Business Fundamentals PDF

CHAPTER 1 BUSINESS → individuals or organizations who try to earn a pro t by providing products that satisfy people’s needs Tangible products (automobile, jeans, phone…) Intangible products Services (when people or machines provide or process something of value...

CHAPTER 1 BUSINESS → individuals or organizations who try to earn a pro t by providing products that satisfy people’s needs Tangible products (automobile, jeans, phone…) Intangible products Services (when people or machines provide or process something of value to customers) Idea (Accountants and attorneys provide ideas for solving problems) When you purchase a product, you are buying the value and bene ts you think the product will provide Target for a company = PROFIT, if a company is pro table, it can go on, unless it will fail A PROFIT is a di erence between what it costs to make and sell a product and what a customer pays for it → Pro t = Selling Price (S.P.) - Cost Price (C.P.) Businesses have the right to keep and use their pro ts as they choose - within legal limits - because pro t is the reward for their e orts and for the risks, they take in providing products. Earning pro ts contributes to society by creating resources that support our social institutions and government. Businesses that create pro ts, pay taxes, and create jobs are the foundation of our economy. In addition, pro ts must be earned in an ethically and socially responsible manner (Nonpro t organizations). Management skills = planning, organisms, leading, controlling Marketing expertise = focus marketing activities is satisfying customers Financial resources = refers to all activities concerned with obtaining money and using it e ectively A business must cover the cost of labor, operate facilities, pay taxes, and provide management. Other challenges for businesspeople include abiding by laws and government regulations and adapting to economic, technological, political, and social changes. To achieve and maintain pro tability, businesses have found that they must produce quality products, operate e ciently, and be socially responsible and ethical in dealing with customers, employees, investors, government regulators, and the community. STAKEHOLDERS → groups that have a stake in the success and outcome of a business THE PEOPLE AND ACTIVITIES OF BUSINESS OWNERS → put up resources, time, e ort, nancial and human resources to start a business. They can manage the business themselves or hire someone EMPLOYEES → responsible for the work that goes on within a business CUSTOMERS → who buy the business’ goods and services MANAGEMENT  EMPLOYEES Management involves the functions of planning, organizing, leading, and controlling. Acquiring, developing, and using resources (including people) e ectively and e ciently. Organization, teamwork and communication. Operations and supply chain management are also important. Motivating the workforce and managing human resources are necessary for success. ff fi ff ffi fi fi fi fi ff ff fi fi ff fi fi fi fi fi ffi MARKETING  CUSTOMERS Focus of marketing = satisfying customers Provide goods and services that satisfy customers’ needs and wants (researched made by marketers). Make decisions about how much to charge for their products and when and where to make them available. They also analyze the marketing environment to understand changes in competition and consumers. Promotion-advertising FINANCE  OWNERS it is the primary responsibility of the owners to provide nancial resources for the operation of the business. (accounting, money, nancial system) THE ECONOMIC FOUNDATION OF BUSINESS ECONOMICS → the study of how resources are distributed to produce goods and services within a social system. Types of resources available Natural resources (land, forests, minerals, water, and other things that are not made by people) Human resources (labor) (the physical and mental abilities that people use to produce goods and services) Financial resources (capital) (the funds used to acquire the natural and human resources needed to provide products) Intangible resources (a description of how a particular society distributes its resources to produce goods and services) These resources are related to the factors of production. The goal is to turn the factors of production and intangible resources into a competitive advantage. ECONOMIC SYSTEM → a description of how a particular economic society distributes its resources to produce goods and services. No country practices a pure form of communism, socialism, or capitalism, although most tend to favor one system over the others. Most nations operate as MIXED ECONOMIES, which have elements from more than one economic system. fi fi  THE FREE ENTERPRISE SYSTEM Many economies are based on free enterprise. Free enterprise provides an opportunity for a business to succeed or fail based on market demand. In a free enterprise system, companies that can e ciently manufacture and sell products that consumers desire will probably succeed. Ine cient business will likely fail. Several basic individual and business rights must exist for free enterprise to work: Own property and pass it on to heirs (individuals) Earn pro ts and use them as they wish (individuals and business) Make decision that determine the way the business operated (individuals and business) Right to choose (individuals and business) Without these, business cannot function e ectively because they are not motivated to succeed. Many entrepreneurs are more productive in free-enterprise societies because personal and nancial incentives are available that can aid in entrepreneurial success. THE FORCES OF SUPPLY AND DEMAND DEMAND = number of goods and services that consumers are willing to buy at di erent prices at a speci c time → consumers are usually willing to buy more of ai item as its price falls because they want to save money Demand curve SUPPLY = number of products that businesses are willing to sell at di erent prices at a speci c time → the potential pro t is higher; businesses are willing to supply more of a good/service at higher prices Supply curve The price at which the number of products that businesses are willing to supply equals the number of products that consumers are willing to buy at a speci c point in time is the EQUILIBRIUM PRICE THE NATURE OF COMPETITION COMPETITION → the rivalry among businesses for consumers’ dollars Pure competition, many small businesses selling one standardized product Monopolistic competition, fewer businesses than in a p.c. environment and the di erences among the goods they sell are small Oligopoly, fewer numbers of player in the market Monopoly, only one player in the market Es → the airline industry is an oligopoly competition → few companies that play in the market and it’s di cult to enter in that world ECONOMIC CYCLE AND PRODUCTIVITY Economies are not stagnant; they expand and contract ECONOMIC EXPANSION occurs when an economy is growing, and people are spending more money. Their purchases stimulate the production of goods and services, which in turn stimulates employment. The standard of living rises. fi ff ffi fi fi fi ff fi ff fi ffi ff ffi  ECONOMIC CONTRACTION occurs when spending declines. Businesses cut back on production and lay o workers, and the economy slows down. In ation: a continuing rise in prices Recession: a decline in production, employment, and income Unemployment: percentage of the population that wants to work but is unable to nd a job De ation: the general decline in the price level of goods and services. It is usually associated with a contraction in the supply of money and credit, but prices can also fall due to increased productivity and technological improvements Depression: condition in which unemployment is very high, consumer spending is low, and business output is sharply reduced Countries measure the state of their economies to determine whether they are expanding or contraction and whether corrective action is necessary to minimize the uctuations Gross domestic product (GDP): the sum of all goods and services produced in a country during a year (it measures only those goods and services made within a country – not pro ts from companies’ overseas operations – but pro ts earned by foreign co. within the country being measured) Relationship between its spending and income (from taxes) (when the nation spends more than it takes from taxes → BUDGET DEFICIT) THE AMERICAN ECONOMY The United States is a mixed economy with a foundation based on capitalism - Competition - Forces of supply and demand - Federal government intervene in economic decision to a certain extent Standard of living: level of wealth and material comfort