1-1 McGraw-Hill/Irwin Understanding Business, 8e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Nickels McHugh McHugh ** 13 CHAPTER * **

1-1McGraw-Hill/IrwinUnderstanding Business, 8e © 2008 The McGraw-Hill Companies, Inc., All Rights

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Nickels McHugh McHugh

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Marketing: Marketing: Building Building

Customer Customer RelationshipsRelationships

Evolution of Marketing• Production Era - Up to early 1900s

• Selling Era - 1920s-1950s

• Marketing Concept Era - 1950s - 1980s– Customer

– Service

– Profit

• Customer Relationship Era - 1990s+

Marketing Strategies inNon-Profit Organizations

• Find a productive board of trustees (Directors)

• Make marketing the focus; not short-term sales

• Know your mission and review mission strategy regularly

• Practice strategic planning

• Carefully segment target market

• Train & develop volunteers for long-term

• Be frugal- know how to manage finances

Elements in the Marketing Mix

ProductProduct

MarketinMarketing g

ProgramProgram

PlacPlacee

PromotioPromotionn

Buy at Buy at Computers Computers

‘R Us‘R Us

PricPricee

Marketing Process

1. Find Opportunity

2. Conduct Research

3. Identify Target Market

4. Design Product

5. Product Testing

6. Brand Name, Design & Price

7. Develop Distribution System

8. Design Promotional Program

9. Build Relationship With Customer

Product Design

• Concept Test

• Test Market

• Package Design/Brand Name

Pricing Strategies

• Cost-Plus

• Value-Based

• Competitive

• Going-Rate

• Skimming

• Discount

• Loss-Leader

• Psychological

Source: Perdue University, May 2005

Other Things To Keep In Mind With Price

• Payment Period• Allowances

– Regular– Seasonal

• Bundling• Trade Discounts• Price Flexibility• Credit Terms

• Price Differences– Target Customers– Geographic Areas

• Volume Discounts and Wholesale Pricing

• Cash and Early Pmt Discount


Place Decisions

• Direct Sales

• Reseller Sales

• Market Coverage– Intensive – Selective– Exclusive

• Inventory Size

• Logistics


Market Research Process

• Define the Question

• Collect Data

• Analyze the data

• Choose the best solution and implement

Marketing Data: Least Error Method

1. Put someone in charge.

2. Give everyone a method of collecting data.

3. Identify the right data.

4. Centralize the data.

5. Use the Data.

Source: cmomagazine.com, September 2004

Sources for Marketing Research Information

Secondary Data

• Government Publications

• Commercial Publications

• Magazines• Newspapers• Internal/General

Sources

Primary Data• Surveys• Focus groups• Interviews• Observation• Online surveys• Questionnaires• Customer comments

The Marketing Environment

EconomicEconomic

SocialSocial

TechnologTechnologyy

GlobalGlobal

CustomeCustomerr

CompetitivCompetitivee

Different Markets

• Consumer• Niche• One-to-One

• Business-to-Business (B2B)

Market Segmentation

• Target Marketing

• Geographic• Demographic• Psychographic• Benefit• Volume

Influences onConsumer Behavior

CultureCulture

SubculturSubculturee

Reference Reference

GroupGroup

Cognitive Cognitive

DissonanceDissonance

CustomeCustomerr

LearningLearning

Consumer Decision Making

Marketing mix

•Product

•Price

•Place

•Promotion

Marketing mix

•Product

•Price

•Place

•Promotion

Psychological

•Perception

•Attitudes

•Learning

•Motivation

Psychological

•Perception

•Attitudes

•Learning

•Motivation

Situational

•Type of Purchase

•Social surroundings

•Physical surroundings

•Previous experience

Situational

•Type of Purchase

•Social surroundings

•Physical surroundings

•Previous experience

Sociocultural

•Reference groups

•Family

•Social class

•Culture

•Subculture

Sociocultural

•Reference groups

•Family

•Social class

•Culture

•SubcultureDecision-Making Decision-Making ProcessProcess

•Problem RecognitionProblem Recognition

•Information SearchInformation Search

•Alternative evaluationAlternative evaluation

•Purchase decisionPurchase decision

•Postpurchase evaluationPostpurchase evaluation • (cognitive dissonance)(cognitive dissonance)

Planning For More Business

• What do we do well-and not do well?

