Chapter 1 Summary 5e

Chapter 1 Business Now: Change is the Only Constant

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In today’s fast-paced business environment, change is the only constant. And the most successful firms have figured out how to embrace change. Their core goal is to generate long-term profits by delivering unsurpassed value to their customers.

One change to embrace: social media. The explosive growth in Facebook and Twitter is playing a pivotal part in forging a new role for both businesses and consumers.

A businessis any organization that provides goods and services in an effort to earn a profit. Of course profit is the financial reward that comes from starting and running a business. Sales or revenue minus expenses equals profit. If a business doesn’t bring in enough to cover expenses, it incurs a loss.

Despite the economic meltdown of 2008, American business start-ups in 2009 reached their highest level in 14 years.People who risk their time, money, and other resources to start and manage a business are called entrepreneurs. As entrepreneurs create wealth for themselves, they produce a ripple effect that enriches everyone around them—including their staff, favorite stores, and even governments that collect taxes from them. In the last 30 years, all net job creation in this country occurred in firms less than five years old.

Looking at the bigger picture, business drives up the standard of living for people worldwide, contributing to a higher quality of life. Businesses provide the products and services that people enjoy—as well as the jobs that people need. And don’t forget the impact of their tax dollars and socially responsible efforts.

But businesses haven’t always been so focused on the consumer and his or her wants. U.S. business has changed dramatically over the past few centuries. The history of American business can be divided into five distinct eras: the Industrial Revolution, the Entrepreneurship Era, the Production Era, the Marketing Era, and the Relationship Era.

During the Industrial Revolution—from the mid-1700s to the mid-1800s—mass production took hold. Huge factories replaced skilled artisan workshops with semiskilled workers specializing in a limited number of tasks. The result was unprecedented production efficiency—but a loss of individual ownership and personal pride in the production process.

Large-scale entrepreneurs emerged in the second half of the 1800s—the Entrepreneurship Era. They built business empires, created enormous wealth, and raised the standard of living for the entire country. Yet success came with a price. Many forced out competitors, manipulated prices, exploited workers, and decimated the environment. By the end of the 1800s, the government stepped in to create laws to regulate business, protect consumers and workers, and bring more balance to the economy.

The early part of the 1900s sparked the Production Era, when major businesses focused on achieving even greater efficiencies in the production process. Jobs became more specialized—increasing productivity while lowering costs and prices. When Henry Ford introduced his assembly line in 1913, it quickly became the standard across industry. Managers focused on efficiency, leaving consumers as an afterthought. But the belt tightening of the Great Depression and World War II brought a new attitude from businesses, which took to hardselling to separate consumers from their cash.

After World War II, the balance of power shifted away from producers and toward consumers. It was the Marketing Era when businesses began establishing brands to differentiate themselves from competitors.The “marketing concept” emerged: a consumer focus began to permeate successful companies in every department, at every level. This approach continues to influence business decisions even now as global competition heats up to unprecedented levels.

In today’s Relationship Era, businesses building on the marketing concept strive to foster long-term relationships with customers. Satisfied customers can be more effective than the best promotional campaign, and cultivating current customers is more profitable than constantly seeking new ones. Technology is key. The Web and other digital resources help businesses gather detailed information about their customers—data that can be used to serve them better.

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Working with businesses to improve society’s quality of life, nonprofits play a critical role in our economy. Nonprofits are “business-like” establishments focusing on such areas as human services, education, and art. Though their primary goal is to “do good,” nonprofits are like businesses in every other way. They employ people, produce goods and services, take in revenue, and contribute to the nation’s economic stability. Nationwide, nonprofits employ about 1 in 10 workers, and nonprofit museums, schools, and theatersare economic magnets that attract additional investments in many communities.

Whether nonprofit or for-profit, organizations rely on four fundamental factors of production to achieve their goals. Some combination of these factors—natural resources, capital, human resources, and entrepreneurship—is crucial for an economic system to work and create wealth. And none comes for free.

Natural Resources includeall inputs that offer value in their natural state, such as land, fresh water, wind, and mineral deposits. Most natural resources must be extracted, purified, or harnessed; people cannot actually create them.

In this context, capital does not include money. Capital refers to the machines, tools, buildings, information, and technology—the synthetic resources that a business needs to produce goods or services.

Human Resources includes the physical, intellectual, and creative contributions of everyone who works within an economy. As technology replaces a growing number of manual labor jobs, education and motivation have become increasingly important to human resource development.

