3 Keeping Business in Perspectiveagriculture, acid rain, global warming, deforestation, erosion, volcanism, and pollution. HIS 201. Western Civilization Before 1600. Survey course

3 Keeping Businessin Perspective

L E A R N I N G O B J E C T I V E S

After reading this chapter, you should be able to:

1. Explain the relationship between business and the social

sciences.

2. Describe the relationship between business and the

humanities.

3. Discuss the relationship between business and

mathematics.

4. Identify the four functions of management.

5. Define marketing and the marketing mix.

6. Differentiate between financial and managerial

accounting.

7. Explain the importance of finance to business success.

8. Describe the four primary activities comprising human

resource management.

9. Define production and operations management.

10. Discuss the role of the business firm to its environment.

Henry Ford said, “history is bunk.” But Henry Ford was wrong! A knowledge of history al-

lows you to better understand what’s going on today and to make better business deci-

sions. Take the case, for example, of Gary Muller.1

Gary Muller raises pigs for a living. In early 1999, Muller was one of America’s 115,000

hog farmers struggling to survive in a collapsing market. In just one year, the market price

for his pigs dropped from 60 cents to 16 cents per pound. A glut of live pigs on the market

had pushed the price of pigs down to levels not seen since the 1930s. Losing money, he

had to rearrange bank payments to avoid going bankrupt.

But Muller and other American hog farmers knew their history. They knew that the

federal government had a long tradition of helping out farmers. For instance, government

price supports (which essentially guarantee farmers a minimum price for their livestock or

produce) have existed for more than 60 years. So Muller and his fellow farmers lobbied

Washington for help. And they got some. The Secretary of Agriculture increased federal

purchases of pork for humanitarian aid, bought hundreds of thousands of hogs to send to

hurricane-ravaged Central America, and authorized expanded government-guaranteed

low-cost loans to help hog farmers pay their bills.

BUSINESS AND THE LARGERSOCIETYHistory is just one of many academic disci-plines that touch on the practice of busi-ness. In this chapter, we demonstrate thatyou can’t fully understand business unlessyou understand the larger society in whichbusiness operates. Business is part of thefabric of life, not an isolated entity.

“I want to go into business. Courses insubjects like history, philosophy, and mathare irrelevant to my career goals. They’re awaste of my time!” I’ve heard commentslike these from students since I first beganteaching in the early 1970s. What thesestudents fail to realize is that most of thecourses taken outside business are rele-vant to their career goals. They can be

This is what learning is. You suddenlyunderstand something you’ve understood allyour life, but in a new way.

D. Lessing

18 CHAPTER 3 Keeping Business in Perspective

EconomicsThe study of the allocation anddistribution of scarce resources.

MicroeconomicsThe study of the behaviors of in-dividual units of activity, suchas individuals, families, andbusiness firms.

MacroeconomicsThe study of whole systems, es-pecially with regard to generallevels of output and incomewithin a country.

directly linked to the practice of business and can help you to be more effectivein your job.

Business is complex and touches almost every element in our lives. This chaptershows you some of the more obvious connections by looking at the primary acade-mic disciplines that businesspeople draw on. No single chapter, of course, can dojustice to the breadth and value of these disciplines. Our more modest goal is toshow you that, if you ignore the many academic disciplines that contribute to con-temporary business, you’re likely to end up with a limited and distorted view of thefield. Maybe more to the point: You won’t learn everything you need to know aboutbusiness in business courses alone!

BUSINESS AND THE SOCIAL SCIENCESMost college students are required to take one or more courses in the social sci-ences. These are courses like economics, psychology, and sociology that deal withthe social and cultural aspects of human behavior. Why are such courses required?Because business is about people. It’s about dealing with customers, employees,suppliers, bankers, and the like. In this section, we show you how economics, psy-chology, sociology, political science, anthropology, geography, and history relate tobusiness.

Economics

Michael Scolari recently fulfilled his lifelong dream of owning his own restaurant. Ashis opening day neared, Michael sat down with his head chef and reviewed themenu. They agreed on the items to be served. But it was Michael’s call on prices.How much should he charge for each item? Take his mixed green salad, for instance.He knew that competitors were charging anywhere from $4 to $8 for a comparablesalad. He treated those prices as his acceptable range. Then he drew on his knowl-edge of economics. He calculated that he needed at least $4.50 to cover his costsand provide a minimal profit. He also remembered that demand declines as price in-creases. How many salads could he sell at $4.50? At $5.00? At $6.00? Using thisanalysis, Michael ended up pricing the salad at $5.50 which, he calculated, wouldmaximize his profit on that item.

Economics is concerned with the allocation and distribution of scarce re-sources. It has two branches. Microeconomics deals with the behaviors of individ-ual units of activity, such as individuals, families, and business firms. Macroeco-nomics, on the other hand, studies whole systems, especially with regard to generallevels of output and income within a country. Both are important to business, al-though microeconomic concepts are typically most relevant to the individual busi-ness decision maker.

No successful businessperson can make decisions without a fundamental under-standing of economic theory. Economists, for instance, have shown us that pricesdepend on the level of customer demand and not just on the cost of production.Their principle of economies of scale helps us to understand the advantages of largesize and why a firm like Wal-Mart can sell goods significantly cheaper than small re-tailers. And their studies of monopoly power provide insights into why the U.S. fed-eral government has gone after companies like Standard Oil, U.S. Steel, IBM, and Mi-crosoft when these firms began to dominate their markets.

Economics is undoubtedly the most important social science to anyone thinkingabout starting or working in a business. And it’s the rare college program in businessthat doesn’t require students to take at least one course in this discipline. As you’llsee, much of the discussion in Chapters 4 and 5 of this book draws on economicprinciples and concepts.

BUSINESS AND THE SOCIAL SCIENCES 19

ECO 201. Principles of Economics I.Nature and methodology of economics; mixed capitalism and market economy; national income; employment theory, including economics of fiscal policy; money, banking, and Federal Reserve System; international trade and finance.

ECO 202. Principles of Economics II.Economics of the firm; theory of consumer demand; determination of price and output in different market structures; distribution of income; economic growth.

PSY 101. Introduction to Psychology.Survey of introductory topics, such as: learning, memory, language development, sensation and perception, research methodology, personality, stress, and psychotherapy, as well as developmental, abnormal, physiological, and social psychology. This course is designed for social science majors or those planning to attend a four-year college or university.

SOC 101. Introduction to Sociology.Scientific study of structure and functioning of human societies, with special attention to factors responsible for the organization and transformation of sociocultural systems.

ANT 211. Cultural Anthropology.This course introduces the student to a holistic study of culture. The major elements of human social behavior, material culture, and cultural diversity are studied as adaptations to social and environmental change—past and present.

POS 250. Public Policy.Emphasizes dynamics of government as they are evidenced in public opinion, pressure groups, political parties, and our governmental institutions; attention also directed toward the political-economical nexus within American society.

GOG 101. Introduction to Geography: Human Environment.Throughout history, human life and society have been shaped by the physical environment. Today, human activity threatens that environment. The relationship between humans and environment is examined in the context of the surface processes of weather, climate, plate tectonics, population distribution, and soil formation. Topics include agriculture, acid rain, global warming, deforestation, erosion, volcanism, and pollution.

HIS 201. Western Civilization Before 1600.Survey course presenting in various forms the origin and development of major political, social, religious, and intellectual institutions in Western civilization to approximately 1600.

HIS 202. Western Civilization Since 1600.Development of Western civilization from the expansion of Europe to the present, including political, diplomatic, economic, social, and cultural areas.

E X H I B I T E X H I B I T 3 - 1

■ Courses in the Social Sciences

Psychology

Nan Elkins hired her fourth employee last month. She now has an office assistantand three sales representatives. But this new employee seems to be causing particu-lar problems for Sean, a sales rep that Nan hired just a year ago. Sean had been an ex-cellent performer. In fact, Nan had been so pleased that she increased his base payfrom $27,000 to $30,000 after nine months. But since the new hire came on board,Sean seems demotivated.

When Nan was recently describing Sean’s behavior to her brother, he quickly fo-cused in on the problem. “I think I know why Sean’s demotivated. We had a situa-tion like this in my psychology class. You gave the new employee $30,000 to start.Sean has worked for you for a year and, after his raise, makes the same amount.Sean’s probably upset because, when comparing his salary to the new hire, hethinks he’s being treated unfairly. Equity theory says people make comparisons andif they think they’re being under-rewarded, they try to reestablish equity by doingthings like exerting less effort.” Suddenly, Nan had new insights into Sean’s behav-ior. When she raised his base to $32,000, he was his old self again.

Psychology seeks to measure, explain, and sometimes change the behavior ofhumans and other animals. Psychologists concern themselves with studying and at-tempting to understand individual behavior. For students of business, psychology’smajor contributions are to marketing and human resource management.

You’re planning a sales presentation; or you’re writing an ad that is going to runin a magazine. If you don’t understand psychology, neither of these actions is likelyto be as effective as it could be. Why? Because success relies on touching the needsand motivations of potential customers. And studies by psychologists and othersusing psychological methods provide guidance in designing effective sales and adcampaigns. For instance, research on persuasion has taught salespeople to listencarefully to what a potential customer is saying and to focus responses on specificobjections that are presented. So if you have any aspirations to pursue a career inmarketing, you’ll want to be sure you prepare yourself by developing a strong under-standing of psychological principles.