• What are we really selling?

• To whom do we sell?

• How do we reach our target group?

• How can we break through the clutter?

Source: Investor’s Business Daily, February 9, 2004

Business-to-Business (B2B)

1. Number

2. Size

3. Geographic Concentration

4. Rational

5. Direct Sales

6. Personal Selling


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Financial Management

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Finance & Managers

• What is Financial Management?

–Finance

–Financial Manager

• Importance of Finance

Most Important Skills Needed by CFOs

75%

55%

10%

51%

38%

19%

27%

26%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Analytical Thinking

Strategic Planning

Leadership

Objectivity

Creativity

Communication Skills

Building Relationships

People Development

Source: Source: CIO Enterprise

Women CFOs

• As of May 2006, 35 of the 500 largest companies in the US had a female CFO

• Five largest companies with female CFO: Citigroup, Home Depot, Verizon, Marathon Oil, and Medco Health Solutions

• Top 3 reasons that helped women achieve their current position: Supportive boss, Supportive spouse, and culture of the organization

Source: : cfo.com, June 1, 2006

Non-Finance Functions of CFOs

1%

2%

5%

25%

53%

18%

39%

49%

60%

0% 10% 20% 30% 40% 50% 60% 70%

Marketing

Sales

Other Skills

HR & Admin.

Revenue Growth

Reengineering

MIS

P & L Responsibility

Business Development

Source: CIO Enterprise

What Financial Managers Do

Where CFOs Get Their Financial Information

Radio5%

Magazines9%

Newspaper47%

Colleagues15%

Television12%

Internet11%

Don't Know1%

Source: : USA Today

Financial Managers: Ask Your Clients

1. What are the client's goals in areas like lifestyle, retirement, saving for college education and their health care as well as that of their dependents?

2. When do they want to reach their goals?

3. What steps have they already taken toward achieving their goals?

4. How do they feel about taking investment risks for a potential higher rate of return?

5. How involved do they want to be in monitoring their progress toward their goals?

Source: : Fpanet.org

Financial PlanningFinancial

Plan

Operating Budget

Financial Controls

Cash Budget

Capital Budget

Long-term Forecasting

Short-term Forecasting

Feedback Feedback

Budget Process

• Financial Plan- Financial Statements

• Types of Budgets– Capital

– Cash

– Operating (Master)

• Financial Controls- Feedback

Need for Operating Funds

• Manage Daily Operations

• Controlling credit operations

• Acquire Inventory

• Capital Expenditures

Why Firms Need FundsShort-Term Funds• Meeting monthly

expenses• Unanticipated

emergencies• Cash-flow problems• Expanding current

inventory• Temporary promotional

programs

Long-Term Funds• New product

development• Replacing capital

expenditure• Mergers or acquisitions• Expansion into new

markets• Building new facilities

Sources of Funds

Short-Term• Trade Credit• Promissory Notes• Family/Friends• Banks, etc.

– Secured Loan– Unsecured Loan

• Factoring• Commercial Paper• Credit Cards

Long-Term• Debt

– Term-Loan– Bonds

• Secured• Unsecured

• Equity– Stock– Retained Earnings– Venture Capital

1.1.Federal, state, and local Federal, state, and local governmentsgovernments

2.2.Federal government Federal government agenciesagencies

3.3.CorporationsCorporations

4.4.Foreign governments and Foreign governments and corporationscorporations

Who Can Issue Bonds?