that people have available to them THE IMPORTANCE OF THE AMERICAN ECONOMY The US economy is unrestricted, participating in global trade to increase speed of growth and gain access to resources and technology. Regulation may impede rms' ability to innovate. Economists prioritize GDP and job expansion, as there is a direct correlation between the employment rate and economic development. Successful businesses boost the economy through increased employment opportunities. Public policy implemented by the government, like the CARES Act amid the COVID-19 crisis, is essential for safeguarding the economy and delivering monetary aid to people and companies. Government policy is responsible for driving job creation and tax revenue that are crucial for the economic and social welfare of the country. Income taxes from individuals make a much larger contribution to the revenue of the U.S. government compared to corporate taxes. Various kinds of companies are taxed according to their organization, and corporations now have a reduced tax rate following a signi cant change in 2017. The present government is contemplating raising taxes for wealthy individuals and businesses. v v fl fl fi fi ff fi fi fl fi  A BRIEF HISTORY OF THE AMERICAN ECONOMY 1. EARLY ECONOMY: Pre-colonization, Native Americans lived o the land. Colonists focused on agriculture. Self-su ciency, abundant resources, and trade shaped the economy. Expansion led to industrial growth and the domestic system. 2. INDUSTRIAL REVOLUTION: The 19th century saw the rise of factories during the Industrial Revolution, introducing new technology and specialized work. Railroads expanded transportation and factories grew, producing goods more e ciently and a ordable. 3. MANUFACTURING AND MARKETING ECONOMIES: Industrialization led to increased prosperity in the United States, shifting from agriculture to manufacturing and services. Businesses focused on consumer needs, sparking marketing advancements and improved standards of living. 4. THE SERVICE AND NEW DIGITAL ECONOMY: After World War II, Americans experienced an increase in living standards, leading to more money and time. The 1960s saw a rise in women entering the workforce, causing shifts in the population. The U.S. population growth slowed, with the South leading gains, and immigrants were a factor. This led to a rise in single- parent families and individuals living alone, with both parents often working. Americans increasingly rely on services, leading to a service-oriented economy. Technology further transformed the economy, with e-commerce growing, accelerated by the COVID-19 pandemic in 2020 which also boosted telemedicine and online shopping. TECHNOLOGY AND THE ECONOMY TECHNOLOGY: methods and processes creating applications to solve problems, perform tasks and make decisions AI: relates to machine (computer) learning that can perform activities and tasks that usually require human intelligence BIG DATA: refers to large volumes of structured and unstructured data that are transmitted at very fast speeds BLOCKCHAIN: a decentralized record-keeping technology that stores linked blocks of ordered transactions over time DRONES: unmanned aerial devices BIG DATA 4 factors big data developed 1. Development of information Technologies systems 2. Internet 3. Social media 4. Internet of things > Bid Data refers to the increasing complexity and granularity of information with key characteristics (7Vs): Volume (the quantity of data) Velocity (the speed at which data is created) Variety (the di erent types of data) Veracity (the accuracy and trustworthiness of the data) Variability (how insights vary or change over time as data is reinterpreted) Visualization (the patterns and trends that can be seen in the data) Value (how data generates business value through useful insight) APPLICATIONS OF BIG DATA Airlines: British Airways uses data to analyze ights, including identifying trends and patterns which could improve performance Financial Services: UBS has over 70,000 employees and uses data to support their human resources function Gaming: PlayStation uses data to improve games by analyzing customer behavior Toys: LEGO uses data to improve the shopper experience by monitoring online forums and from this feedback to their teams to take action to optimize their website ff ffi fl ffi ff ff  THE ROLE OF THE ENTREPRENEUR An ENTREPRENEUR is an individual who risks money, time, and e ort to develop for pro t an innovative product or way of doing something. Let the free enterprise system help them to succeed Change business practices through new technology through new technology and innovative management techniques The role of government in American economy The American economic system is a modi ed capitalism where governments regulate business to ensure competition, protect consumers and employees, and measure and regulate the economy's health and growth. The role of ethic and social responsibility While some businesses engage in misconduct, most uphold ethical and socially responsible behavior. This behavior a ects employees, investors, and stakeholders, impacting public trust in corporations. Society demands responsible conduct towards stakeholders and values diversity in the workforce for improved performance. Ethical behavior can enhance reputation and pro ts, with companies like Microsoft and Patagonia leading by example. Monitoring societal values and prioritizing stakeholder interests can promote ethical business practices. CHAPTER 2 BUSINESS ETHICS AND SOCIAL RESPONSIBILITY BUSINESS ETHICS: principles and standards that determine acceptable conduct in business. It is in uenced by personal values as well as by stakeholders, including employees, customers, competitors, and regulators. SOCIAL RESPONSIBILITY: business’ obligation to maximize its positive impact and minimize its negative impact on society The most basic ethical and social responsibility concerns have been codi ed by laws and regulations that encourage businesses to conform to society’s standards, values, and attitudes. Laws and regulations attempt to institutionalize ethical conduct and prevent harm to customers, the environment, and other stakeholders. BUSINESS LAW refers to the laws and regulations that govern the conduct of business. Many problems and con icts in business could be avoided if owners, managers, and employees knew more about business law and the legal system. Business ethics, social responsibility, and laws together act as a compliance system, requiring that businesses and employees act responsibly in society THE ROLE OF ETHICS IN BUSINESS Growing concern about legal and ethical issues in business. Regardless of what an individual believes about a particular action, if society judges it to be unethical or wrong, whether correctly or not, that judgment directly a ects the organization’s ability to achieve its business goals. Many rms are recognized for their ethical conduct. Media coverage of corporate misconduct can create the impression that it is more prevalent than it is, because positive ethical behavior receives less attention. Often, misconduct cases begin as ethical con icts that escalate into legal disputes when cooperative resolution is not possible. This is because people may have di erent ethical beliefs and resort to legal action to resolve problems. fi fl fl ff fi fl ff ff fi ff fi fi  Business ethics goes beyond legal issues; it is based on building trust and con dence in business relationships. Organizations with a reputation for unethical behavior have di culty establishing trust. Negative judgments can a ect an organization’s ability to build relationships with customers and suppliers, attract investors, and retain employees. RECOGNIZING ETHICAL ISSUES IN BUSINESS ETHICAL ISSUE: an identi able problem, situation, or opportunity that requires a person to choose from among several actions that may be evaluated as right or wrong, ethical or unethical One of the principal causes of unethical behavior in organizations is rewards for overly aggressive nancial or business objectives Ethical issue can be more complex now than in the past The vast number of new-format investigative programs has increased consumer and employee awareness of organizational misconduct BRIBERY It is considered improper to give or accept BRIBES, which are payments, gifts, or special favors intended to in uence the outcome of a decision. They are illegal in many countries. Experience with the culture in which a business operates is critical to understanding what is ethical or unethical Firms must observe the values and policies of global business MISUSE OF COMPANY TIME Engaging in activities that are not necessary for the