, or capital,
to pay for the costs of setting up and running commercial enterprises.
The willingness of private investors to risk their capital in the hope of
gaining profit distinguishes the American system from those in which the

government supplies the resources.

SATISFYING NEEDS AND WANTS
The guiding principle
All human beings have certain basic needs-things
that they must
have in order to survive. In addition to these basic needs, there are many
things that people want to make their lives more comfortable or satisfying. A business must provide its customers-whether
they are individuals, other companies, or the government-with
something that they
need or want. Otherwise, the business will have no sales, no income, and
no profit and will be forced to close its doors. The idea that success in
business depends on fulfilling consumer needs and wants is fundamental
to the American business system.
Human needs and wants shift with the advance of civilization. Yesterday's demand for horse collars and horse carriages has been replaced
today by an even greater demand for automobiles and motorcycles. In
like manner, the manual typewriter has given way to the electronic word
processor, and the tape deck is replacing the phonograph record. Specific
consumer demands change constantly, but there will always be a wide
range of human wants and needs to encourage business to operate, whatever the circumstances.

GOODS AND SERVICES
The means to satisfy human needs and wants
In meeting human needs and desires, businesses provide goods and
services to consumers. Goods are physical products and include both
necessities like food and shelter and luxuries like television sets and
motor boats. Seroices are activities that help people or organizations
without directly creating a physical product. Services can be classified as
personal, professional, or financial. In the modern world, services range
from home and office maintenance and repair to financial operations and

highly complex communications and research activities. Lawn mowing,
auto repair, television programs, and banking are other examples. Thousands of different kinds of services make up this rapidly growing business
segment.

7


8

Unit 1 The Business System in the United States

There are additional subcategories of goods and services. Goods
made and sold to meet the needs and wants of manufacturers are called
industrial goods. They normally undergo a process of conversion as they
are utilized in the fabrication of the final product. Goods made and sold
to meet the needs and wants of consumers are known as consumer goods
and do not require processing by their ultimate users. Services may also
be subdivided into those that are business-oriented, such as office maintenance, and those that are consumer-oriented, such as hairstyling. Nonprofit organizations also provide services, usually related to education,
health care, and social welfare.

PRIVATE PROFIT
The payoff for satisfying consumer needs
The primary goal of business is to make money. In a sense, it is the
businessperson's payoff for satisfying human needs and wants. In simplest terms, profit is the amount of money left from income made by
selling goods and services after all costs of producing, marketing, and
distributing the goods and services have been paid. Said another way,
persons enter business with the hopes that they will take in more money
than they spend. (See Table 1-1.) Obviously, sometimes there is no
money left over, or costs turn out to be higher than income. If that
unhappy outcome occurs, the business either breaks even or takes a loss.

The intention in business, however, is to operate in such a way that
profits will be as high as possible, consistent with social responsibility.
The incentive to make money is called the profit motive.
The profit motive is that which most clearly distinguishes business
from other kinds of enterprises in the United States. There are other
organizations that also meet some of the wants and needs of people.
They provide goods and, particularly, services. These enterprises differ
from business in several ways, but the principal difference is that they do

TABLE 1-1
PROFIT OR LOSS?
How One Company Makes a Profit
Company A adds up the revenues each year from sales of its
products or services (like this).
It deducts the costs each year for its materials, labor, rent,
utilities, etc.
What's left is its profit.

$100,000
- 90,000
$ 10,000

How Another Company Doesn't Make a Profit
Company B adds up its revenues for the year (like this).
It deducts its expenses for the year (like this).
And it ends up with a loss (like this).
Moral
To make a profit, a business must generate revenues that are
greater than its expenses.

$100,000
-105,000
- $5,000


Chapter 1 The Roles of Business Enterprise in Society

not seek a profit. The most important kinds of enterprises of this kind are
private nonprofit enterprises and public enterprises.