The other major area of business that has been largely shaped by psychologicalprinciples is human resource management. Hiring tools such as selection tests andinterviews, for example, are largely based on psychological research. Similarly, al-most everything business does in the areas of training, performance evaluation, moti-vation techniques, and leadership development has been shaped by contributionsmade by industrial and organizational psychologists.

More recently, psychology has given business fresh insights into human diversity.Psychologists’ efforts to understandgender and cultural diversity providemanagers with a better understandingof the needs of their changing customerand employee populations.

Sociology

Work is increasingly being done inwork teams. But work teams are notwithout their problems. Ask ToddLyall. He had read a lot about the popu-larity of teams and how they could in-crease productivity. So he reorganizedhis four Speedy Muffler franchises innorthern Ohio around teams. Employ-ees would now be entirely rewardedfor their team effort. Instead of getting


Much of what we know works

and doesn’t work in an

employment interview comes

out of research done by

psychologists. For instance,

evidence demonstrates that

structured and well-organized

interviews provide more

reliable information from

which to make hiring

decisions.

higher productivity, Todd got what sociologists call “social loafing.” Team memberswere slacking off when they realized that their individual contributions couldn’t beidentified. Todd quickly corrected the problem by redoing the employees’ evalua-tion procedures and reward criteria. Now his employees are evaluated and rewardedfor both their team and individual productivity.

Sociology deals with the social system in which individuals fill their roles. Thatis, sociology studies people in relation to their fellow human beings. At a macrolevel, a number of sociological issues have relevance to business. For instance, manycurrent business practices have been modified to reflect societal changes such asglobalization, cultural diversity, gender roles, and family life. Sociology has alsogiven us insights into how changing demographics have altered customer and em-ployment markets.

At a more micro level, most of our knowledge on how to design effective orga-nizations has its roots in sociology. The idea that large organizations could be moreefficient by introducing standardization and other bureaucratic concepts came outof sociology. Much of our knowledge of groups—for example, norms, roles, status,and conformity—is essentially from the area of social interaction within sociology.And much of our recent knowledge about teams has its origins in sociology.

Political Science

Monroe County, New York wanted to attract new businesses and keep existing onesin its community. But communities everywhere want new businesses and the jobsthey create. This creates a competitive climate, which astute businesspeople cantake advantage of. Managers of ABB Instrumentation Inc. of Rochester, New York,did just that.2 In exchange for agreeing not to move, the County of Monroe Indus-trial Development Agency issued $21 million in bonds to support the building of anew plant and provided ABB with $2 million in tax abatements.

Is the above unusual? No. Politicians and governments provide tax breaks andsubsidies to business to make their community more attractive. And, of course, theastute businessperson uses this knowledge to negotiate more attractive deals whenmaking location or relocation decisions.

Political science is concerned with the study of government and politics. Thiswould include politics inside a business, too—organizational politics. For instance, po-litical science has helped us to better understandthe structuring of conflict, allocation of power,and how people manipulate power for individualself-interest within business organizations.

Topics such as quotas, tariffs, subsidies, andprotectionism—frequently addressed in politicalscience courses—reinforce the role that govern-ments play in a business firm’s environment. Addi-tionally, our understanding of the increasingpower of lobbyists and other interest groups onthe actions of organizations comes from politicalscientists.

Managers who ignore the influence that poli-tics can have on the success of a business do soat great peril. We don’t have to look further thanthe recent problems Microsoft has had with theU.S. Department of Justice and the Federal TradeCommission to make our point. Many experts be-lieve that Microsoft got itself into antitrust trou-bles largely because the company arrogantly ig-nored the power of government, did little or no

BUSINESS AND THE SOCIAL SCIENCES 21

Bill Gates, CEO of Microsoft,

appeared before the U.S.

Senate Judiciary Committee to

defend his company against

charges that it was a

monopoly. His company lost.

The court’s initial decision was

that Microsoft engaged in

monopolistic behavior.

lobbying on its own behalf, and failed to build a coalition of supporters in Congress.3

Meanwhile, competitors like Netscape aggressively built close ties with key mem-bers of Congress and used this leverage to encourage a federal investigation of Mi-crosoft and an eventual trial, which the company lost.

Anthropology

Business practices are not consistent from country to country. Failure to understandthis can cost a company plenty. Take the case of a small U.S. manufacturer of farmequipment that was attempting to break into the Chinese market. The company relo-cated one of its sales representatives to Shanghai with high expectations. After twoyears and spending more than $800,000, the salesman had nothing to show for his ef-forts, and he was transferred back to the United States. What executives at this com-pany failed to understand is that Asians don’t do business the way North Americansdo. Asians rely heavily on relationships in business transactions. They don’t begin seri-ous negotiations until they know and trust the other party. Had the executives at thisfarm machinery company had a better understanding of cultural anthropology, theywould have known and treated expansion into Asian markets as a long-term project.

Anthropology is the study of societies to learn about human beings and their ac-tivities. It includes their physical character, evolutionary history, racial classification,geographic distribution, group relationships, and cultural history and practices.

From a business perspective, anthropology can help us to understand differ-ences in fundamental values, attitudes, and behaviors among people in differentcountries and within different organizations. It has been particularly valuable in pro-viding insights into cultural diversity. In a world where national boundaries are be-coming less and less important, the ability to understand how people from other cul-tures think and behave becomes critical if businesses are to successfully globalizetheir operations.

Inside organizations, anthropology has helped managers shape the design ofsuccessful corporate cultures. Every firm has its own set of rites, rituals, ceremonies,taboos, stories, and socialization processes that influence the behavior of employees,especially new ones. Any attempt to bring about significant changes within a firm re-quires that these cultural artifacts also be changed. Insights from anthropologists canhelp business decision makers design their corporate culture so that it matches upwell to its changing environment.

Geography

Why did Reynolds Metals locate several of its aluminum processing plants in south-ern Washington state and upstate New York? Labor supply? Favorable taxes? No!These plants require a huge amount of electricity, and the availability of low-costwater-generated electricity in these two locations made them ideal spots for alu-minum plants. Geographic location, therefore, was the primary determinant.

Geography is the study of the earth’s surface. It describes and analyzes the spa-tial variations in physical, biological, and human phenomena, looking for global andregional patterns. An understanding of geography would help you to understandhow physical elements such as mountains, rivers, and lakes separate regions andmarkets. Climate, too, dramatically influences tastes, preferences, and markets.

In a global marketplace, a knowledge of geography can help you to understandand help to guide business decisions. Firms in the corporate farming business, for in-stance, need to know details about soil qualities and climate changes. Firms in thetimber business need to know how geography affects growing rates. And firms try-ing to sell into diverse global markets need to know how climate affects consumertastes and how geography aids or hinders transportation.

In recent years, with the growth in environmental awareness, the science of ge-ography has taken on increased importance to business. No analysis of issues such as


conservation of resources, burning of forests, droughts and floods, or urban pollu-tion is complete without a knowledge of geography. This certainly is important tocompanies in industries such as timber, farming, construction, and automobiles.

History

We opened this chapter by showing you the relevance of history to business. We re-turn to the topic in this section.

History is a discipline that studies the chronological record of events. Thischronology is based on a critical examination of source materials and often includesan explanation of causes. There is no shortage of topics around which history hasbeen organized. There’s world history, American history, and military history. Thereis a history of law, art, and religion, as well as histories of various peoples, cultures,countries, and regions. Many an astute business executive has used a knowledgegained from studying military history, for instance, to develop effective corporatestrategies.

An obvious subject that can benefit students of business is business history.What can you gain from this subject? First, it provides a context for current busi-ness practices. The existence of labor unions and growth of labor laws make a lotmore sense if you’ve read about 16th-century labor guilds and how worker insecuri-ties and high unemployment in the 1930s created a political climate supportive ofincreased pro-labor legislation. Second, history allows you to learn from the experi-ence of others. What worked, what didn’t, and why? Hundreds of thousands oftoday’s corporate leaders have read Alfred Sloan’s book, My Years with GeneralMotors, in which he describes how he took over a cash-short, chaotic, and nearlybankrupt company in the 1920s and turned it into the world’s largest corporation.Many of today’s current practices related to planning, strategy, decentralization,and market segmentation can be directly traced to ideas that Sloan introduced atGM 75 years ago.

BUSINESS AND THE HUMANITIESCourses in English, speech communication, foreign languages, and philosophy andethics should be part of every student’s preparation for a career in business.

BUSINESS AND THE HUMANITIES 23

Aluminum companies like

Reynolds Metals locate plants

near dams on the Columbia

River in southern Washington

state to take advantage of low-

cost electric power.

English

“I hate writing,” the market researcher confided. “I sit down in front of my com-puter and I struggle trying to put my ideas on the screen. It takes me an hour towrite something that probably should take me five minutes. And even then I’m notsure I’ve made the points I wanted to and as clearly as I wanted to.”

An increasing number of employers are concerned about the woeful lack ofreading and writing skills among today’s employees. For instance, Richard Todd ofthe Federal Reserve Bank of Minneapolis says: “Good writing is one of the two keyabilities I focus on when hiring; the other is the ability to read critically. I can trainpeople to do almost anything else, but I don’t have time to teach this.”4

English, of course, is a language. In this section, we’re concerned with the useof this language to improve written communication. This encompasses reading andwriting skills. Most college students are required to take two courses in English. Onefocuses on grammar and composition, the other on literature. Together they seek tohelp students develop their writing and reading skills.