job Some companies have chosen to block certain type of website Misusing also company resources by using company’s computer and internet access Lost productivity and pro ts for the employer ABUSIVE AND INTIMIDATING BEHAVIOR Most common ethical problem for employees Physical threats, false accusations, profanity, insults, yelling, ignoring someone Di cult to evaluate and manage because of diversity in culture and lifestyle Bullying is associated with a hostile workplace MISUSE OF COMPANY RESOURCES Spending an excessive amount of time on personal emails, submitting personal expenses on company expense reports, or using company copier for personal use While serious resource abuse can result in ring, some abuse can have legal repercussion Employee internal theft or the misuse of the employer’s assets is a major loss of resources for many rms, especially retailers. Firms need a good monitoring system and employee training to prevent the theft of resources CONFLICT OF INTEREST When an individual must choose whether to advance the individual’s own personal interests or those of others To avoid, employees must separate personal nancial interests from business dealings Insider trading, bribery FAIRNESS AND HONESTY - Are at the heart of business ethics and relate to the general values of decision makers - Businesspersons are expected to follow all applicable laws and regulations, not to harm customers, employees, clients, or competitors - Can relate to how the employees use the resources of the organization - Dishonesty = lack of integrity, lack of disclosure, and lying (ex. theft of supplies) fi ffi fi fl fi ff fi fi fi fi ffi  COMMUNICATIONS False and misleading advertising and deceptive personal-selling tactics can lead to the failure of a business Product labelling BUSINESS RELATIONSHIPS Keeping company secrets, meeting obligations and responsibility, and avoiding undue pressure that may force others to act unethically Managers can in uence employees’ actions  create a work environment that helps the organization achieve its objective and ful ll PLAGIARISM = the act of taking someone else’s work and presenting it as your own without mentioning the source MAKING DECISIONS ABOUT ETHICAL ISSUES It can be di cult to recognize speci c ethical issues in practice. Thus, the perceived importance of an ethical issue substantially a ects choices. However, only a few issues receive scrutiny, and most receive no attention at all. Open discussion of ethical issues does not eliminate ethical problems, BUT it does promote both trust and learning in an organization. Once a person has recognized an ethical issue and can openly discuss it with others, the individual has begun the process of resolving that issue. Improving ethical behavior in business Ethical decisions in an organization are in uenced by three key factors: 1. Individual moral standards and values 2. In uence of managers and co-workers 3. Opportunity to engage in misconduct It is di cult for employees to determine what conduct is acceptable within a company if the rm does not have established ethics policies and standards. Without such policies and standards, employees may base decisions on how their peers and superiors behave. Professional CODES OF ETHICS are formalized rules and standards that describe what the company expects of its employees. Codes of ethics do not have to be so detailed that they consider every situation, but they should provide guidelines and principles that can help employees achieve organizational objectives and address risks in an acceptable and ethical way. Codes of ethics, policies on ethics, and ethics training programs advance ethical behavior because they prescribe which activities are acceptable and which are not, and they limit the opportunity for misconduct by providing punishments for violations of the rules and standards. Whistleblowing occurs when an employee exposes an employer’s wrongdoing to outsiders, such as the media or government regulatory agencies. More companies are establishing programs to encourage employees to report illegal or unethical practices internally so that they can take steps to remedy problems before they result in legal action or generate negative publicity. THE NATURE OF SOCIAL RESPONSIBILITY Four stages of social responsibility: 1. Financial 2. Legal compliance 3. Ethics 4. Philanthropy fi fl fl ffi ffi fl ff fi fi  Earning pro ts is the nancial or economic foundation, and complying with the law is the next step. However, a business whose sole objective is to maximize pro ts is less likely to consider its social responsibility, although its activities will probably be legal. Corporate citizenship is the extent to which businesses meet the legal, ethical, economic, and voluntary responsibilities places on them by their various stakeholders. Companies must develop ethical policies and integrate them into decision-making processes to avoid potential con icts. One of the major corporate citizenship issues is the focus on preserving the environment and animal rights. Concerns about animal welfare have caused some business to invest in meat alternatives. Part of the answer to climate change issues is alternative energy such as solar, wind, biofuels, and hydro applications. The drive for alternative fuels such as ethanol from corn has added new issues such as food price increases and food shortages. Renewable energy is supported by individuals, organizations, and governments as a way to prevent global climate change. The cost of renewable energy has increasingly declined, often making solar and wind power comparable with traditional power sources. To respond to these developments, most companies are introducing eco-friendly products and marketing e orts. Consumers are increasingly looking to brands to take a stand on important social, environmental, and political issue. SOCIAL RESPONSIBILITY ISSUES Managers consider and make social responsibility decisions on a daily basis. Among the many social issues that managers must consider are their rms’ relations with stakeholders, including owners and stockholders, employees, consumers, regulators, communities, and environmental and social advocates. Social responsibility is a dynamic area with issues changing constantly in response to society’s demands. There is much evidence that social responsibility is associated with improved business performance. Consumers are refusing to buy from businesses that receive publicity about misconduct. 1. Relations with owners and stockholders: businesses must rst be responsible to their owners, who are primarily concerned with earning a pro t or a return on their investment in a company. In larger businesses ensuring responsibility becomes a more di cult task. Obligations to its owner include providing all relevant information to investors ffi fl fi fi ff fi fi fi fi  about the current and projected performance of the rm → the business must maximize the owners’ investment in the rm 2. Employee relations are critical for business success, as employees are essential for achieving a company’s goals. Businesses must ensure a safe workplace, fair compensation, open communication, and fair treatment of employees. Workplace safety is regulated by laws enforced by OSHA, with labor unions contributing to better safety and bene ts. Companies increasingly value employee input, even from lower-level sta , as it aids organizational success. Diversity, equity, and inclusion are now major business priorities. Diversity encompasses di erences in race, gender, religion, socioeconomic status, and more, with research showing that diverse leadership correlates with higher pro ts. Equity ensures equal opportunities and fair treatment, addressing historical underrepresentation in education, employment, and advancement. Inclusion involves making diverse individuals feel valued and welcomed. Overall, businesses must embrace diversity, equity, and inclusion to build stronger, more innovative teams. 3. Consumer relations: businesses have a responsibility to provide customers with safe, high-quality products and respect their consumer rights. Consumerism refers to e orts by individuals, groups, and organizations to protect these rights, including writing to companies, lobbying, public announcements, and boycotts of irresponsible businesses. The Federal Trade Commission’s Bureau of Consumer Protection enforces laws against unfair, deceptive, or fraudulent practices, operating through eight specialized divisions to safeguard consumer rights. The foundation of consumer rights stems from John F. Kennedy’s 1962 consumer bill of rights, which includes: 1. Right to Safety: Businesses must avoid selling products that may cause harm or injury. Unsafe products can damage public trust and lead to costly litigation. Companies must also ensure safe shopping environments. 