NONPROFIT ENTERPRISES
Voluntary contributions or taxes provide capital
PRIVATE NONPROFIT ENTERPRISES Private nanprofit organizations are financed, established, and operated in much the same way as
business. Their goal, however, is not to make a profit, but to meet needs
that are not or cannot be effectively or fully satisfied by business. Among
private nonprofit enterprises are hospitals, museums, research and charitable organizations, colleges and universities, and professional associations. Financing for these organizations is provided by voluntary contributions from individuals, businesses, and, in part, the government.

PUBLIC ENTERPRISES Public enterprises, organizations operated
by units of government and financed with taxes or service charges to the
public, are increasingly important in American society. Many of these
organizations-like
highway departments, public health services, local
sewage disposal plants, and water systems-are
operated just as if they
were businesses. They have the same management problems, the same
kinds of budgets, similar physical plants and personnel, and often the
same concerns with income and costs. The difference is that a public
enterprise is not financed with private capital and does not expect to
make a profit. Funds to establish public enterprises usually come from
taxes. The enterprises generally are operated so that income and expenses will be equal. If a profit does occasionally result, this surplus

belongs to the sponsoring government body rather than to private investors.

2 VALUES
Business contributes certain values to society
Although the main motivation for establishing and operating a business is to make a profit for investors, business serves important social
functions beyond this. Our society supports and encourages business
because it makes these contributions. American business provides individuals and society as a whole with a means of exchange, with wealth,
and with employment. It is not the only institution in the United States
that makes such contributions to society, but it is probably the most
important.

MEANS OF EXCHANGE
Buying and selling
Few societies have ever endured where each individual or family
produced all of the essentials of life for private use. Even in pioneer
America, specialization existed in the production of tools and weapons,
household implements, and certain other goods, including agricultural
products. The fact that certain people and groups had goods that others
needed and did not or could not produce for themselves created a need

9

Action Brief
WHO EARNS WHAT
FROM YOUR JEANS?
If you pay $78.96 for a pair of
blue denim jeans, who really
gets your money? Lots of
people besides the retail
shop where you bought them.

The cotton farmer, for
instance, gets $7.63 off the
top. The mill that cleans, or
"gins," the raw cotton gets
47 cents. Another 4 cents
goes for miscellaneous
handling. The textile mill that
weaves and dyes the fabric
takes $3.30 for its
contribution. The actual
garment manufacturer, such
as Levi's, gets another $5.73.
That means that the cost of
your jeans as they leave the
factory is about $70.57.
Between the wholesaler and
the retailer, another $8.45 is
shared. Remember: These
two businesses provide the
jeans with utility of place
and time. That is, you could
get those jeans right now,
without waiting, and at a
store right in your own
neighborhood.


10

Unit 1 The Business System in the United States

for trade. The trade-or exchange-of
goods and services is a basic function of business. In a highly technical, specialized society such as ours,
this aspect of business predominates. Today, if you wished to have a
Sony Walkman, for example, you would mow a lawn for wages or make
an item for sale, and exchange that money with a retailer for the Walkman. The retailer, in turn, would exchange the money with the manufacturer to obtain the Walkman. A modern family directly produces virtually
none of the necessities of life. Food, clothing, shelter, and the means of
transportation and communication are all supplied by the buying and
selling processes that are part of business.

WEALTH
More than money
Business creates wealth that would not otherwise exist. Although

wealth is commonly interpreted to mean the possession of a super abundance of money, the term embraces everything that money can buy as
well. More specifically, wealth also includes material goods, services, and
leisure, all of which have been made available to us by business. Consider again a family attempting to produce everything for its own needs.
One or two people working with handmade tools can produce only the
most rudimentary goods-and
barely enough of them to fill even the
family's needs. No matter how skilled these people may be, the demands made on their time are enormous. They must, for example, grow
and preserve food, build and maintain shelter, deal with medical problems, and find fuel. Such diverse activity does not leave them free to
accumulate wealth of any kind. Business allows the accumulation of
wealth by providing economical manufacturing and efficient distribution
of goods and services. This is not possible in a subsistence society.
Most people seem to strive for a life that is more than a hand-tomouth existence, but not everyone pursues wealth with equal fervor.
The business system in America serves the ambitious as well as the
satisfied, but it tends to encourage earning and spending.