Every employee in a business firm needs to have strong reading skills. Whetherit’s reading basic instructions for running a machine on the factory floor or a 150-page legal brief, the ability to understand written documents is a necessary part ofevery job. Writing skills, on the other hand, have not historically been necessary inevery job. But as firms increasingly empower operative employees to assume duties


ENG 101. English Composition I.A study of the principles of composition with emphasis on language, the mechanics of writing, the types of discourse, and research and documentation.

ENG 102. English Composition II.A continuation of English 101 with emphasis on analysis of readings in prose fiction.

COM 210. Public Speaking.Analysis and application of theory and research in public speaking. Developing skills in preparation, presentation, and evaluation of speeches, including 4 or 5 classroom performances.

PHL 101. Introduction to Philosophy.Designed to acquaint the beginning student with philosophical problems and methods in such areas as metaphysics, epistemology, logic, and value theory.

PHL 115. Ethics.A study of the principles of morality with a critical examination of various ethical theories and their application to contemporary moral issues.

SPA 101. Elementary Spanish I.Primary emphasis is on aural/oral skills. Students will learn to converse and ask questions in simple present time and become acquainted with location of Hispanic populations and elements of their daily lives.

SPA 102. Elementary Spanish II.A continuation of SPA101. Students will learn to express past and future time. They will continue to learn about Hispanic countries and their cultures.


■ Courses in the Humanities

previously done by management, and as more and more employees are required touse computers on their jobs, the ability to write well becomes a required skill.Courses in English composition give you the opportunity to develop your skills at or-ganizing ideas, selecting the proper words to convey them, and then structuringthose words so as to send your message with clarity.

Speech Communication

Verbal communication is the dominant means by which people communicate inbusiness. If you can’t express your ideas clearly using spoken words, you’re going tohave trouble in almost every business endeavor. Remember, we’re not talking aboutmerely giving speeches here. Formal presentations in front of groups is only a smallpart of verbal communication.

Speech communication refers to transference of meaning through spoken lan-guage. Your ability to verbally communicate depends on a number of variables—thewords chosen; the pitch and inflections used in conveying those words; and yourskills at pronunciation. Courses in speech can help you to improve your communica-tion skills by evaluating tone, presentation, enthusiasm, emotion, persuasiveness,and nonverbal messages.

Foreign Languages

International marketing people who fail to grasp the nuances of language do so atgreat peril. The meanings of ad slogans, for instance, don’t necessarily translate in-tact. One of the most famous gaffes was committed by the marketers of the Chevro-let Nova, when they introduced the car into Mexico. The car’s name literally means“doesn’t go” in Spanish. And the landscape is littered with other, similar goofs. InChina, Pepsi’s “Come alive” campaign translated into “Wake up your dead ances-tors;” and KFC’s “Finger-lickin’ good” slogan turned into “Eat your fingers off.”

The study of foreign languages has grown in importance as business has goneglobal. While English has become “the language of business” around the world, those in-dividuals who can speak the native language of those with whom they work gain threedistinct advantages. First, they increase the level of comfort and trust others feel towardthem. People are more likely to work with someone who is like themselves, and a com-mon language helps build that bond. Second, a common language reduces opportunitiesfor miscommunication. And third, when you learn another language, you also gain in-sight into the culture, practices, and behavior of those people who speak that language.

Foreign languages encompass any language different from your native tongue.The most popular languages spoken in the world today are Mandarin, English, Hindi,and Spanish.5

Historically, those Americans whotook a foreign language in school studiedone of four: Latin, French, German, orSpanish. Note, however, that Americanshave never been as linguistically diverseas Europeans. It’s not unusual for some-one from France, for instance, to speakGerman and English as well as French.

Americans appear to be mirrored intradition when it comes to learning for-eign languages. One out of every fourAmerican students who take a foreignlanguage in middle school or highschool still chooses French, a languagespoken fluently by only one out of every50 people on the planet. By contrast, 1

BUSINESS AND THE HUMANITIES 25

It helps to be able to speak

Spanish when doing business

in cities such as Miami, El Paso,

Tucson, or Los Angeles.

percent of American teenagers study Chinese or Japanese, which combined are spo-ken by 20 percent of the world’s people.

If you want to prepare yourself properly for a career in global business, considerbuilding your skills at Japanese, Mandarin, Russian, and Hindi. In addition, becauseof the proximity to Latin America, it makes sense for Americans to know Spanish. Inmany parts of California, Arizona, New Mexico, and Texas, more people speak Span-ish fluently than English.

Philosophy and Ethics

Chuck was among ten accounting employees transferred by a large oil company fromLos Angeles to Houston. The company paid for moving Chuck, his wife, and twosmall children’s household goods. And they put Chuck and his family up at a Houstonhotel for up to two months while they looked for a permanent residence. AfterChuck’s first week in Houston, he turned in an expense report to his boss. The reportincluded $215 for food, which reflected Chuck and his wife’s frugal tastes. Inciden-tally, the company typically budgets $50 a person, per day, for food and doesn’t re-quire receipts. After briefly reviewing the expense report, the boss rejected it. Hetold Chuck, “There’s four in your family and you turn in $215 for food? Get real! Theother transfers are showing food expenses of over $800 for the week. Your figure isway too low. It’s going to attract too much attention. Kick it up to at least $700. Youcan pocket the difference.” Chuck was perplexed. What should he do? Follow hisboss’s orders and lie, or stand by his actual expenses and deal with his boss’s wrath?

Chuck faces an ethical dilemma. And among the many issues addressed in phi-losophy are ethical dilemmas. Philosophy critically examines the grounds for funda-mental beliefs; and ethics is a branch of philosophy concerned with determiningwhat is good and bad or right and wrong.

Each one of us has a system of values by which we live; and a philosophy coursewill force you to assess your fundamental beliefs. As an example, for students ofbusiness, capitalism and socialism provide two very different philosophies of howeconomic resources should be owned, produced, distributed, and consumed. Butphilosophy provides something important to anyone in business. It helps developcritical thinking and introduces the role of ethics in decision making.

Critical thinking facilitates the ability to think both clearly and critically primar-ily through inductive and deductive logic. It can help you, for instance, to identifyinconsistent reasoning, unclear or misleading language, and manipulative commu-nicative techniques. This, in turn, can make you more effective at problem solving,decision making, and strategic thinking.

Additionally, because ethics moves beyond black-and-white to shades of gray, phi-losophy can help you to apply moral reasoning to business conflicts, deal with ethical is-sues, and assess the morality of business activities. Ethical analyses by philosophersJohn Locke, John Calvin, and Adam Smith go directly to the existence of business firmsand what constitutes proper behavior within them. For instance, the liberty ethic(Locke) proposed that freedom, equality, justice, and private property were legal rights;the Protestant ethic (Calvin) encouraged individuals to be frugal, work hard, and attainsuccess; and the market ethic (Smith) argued that the market and competition, not gov-ernment, should be the sole regulators of economic activity. These ethics have shapedtoday’s organizations by providing a source of power and legitimate authority, linking re-wards to performance, and justifying the existence of business and the corporate form.

BUSINESS AND THE ALLIED DISCIPLINESIn this section, we look at allied disciplines that you’re likely to encounter in yourcollege program. These include mathematics and statistics, computer science, andlaw. Again, we’ll consider these disciplines in light of what they can contribute tothe practice and understanding of business.


BUSINESS AND THE ALLIED DISCIPLINES 27

MAT 221. Calculus for Business, Natural, and Social Sciences.Introduces analytic geometry, elementary functions (including logarithmic and exponential functions), central ideas of the calculus (limit, derivative, and integral), applications of derivatives to business, social, and natural sciences.

STA 201. Business Statistics I.Expands upon probabilistic concepts to orient the student toward managerial decision making using quantitative methodologies. Topics covered include classical regression analysis, forecasting, Bayesian decision theory, linear programming, and simulation.

CIS 201. Introduction to Computers.A survey course, discussing computing terminology, components, programming concepts, and the computer’s integration into business activities. Laboratory experience includes word processing, spreadsheets, and databases.

BUS 210. Business Law.The legal and social environment of business; contracts, personal property, commercial paper, secured transactions, creditor’s rights, and insurance; agency and employment; real property, and estates.


■ Courses in the Allied Disciplines

StatisticsMaking valid inferences aboutthe characteristics of a group ofpersons or objects based on nu-merical information.

Mathematics and Statistics

Veronica uses statistics every day in her job as an insurance actuary at State Farm. Sherelies on statistics to calculate the risk probability when determining rates for variousproducts like life policies and automobile insurance. Her statistics tell her, for exam-ple, that a single male under age 25 is three times more likely to be in an alcohol-related car accident as a married male in his forties. This is why young male driverstypically pay such high car insurance rates. But business employees of all types regu-larly use statistics on their jobs. Production workers, for instance, use statistics to as-sess whether the machines they’re working on are operating within tolerance. Andsalespeople use statistics to assess various clients’ probability of buying and then usethat information to best allocate their time among prospective customers.

Mathematics is the science of counting, measuring, and describing theshapes of objects. Statistics, which is grounded in mathematical probability,deals with making valid inferences about the characteristics of a group of personsor objects based on numerical information. Today, business decisions increasinglyrequire individuals to have a working knowledge of algebra, calculus, and de-scriptive statistics.