Sources of Equity Financing

Equity Equity CapitalCapitalEquity Equity CapitalCapital

Internal Internal SourcesSourcesInternal Internal SourcesSources

External External SourcesSourcesExternal External SourcesSources

Retained Retained EarningsEarnings

Retained Retained EarningsEarnings

Owner Owner ContributionContribution

ss

Owner Owner ContributionContribution

ssSale of Sale of

PartnershipsPartnerships

Sale of Sale of PartnershipsPartnerships

Venture Venture CapitalCapital

Venture Venture CapitalCapital

Public Sale of Public Sale of StockStock

Public Sale of Public Sale of StockStock

IPO

Summer of 2006• 89 companies filed plans to raise money through

IPO – looking to raise $16.3 billion• 17 companies withdrew their plans to proceed

with their IPO – were hoping to raise $3.89 billion

• Withdrawing – Go Daddy Group and PNY Technologies

• Filing – Double-Take Software and Hansen Medical

Source: : redherring.com, August 18, 2006

Google IPO

• Launched – August 2004• IPO Price -- $ 85 per share• Seeking to raise $2.7 billion• Unusual auction-style offering • With IPO, the company must

shed light on the inner workings • Key competitors – Yahoo and Microsoft• As of March 31, 2004 Google employed

about 1,900 employeesSource: : cnet news.com, April 30, 2004; Forbes, September 17, 2004

Venture Capitalists

• Finance new and rapidly growing companies• Purchase equity securities• Assist in the development of new products or

services• Add value to the company through active

participation• Take higher risks with the expectation of higher

rewards• Have a long-term orientation

Source: : NVCA.com


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**Securities Securities Markets: Markets:

Financing and Financing and Investing Investing

OpportunitiesOpportunities19

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Functions of Securities Markets

• Long-Term Funding for Businesses

• Place to Buy/Sell Securities (Investments)

Capital Markets

• Primary Markets (IPO's)

• Secondary Markets

Investment Banker

• Assist Sale/Issue of New Securities

• Underwrite issues

• Sells to Institutional Investors

• Coupon/Interest Rate

• Denomination ($1,000)

• Principal

• Maturity Date

• Classes

• Unsecured/Debenture

• Secured

Bond Market

BondsAdvantages

• No Vote

• Interest is Tax-Deductible

• Temporary Source of Funds

• Can be repaid before maturity with call provision

Disadvantages• Increase Debt

• Legal Obligation to Pay Interest

• Repaid on Maturity Date

Special Bond Features

• Sinking Fund

• Callable

• Convertible

Equity Financing

• Preferred or Common

• Investment never has to be repaid

• Not legally obligated to pay dividends

Debt Financing

• Secured or Debenture

• Must be repaid on maturity date

• Interest must be paid whenever specified

Debt vs. Equity Financing

What is Stock?

• Ownership

• Certificate

• Par Value

• Dividends

• Common vs. Preferred

Stock

Advantages• No Repayment

• No Legal Obligation

• Does Not Create Debt

Disadvantages• Voting Rights

• Dividends not Tax-Deductible

• Management Works to Keep Stockholders Happy

Organized Securities Exchanges

• New York Stock Exchange (NYSE)

• American Stock Exchange (AMEX)

• Over-the-Counter (OTC)

• NASDAQ

Investment Criteria

• Risk

• Yield

• Duration

• Liquidity

• Tax Consequences

Investing in BondsCorporate

BondsMunicipal

BondsUS Treasury

Bonds

From 1 to 20 years From 1 to 40 years From 2 to 30 years

Taxable

Exempt from federal taxes and some state

and local taxes

Exempt from state and

local taxes

May be riskier than government bonds, but may have higher

yields

Attractive to investors

in high tax brackets

Government backing

provides maximum

safety

S & P’s Top Credit AAA-Rated Companies

1. Automatic Data Processing

2. Exxon Mobil

3. General Electric

4. Johnson & Johnson

5. Pfizer

6. United Parcel Service

Compared to having 32 Top Companies in

the ’80s

Source: Business Week, 2006

Investing in Stock

• Growth vs. Income– Capital Gain vs.