EMPLOYMENT

Rewarding occupations
One of the greatest social contributions of business is to provide employment. An obvious benefit of employment is that it gives people the
money needed to buy goods and services in a business-oriented society.
Employment serves a greater function, however. In today's society, jobs
and careers can be among the most important paths to personal satisfaction. Useful, productive, and rewarding employment can give meaning
to people's lives by providing them with a sense of purpose, a feeling of
accomplishment, and an outlet for creativity. In a relatively free and open
business environment, such as ours, the opportunity to advance as the
result of improved skills and abilities is a great incentive to personal
growth. As a society is the sum of its citizens, personal growth contributes
to social and economic growth.
As society's needs and wants change, so do employment opportunities change. Only a few years ago, most jobs in business involved making
goods; today most jobs in business are concerned with providing services.
(See Figure 1-1.)


3 THE BUSINESS PROCESS
Converts resources to useful goods and services
Business performs its many functions mainly by converting available
resources into products or services for which there is a demand. The
conversion process creates or adds value or usefulness to resources.
This is achieved by giving resources utility of form, place, time, or possession-or of some combination of these.

CONVERTING RESOURCES
Transforms input into output
Of the resources used by business, the most familiar may be the
physical raw materials used in manufacturing. The conversions of iron
ore and other materials into steel, and of steel into farm implements, are
clear examples of creating a useful product from a raw material of little
apparent value. Soil and seeds are familiar resources too. The farmer

combines them in the agricultural process to produce vegetables, grains,
and fruit. Resources may themselves be manufactured goods as they are
for retail camera or clothing stores. Human skills or knowledge, particularly in the modern world, may also be considered business resources.
For an advertising agency, a newspaper, or a research organization,
human abilities and creativity are the chief resources.
Conversion of resources takes place on a far broader plane than the
manufacture of shoes and sunglasses. It is inherent in every business.
Banks convert money into loans and interest. Department stores convert
goods into sales. Movie theaters convert film into entertainment. Restaurants convert foodstuffs into meals. Insurance companies convert premium payments into protection. Motels convert furniture and fixtures
into shelter for travelers. Construction firms convert concrete into highways. Airlines convert fuel and planes into transportation. A doctor converts the knowledge of medicine into health.
In summary, the business process converts inputs, resources that go
into a production or operation process, into outputs, end products or
services which have value and utility. (See Figure 1-2.)


ADDING UTILITY
Makes output more useful than input
If businesses are to sell their goods or services for a profit, they must
change their resources in some way to make them more useful or desirable to consumers. A business may give these resources utility ofform by
physically changing them in a way that increases their value. A sheet of
plastic, for example, is shaped into a Frisbee. Utility of place is given to
resources by moving them into a location where they are available for
immediate use by customers. In this way, a transportation company
creates utility of place by conveying goods and raw materials to where
they are needed. For instance, fuel oil stored at the refinery cannot be
used by consumers; the oil is valuable for heating a house only after it has
been delivered there. Utility of time is given to a resource or product by
making it available to consumers without delay. Thus retailers who invest their money to maintain a stock of goods that is always available on
their shelves provide their customers with utility of time. These stocked
goods are more valuable to consumers because they can be readily obtained. Utility of possession is created by advertising and promotion.

These activities increase the value of goods and services by increasing
public demand for them. Since advertising and promotion stimulate the
feeling or awareness of desire to possess and use, they are essential aspects of the American business system. Utility of possession, place, and
time are closely related to marketing activity, as you will see in Unit 3, for
the major goal of marketing is to get products to those who need them, in
places where they are needed, at the time of such need.