One of the more widely used statistical measures is standard deviation. Assumefor a moment that you’re working in marketing for Porsche. You know from datacollected from previous customers that a typical Porsche 993 buyer is 43.3 years old.Using statistical analysis, you’ve calculated that the standard deviation (which is ameasure of variation from the mean) is 4.2 years. Assuming a normal distribution,this would mean that 68 percent (which encompasses plus and minus one standarddeviation) of 993 buyers are between the ages of 39.1 and 47.5. And since almost


In the 1960s, insurance firms needed computers that filled an entire room to generate necessary statistical reports. Today, these firms can

calculate the same statistics much faster on small, powerful desktop computers.

100 percent of buyers will be included in the range of �/� three standard devia-tions, you can be pretty safe in saying that almost all Porsche 993 customers fallwithin the age range of 30.7 to 55.9. What, if anything, does this mean to you as amarketing person at Porsche? Quite a bit, actually. Magazine and television programsattract individuals with different demographics. So if you knew that the average ageof readers of Snow Boarding magazine is 19.5 (with a standard deviation of 1.1) andthe average television viewer watching the Masters’ Golf Tournament is 58.7 (with astandard deviation of 3.6), you’d be wise to look for other places to put yourPorsche 993 advertisements. An ad in Car and Driver magazine, whose readershipmore closely mirrors the demographics of 993 buyers, for instance, might be a farbetter choice.

Computer Science

A top executive (who will remain nameless) at a multibillion-dollar consumer prod-ucts company was reminiscing recently: “When I was an undergraduate, back inthe late 1960s, I didn’t pay much attention to computers. I didn’t figure they hadany relevance to me and my career goals. After all, I was going into marketing andeventually management. Even when I got to grad school, in the mid-1970s, I ig-nored computers. I knew they were growing in importance, but I didn’t need toknow anything about them. After all, if I needed something done on a computer, Icould delegate it or hire someone to do it. Boy, was I ever naïve. Now I spend atleast two hours a day on my computer. I use it for all kinds of things—scheduling,e-mail, composing correspondence, monitoring sales in different regions, videoconferencing, doing spreadsheet analyses. I’d be lost without it. And to think that

BUSINESS AND THE ALLIED DISCIPLINES 29

Investment Analyst Harvey Weinstein, Merrill Lynch

Place of birth: Trenton, New Jersey

Year of birth: 1966

Education: B.S., UCLA, 1987; M.B.A., Stanford University, 1992

Current job title: Senior investment industry analyst for utilities

Career progression: 1987–1990, assistant product manager, Quaker Oats;1992–1994, airline industry analyst, Merrill Lynch; 1994–1998, industry analyst forgas and electric utilities; 1998–present, senior industry analyst.

Career path: I knew I wanted to get an M.B.A. but most schools wanted me to getsome real-world experience first. I learned quite a bit about consumer marketingduring the two years I spent at Quaker Oats. Then I enrolled in Stanford’s M.B.A.program. Upon graduation, I joined Merrill Lynch in New York as an analyst. I beganworking in the airline industry and, in recent years, I’ve specialized in utilities. My near-term goal is to gain some global ex-perience by being transferred to one of our firm’s international offices. I’d like to eventually end up working in bonds. Ithink as the population ages, fixed-income securities will be one of the fastest-growing segments of our business.

I love what I do. I get up every weekday morning excited about going into the office. And no matter how much youmake in a job, if you can’t look forward to going to work, you’re not going to be happy and you’re probably not going to beas effective in your career as you could be.

Computer scienceA field of study that deals withthe structure, operation, andapplication of computers andcomputer systems.

as recently as 15 years ago I thought I’d go through my entire career never havingto use a computer!”

This anonymous executive is far from alone. Most employees today who areover the age of 50 joined the workforce at a time when the term software meantclothing and hardware referred to items you bought at a hardware store. If some-thing had to be done by a computer, it was assigned to a group of “geeks” who wereholed out in a separate department. Today, of course, very few jobs don’t require in-terfacing with a computer.

Computer science is a field of study that deals with the structure, operation,and application of computers and computer systems. It essentially evolved out of re-search done by people with training in mathematics and electrical engineering.

Unless you’re interested specifically in designing computer systems or writingprograms, you’re not going to need to be a computer expert to work in business.But you’re going to have to know some basics. You’ll need to be able to do financialprojections on spreadsheets; use graphic programs to illustrate your reports; accessdatabases; and find things quickly on the Internet. These are basic tools that every-one in business is currently, or will very soon be, using.

Law

When Jean Morrow bought the “Dress for Success” shop in Kansas City, she thoughtone of the store’s problems was that it needed a makeover to appeal more to youngprofessional women. So she spent $100,000 to remodel the store’s interior and re-placed three of her five salespeople. The people she let go were aged 45, 53, and 61.Their replacements were 26, 29, and 37. Within a month after she made the change,she found herself the defendant in an age discrimination suit. Her defense? “All Iwanted to do was give the store a younger look. Our customers are mostly in theirlate twenties and early thirties. I want salespeople who can relate to this age group.”

In spite of Jean’s attempt to explain her decision in terms of a changed strategy andimproving profitability, the court ruled against her. Firing employees solely on thebasis of age is against the law in the United States.

You don’t need to be a lawyer to be in business. But a basic knowledge of thelaw—particularly as it pertains to employment—is an absolute must in today’s legal-istic society. Even the smallest business can find itself in trouble if it doesn’t have theproper licenses and approvals. And as soon as you hire your first employee, you areresponsible for ensuring that you comply with a wide range of employment law—in-cluding equal opportunity, discrimination, and sexual harassment.

Law refers to the discipline and profession concerned with the customs, prac-tices, and rules of conduct that a community establishes and holds as binding.Within the United States, businesses need to abide by laws imposed at the federal,state, and local levels. Those firms that engage in international operations need to befamiliar with those country-specific laws that apply to them. A course in businesslaw introduces the legal environment in which organizations must operate. In addi-tion to employment law, for instance, it covers regulatory law, tort law, contracts,and agency.

If you’re planning to start a business one day, it helps to look at the law from astrategic standpoint. Laws constrain and limit opportunities. A great business idea,for instance, may not be realistic if it infringes on someone else’s copyright, trade-mark, or patent. Similarly, in the United States at least, a host of federal agencies—in-cluding the Equal Employment Opportunity Commission, the Food and Drug Admin-istration, the Federal Trade Commission, and the Occupational Safety and HealthAdministration—regulate business practices. Failure to understand the laws thatthese agencies might impose upon your business can mean the quick demise of thatbusiness.

On the other hand, the law can also be your business ally. It can protect yourcopyrights, trademarks, and patents from infringement by others. And many regula-tions that may be perceived, at first glance, as constraints may actually be barriersthat limit others from competing against you. Antitrust laws, as a case in point, haveallowed many small steel producers to thrive by restricting the ability of larger pro-ducers to dominate markets.


A computer spreadsheet, like

this one used by Sports

Management, Inc., allows

business decision makers to

manipulate numbers and see

the impact of various possible

scenarios on a firm’s profits.

TRADITIONAL BUSINESS DISCIPLINESThe subject of business is typically presented around its traditional functions of man-agement, marketing, accounting, finance, human resource management, manage-ment information systems, and production and operations. In this section, we brieflydescribe each.

TRADITIONAL BUSINESS DISCIPLINES 31

BUS 201. Accounting Principles I.Introduces the student to the accounting cycle in service and merchandising concerns using the single proprietorship form of business organization; covers use of special journals and subsidiary ledgers in the accounting system as well as accounting and internal control procedures for cash, receivables, inventory, and plant and equipment.

BUS 202. Accounting Principles II.Covers accounting principles and procedures for payroll, partnerships, corporations, long-term liabilities and investments, and manufacturing firms with a general accounting system. Introduces the student to cost accounting systems, financial statement analysis, budgeting, and use of accounting information in making managerial decisions.

BUS 310. Management and Organizations.Management theories and analysis of basic management functions; planning, organizing, leading, and controlling for establishing and accomplishing business objectives. Also reviews organizational structure, process, human behavior, organizational culture, and environmental considerations.

BUS 311. Principles of Marketing.Study of those activities necessary to the design, pricing, promotion, and distribution of goods and services for use by organizations and ultimate consumers.

BUS 312. Business Finance.A study of methods of meeting the demands for funds in the business sector of the economy. Stresses initial and follow-up considerations in financing a business, including some examination of the role of financial institutions. Additional topics covered include financial planning and control, short and intermediate term financing, sources of capital, expansion and growth, and financially distressed business firms.

BUS 410. Human Resource Management.Designed to recognize and evaluate the application of behavioral science approaches in the study of human resource management. Topics include recruiting and selection, training, management development, performance evaluation, communications, wage and benefit programs, and management-labor relations.

BUS 420. Management Information Systems.Study of management information systems and their design and implementation. General systems theory, computer hardware, and programming are emphasized and then integrated to demonstrate how an MIS is developed.

BUS 450. Production and Operations Management.Study of the process of converting an organization’s inputs into outputs whether in goods-producing or service industries. Provides an overview of concepts, tools, and techniques used in management of production and operations function in organizations.


■ Core Courses in Business


GoalsPurposes or accomplishmentsthat a business seeks to attain.

ResourcesMaterials, labor, capital, and in-formation needed for a busi-ness to attain its goals.

ManagersThe group of employeescharged with the responsibilityof planning, organizing, leading,and controlling.