2. Right to Be Informed: Consumers have the right to access complete product information, including risks and usage instructions. 3. Right to Choose: Consumers deserve a variety of goods and services at competitive prices, ensuring fair quality and service. 4. Right to Be Heard: Consumers’ concerns must be considered in policy-making, and complaints should be handled fairly. 4. Sustainability issues: the environment faces signi cant threats due to population growth, resource overuse, and technological advancements. These activities, while improving living standards, have led to accelerated species extinction and environmental degradation. Sustainability, from a business perspective, involves strategies that balance economic activities with preserving the natural environment. 1. Pollution: 1. Water Pollution: Toxic waste, agricultural runo , and industrial spills contaminate waterways, threatening health and ecosystems. 2. Air Pollution: Emissions from vehicles and factories contribute to acid rain, global warming, and respiratory health risks. Carbon dioxide levels, exacerbated by industrialization, are causing unprecedented global temperature rises. 3. Land Pollution: Dumping of waste, deforestation, and mining harm ecosystems and lead to water contamination. The degradation of CO2-absorbing forests and the persistence of non-biodegradable plastics worsen the problem. 2. Alternative Energy: 1. Traditional fossil fuels are environmentally harmful and increasingly scarce. To combat this, countries are investing in alternative energy like wind, solar, nuclear, biofuels, and geothermal power. 2. The U.S. is becoming an energy leader with natural gas drilling but faces environmental concerns. Major car manufacturers, like General Motors, are transitioning toward electric vehicles, aiming to eliminate combustion engines by 2035. Businesses and nonpro ts are addressing environmental challenges by integrating sustainability into strategies. Initiatives like the United Nations Global Compact promote collaboration between businesses, governments, and society for responsible environmental practices. Consumers and leaders increasingly expect companies to fi fi fi ff ff fi fi fi ff ff  balance pro t with positive societal impact, emphasizing the need for sustainable innovation. 5. Response to environmental issues: many rms are trying to eliminate wasteful practices, the emission of pollutants, and the use of harmful chemicals from their manufacturing processes. Other companies are seeking ways to improve their products. A growing number of businesses and consumers are choosing green power resources where available. Society must weight the huge costs of limiting or eliminating pollution. Managers must coordinate environmental goals with other social and economic ones. 6. Community relations: businesses have a signi cant role in supporting the general welfare of the communities and societies where they operate. Many companies aim to improve their communities, making them better places to live and work. The most common approach is through charitable donations to local and national organizations. UNEMPLOYMENT The quality of education in the United States has become a concern for companies as they face a shortage of prospective employees with essential skills. Unemployment, which peaked at 10% during the Great Recession and over 14% during the COVID-19 pandemic, remains a critical issue, with current rates at 6.3%. Unemployment has both economic and ethical implications. social unrest: high unemployment, especially in areas with signi cant wealth disparity, can lead to protests. factory closures: while sometimes necessary for economic reasons, plant closures impact employees and their communities. Criticism of hiring standards Some companies face backlash for setting hiring standards that are deemed too high, leaving positions un lled and job seekers excluded. Businesses argue a lack of essential skills among applicants, with jobs requiring increasingly specialized knowledge and education. CHAPTER 3 INTERNATIONAL BUSINESS refers to the buying, selling, and trading of goods and services across national boundaries. Falling political barriers and new technology are making it possible for more and more companies to sell their products overseas as well as at home. And, as di erences among nations continue to narrow, the trend toward the globalization of business is becoming increasingly important. The internet and the ease by which mobile applications can be developed provide many companies with easier entry to access global markets than opening brick-and-mortar stores. Global marketing requires balancing a rm’s global brand with the needs of local consumer. WHY NATIONS TRADE Nations and businesses engage in international trade to obtain raw materials and goods that are otherwise unavailable to them or are available elsewhere at a lower price than what they can produce. Which goods and services a nation sells depends on what resources it has available and its ability to compete in global markets. Absolute advantage: a monopoly that exists when a country is the only source of an item, the only producer of an item, or the most e cient producer of an item Comparative advantage: the basis of most international trade, when a country specializes in products that it can supply more e ciently or at a lower cost than it can produce other items fi fi ffi fi ffi fi fi ff fi  Outsourcing phenomenon: the transferring of manufacturing or other tasks, such as data processing, to countries where labor and supplies are less expensive TRADE BETWEEN COUNTRIES To obtain needed goods and services, nations trade by exporting and importing. Exporting is the sale of goods and services to foreign countries Importing is the purchase of goods and services from foreign sources BALANCE OF TRADE is the di erence in value between a nation’s exports and its imports. US imports more products than it exports → negative balance of trade Trade de cit: a nation’s negative balance of trade, which exists when that country imports more products than it exports When a nations exports more goods than it imports, it has a favorable balance of trade, or trade surplus. Balance of payments: the di erence between the ow of money into and out of a country. A country’s balance of trade, foreign investments, foreign aid, loans, military expenditures, and money spent by tourists comprise its balance of payments. A country with a trade surplus generally has a favorable balance of payments because it is receiving more money from trade with foreign countries than it is paying out. When a country has a trade de cit, more money ows out of the country than into it. If more money ows out of the country than into it from tourism and other sources, the country may experience declining production and higher unemployment because there is less money available for spending. INTERNATIONAL TRADE BARRIERS When a company decides to do business outsides its own country, it will encounter a number of barriers to international trade. 1. ECONOMIC BARRIERS: when conducting business internationally, managers must carefully consider various economic factors to ensure success. 1. Level of economic development in the target country. Industrialized nations typically o er advanced economies, well-developed infrastructure, and robust consumer markets. In contrast, least-developed countries (LDCs) are characterized by low per- capita income. Consumers in these nations are less likely to purchase nonessential goods, yet they present a signi cant opportunity for businesses o ering products or services that enhance infrastructure, health, or technology. 2. Infrastructure is another critical factor, encompassing transportation, communication, utilities, and health care systems. In LDCs, businesses may need to address challenges stemming from underdeveloped distribution and communication systems or a lack of advanced technology. Adapting to these limitations is essential for e ectively operating in such markets. 3. Exchange rates determine the value at which one nation’s currency can be exchanged for another and uctuate daily. In some cases, governments may intentionally devalue their currency to encourage exports and attract foreign tourism. Devaluation lowers the value of a country’s currency in relation to others, making domestic goods and travel more a ordable for foreign buyers. 