4 KINDS OF BUSINESSES
An endless variety
The many functions of business and the endless possibilities for carrying out the conversion processes have resulted in remarkable diversity
in American business, from single-owner welding shops to multinational
manufacturing companies like General Electric, employing hundreds of
thousands of people. Products range from electrical circuit systems nearly
too small to see with the naked eye, to an entire chemical plant prefabri-


Chapter 1 The Roles of Business Enterprise in Society

cated for export. Businesses can be classified by type: production, distribution, or services. Businesses may also be grouped into standard industry classifications.

PRODUCTION ENTERPRISES
Emphasize physical conversion
Companies that manufacture materials or goods are engaged in proas mining, farming, or forestry (often called the extractive industries)-or
it may use
already-manufactured materials to produce higher-level goods. The final
manufacture of a television set, for example, is the end result of a long
chain of processes usually performed by many different companies.

duction. The production may be on a basic level-such

DISTRIBUTION

ENTERPRISES

Emphasize transportation

and selling

The process of moving goods from their point of production to consumers is called distribution. The most obvious example of distribution
is physical transportation: railroads, shipping and trucking companies,
and airlines. Packaging and grading operations (of bulk foods, like bagging potatoes for example) belong to this category. So do companies that
store goods in warehouses and those merchants engaged in wholesale
distribution and retailing.

SERVICE ENTERPRISES
Provide assistance rather than goods
Service enterprises comprise the fastest growing area of business
activity, which includes firms that do not directly create or distribute
goods. The communications industry-including
the press, radio and
television, and the telephone and telegraph system-is a service industry. Services to individual consumers, such as repair and maintenance,
are also included, as are hotels and restaurants, barbers and hairdressers,
private educators, doctors and dentists, and hospitals. Financial institutions such as banks and savings and loan companies, insurance companies, and computer service organizations also provide services and are
included in this classification.

CLASSIFICATION BY INDUSTRY
Federal designations
A somewhat more detailed and useful breakdown of businesses by
type is offered by the federal government. It is widely used for reporting
and analyzing statistical data on business. This approach classifies and

groups individual businesses into large industry designations. Thus, an
industry is a collection of all businesses that perform similar operations
to provide the same kinds of goods and services. All companies that
process textiles, for example, make up the textile industry.
The Standard Industrial Classification (SIC) is the numerical
system devised by the U.S. Office of Management and the Budget. SIC
(as shown in Table 1-2) places each company in a major industrial classifi-

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14

Unit 1 The Business System in the United States

TABLE 1-2
STANDARD INDUSTRIAL CLASSIFICATION SYSTEM (SIC)
Major Classification Oivisions*
A. Agriculture,

Forestry, and Fisheries

B. Mining
C. Contract Construction
D. Manufacturing
E. Transportation,

Communication, Electric, Gas, and Sanitary Services

F. Wholesale and Retail Trade

G. Finance, Insurance, and Real Estate
H. Services (Hotels, Amusements, Auto Repairs, Medical, Legal, and
Educational)
I. Government

J. Nonclassifiable Establishments
*Each major division is further broken down into subclassifications indicated by
numbers: for example, 2521for manufacturing of wooden office furniture. There
are 99 major groups in all, with Manufacturing having nearly 450 individual (or
four-digit) classifications.
Source: Standard Industrial Classification Manual, Executive Office of the
President, Office of Management and the Budget, U.S. Government Printing Office,
1972.

cation. There are 99 of these. The company may then be classified into
one of hundreds of smaller classifications within that industry. That way,
each company that is classified as a member of SIC 2385, Raincoats and
Other Waterproof Garments, for example, can compare its production,
sales, employment, and financial data with that of others in the same
industry.