ManagementThe process of planning, orga-nizing, leading, and controllingan organization’s resources inorder to achieve its goals.

Top managementSenior managers who set theoverall strategic focus.

Middle managementResponsible for implement-ing strategies set by top management.

First-line managementThe lowest level of manage-ment; responsible for supervis-ing the work of operative employees.

Management

Imagine a business firm with no plans, no organization, no leadership, and no con-trols. Sounds like chaos, doesn’t it? Well that’s what you’d have without management.

Management is the process of planning, organizing, leading, and controlling anorganization’s resources in order to achieve its goals. The key terms to understandingthis definition are goals, resources, planning, organizing, leading, and controlling.

Every business firm—or any organization, for that matter—has goals or objec-tives (we use these terms interchangeably). These are purposes or accomplishmentsthat a business seeks to attain. It might be “to earn a profit,” “to generate at least a 20percent return on capital,” “to be a good citizen in every community in which weoperate,” or “to provide customers with the highest-quality product and fastest ser-vice in the industry.” If a business firm has no goals, it will lack direction. So goalsare a critical requirement.

Businesses also need resources to attain their goals. This includes materials,labor, capital, and information. A small book publisher, for example, needs authors,editors, paper, printers, and the money to pay for them if it’s going to achieve itsgoals of publishing ten new books a year.

Management and Managers What’s the difference between manage-ment and managers? As previously noted, management is a process. Managers isthe name for the group of employees charged with the responsibility of performingthis process.

As shown by the shaded portions in Exhibit 3-5, managers can typically be classi-fied into one of three categories. At the highest level of the organization is top man-agement—those senior managers who set the overall strategic focus. They typicallyhave titles such as chief executive officer, chief operating officer, president, andchairman of the board. Middle management is responsible for implementingstrategies set by top management. Typical titles of middle managers include generalmanager, plant manager, division manager, branch manager, and unit chief. Lastly,there is first-line management. This is the lowest level of management, responsi-ble for supervising the work of operative employees. They’re frequently called su-pervisors or foremen. In recent years, first-level managers are increasingly beinggiven labels such as coaches, facilitators, or team leaders. Moreover, in many organi-zations, operating employees are now being empowered to assume managerial re-sponsibilities, so you can’t assume that someone has to have a traditional manage-ment title to be performing management tasks.

Topmanagement

Middlemanagement

First-line management

Operative employees


■ Classifying Managers


PlanningDetermining what an organiza-tion needs to do and how tobest get it done.

OrganizingArranging and coordinating theorganization’s resourcesthrough a formal structure.

LeadingGuiding, directing, and coordi-nating people toward the orga-nization’s goals.

ControllingThe activity of monitoring, com-paring, and correcting perfor-mance to ensure that the orga-nization meets its goals.

Marketing mixThe four elements that go into amarketing program: product,price, place, and promotion.

MarketingThe process of determining cus-tomer wants and needs, thenproviding those customers withgoods, services, and ideas thatsatisfy their expectations.

Marketing conceptThe philosophy that a businessmust be consumer oriented.

Planning Since business firms exist to achieve some purpose, someone has todefine that purpose and the means for its achievement. Managers are that someone,and they do it through planning. Planning is determining what an organizationneeds to do and how to best get it done. It encompasses defining an organization’sgoals or objectives, establishing an overall strategy for achieving those goals, devel-oping a comprehensive hierarchy of plans to integrate and coordinate activities, andscheduling tasks.

In this book, you’ll find planning concepts and tools described in Chapter 4 (en-vironmental scanning), Chapter 5 (decision making and strategy analysis), Chapter11 (purposes and types of plans), and Chapter 14 (operations planning).

Organizing Management is also responsible for arranging and coordinating theorganization’s resources through a formal structure. This is called organizing. It in-cludes the determination of what tasks are to be done, who is to do them, how thetasks are to be grouped, who reports to whom, and where in the organization decisionsare to be made. Chapters 7 and 11 of this book specifically address organizing issues.

Leading Every organization contains people, and it’s management’s job toguide, direct, and coordinate those people toward meeting the organization’s goals.This is leading. When managers motivate employees, provide direction and leader-ship, select the most effective communication channel, or resolve conflicts amongmembers, they are engaging in leading. Most of these issues are covered in Chapter11 of this book.

Controlling The final activity that management performs is controlling. Afterthe goals are set, the plans formulated, a structure put in place, and the peoplehired, trained, and motivated, something may still go amiss. To ensure that thingsare going as planned, management must monitor the organization’s performance.Actual performance must be compared with the previously set goals. If there are anysignificant deviations, it’s management’s responsibility to get the organization backon track. This activity of monitoring, comparing, and correcting performance to en-sure that it meets its goals constitutes controlling.

Effective management will monitor all key resources within the organization.As such, you’ll find us discussing the topic in several chapters of this book. For in-stance, supplier controls are covered in Chapter 8; financial controls are presentedin Chapter 9; and quality, inventory, and operations controls are addressed inChapter 14.

Marketing

Remember the old saw: If you build a better mousetrap, the world will beat a path toyour door? Unfortunately, it doesn’t work that way! The saw doesn’t address thepossibility that the mousetrap, while objectively better, isn’t seen that way by con-sumers; or that consumers object because the new mousetrap is considerably moreexpensive; or that consumers never learn about the new mousetrap’s existence; orthat they never buy it because they can’t find it at their normal shopping venues.What we’re saying is: The successful mousetrap needs marketing!

Marketing is the process of determining customers’ wants and needs, then pro-viding those customers with goods, services, and ideas that satisfy their expecta-tions. Today we recognize that long-term business success can be achieved only bybeing consumer-oriented. In fact, we call this philosophy the marketing concept.

Marketing can best be understood by analyzing the marketing mix—the fourelements that go into a marketing program: product, price, place, and promotion.We discuss these elements, in detail, in Chapter 4 (marketing research); Chapter 6(consumer behavior); Chapter 8 (distribution); and Chapter 12 (marketing strategy,product development, packaging, branding, pricing, and promotion). Here we pro-vide a brief overview.


Steve Jobs, co-founder of Apple

Computer and currently its

interim CEO, is widely viewed

as a charismatic and visionary

leader. His push to get the

company to develop new

products is seen as the primary

reason for Apple’s recent

resurgence in the personal

computer market.

ProductA good, service, or idea thatsatisfies a want or need.

PriceThe exchange value of a good orservice.

Product Businesses provide a product—a good, service, or idea that satisfiesa want or need. Marketing contributes to the design of the product from its knowl-edge of the customer (and potential customers). In addition, product concerns in-clude decisions about package design, brand image, warranties, and customer ser-vice. Why? Because these elements all influence the customer’s vision of theproduct. When a buyer purchases an $80,000 Mercedes sports car, he or she isn’tjust buying four-wheel transportation. That need could be met by a $20,000 Toyota.The Mercedes consumer is also buying an image of quality, status, and outstandingservice. These attributes are as much a part of the Mercedes as are steel and glass.

Providing a product that continues to meet consumer needs requires close vigi-lance and an ability to respond to changing consumer tastes. Existing products needto be changed, new products developed, and new markets entered. An effectiveproduct strategy ensures that the business’s product responds to and meets chang-ing consumer wants and needs.

Price In a capitalistic system, a purchase decision is influenced by price—theexchange value of a good or service. A Nike shoe model that languishes on the re-tailer’s shelf when priced at $89 sells out in a day when priced at $39. The productis still the same. But demand changes with price, and a lower price makes the Nikeshoes more attractive to the budget-conscious consumer.

The challenge in pricing decisions is to set a price that covers a business’s costsand also is still acceptable to the consumer. Moreover, the price of a product influ-ences its image and place in the market. Rolex, Armani, and Louis Vuitton are prod-uct brands that use price to differentiate themselves from competitors and establishthemselves as prestige goods. And manufacturers of prestige products typically arevery careful about introducing lower-priced items for fear of undermining their pres-tige image. The decision by BMW and Mercedes, for instance, to introduce cars that


PlaceThe path of getting the productfrom the producer to the con-sumer in the proper quantitiesand at the right times and locations.

PromotionThe techniques used by sellersto inform, persuade, and influ-ence a purchase decision.

Managerial accountingInformation that serves internalusers.

Financial accountingInformation that serves externalstakeholders.

AccountingA comprehensive system for col-lecting, measuring, summarizing,interpreting, and communicatingfinancial information to supportdecisions of management andother interested parties.

are priced to compete in the under $40,000 market segment is risky. It could poten-tially tarnish their luxury-car image.

Place An effective marketing program requires a successful distribution strat-egy. We use the term place to describe the path of getting the product from the pro-ducer to the consumer in the proper quantities and at the right times and locations.Examples of place decisions include: How will the product be delivered? Where willit be available?

There are a lot of ways to deliver product. Examples include railroad, truck, airfreight, and pipelines. The availability of low-cost air freight, for instance, has been amajor factor in the explosive growth of catalog sales.

Computer manufacturers provide an illustration of how businesses can choosedifferent place strategies. Most manufacturers sell either to wholesalers or retailersunder their brand name. IBM and Compaq typically follow this strategy. SeveralAsian manufacturers have chosen to sell their products to other computer makers,who then put their brand name on it. This approach makes the other computermaker the actual customer. In recent years, many computer manufacturers have by-passed traditional marketing channels of wholesalers and retailers and sold theirproduct directly to consumers through telephone sales and the Internet. Dell Com-puter has grown to sales in excess of $20 billion a year following this strategy.