2. ETHICAL, LEGAL AND POLITICAL BARRIERS: when a company decides to enter the international marketplace, it must navigate complex relationships among domestic laws, international regulations, and the legal systems of the host country. Additionally, companies face trade restrictions, shifting political climates, and di ering ethical values, all of which can in uence their operations. 1. Laws and regulations: The United States has established various laws governing international trade and treaties that facilitate business between American companies and foreign nations. However, businesses must also adapt to the legal frameworks of the countries in which they operate. Legal systems di er widely. In some regions, copyright and patent laws are less stringent, and enforcement may be inadequate. In ff fl fl fi fl ff fi fi ff ff fl fl ff ff ff ff  response, companies may need to take extra measures to protect their intellectual property. 2. Tari s and trade restrictions: Tari s, quotas, and other trade restrictions are often employed to control the ow of goods across borders. An import tari is a tax on goods entering a country, with rates varying depending on the type and origin of the product. Tari s can serve political purposes, such as sanctions, or economic goals, such as protecting domestic industries. Countries may also implement quotas to limit the quantity of imports, bene ting domestic suppliers at the expense of higher consumer prices. Embargoes, on the other hand, completely ban trade with speci c nations or goods. Such measures are often politically motivated but can have economic and social implications. Dumping, where products are sold below production cost to gain market share. Anti-dumping measures, such as tari s or quotas, are implemented to counteract these practices but can result in higher prices for consumers. 3. Political barriers: Political considerations often in uence international trade, with governments enacting tari s or embargoes in response to political events. A sudden shift in political power can lead to hostile policies, forcing companies to exit a market Political alliances can also lead to the formation of cartels. These organizations demonstrate how political and economic interests intersect to impact global markets. 3. SOCIAL AND CULTURAL BARRIERS: these barriers arise from di erences in traditions, behaviors, and societal norms across countries. A failure to understand these distinctions can lead to miscommunication, damaged relationships, and lost opportunities. One major aspect is the in uence of language and communication styles. Capturing the intended meaning while respecting cultural nuances. Non-verbal communication, such as body language, personal space, and gestures, varies signi cantly between cultures and must be carefully considered to avoid misunderstandings. Additionally, cultural norms in uence business practices, including perceptions of time, family roles, and acceptable marketing strategies. Religious beliefs and local customs also play a signi cant role in shaping consumer preferences and behaviors. Another challenge lies in adapting to technical and logistical standards, such as measurement systems, which di er between regions. Ultimately, conducting thorough research and developing cultural competence are essential steps for companies seeking to navigate international markets successfully. These e orts minimize risks, enhance partnerships, and foster sustainable growth. 4. TECHNOLOGICAL BARRIERS: technological infrastructure varies widely across countries, and this disparity can present both challenges and opportunities for businesses. In many nations, limited access to traditional technologies, such as private phone lines, has led to innovative solutions, such as a shift toward wireless communication. This creates opportunities for businesses to introduce and adapt products that meet speci c technological needs. At the same time, advancements in technology introduce new competition and rede ne market dynamics. TRADE AGREEMENTS, ALLIANCES, AND ORGANIZATIONS 1. General agreement on tari s and trade 1. General agreement on tari s and trade (GATT): a trade agreement, originally signed by 23 nations in 1947, that provided a forum for tari negotiations and a place where international trade problem could be discussed and resolved 2. World trade organization (WTO): international organization dealing with the rules of trade between nations 2. United States-Mexico-Canada agreements (USMCA): agreement that eliminates most tari s and trade restrictions to encourage trade among the US, Mexico and Canada 3. European Union (EU): a union of European nations established in 1958 to promote trade among its members; one of the largest singe markets today 4. Asia-Paci c Economic Cooperation (APEC): an international trade alliance that promotes open trade and economic and technical cooperation among members nations 5. Association of Southeast Asian Nations (ASEAN): a trade alliance that promotes trade and economic integration among member nations in Southeast Asia 6. World Bank: an organization established by the industrialized nations in 1946 to loan money to underdeveloped and developing countries; formally known as the International Bank for Reconstruction and Development ff fi fl fi ff ff fl ff ff ff fi fi fi ff ff ff fl fl ff ff ff fi fi ff  7. International Monetary Fund (IMF): an organization established in 1947 to promote trade among member nations by eliminating trade barriers and fostering nancial cooperation GETTING INVOLVED IN INTERNATIONAL BUSINESS Businesses may get involved in international trade at many levels. The degree of commitment of resources and e ort required increases according to the level at which a business involves itself in international trade. 1. Exporting and importing: Importing involves purchasing goods from foreign markets for resale. Exporting occurs when businesses supply foreign companies with products. Exporting often becomes essential for businesses looking to expand into new markets where products may have more growth potential than domestically. Additionally, countertrade agreements— bartering goods instead of using currency—are common in some international trades, particularly with Eastern European nations. Businesses often use export agents to handle international transactions, storage, and transportation. These agents may act as intermediaries, o ering expertise and sometimes assuming ownership of the products for pro t. 2. Trading companies play a critical role in facilitating international trade by linking sellers and buyers across countries. They manage activities such as consulting, market research, advertising, and foreign exchange. Companies like WTSC provide platforms that connect millions of businesses globally, enabling smoother international transactions. 3. Licensing and franchising: Licensing allows foreign companies to use intellectual property such as trademarks, production processes, or products in exchange for a fee or royalty. Franchising, on the other hand, provides franchisees with branding, operational methods, and products in return for nancial commitments and adherence to strict standards. Both licensing and franchising o er cost-e ective ways for businesses to expand internationally, though maintaining quality standards is essential to protect brand image. 4. Contract manufacturing: hiring foreign companies to produce goods according to speci cations while retaining their own branding. 5. Outsourcing: where businesses shift tasks to countries with lower labor costs. This has been a controversial practice due to concerns over job losses and quality issues. 6. O shoring involves relocating processes to another country while retaining control. Unlike outsourcing, o shoring allows businesses to maintain closer oversight of their international operations. 7. Joint ventures and alliances o er collaborative opportunities. Joint ventures involve working with local partners to share costs and operations. Strategic alliances go further, forming partnerships that provide competitive advantages on a global scale. 