Dividend

• Blue Chip vs. Penny

• Market Order

• Limit Order

• Stock Split

How Stock Splits Work100 shares of 100 shares of

ABC stock ABC stock selling at selling at

$80$80

100 shares @ 100 shares @ $40$40

100 shares @ 100 shares @ $40$40

100 shares 100 shares @ $45@ $45

100 shares 100 shares @ $45@ $45

2 for 12 for 1 Stock Split Stock Split

DeclaredDeclared

Lower Price Lower Price increases increases DemandDemand

Increased Increased demand demand

increases priceincreases price

How Much Profit Has Been How Much Profit Has Been Made?Made?

Return From Most Widely Held Stock

Rank Price One Year Total Return

General Electric $34.66 -2.2%

Microsoft 27.97 4.1

Pfizer 21.35 -21.0

ExxonMobil 57.38 17.0

Cisco Systems 17.37 -11.1

Johnson & Johnson 63.34 5.6

Intel 25.11 4.6

Citigroup 47.94 7.6

Source: Money, January 2006

Mutual Funds• Pool Investors’

Money

• Best for Small Investors

• Index Fund

• Diversification

• No-Load vs. Load

• Open-End vs. Closed-End

Sales of Mutual Funds Worldwide

Q4, ’03 Q2, ’04 Q4, ‘04 Q2. ‘05

All Funds $73 $22 $166 $166

Equity 116 75 100 65

Bond -4 -12 43 49

Money Market -67 -58 -10 *

Balanced/mixed 23 4 24 26

Other 5 13 8 25Source: USA Today, 10/16/2000

Source: Investors Business Daily, February 10, 2006

(In Billions)

Types of Investments

Traditional– Stocks/Bonds

– Gov’t Securities/CDs

– Money Market or Mutual Funds

– Real Estate

High-Risk– Stock on Margin

– Junk Bonds

– Commodities

Components for Optimal Portfolio Performance

• Diversification

• Timelines

• Safety & Risk

• Income & Total Return

Do Corporations Provide Enough Information?

80%

15%

5%

NOYESNOT SURE

Source: USA Today

How does Buying Stock on Margin work?

Step 1Step 1

An investor An investor wishes to wishes to buy 100 buy 100

shares at shares at $100 per $100 per

shareshare

Step 2Step 2

However, the However, the investor has investor has only $4,000 only $4,000 available to available to

investinvest

Step 3Step 3

The investor The investor finds he is finds he is able to buy able to buy the stock the stock

with a 40% with a 40% marginmargin

Step Step 44

The investor The investor puts up puts up

$4,000 and $4,000 and borrows borrows

$6,000 from $6,000 from the brokerthe broker

Measures of Investment

• Stock Quotations

• Bond Quotations

• Mutual Fund Quotations

Stock Quotes

• % Change in YTD Price

• High/Low Price

• Company Name & Stock Symbol

• Last Dividend Per Share

• Dividend Yield

• P/E Ratio

• # of Shares Traded

• Closing Price

• Net Change- Price

Mutual Fund Quotations

• Fund Name

• Net Asset Value (NAV)

• Net Change in NAV

• YTD Return

• Long-Term Return

Original 12 Dow Stocks (1896)

• American Cotton Oil

• American Sugar Refining Co.

• American Tobacco

• Chicago Gas

• Distilling & Cattle Feeding Co.

• General Electric Co.

• Laclede Gas Light Co.

• National Lead

• North American Co.

• Tennessee Coal, Iron, & Railroad Co.

• U.S. Leather

• U.S. Rubber Co.

How Much Have They Grown?

1955 2003/2004

S&P 500 45.48 1126.21(’04)

NYSE $207.7 Billion $17.8 Trill (’03)

Mutual Fund Industry

1 Million 250 Mill (’03)

100 8,000

$2.5 Billion $7 Trill

accounts

funds

assets

Source: Fortune, 2004

What Adults Believe About Wall Streets’ Key Players

40 45 50 55 60 65 70 75

Essential to theEconomy

Only Want to Make $

Most Firms Would Breakthe Law to Make More $

Dominated by Greed

Most are Honest

Successful OnesDeserve High Pay

Good for USA

% Adults That % Adults That Agree With the Agree With the

StatementStatement

Source: Source: USA Today


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Ethical Ethical Behavior Behavior