Promotion The most visible element in the marketing mix is promotion.This encompasses the techniques used by sellers to inform, persuade, and influencea purchase decision. It includes advertising, personal selling, sales promotions, andpublic relations.

Why do businesses engage in promotion? To communicate information abouttheir products. Much of the recent advertising done by Pfizer for its Viagra brand, forinstance, has been directed at educating potential consumers about the benefits ofthis product. Along with the product itself and pricing, promotion also helps shapethe product’s image. Tommy Hilfiger, for example, spends tens of millions of dollarson advertising each year to help convey its youthful, hip image.

Accounting

Four business executives were debating the importance of their various departmentsto the success of their company:

The production executive says, “Remember, nothing happens in this place untilwe produce something.” The director of research and development disagree, saying,“Wrong. Nothing happens until we design something.” The marketing executivejoins the debate: “What are you talking about? Nothing happens here until we sellsomething.” Finally, the exasperated accounting manager can’t constrain herself anylonger. “It doesn’t matter what you produce, design, or sell. No one knows whathappens until we tally up the results!”

Accounting is a comprehensive system for collecting, measuring, summarizing,interpreting, and communicating financial information to support decisions of man-agement and other interested parties. It measures business activities, processes thatinformation into reports, and communicates these findings to decision makers bothoutside and inside the organization. Without accounting data, businesses would beunable to judge their financial performance.

Accounting information is typically classified by whom its designed for. Informa-tion that serves external stakeholders is called financial accounting. Informationthat serves internal users is called managerial accounting.

Financial Accounting Businesses are required to report financial informa-tion to a number of outside stakeholders. These typically include stockholders, cred-itors and lenders, unions, and government agencies such as the Securities and Ex-change Commission. If you were thinking of buying some stock in a company, you’d


FinanceThe business function con-cerned with acquiring funds forthe organization and managingfunds within the organization.

Equity financingFunds received in exchange forpart ownership in the business.

Debt financingBorrowed funds that must berepaid.

probably want to take a look at its financial statements. You’d be interested, for ex-ample, in learning about its current sales, profits, and expenses. You’d also want toknow what its cash position looked like and how much it owed. The informationyou’d be using would be from data that the company had reported as part of the fi-nancial accounting information provided for people outside the organization.

Managerial Accounting Managerial accounting generates confidential in-formation for internal decision makers. Historically, this was limited to managers.They wanted reports on costs of production, marketing, and the like. They neededbudgets for departments and projects. They needed data to make intelligent tax-related decisions. And managerial accounting provided that information. However,in recent years, operating employees have increasingly been participating in deci-sions that previously were restricted to those in the managerial ranks. Work teams atMotorola, for instance, now make decisions about work assignments, productionscheduling, and product improvement. To make these decisions, team membersneed the same kind of accounting information that managers do.

Finance

It was 1997 and Stacey Lawson had a good business idea.6 The 25-year-old recentgraduate from the Harvard Business School wanted to offer engineering firms an on-line database of valves, gears, and other components in three-dimensional view. Butshe didn’t have any money. To her rescue came Charles River Ventures, a firm thatprovides venture capital to small businesses in return for a part of the equity. Thebusiness succeeded. Two years later, Lawson’s company, InPart Design, was sold toanother firm for $45 million. Because Stacey owned a 10 percent stake, she walkedaway with $4.5 million—money she could never have made without relying onsomeone else for initial financial assistance. And knowing where and how to get thatfinancial assistance is part of the finance function.

Finance is the function that acquires funds for the organization and managesfunds within the organization. It includes assessing a firm’s long-term needs, obtain-ing those funds, conducting day-to-day financial activities, and managing financialrisks. Not surprisingly, because of their focus, the finance and accounting functionsoften overlap. For example, both address financial statements and financial ratioanalysis. Probably the two most important contributions finance makes to running abusiness are providing guidance in acquiring funds and offering insights into howbest to manage financial assets.

Sources of Funds Ted Rosenberg borrowed $50,000 from his bank to helppay for the Jiffy Lube franchise he recently purchased; Joyce Carlson used a $20,000credit line with a coat manufacturer to order winter coats for her retail clothingstore in Minneapolis; General Motors issued $3 billion in bonds to finance the build-ing of a new auto plant; Broadcast.com’s founders took their company public by is-suing stock in order to finance their expansion plans; and Microsoft uses the billionsof dollars it has saved in retained earnings to pay for expanding its Redmond, Wash-ington, headquarters or to acquire new companies.

Along with our previous vignette on Stacey Lawson, these examples illustratethe various ways in which businesses can raise money to finance operations.

The one thing that may not have been so obvious in these examples is that someused debt financing, while others used equity. Debt financing relies on borrowedfunds that must be repaid. This includes sources such as banks, supplier’s credit, andbonds. In contrast, equity financing doesn’t require repayment. These are fundsreceived in exchange for part ownership in the business. When a company sellsstock in itself, the owners are essentially selling off part of the business and nowshare ownership with their stockholders. In essence, equity financing requires afirm’s owners to give up some of their control. With debt financing, lenders receive


Human resource managementThe function concerned with at-tracting, developing, and retain-ing the right quantity and qual-ity of employees for theorganization to achieve itsgoals.

only repayment of the original loan plus interest. They don’t share in profits or anyincrease in value of the company over time.

Financial Management The analysis of financial data, the efficient use offunds, and techniques for assessing business investments are some of the key ele-ments in financial management.

Many of what were otherwise successful businesses have failed solely becausemanagement didn’t understand basic financial analysis tools. Take the case of JimDugan. After spending months looking at various opportunities, he bought a smallprinting business just outside his hometown of Providence, Rhode Island. The firmhad been in business for more than 20 years and provided a comfortable living for itsowner. Jim, however, had big plans. He leased new space, doubling his physicalplant. He bought several new pieces of equipment, with state-of-the art technology.And he invested in a major promotional program to increase sales. Three years later,Jim considered his plans a success. He had increased sales from less than $600,000 ayear to over $2 million. But he was forced to file bankruptcy. He lost the businessand his $400,000 investment. In spite of pleas from his accountant, what Jim failedto understand was that the cost of acquiring the additional sales was considerablymore than the additional revenue itself. In fact, each new dollar in sales was costinghim nearly $2! Jim had confused increased sales with increased profits. Had he un-derstood financial management, he would have been able to calculate that the rateof return on his investment was inadequate to cover the increased costs from higherrent and additional marketing, plus the interest on money he had to borrow.

Effective financial management ensures that a company has the necessary cashto pay current bills and funds to invest in new plant and equipment. It also providesthe tools to allow managers to allocate its financial resources in ways to get the“most bang for the buck” and to maximize the economic value of the firm.

Human Resource Management

An increasing number of business executives are coming to the conclusion that it’speople who make their organization unique, and it’s these people who can givetheir firm a competitive advantage. So finding, hiring, and keeping good employeesis critical to a business’s success.

Human resource management (HRM) is the function concerned with at-tracting, developing, and retaining the right quantity and quality of employees forthe organization to achieve its goals. The HRM function is typically described as en-compassing four activities: staffing, training and development, employee motivation,and maintaining a safe and healthful workplace.

Staffing The essence of staffing is assessing human resource needs, recruitingqualified job candidates, and evaluating candidates to identify the best ones.

A firm needs to have the right number and kinds of people. This requires humanresource planning. For example, when Laura Perlman decided to double the size ofher Boston daycare school, she realized that her first priority had to be finding twonew licensed teachers and four new teacher’s aides. Similarly, when BP Amoco re-cently bought Arco, the combined oil company found itself overstaffed by nearly10,000 people. So a key element in staffing is planning in order to identify shortagesand surpluses in the number and mix of employees.

If planning uncovers the need to hire additional employees, then job applicantsneed to be found. This requires recruitment, historically done largely through ads innewspapers or use of employment agencies. In recent years, many firms have turnedto the Internet for recruiting job candidates. Most companies now list job openingson their Web sites. And dedicated Web sites specifically designed to bring employ-ers and job candidates together (such as www.monster.com) are becoming widelypopular.


Looking for a job? Internet

Web sites such as monster.com

list hundreds of thousands of

job vacancies and are widely

used by firms looking for new

employees.

HardwareThe physical components of acomputer.

Management informationsystems (MIS)Systems for transmitting andtransforming data into informa-tion that can be used to facili-tate communication and deci-sion making.

The final element in staffing is eval-uating candidates to find the best quali-fied. Popular assessment tools includeinterviews, aptitude tests, and refer-ence checks.

Training and DevelopmentRegardless of how good management isat identifying qualified candidates, newhires often require some job-specifictraining. Additionally, the skills of cur-rent employees become dated (or evenobsolete) over time and need renewal.And, of course, businesses change overtime, and it’s necessary to realign indi-vidual abilities with business needs forthe future. Each of these cases suggeststhe need for employee training.

Employee training gives individualsspecific skills that they will use on the

job. Management development looks at practices for ensuring a continual flow ofqualified managers.

Employee Motivation High performance on the job depends on both abil-ity and motivation. Many employees with extraordinary talents don’t perform satisfac-torily because they will not exert the necessary effort. Therefore, HRM needs to ad-dress what organizations can do to motivate employees. This includes issues such asthe design of employee jobs, performance appraisals, and compensation practices.