8. Direct investment involves owning and operating facilities in foreign countries. At the highest level of international involvement are multinational corporations (MNCs) like Nestlé or Royal Dutch Shell. These corporations operate globally, often generating more revenue than the economies of some countries. While MNCs bene t from accessing global resources, they face criticism for allegedly exploiting labor, harming environments, and widening economic disparities between nations. Each level of involvement in international business comes with unique opportunities and challenges, requiring businesses to carefully consider their strategies and investments. INTERNATIONAL BUSINESS STRATEGY Planning in a global economy requires businesspeople to understand the economic, legal, political, and sociocultural realities of the countries in which they operate. These factors directly in uence the strategies businesses adopt when expanding beyond their domestic borders. Developing Strategies Traditionally, companies operating internationally have employed a multinational strategy, customizing their products, promotions, and distribution methods based on cultural, technological, regional, and national di erences. Even standardized products often require localized advertising to account for language and cultural di erences. However, many businesses are shifting from customization to a global strategy (globalization). This approach standardizes products, promotions, and distribution globally, treating the world as a single entity. ff fl fi fi ff ff ff fi ff ff ff ff fi ff fi Social media is a key channel for global customer engagement. Before expanding internationally, businesses must conduct environmental analyses to assess market potential and challenges, choosing strategies that align with local needs. Companies often rely on local managers to gain insights and respond quickly to changes, embracing the philosophy to “think globally, act locally.” Managing Global Business Challenges The reduction of political barriers has opened new opportunities for international trade. Managers adept at crafting and implementing culturally sensitive global strategies are essential for company success. Additionally, Centers for International Business Education and Research (CIBERs), funded by the U.S. government, benchmark best international practices to help rms become globally competitive. These resources assist in navigating the internationalization process, especially for smaller businesses. Even small businesses can thrive in foreign markets by thoroughly researching and implementing appropriate strategies. Global awareness remains a critical skill for modern managers, ensuring their ability to navigate the complexities of international business successfully in the 21st century. CHAPTER 4 SOLE PROPRIETORSHIPS are businesses owned and operated by one individual, they are the most common forms of business organization in the US. Common examples include many retailers such as restaurants, hair salons, ower shops, and independent grocery stores. Sole proprietors also include independent contractors who complete projects or engage in entrepreneurial activities for di erent organizations but who are not employees. They are typically small businesses employing fewer than 50 people. Sole proprietorships constitute approximately three-fourths of all businesses in the United States. Women business owners are less likely to get access to credit than their male counterparts. ADVANTAGES DISADVANTAGES Ease and cost of formations, it’s relatively easy Unlimited liabilities in meeting the debts of the and inexpensive. Lawyers are not usually needed to business → if the business cannot pay its creditor, create such enterprise. Many independent the owner may be forced to use personal salespersons and contractors can perform their nonbusiness holdings to pay o debts work using a smartphone Secrecy: the proprietor does not have to discuss Limited sources of funds: relatively few sources of operating plans publicly money available to the sole proprietorship are banks, friends, family, the Small Business Distribution and use of pro ts: all pro ts belong Administration, or the owner’s own funds. The exclusively to the owner owner’s personal nancial condition determines Flexibility and control of the business: he has their credit standing. Additionally, sole complete control over the business and can make proprietorships may have to pay higher interest decision on the spot without anyone ales’s approval rates on funds borrowed from banks than do large corporations because they are considered greater risks. Government regulation: they have the most Limited skills: he must be able to perform many freedom from government regulation functions in diverse elds Taxation: pro ts are considered personal income Lack of continuity: the life expectancy is directly and are taxed at individual tax rates. The owner linked to the owner’s life and ability to work pays one income tax that includes the business and individual income Lack of quali ed employees Closing the business: it can be dissolved easily. Taxation: it can be a disadvantage, depending on No approval of co-owners needed. The only legal the proprietor’s income condition is that all nical obligations must be paid to resolved fi fi fi fi fi fi ff ff fi fl fi  PARTNERSHIPS are a form of business organization de ned as an association of two or more persons who carry on as co-owners of a business for pro t. 1. General partnership is a type that involves a complete sharing in both the management and the liability of the business 2. Limited partnership: it has at least one general partner, who assumes unlimited liability and at least one limited partner, whose liability is limited ti their investment in the business Articles of partnership are legal documents that set forth the basic agreement between partners ADVANTAGES DISADVANTAGES Ease of organizations: starting a partnership Unlimited liabilities can be a disadvantage to one requires little more than drawing up articled of partner their personal nancial resources are partnership. No legal character have to be granted greater than those of the other but the name of the business should be registers with the state Availability of capital and credit: when a business Responsibilities and con ict: all partners are has severe partners, it has the bene t of a responsible for the business actions of all others. combination of talents and skills and pooled Partners may have the ability to commit the nancial resources. They have grater earring power partnership to a contract without approval of the and better credit ratings other. A bad decision by one may put the other partners’ personal resources in jeopardy Combined knowledge and skills: partners in the Life of the partnership: it is terminated when a most successful partnerships acknowledge each partner dies or withdraws. In a two-person other’s talent and avoid confusion and con ict by partnership, if one partner withdraws, the rm’s specializing in a particular area of expertise liabilities would be paid o and the assets divided between the partners Decision making: small partnerships can react Distribution of pro ts: pro ts earned by the more quickly to changes in the businesses partnership are distributed to the partners in the environment than can large partnerships and proportions speci ed in the articled of partnership. corporations. Such fast reactions are possible This may be a dis if the division does not re ect the because the partners are involved in day-to-day work each partner puts into the business operations and can make decisions quickly after consultation Regulatory controls: has fewer regulatory controls Limited sources of funds: because no public value a ecting its activities than does a corporation. is placed on the business, potential partners don't always know what one partnership share is worth, although third parties can asses the value. Taxation of partnerships → partnerships are quasi-taxable organizations, this means that partnerships don’t pay taxes when submitting the partnership tax return to the Internal Revenue Service. fi ff fi fi fi fi ff fl fi fi fi fl fl fi fi  CORPORATION is a legal entity, created by the state, whose assets and liabilities are separate from its owners. As a legal entity, a corporation has many of the rights, duties, and powers of a person, such as the right to receive, own, and transfer property. Corporations can enter into contract with individuals or with other legal entities, and they can sue and be sued in court. They are typically owned by many individuals and organization who own stocks, which are shares of the business that may be bought or sold. As owners, the stockholder are entitled to all pro ts that are left after all the corporations other obligations have been paid. These pro ts may be distributed in the form of cash payments called dividends. Creating a corporation A corporation is formed, or incorporated, under the laws of the state where it is established. The individuals responsible for creating the corporation are called incorporators. Each state has speci c procedures for incorporating, often referred to as chartering the corporation. Generally, most states require a minimum of three incorporators, making it feasible for many small businesses to incorporate. Additionally, the corporation’s name must be unique. To o cially incorporate, the incorporators must le articles of incorporation with the appropriate state o ce, often the secretary of state. These articles contain fundamental details about the corporation. Most states adhere to the Model Business Corporation Act issued by the American Bar Association, which includes the following 10 key items: 1. The corporation’s name and address. 