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Ethics

• More Than Legality

• Standards are Fundamental

• Ethics begins with each Ethics begins with each of usof us

Top U.S. Ethical Issues

0% 10% 20% 30% 40% 50% 60%

Producing Low-quality or Unsafe Products

Discrimination

Securities and/or Bank Fraud

Unfair Treatment of Employees/Customers

Bribes and Kickbacks

Lack of Public Trust in Corporate America

Dishonesty with Customers

Lying on Reports/Falsifying Records

Conflicts of Interest

Deceptive Sales/Marketing Practices

Improper Accounting Practices

Source: CMO Magazine, October 2004

Ways to Prevent Unethical Behavior

Source: CMO Magazine, Oct. 2004

0% 10% 20% 30% 40% 50% 60% 70% 80%

New Laws

Adding Ethics Classesto College Programs

A Code of Conduct

Publicity About ThoseBeing Punished

Employee EducationPrograms

Increasing Penaltiesfor Offenders

Most Popular Ways to Monitor Employees

• Internet (74%)

• Background Exams (62%)

• Store and Review Email (43%)

• Store and Review Computer Files (31%)

• Videotape Employees (18%)

Source: USA Today

Ethics Check Questions:

• Is It Legal?

• Is It Balanced?

• How Will It Make Me Feel AboutHow Will It Make Me Feel About

Myself?Myself?

Why Don’t We Trust Corporations?

Source: USA Today

Factors Influencing Managerial Ethics

IndividualIndividual OrganizationalOrganizational EnvironmentalEnvironmental

• ValuesValues

• Work Work BackgroundBackground• Family StatusFamily Status

• PersonalityPersonality

• Top Level Mgmt. Top Level Mgmt. PhilosophyPhilosophy

• The Firm’s The Firm’s Reward SystemReward System

• Job DimensionsJob Dimensions

• CompetitionCompetition

• Economic Economic

ConditionsConditions

• Social/Cultural Social/Cultural

InstitutionsInstitutions

Codes of Ethics

• Compliance-Based

• Integrity-Based

Steps to Improve U.S. Business Ethics

1. Top management support

2. Employees’ understanding

3. Managers’ training

4. Ethics Office

5. Outsiders must be informed

6. Enforcement of ethics code

Levels of CorporateLevels of CorporateSocial ResponsibilitySocial Responsibility

Societal ResponsibilitySocietal Responsibility

Stakeholder ResponsibilityStakeholder Responsibility

Profit ResponsibilityProfit Responsibility

Owners/StockholdersOwners/StockholdersGeneralGeneral

PublicPublic

CustomersCustomers

EmployeesEmployees

Suppliers/DistributorsSuppliers/Distributors

EcologicalEcological

EnvironmentEnvironment

Public Interest GroupsPublic Interest Groups

Source: Source: MarketingMarketing, 5/E by Berkowitz, Kerin, Hartley, and Rudelius., 5/E by Berkowitz, Kerin, Hartley, and Rudelius.

Corporate Responsibility(Percent of country’s top 100 companies that publish

separate CR reports)

Source: Source: Financial Times,Financial Times, June 15, 2005 June 15, 2005

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Spain

Italy

US

Germany

France

UK

Japan

Social Audit

• Company

• Outside Groups that serve as watchdogs:– Socially-Conscious Investors– Environmentalists– Union Officials– Customers

International Ethics and Social Responsibility

• Ethical problems are Not Unique to the U.S. managers

• Demand for Socially Responsible Behavior from Global Suppliers

• Joint Initiative on Corporate Accountability and Workers’ Rights

• Inter-American Convention Against Corruption

Best Company Reputation

• Johnson & Johnson (80.6)

• Coca-Cola (79.7)

• Google (79.5)

• UPS (79.4)

• 3M (78.8)