Maintaining a Safe and Healthful Workplace HRM is also con-cerned with creating and maintaining a safe and healthful workplace. Good employ-ees often have other employment options. If firms are going to keep qualified peo-ple from going other places, they need to minimize accidents, providecomprehensive health and benefit programs, and minimize the stressful elements ofwork. This explains, incidentally, why a number of companies provide on-site ath-letic facilities for employees and their families, free health-club memberships, andcompany-supported stress-reduction programs.

Management Information Systems

Management information systems (MIS) are systems for transmitting andtransforming data into information that can be used to facilitate communicationand decision making. The MIS function addresses hardware, software, and manag-ing information.

Hardware You probably own a microcomputer or certainly have access toone at your college. The physical components of that computer are collectivelycalled hardware. The monitor, the keyboard, the mouse, the hard disk drive, themodem, the central processing unit, and the CD-ROM drive are all consideredhardware.

There aren’t many business firms anymore that don’t rely on computers. But asyou well know if you’ve bought one yourself, the decision to buy a computer iscomplicated. How much memory do you want? How fast a processor do you need?What size screen should you order? These same computer decisions also need to bemade for every business, except they’re more complex because you have to be surethat your equipment is compatible and is designed to do the kind of things you needto have done.


Applications softwarePrograms designed to performspecific tasks.

Operating system softwareThe basic program to run thecomputer.

SoftwareThe programs that tell the com-puter what to do.

GroupwareSoftware that allows communi-cation through sharing commondatabases and e-mail.

Production and operationsmanagement (POM)The function concerned with theefficient transformation of re-sources into finished goods andservices.

Software As you also undoubtedly realize, computer hardware is dumb. Itcan’t do anything without instructions. Software is the term we use to describe theprograms that tell the computer what to do. First, there is the basic program to runthe computer. This is called the operating system software. Most PCs today useeither Microsoft’s Windows or the Apple Macintosh operating system. In addition,there is a multitude of programs designed to do specific tasks, such as writing lettersor analyzing financial numbers. These are called applications software.

Once the hardware and operating system are chosen, business decision makersneed to determine which applications software will be installed on which machines.Most businesspeople will need, at a minimum, programs for doing word processing,spreadsheets, graphics, and e-mail. In addition, it’s often necessary for managers andemployees alike to communicate with one another on projects. Their computerswill need to be loaded with groupware—software that allows communicationthrough sharing common databases and e-mail. Using groupware, employees areable work together on a single document at the same time.

As hardware has become more standardized, the excitement in computers hasmoved to the software arena. For example, software programs have recently beendeveloped that can recognize your voice (suggesting that keyboards may soon gothe way of the dinosaur), read facial expressions to determine whether someone islying or not, and continually scan the Internet to find information that is specificallyrelevant to your needs and then report that information to you.

Managing Information MIS relies on hardware and software to providebusiness decision makers with the information they need, when they need it. MISoptimizes the collection, transfer, and presentation of information throughout an or-ganization in order that the right information get to the right person so that he orshe can make an informed decision. And in spite of the use of the word manage-ment in MIS, that person is increasingly an operating employee. As firms havepushed operating decisions down to operative employees, the design of informationsystems have needed to be modified to address the needs of workers and workteams as well as managers.

Another increasingly important issue related to managing information today isprivacy. Computers that are linked to common databases create the potential forunauthorized individuals to access confidential information. And information sys-tems also have the capability of allowing managers to closely monitor every key-stroke an employee makes on his or her computer. When a recent study shows thata large segment of the workforce uses its computers an average of 90 minutes eachday (!) visiting Web sites unrelated to the job,7 it seems managers need to be able tomonitor their employees’ computer activity. But when does such monitoring in-fringe on employees’ rights to privacy?

Production and Operations

The function of production and operations management (POM) is concernedwith the efficient transformation of resources into finished goods and services. Thetwo major elements of POM are designing operations and managing operations.Many of the decisions that businesspeople make relating to POM require an under-standing of quantitative techniques. So, for instance, dealing with POM problemstypically requires the use of sophisticated statistical and mathematical models.

Designing Operations Every business requires basic decisions such as:Where should we locate? And what’s the best way to lay out our plant or offices? POMprovides answers to such questions. Designing operations includes developing aprocess strategy, capacity planning, location selection, layout decisions, and job design.

Managing Operations Once a firm’s operations have been designed, theprocesses need to be managed. This includes supply-chain management—integrating

the activities that procure materials, transform them into goods and final products,and deliver them to customers; inventory management; scheduling; materials re-source planning; project management; and application of modern production tech-niques such as quality management, just-in-time inventory systems, mass customiza-tion, lean manufacturing, and computer-aided design and manufacturing.

PLAN OF THIS BOOKBusiness draws upon the larger society of which it is a part. Unless you look at busi-ness in this larger context, you end up with a narrow and limited view of the role ofbusiness in today’s society. That, in essence, has been the theme of this chapter.

Exhibit 3-6 provides a simplified model of business by integrating the businessfirm with the larger environment in which it operates. This model also helps to ex-plain the sequencing of chapters within this book.



Monitoring External Sources

The Economy

Internal Information Systemsand Decision Making

Management

LaborSupply Customers

Accounting and

Finance

HumanResource

ManagementMarketingOperations

FinancialSources

Suppliersand

Distributors

T h e B u s i n e s s E n v i r o n m e n t

Employees

Social TrendsLaws

New TechnologiesGovernment Agencies

The CommunityCompetitors

The Business Environment Information Sources and Systems Primary Relationships The Business Firm Business Functions

■ An Integrative Model of Business

The business firm is part of a larger business environment. That environment in-cludes competitors, a legal system, government agencies, economic forces, socialtrends, new technologies, and communities in which the firm is located. All theseentities have the capability of influencing a business firm’s performance.

Because these forces in the environment can adversely affect a business firm,management needs to monitor them (see Chapter 4) and then use that informationto shape the firm’s strategy (Chapter 5).

There are other, more specific forces in the environment that are critical to anybusiness firm’s success. Failure to build effective relationships with them is almostcertain to lead to problems. In fact, you should consider these relationships as neces-sary to a business firm’s survival. They include relationships with customers (Chap-ter 6), without whom there is no business; labor sources (Chapter 7), from whomqualified employees can be found; suppliers and distributors (Chapter 8), who pro-vide a business with material resources and distribution channels; financial sources(Chapter 9) that control the funds a business needs to keep operating; and other im-portant stakeholders (Chapter 10), like labor unions and government agencies, whohave the capability of seriously disrupting operations.

The center of Exhibit 3-6 is the business firm itself. And inside it are the tradi-tional business disciplines critical for providing quality goods and services. These aremanagement (discussed in Chapter 11), marketing (Chapter 12), accounting and fi-nance (Chapter 13), and operations (Chapter 14).

It’s important that you notice the links between various business functionsand primary relationships in the environment. It’s not by chance that these func-tions define the essence of any business firm. They reflect the reality that certaingroups and organizations in the environment have the potential to undermine anybusiness firm. Customers are an obvious example. No business can survive verylong if it fails to adequately respond to the needs of its customers. As such, firmsrespond by dedicating a specific business function—in this case, marketing—todeveloping and maintaining relationships with customers. The same is true forlabor and financial sources, as well as suppliers and distributors. And it’s manage-ment’s job to monitor the environment, make decisions, set strategy, and coordi-nate internal operations.

SUMMARY 41

Summary

(This summary is organized by the chapter-openinglearning objectives).

1. Explain the relationship between businessand the social sciences.

Business is about people. It deals with customers,employees, suppliers, and others. The social sci-ences study people. Psychology, for instance,studies individual behavior; sociology focuses ongroups; and economics is concerned with howpeople allocate resources. If business were a sci-ence, it would be a social science. And individu-als who want to understand how businesses workneed a grounding in the basic social sciences.

2. Describe the relationship between businessand the humanities.

Business doesn’t exist in isolate. Businesspeopleneed a foundation to build their thinking and

communication skills. Studying English, foreignlanguages, philosophy, and similar courses in thehumanities can help you to see the relationship ofbusiness to the larger society and prepare you tobe more effective in business by developing yourskills at speaking, writing, reasoning, and decisionmaking.

3. Discuss the relationship between businessand mathematics.

Business decisions are increasingly complex andsophisticated, requiring a working knowledgeof algebra, calculus, and statistics. Most pro-grams in business today, for instance, requirestudents to have taken two or three years of ad-vanced math courses, at least through calculus.And they also require students to take coursesin statistics. Decisions as varied as determiningan optimum production schedule and selecting

among various loan options require solid mathe-matical skills.

4. Identify the four functions of management.

The four functions of management are planning,organizing, leading, and controlling. Planning isdetermining what an organization needs to doand how to best get it done. Organizing arrangesand coordinates the organization’s resourcesthrough a formal structure. Leading is concernedwith guiding, directing, and coordinating peopletoward meeting a firm’s goals. Controlling moni-tors, compares, and corrects performance to en-sure that goals are achieved.

5. Define marketing and the marketing mix.

Marketing is the process of determining customerwants and needs, then providing those customerswith goods, services, and ideas that satisfy theirexpectations. The four elements that go into amarketing program—product, price, place, andpromotion—are called the marketing mix. Theproduct is a good, service, or idea that satisfies awant or need. Price is the exchange value of agood or service. Place focuses on the path of get-ting the product from the producer to the con-sumer in the proper quantities and at the righttimes and locations. Promotion encompasses thetechniques used by a seller to inform, persuade,and influence a purchase decision.