2. The corporation’s objectives. 3. Classes of stock (e.g., common, preferred, voting, nonvoting) and the number of shares to be issued. 4. The corporation’s expected duration (usually perpetual). 5. The amount of nancial capital required at incorporation. 6. Provisions for transferring shares between owners. 7. Provisions for regulating internal corporate a airs. 8. The registered business o ce’s address in the state of incorporation. 9. Names and addresses of the initial board of directors. 10. Names and addresses of the incorporators. After these articles are submitted, the state issues a corporate charter, a legal document that the state issues to a company based on information the company provides in the articles of incorporation. Following this, the owners hold an organizational meeting, during which they establish the corporation’s bylaws and elect a board of directors. The bylaws may outline board committees and de ne rules and procedures for their operation. domestic corporation: if the corporation does business in the state in which it is chartered foreign corporation: it does business in other states where the corporation does business alien corporation: if the corporation does business outside the nation in which it is incorporated 1. Private corporation is owned by just one or a few people who are closely involved in managing the business (a private corporation that needs more money to expand or to take advantage of opportunities may have to obtain nancing by “going public” through an initial public o ering, that is, becoming a corporation by selling stock so that it can be traded in public markets) 2. Public corporation is one whose stock anyone may buy, sell, or trade 3. Quasi-public corporation are owned and operated by the federal, state, or local government 4. Nonpro t corporation focus on providing a service rather than earning a pro t, but they are not owned by a government entity ffi fi fi ffi fi ff fi fi ffi ff fi fi fi fi  Elements of a Corporation 1. The Board of Directors is a group elected by stockholders to oversee the general operations and set long-term objectives for the corporation. They are responsible for ensuring that these objectives are achieved on schedule. Board members have a duty of care and loyalty to oversee management and prevent any misuse of funds. An essential role of the board is hiring corporate o cers, like the president and CEO, who manage the rm’s daily operations and report to the board. The importance of boards grew after the accounting scandals of the early 2000s and the Sarbanes-Oxley Act, which emphasized corporate governance. However, some argue this act did not signi cantly increase oversight by directors. Board members may be inside directors (employees of the company) or outside directors (una liated individuals such as executives from other rms, lawyers, or professors). Outside directors are valued for their independence and expertise, as they are less likely to face con icts of interest. E ective boards require quali ed and independent members, especially after past corporate scandals. To attract experienced directors, companies have increased the mandatory retirement age for board members, sometimes up to 75 years or older. Additionally, limiting board overlaps helps minimize con icts of interest. 2. Stock Ownership: corporations issue two types of stock: 1. Preferred Stock: Preferred stockholders generally don’t participate in corporate management but have priority over common stockholders for dividend payments. These dividends are often a xed percentage of the stock’s original issue price. For instance, if a share of preferred stock costs $100 with a 5% dividend rate, the annual dividend will be $5 per share. Preferred stockholders typically enjoy cumulative dividend rights, meaning any missed payments in one year accumulate and must be paid before dividends are issued to common stockholders. 2. Common Stock: Common stockholders have voting rights in the corporation, often one vote per share, allowing them to elect the board of directors and vote on key issues during annual meetings. Voting may also be done by proxy, where stockholders assign their voting rights to someone else. Dividends for common stockholders depend on corporate pro tability and may vary. Some corporations reinvest pro ts into the business instead of paying dividends. Common stockholders bene t from preemptive rights, allowing them to buy new shares of stock when issued, maintaining their ownership percentage. For example, if a stockholder owns 10% of a company, they have the right to purchase enough new shares to retain that 10% ownership. ADVANTAGES DISADVANTAGES Limited liability: because the corporation’s assets Double taxation: corporations are taxed as and liabilities are separated from its owners’, in separate legal entities, meaning they must pay most cases the stockholders are not responsible for taxes on their pro ts. When these after-tax pro ts the rm’s debts if it fails are distributed as dividends to shareholders, the shareholders must pay income taxes on these dividends. This creates a situation where income is taxed twice, reducing overall pro tability for owners. Ease of transfer of ownership: shareholders can Forming a corporation requires drafting and ling sell or trade shares of stock to other people without legal documents which often requires a lawyer. causing the termination pf the corporation, and they States impose ling fees and some require annual can do this without the prior approval of other maintenance fees. These costs can add up. shareholders Perpetual life: usually it is chartered to last forever Disclosure of information: corporations must unless its articled of incorporation stipulate share nancial and operational details with otherwise shareholders through annual reports. This information is made public, meaning competitors can access sensitive data about the corporation’s operations, pro ts, and strategies. fi fi fi fl fi fi ffi fi fi ffi ff fi fi fi fi fi fi fi fl fi fi  External sources of funds: of all the forms of Employee-owner separation: many employees are business organization, the public corporation nds not shareholder of the company for which they it easiest to raise money work. This separation of owners and employees may cause employees to feel that their work bene ts only the owners Expansion potential: because the large public corporation can nd long-term nancing readily, they can easily expand international and international markets OTHER TYPES OF OWNERSHIP 1. Joint venture is a partnership established for a speci c project or for a limited time 2. S corporation is a corporation taxed as through it were a partnership with restrictions on shareholders 3. Limited Liability Company (LLC) is a form of ownership that provides limited liability and taxation like a partnership but places fewer restrictions on members 4. Cooperative is an organization composed of individuals or small businesses that have banded together to reap the bene ts of belonging to a larger organization TRENDS IN BUSINESS OWNERSHIP: Mergers and Acquisitions Companies achieve growth by expanding their operations, developing and selling new products, or reaching new groups of customers in di erent geographic areas. Such growth, when carefully planned, helps improve pro tability. Companies also grow through mergers and acquisitions. A merger occurs when two companies combine to form a new company An acquisition happens when one company buys another, often by purchasing most of its stock. Governments often scrutinize mergers to protect customers from monopolistic practices. The merger between AT&T and Time Warner underwent signi cant regulatory analysis to address antitrust concerns. Mergers can also pose risks for the acquiring company. Mergers can take several forms. - A horizontal merger occurs between companies that produce similar products or operate in the same industry. - A vertical merger happens when companies at di erent levels of an industry’s supply chain merge. - A conglomerate merger involves rms from unrelated industries. Acquisitions can be “friendly” where both parties agree to the terms, or “hostile” where the target company resists the takeover. In hostile cases, corporate raiders may make a tender o er to buy stock at a premium