Entrepreneurs take the risk of launching and operating their own businesses, often seeing opportunities where others don’t. Entrepreneurial enterprises can kick-start an economy, yet they can’t thrive in an environment that doesn’t support them. The key is economic freedom: freedom to choose who to hire and what to produce and freedom from excess regulation and too much taxation. Protection from corruption and unfair competition is also critical.

All four fundamental factors of production must be in place for an economy to thrive. Which is most important? Well, Russia and China are both rich in national resources and human resources, and both have a solid level of capital. Yet both rank relatively low in terms of gross national income per person. The missing ingredient seems to be entrepreneurship, limited in Russia largely through corruption and in China through government interference and taxes. In contrast, Hong Kong has a small population, severely limited natural resources—yet it consistently ranks among the richest regions in Asia. Perhaps it’s not coincidence that Hong Kong operated for many years under the British legal and economic system—which actively encouraged entrepreneurship. Recognizing the potential of entrepreneurship, China has recently done more to relax regulations and support free enterprise—resulting in tremendous growth.

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The business environment can make the critical difference in whether an economy thrives or plummets. Five key dimensions of the business environment are the economic environment, the competitive environment, the technological environment, the social environment, and the global environment.

In September 2008, the U.S. economy plunged into the worst fiscal crisis since the Great Depression—an economic crisis that quickly spread around the world. Through 2009 the U.S. economy began to recover, although unemployment remained high. The Federal Reserve took proactive steps to encourage economic turnaround, and President Obama spearheaded passage of a massive economic stimulus package designed to create jobs and build infrastructure.

The government also has ongoing efforts to reduce the risks of starting and running a business. A relatively low federal tax rate for individuals and organizations supports business, as do government agencies like the Small Business Administration and the Federal Trade Commission. Many states offer special tax incentives to attract new firms. Legislation also supports enforceable contracts and curbs corruption and unethical practices—another key to strong economic environments.

As global competition heats up, customer satisfaction is paramount. After all, getting current customers to buy more of your product is a lot less expensive than convincing potential customers to try your product for the first time. Customer satisfaction translates into higher profits—even when the competition is tough, and comes from delivering unsurpassed value. A product has value when its benefits to the customer are equal to or greater than the price that the customer pays. And the key to value is quality. Speed to market can be another source of competitive advantage, as can happy employees.

Business technology includes any tools that businesses can use to become more efficient and effective. Technology is transforming business. New industries have emerged, and others have disappeared. For fast-moving firms, the technological environment represents a rich source of competitive advantage, but it can clearly be a major threat for companies that are slow to adapt or to integrate new approaches. The creation of the World Wide Web is an example of a development that has transformed business as well as people’s lives. People have anwhere/anytime access to send and receive data. Even after the global economic crisis e-commerce is posting solid growth. Businesses are connecting their digital networks with suppliers and distributors for a more seamless flow of goods and services. And alternative selling strategies thrive on the Internet. As technology continues to evolve, companies that welcome change and manage it well will be most successful.

The social environment embodies the values, attitudes, customs, and beliefs shared by groups of people. It also covers demographics such as population size and density, and specific traits like age, gender, race, education, and income. Social environments change drastically from county to country. The U.S. itself has a number of different social environments. While the American population has always included an array of different cultures, the U.S. has become more ethnically diverse in recent years. Growing ethnic populations offer robust profit potential for firms that pursue them. The rapidly aging population also brings opportunities and threats for business.

Following the high-profile ethical meltdowns that dominated headlines the past few years, workers, consumers, and goverments now hold businesses and their leaders to a higher standard. Consumers and workers also expect more efforts to improve communities. Sustainability—doing business today without harming the ability of future generations to meet their needs—has become a core issue in the marketplace.

The U.S. economy operates within the context of the global environment. Over the last two decades, technology and free trade have blurred the lines between individual economies around the world. Thanks to the General Agreement on Tariffs and Trade or GATT—signed by 125 countries—goods move more freely than ever across international borders. But even in a global economy, there are multiple threats. In the past decade alone, war, terrorism, disease, and natural disasters have taken a horrific toll in human lives as well as industries like tourism.

Whatever your career choice, business will impact your life. Both the broader economy and your own business skills will influence the level of your personal financial success. But experts advise you to “do what you love.” Today’s environment values abilities like creativity, communication, and caring over routine, programmable skills that computers can emulate.

Following your passion doesn’t guarantee a fat paycheck, but it does boost your chances of both financial and personal success.