5 THE DYNAMICS OF BUSINESS
Business is dominated by uncertainty and change
The activities of business take place in a turbulent, dynamic environment. Business itself changes as social and economic conditions change.
Forecasting the overall performance of business is difficult; precisely determining the outlook for any individual business is nearly impossible.
Uncertainty underlies all business activity. It is this uncertainty, coupled
with the element of change, that creates an environment of risk for business while at the same time presenting business with major opportunities
for reward and success.

Chapter 1 The Roles of Business Enterprise in Society

RISK
A basic feature of American enterprise
Risk is a fundamental feature of American business. People are free
to invest their capital and make a profit, but at the same time, they must
face the possibility of loss. This is the risk that they take. The expectation of gain is the major driving force of business, but there is always the
chance that a decrease in the demand for products, ineffective manageme nt, government regulation, social change, or dozens of other factors
may cause a loss. If this loss is only temporary, a business may recover. If,
however, the expenses of the business continually exceed its income, the
business will be insolvent, no longer able to pay its debts. Though the
possibility of loss and failure is a problem, it is also a great incentive to
careful management and aggressive competition.

GROWTH, STABILITY, OR STAGNATION
Describes the level of economic activity at a given time
A certain amount of inertia enters into every human enterprise. Although growth appears to be the healthiest state for people, businesses,
and the economy in general, periods of stagnation have always interrupted this process. Stability is an intermediate stage that seems only to
be maintained by the promise of future growth. The government has
attempted to counteract national economic stagnation, and good business
managers make a concerted effort to prevent slumps in their company or
industry, but performance uncertainty continues.

OPPORTUNITY AND CHANGE
An impetus for growth
The continual change in the business world creates conditions ripe
for opportunity. Risk of loss and failure may threaten survival in the
business world. Within the last two decades, firms that were household
names like Addressograph-Multigraph,
Grant's variety stores, and Iowa

Packing have passed from the scene, but dozens of other companies like
Apple Computer, Family Dollar Stores, and Louis Rich packaged foods
have sprung up to take their places. Without the freedom that results in
risk, however, opportunity is lost. Shifting markets, management and
personnel problems, and a changing social environment all present the
owner or manager with opportunities to implement new practices and
operations. It is only through the eXploitation of opportunities presented
by change that growth and profits occur.

6 AMERICAN BUSINESS HISTORY
From exploitation to regulation
In the beginning, the business of America was mainly farming. Most
manufactured goods were imported from Europe. As the population migrated westward, however, the need arose for an efficient means of transporting goods between cities. Railroads were built by business specula-

15

Action Brief
12.8 MILLION RICH

TEENAGE GIRLS
They spend $30 billion a
year! Those figures, alone,
should make these ladies the
most valued single consumer
market, but they do not.
Why? Because, taken
together as a market, these
teenagers are unpredictably
fickle. The overnight
popularity, for example, of

torn shoulder sweaters
related to the Flashdance
craze caused dozens of
sweater makers to rush into
production. The craze,
however, died out before
most of these manufacturers
could get their products to
market. But the market is
still very tempting for
business people.
Teenage girls have
surprisingly high discretionary
income. Most have jobs, and
many have a big allowance.
One-third of them have the
use of a credit card, and onequarter have their own
checking account. They are
also the ones who set the
trends, particularly in fashion,
cosmetics, and hair care.
The problem is that they
tend to act collectively, for
better or worse. "When one
of the young ladies in her
group has to have
something," says one
marketer, "they all do. But
when one loses interest the
rest are just as quick to drop

the fashion."


16

Unit 1 The Business System in the United States

tors in the 1800s to fill this need. In turn, the railroads spurred the growth
of business beyond the pioneers' wildest dreams. They also made possible telegraph lines along the rights of way. This fast new method of
communication linked buyers and sellers across great distances, creating
a network of business markets across the nation. Banks, then run by
unregulated groups of investors, supported these flourishing markets by
supplying capital. Population growth was stimulated by an influx of immigrants attracted by expanding employment opportunities in the growing American economy.