price. To defend against hostile takeovers, companies might implement poison pills, shark repellents, or seek a white knight, which is a more favorable company willing to acquire them. They may also increase debt to make themselves less attractive to potential raiders. Another method of acquisition is a leveraged buyout (LBO), where investors borrow money to purchase a company, using the company’s assets as collateral for the loan. While LBOs can be e ective, the high debt levels involved can lead to nancial risks if not managed properly. Mergers and acquisitions can bring bene ts, such as increased market share, access to new resources, and cost reductions. They can also enhance a company’s ability to compete globally. However, critics argue that they can harm employee morale, increase debt, and sometimes lead to bankruptcy. Mergers may also divert management’s focus away from running the business e ectively. Despite these challenges, mergers and acquisitions remain popular strategies for growth, particularly in industries like technology, healthcare, and nancial services. ff ff fi fi fi fi fi fi fi fi ff ff fi fi fi fi ff  CHAPTER 5 THE NATURE OF ENTREPRENEURSHIP AND SMALL BUSINESS Entrepreneurship is the process of creating and managing a business to achieve desired objectives. Many large businesses begun as small businesses based on the vision of their founders, some entrepreneurs who start small businesses have the ability to see emergent trend, in response, they create a company to provide a product that serves customer needs. Success requires creativity, innovation, and entrepreneurship, and requires more than a formal education. It requires the ability to learn and develop skills and knowledge and be an independent thinker. The entrepreneurship movement is accelerating, and many new, smaller businesses are emerging. - Micro-entrepreneurs are entrepreneurs who developed businesses with ve or fewer employees - Social entrepreneurs are individual who use entrepreneurship to address social problems What is a small business? A small business is any independently owned and operated business that is not dominant in its competitive area and does not employ more than 500 people. While small business administration is an independent agency of the federal government that o ers a manager and nancial assistant to small businesses. The role of small business in the American economy Small businesses are vital to the American economy. More than 99% of all US lms are classi ed as small businesses, and they employee about half of private workers. In addition, small businesses are largely responsible for fueling job creation and innovation. Industries that attract small business Small businesses thrive across many sectors, with retailing, wholesaling, services, manufacturing, and high technology being particularly appealing to entrepreneurs. These elds often require lower initial investments, are easier to enter, and allow a focus on niche markets. Retailing Retailers acquire goods from producers or wholesalers to sell directly to consumers, often through physical locations or online platforms. Online retailing, especially via sites like Amazon or Etsy, o ers low-cost entry opportunities. Retail businesses are attractive due to the simplicity of starting operations and the ability to meet speci c consumer needs. Crowdfunding platforms like Kickstarter are frequently used to fund these ventures, especially for non-store retailing, which involves direct marketing or selling outside traditional retail spaces. Wholesaling Wholesalers bridge the gap between producers and retailers, o ering goods and services that streamline operations. Small businesses excel in this sector by staying closer to consumers and identifying unique market needs. Services The service sector encompasses businesses providing intangible products, such as real estate, insurance, salons, and accounting. With services accounting for 80% of U.S. jobs, the sector is a hotspot for small entrepreneurs. Opportunities like luxury retail support through platforms or personal services attract skilled professionals who often cater directly to consumers. Manufacturing Manufacturing allows small businesses to produce customized products, leveraging technologies. Small manufacturers often bene t from their exibility and ability to address speci c consumer demands. ff fi ff fi fi fi fi fi fl ff fi fi  High Technology High-tech industries involve elds like biotechnology, robotics, and virtual reality. Although requiring signi cant startup capital, these industries provide substantial rewards for innovation. Sharing Economy The sharing economy, or gig economy, involves renting underutilized resources. This model appeals to entrepreneurs and gig workers seeking additional income. Despite regulatory and classi cation challenges, the global sharing economy continues to grow and diversify into tourism and mobility sectors. ADVANTAGES AND DISADVANTAGES OF SMALL-BUSINESS OWNERSHIP Advantages of Small-Business Ownership 1. Independence: Freedom to be your own boss and make decisions. Flexibility to choose working hours, location, and team. Opportunity to work in a family-oriented setting and leverage online tools to start businesses from home. 2. Lower Costs: Requires less capital for setup and maintenance. Relies on personal savings, credit cards, or family support for funding. Outsourcing non-core activities like accounting or legal services reduces expenses. 3. Flexibility: Rapid decision-making due to fewer management layers. Ability to adapt quickly to market changes and customer feedback. Social listening helps small businesses respond to trends faster than large rms. 4. Focus on Niche Markets: Ability to cater to speci c customer groups or unmet needs. Avoids competition from larger rms by specializing in unique products or services. 5. Reputation: Opportunity to build strong customer relationships and a good reputation for quality and service. A focused approach enables delivering exceptional customer satisfaction. Disadvantages of Small-Business Ownership 1. High Stress Levels: Owners juggle multiple roles, leading to long working hours. Constant pressure from competition, market changes, and nancial obligations. Psychological stress from managing all aspects of the business. 2. High Failure Rate: About 50% of businesses fail within the rst ve years. Common reasons include undercapitalization, managerial inexperience, and failure to manage growth. 3. Undercapitalization: Insu cient funds to sustain operations during slow periods. Over-reliance on personal savings and lack of access to signi cant external funding. Seasonal variations in sales can strain cash ow. 4. Managerial Inexperience: Lack of skills in hiring, nance, and other management areas. Overemphasis on product development at the expense of operational management. 5. Inability to Cope with Growth: Struggles with delegating authority as the business expands. Need for specialized management skills to handle increased complexity. Poorly managed growth can harm reputation and customer satisfaction. ffi fi fi fi fi fi fi fi fl fi fi fi fi  STARTING A SMALL BUSINESS To start any business, are or small, you just have some kind of general idea. A key element of success is a business plan, which is a precise statement of the rationale for a business and step-by-step explanation of how it will achieve its goals. The business plan should include an explanation of the business, an analysis of the competition, estimates of income and expenses, and other information. It should also establish a strategy for acquiring su cient funds to keep the business going. A good business plan should act as a guide and reference document, not a shackle that limits the business’s exibility and decision-making ability. It must be revised periodically to ensure that the rm’s goals and strategies adapt to changes in the environment. After developing a business plan, the entrepreneur has to decide on an appropriate legal form of business ownership. To make money from a small business, the owner must rst provide or obtain money to get started and to keep it running smoothly. - equity nancing is the process of raising capital by selling shares of ownership in a business. It involves o ering part of the company’s equity to investors in exchange for funds. These investors become co-owners and may share in the pro ts through dividends or increased share value. Unlike loans, equity nancing does not require repayment, but it may dilute the owner’s control over the business. Equity investors often provide additional support, such as expertise or industry connections, to help the business succeed. - debt nan