Source: USA Today

Most Admired Global Companies

1. General Electric

2. Toyota

3. Procter & Gamble

4. FedEx

5. Johnson & Johnson

6. Microsoft

7. Dell

8. Berkshire Hathaway

9. Apple Computer

10. Wal-Mart

Source: Fortune, 2006


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Managing Risk

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Riskiest Jobs

0 20 40 60 80 100 120 140

Fishing

Logging Workers

Pilots & Flight Engineers

Structural Metal Work

Refuse Collectors

Farmers & Ranchers

(Source: Bureau of Labor Statistics)

Workplace Deaths

0

500

1.000

1.500

2.000

2.500

Wo

rkp

lace

dea

ths

Transportation Assualts and violence Exposure to harmfulsubstances/environments

Cause

(Source: www.iii.org)

2005 numbers

Managing Risk

• Types of Risk

• Reduce/Avoid Risk

• Loss-Prevention Program

• Risk Management Strategy

• Self-Insure

• Buy Insurance

– Uninsurable Risk

– Insurable Risk

– Law of Large Numbers

– Rule of Indemnity

– Sources of Insurance

Types of Risk

Pure Risk• Potential for Loss with no Potential for Gain

Speculative Risk• Potential for Loss with

Possibility for Gain

Options After Risk is Identified

• Reduce the risk

• Avoid the risk

• Self-insure against the risk

• Buy insurance against the risk

Self-Insuring Against Risk

• Many companies and municipalities have turned to self-insurance.

• Companies turn to this option because they either can’t find or can’t afford conventional property/casualty policies.

• Firms set aside money to cover routine claims and buy only “catastrophe” insurance policies to cover big losses.

Costliest Disasters

0,0 10,0 20,0 30,0 40,0 50,0

Hurricane Frances '04

Hurricane Hugo '89

Hurricane Ivan '04

Hurricane Charley '04

CA Quake '94

11/09/2001

Hurricane Andrew '92

Hurricane Katrina '05

(Source: Insurance Information Estimates)= projection

Worst Terrorist Acts

1. September 11, 2001 (U.S.): Hijacked airliners crashed into the World Trade Center and the Pentagon caused $20.7 billion insured property losses.

2. April 24, 1993 (U.K.): Bomb exploded near NatWest tower in the financial district caused $974 million insured property losses.

(Source: www.iii.org)(Source: www.iii.org)

Types of Uninsurable Risk

Market Risk

Political Risk

Personal Risk

Operational Risk

Guidelines for Evaluating if Risk is Insurable

1. The policymaker must have an insurable interest.

2. The loss should be measurable.3. The chance of loss should be measurable.4. The loss should be accidental.5. The risk should be dispersed.6. The insurance company can set standards

for accepting the risk.

Rule of Indemnity

The rule of indemnity says that an insured person or organization cannot collect more than the actual loss from an insurable risk.

Types of Insurance

• Health• HMO

• PPO

• MSA

• Disability

• Workers’ Compensation

• Liability

• Other Business Insurance

• Life Insurance for Business

• Home-Based Business

Types of Property & Liability Insurance

• Fire• Automobile• Homeowner’s• Computer coverage• Professional liability• Business interruption• Nonperformance loss protection• Criminal loss protection• Commercial credit insurance• Title insurance

Average Expenditures for Auto Insurance in the U.S.

$0,00$100,00$200,00$300,00$400,00$500,00$600,00$700,00$800,00$900,00

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

Avera

ge e

xp

en

dit

ure

Source: www.iii.org

Types of Life Insurance

• Group life insurance

• Owner or key executive life insurance

• Retirement and pension plans

• Credit life insurance

Insurance Industry

• World insurance premiums totaled $3.4 trillion in 2005 according to Swiss Re.

• The Highline/National Association of Insurance Commissioners data show U.S. insurance premiums totaled $947.9 billion in 2005.

• In 2005, five hurricanes (Katrina, Wilma, Rita, Ophelia and Dennis) caused $57.3 billion in damages, or 94% of total 2005 losses.

Source: www.iii.org

Documents

1-1 McGraw-Hill/Irwin Understanding Business, 8e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Nickels McHugh McHugh ** 13 CHAPTER * **