RAPID INDUSTRIAL GROWTH
From agriculture to industry
The vastness of American resources-land
and minerals, a cohesive
transportation and communication system, capital, and an eager labor
force-gradually
shifted the focus of business from agriculture to industry. Small shops were incorporated into large factories. Product parts were
standardized so that the unskilled labor market could be tapped. New
sources of power-steam
and electricity-turned
the wheels and did the
work faster. Business growth spurted ahead in the late 1800s. This was a
period of rapid industrialization that caused business to run rampant in its
haste to make profits. Lack of restraints resulted in capricious, often
unfair business practices.
Workers were exploited. Labor unions were pushed aside. The little

investors were duped. The interests of the general public were ignored.
As a response to this exploitation, there began a trend in 1889 and 1890
that continues to some extent today. The public called upon its government to pass laws regulating and limiting business operations. Chief
among these laws were the Interstate Commerce Act, which is a law to
regulate transportation, and the Sherman Antitrust Act, which is a law
designed to discourage anticompetitive business practices. (These, as
well as other important regulatory laws, will be discussed in more detail
in later chapters.)

TOWARD A SERVICE ECONOMY
From products to services
Nothing held back the growth of business for long. American business soon took worldwide leadership in production capabilities. By the
middle of the twentieth century, however, a subtle shift took place in
consumer demand. The public, with its newfound leisure, began to
demand services as well as products. These purchased services came in
the form of hotel and motel rooms, meals served in restaurants, extensive
health care, vacation trips to faraway places, and entertainment of all
kinds. The business entrepreneur proved to be just as eager to provide
services as goods, as long as there was a possibility of profit.

MARKETING EMPHASIS
From production to marketing
In the rush to produce either goods or services, business had a tendency to make something available first, and then to sell it. When the


Chapter 1 The Roles of Business Enterprise in Society

public displayed indifference toward these products and services, this
practice often led to great waste. Goods were sold at a loss, and services
went begging. To avoid this outcome, the emphasis in American business has swung since World War II from production to marketing. Successful business firms now first try to assess what the market wants-or

will buy-and then try to match their production efforts to that demand.

THE MODERN OUTLOOK
A balanced approach
Maintaining a balance between what is good for business and what is
good for the public at large is a major concern in America. Each decade,
of course, introduces new problems. Today, we are concerned with such
matters as decent wages and rising prices, industrial pollution and protection of the environment, the need to create more jobs and to make jobs
more satisfying, equal employment opportunities, and business ethics.
The American approach is to seek resolution of these issues two waysin the marketplace and in the legislature. Business generally will do
everything in its power to make a profit; consumers usually will do their
best to buy only what they feel is a bargain. When the marketplace fails
to provide mutual satisfaction, both parties are likely to seek government aid.

7 TODAY'S BUSINESS ENVIRONMENT
An interaction with society and nature
Business cannot and does not exist in a vacuum. Each business firm
operates within a web of external conditions that both nurture and rcstrain its survival and growth. This web, or network, is oftcn called the
business system. A system is a group of related parts that work together
in an organized way for some specific purpose-or
purposes. A particular
firm also has its own unique internal system. This usually consists of
people working together to convert or transform the company's resources
into useful products or services for sale. The stock clerks in a supermarket, for example, receive canned goods and place them on the
shelves. Other clerks operate the checkout counters. Still other employees come in at night to sweep and clean. The store manager tries to tie
this system together by making sure that the goods are ordered on time,
that the employees fulfill their job duties, and that money flows in from
customers and flows out to pay suppliers and employee wages. Regardless of how well this internal system may function, the firm is at the
mercy of other factors in the outside environment that make up the
business system. This environment is made up of five major, interacting

influences or conditions. (See Figure 1-3.)

A COMPANY'S INDUSTRY
Others who fish in the same pond
Every business firm operates within, or in competition with, a family
of similar firms. They may be smaller or larger, but they have in common
similar products or services, similar processes and technology, and similar

17