6. Differentiate between financial and manage-rial accounting.

Financial accounting is externally focused, whilemanagerial accounting is internally focused. Fi-nancial accounting provides information to peo-ple outside the firm such as creditors, stock-holders, and government agencies. Managerial accounting generates information for internal de-cision makers in the firm such as top executives,department heads, and, increasingly, employeework teams.

7. Explain the importance of finance to busi-ness success.

Businesses need financial resources to operate.Hiring people, buying raw material and equip-ment, and the like require money. And the fi-nance function addresses where those funds can

be found and how they can be managed most effi-ciently. Insightful financial analysis can help toavoid unprofitable decisions and can identify op-portunities where profits can be expanded.

8. Describe the four primary activities thatmake up human resource management.

The four primary activities that make up humanresource management are staffing, training anddevelopment, employee motivation, and main-taining a safe and healthful workplace. Staffing isconcerned with assessing human resource needs,recruiting qualified job candidates, and evaluatingcandidates to identify the best ones. Training anddevelopment keep employees’ skills up to dateand ensure a continual flow of qualified peoplefor filling management positions. Employee moti-vation is concerned with stimulating work effort.And human resource management is also con-cerned with minimizing workplace accidents,providing health and benefit programs for em-ployees, and minimizing the stressful elements ofwork.

9. Define production and operations manage-ment.

Production and operations management is con-cerned with the efficient transformation of re-sources into finished goods and services. It specif-ically focuses on designing and managing theoperations side of a business.

10. Discuss the role of the business firm to itsenvironment.

The business environment includes competitors,laws, government agencies, economic forces, so-cial trends, new technologies, the community, cus-tomers, suppliers, financial sources, and the laborsupply. It is within this environment that businessmust operate. It is influenced by and, in turn, influ-ences these environmental forces. It’s important torealize that businesses don’t operate in isolation.They depend on their environment for resourcessuch as raw materials and labor. They also dependon the environment for customers. And businessesmust continually adjust to the changing social, eco-nomic, and technological forces in the environ-ment if they are to succeed and thrive.


Building Your Business Vocabulary

Accounting (p. 35)Applications software (p. 39)

Computer science (p. 29)Controlling (p. 33)

Debt financing (p. 36)Economics (p. 18)

1. “An integrative approach to the study of businessis most needed by students who are non-businessmajors, pursuing college part-time, and lack man-agerial experience.” Build an argument to supportthis statement. Then build an argument againstthis statement.

2. Which of the social sciences do you think con-tributes the most to business success? Defendyour answer.

3. Do you think courses in engineering are relevantto a better understanding of business? Why orwhy not?

4. “Successful businesspeople are born, not made.”Do you agree or disagree with this statement? Ex-plain your position.

5. How do you think changes in information tech-nology and systems have changed the practice ofbusiness over the past 20 years?

TEAM EXERCISE 43

Equity financing (p. 36)Finance (p. 36)Financial accounting (p. 35)First-line management (p. 32)Goals (p. 32)Groupware (p. 39)Hardware (p. 38)Human resource management

(p. 37)Leading (p. 33)Macroeconomics (p. 18)Management (p. 32)

Management information systems(p. 38)

Managerial accounting (p. 35)Managers (p. 32)Marketing (p. 33)Marketing concept (p. 33)Marketing mix (p. 33)Microeconomics (p. 18)Middle management (p. 32)Operating system software

(p. 39)Organizing (p. 33)

Place (p. 35)Planning (p. 33)Price (p. 34)Product (p. 34)Production and operations

management (p. 39)Promotion (p. 35)Resources (p. 32)Software (p. 39)Statistics (p. 27)Top management (p. 32)

Review Questions

1. How can economic theory help business decisionmakers?

2. How has psychology contributed to making busi-ness firms more effective?

3. How can a knowledge of history help you betterunderstand the field of business?

4. Why should students of business learn foreign lan-guages?

5. What can students of business learn from coursesin philosophy?

6. Describe three categories of managers. How dothey differ?

7. What is the marketing concept?

8. What’s the difference between debt and equity fi-nancing?

9. If people are critical to a firm’s success, whatbusiness function is most responsible for provid-ing insights into acquiring and motivating work-ers?

10. What is applications software?

Questions for Critical Thinking

Team Exercise

Careers in BusinessThe class will be broken up into teams of three mem-bers each. Each team member is to find someone cur-rently working in business whose undergraduate de-gree is in a non-business subject area. Examplesmight be mathematics, political science, sociology,

physical education, English, chemistry, or electricalengineering.

Each team member is to interview the subject tofind out: (a) how the person ended up with a careerin business; (b) challenges the subject finds in his orher job; and (c) how the person’s undergraduate de-

Thinking IntegrativelyTwo large manufacturing companies are considering amerger. One is headquartered in New York City; theother, in Paris, France. This merger is likely to affectalmost every aspect of both firms’ operations. Explainhow a knowledge of the following academic disci-


Skill Exercise

plines could have a bearing on the success or failureof this merger: (a) finance; (b) human resource man-agement; (c) production and operations management;(d) political science; (e) anthropology; and (f) com-munication technology.

Case Exercise

Insights from a Retail AnthropologistPaco Underhill is a retail anthropologist. He and hiscolleagues at Envirosell help companies to do a bet-ter job at selling their products. He says that con-sumer-product marketing has gone from a polite bat-tle where Sears competes with J. C. Penney or Cokecompetes with Pepsi into “a good old-fashioned barfight where everyone is scrambling for America’s dis-cretionary dollars.” In this environment, businessfirms need solid research to help them better cap-ture those discretionary dollars. In Underhill’s yearsof research, he’s learned quite a bit about con-sumers. The following illustrates a few examples ofwhat he’s learned.

Underhill has found that women and men havedifferent shopping patterns. For instance, womenare especially sensitive to physical proximity. Themore women are bumped from behind in a busyaisle, the less likely they are to turn from browsersinto buyers. And men and women differ when theytry things on. If a man takes clothing into a dressingroom and it fits, there’s a pretty good chance he’llbuy it. If a woman takes clothing into a dressingroom, she may buy it or she might just as easily passon the purchase.

The key to selling shoes, according to Underhill,is getting the customer comfortably seated to tryshoes on. The chairs at Nordstrom, for instance, arequite low. Once a customer is sitting in one of Nord-strom’s chairs, it’s a lot harder to get up. And Nord-strom salespeople get the customer not only the

shoes the customer asked for, but also a couple more.Underhill has found that it’s hard for customers to re-sist someone who is down on his or her knees at theirfeet.

The most immediate turnoff for consumers is hav-ing to wait. Underhill’s research has found that peoplewill have an accurate perception of how long they’vewaited up to 2 1/2 to 3 minutes. If someone standsaround for 5 minutes, they often say, “Oh, I was herefor 10 minutes.” But people’s perception of waitingtime can be affected if they’re given something to do.A Scandinavian bank, for instance, gives customersnumbers, like in a bakery. So people can sit down andread. These bank customers aren’t nearly as irritatedas the typical American customer, who has to stand inline and wait while others complete long transactionsat the teller window.

Questions1. Contrast the job of “retail anthropologist” with

the description of anthropology in this chapter.2. How does this case integrate marketing and an-

thropology?3. Contrast the science of consumer behavior with

the science of physics or mathematics. How dothey compare in terms of creating concepts thatcan predict phenomena? Can consumer behaviorever be as exact a science as physics or chemistry?

Based on “Why Buy Kazoos You Can’t Use?” U.S. News & World Re-port, June 21,1999, p. 64.

gree did or did not prepare him or her for the cur-rent job. Team members should also ask the sub-jects what they’d do differently regarding thecourses they’d take if they were going to college allover again.

After the team members have conducted their in-terviews, they are to meet to compare their re-sponses. What similarities, if any, were found? Whatdifferences? The group should prepare a report on itsfindings that can be shared with the rest of the class.

VIDEO CASE EXERCISE 45

A custom five-part continuing video case was createdespecially for business.today. These succinct, profes-sionally produced videos are tied directly to chapterand part concepts. The videos give students a real-world perspective on how a growing and evolvingbusiness meets the challenges of a changing businessenvironment.

Video Case Exercise

Corresponding in-text written video case discus-sions, designed to enhance student learning and to re-inforce key chapter concepts, will appear at the endof each part

1. D. Eisenberg, “Lean Times on the Farm,” Time, Janu-ary 11, 1999, p. 40.

2. Time, November 30, 1998, p. 8.3. J. V. Grimaldi, “Microsoft Has Lost, Most Say,” Seattle

Times, February 7, 1999, p. G1.4. A. Fisher, “Readers Speak Out on Illiterate MBAs and

More,” Fortune, March 1, 1999, p. 242.5. This section is based on J. Steinberg, “Parlez-Vous

Francais? But Why Bother?” New York Times, Decem-ber 27, 1998, p. WK-3.

Notes

6. H. Rosenberg, “This Generation Is All Business,” Busi-ness Week, March 1, 1999, p. ENT 6.

7. See Conference Board study cited in J. Thaler, “TheWeb at Work: Fun, and Profit?” The Seattle Times,April 4, 1999, p. C1.

Documents

3 Keeping Business in Perspectiveagriculture, acid rain, global warming, deforestation, erosion, volcanism, and pollution. HIS 201. Western Civilization Before 1600. Survey course