Business in a Changing

World
Week 1
By: Handini Audita, S.E., M.Sc

1-2

The Nature of Business

Business
Individuals or organizations who try to earn a
profit by providing products that satisfy peoples
needs

Products
Goods or services with tangible and intangible
characteristics that provide satisfaction and
benefits

1-3

A Product Can Be
Tangible
Goods

Automobile
Computer
Phone
Coat

Services

Ideas

Dry cleaning
Doctors
checkup
Basketball
game
Concert

Professionals
generate
ideas for
solving
problems

1-4

Nonprofit Organizations

Nonprofit Organizations
Provide
goods and
services

Engage in
Do not share
management,
the purpose
marketing
of earning
and finance to
profits
reach goals

1-5

To Earn

a Profit
Management
Skills

Acting
Ethically

Marketing
Expertise

Profit
Adapting to
Change

Financial
Resources

Abiding by
the Law

1-6

Overview of the Business World

1-7

Economic Foundations of Business

Natural Resources
Land, forests, mineral, water, and other things not made by
people
Human Resources also called Labor
The physical and mental abilities people use to produce
goods and services
Financial Resources also called Capital
The funds used to acquire the natural and human
resources needed to provide products
Intangible Resources
Such as a good reputation for quality products or being
socially responsible

1-8

Economic Systems
Economic System
A description of how a particular society distributes
its resources to produce goods and services
All economic systems must address these 3 important issues:

1. What goods and services, and how much of each, will

satisfy consumers needs?
2. How will goods and services be produced, who will
produce them, and with what resources will they be
produced?
3. How are the goods and services to be distributed to
consumers?

1-9

Communism

Communism

First described by Karl Marx as a society in which

the people, without regard to class, own all the
nations resources
On paper it appears efficient, but in practice, these
economies suffer from:
low standards of living
critical shortages of consumer goods
high prices
corruption and little freedom

C
H
I
N
A

C
U
B
A

1-10

Socialism

Socialism

An economic system in which the government owns and

operates basic industries but individuals own most
businesses
Most socialist countries are democratic and recognize
individual freedoms
The socialist system may allow a higher standard of
living and is more stable; but taxes and unemployment
are generally higher in socialist countries

S
W
E
D
E
N

I
S
R
A
E
L

I
N
D
I
A

1-11

Capitalism

Capitalism,
or Free
Enterprise

An economic system in which individuals own and operate

the majority of businesses that provide goods and services
Pure capitalism or free-market system happens when all
economic decisions are made without government
intervention; also called laissez-faire capitalism
Modified capitalism differs from pure capitalism in that the
government intervenes and regulates business to some
extent

C
A
N
A
D
A

U
S
A

J
A
P
A
N

1-12

Comparison of Communism, Socialism,

and Capitalism

1-13

Mixed Economies
No country practices pure capitalism, socialism, or
communism

Mixed
Economies

Economies made up of elements

from more than one economic
system
No country practices a pure form of
any economic system, although
most favor one system over others

China and Russia have used state capitalism

to advance the economy, integrating the
powers of the state with the advantages of
capitalism

1-14

Modified Capitalism
Modified capitalism differs from pure capitalism
in that the government intervenes and
regulates business to some extent
One way of
regulating business is
through laws
Federal Trade
Commission Act
created the Federal
Trade Commission
Enforces antitrust laws and
monitors businesses to ensure
fair competition

Importance of
governments role in
economy

1-15

The Forces of Supply and Demand

Supply

The number of
products businesses
are willing to sell at
different prices at a
specific time

The number of
products consumers
are willing to buy at
different prices at a
specific time

Deman
d

1-16

Equilibrium Price
Equilibrium
price is the
price at
which the
number of
products
that
businesses
are willing to
supply
equals the
amount of
products
that
consumers
are willing to

1-17

The Nature of Competition

Competition is the rivalry among businesses for consumers
dollars
Pure
Competition

Monopolistic
Competition

The market
structure that
exists when
there are
many small
businesses
selling one
standardized
product

Fewer
businesses
than in a
pure
competition
and the
differences
among the
goods they
sell are small

Oligopoly

Monopoly

The market
structure that
exists when
there are
very few
businesses
selling a
product

The market
structure that
exists when
there is only
one business
providing a
product in a
given market

1-18

Economic Cycles and Productivity

May lead to
inflation a
continuing rise
in prices
May lead to
recession a
decline in
production,
employment
and income

Economic expansion occurs then

an economy is growing and people
are spending more money; their
purchases stimulate the production
of goods and services, which in turn
stimulates employment
Economic contraction is a
slowdown of the economy
characterized by a decline in
spending and during which
businesses cut back on
production and lay off workers

1-19

Economic Cycles and Productivity (cont.)

Recessions are often characterized by rising levels of
Unemployment the condition in which a percentage of

the population wants to work but is unable to find jobs

Deflation occurs when rising unemployment stifles demand,
forcing prices down
Severe recession may turn into a
Depression a condition of the

economy in which unemployment is

very high, consumer spending is low,
and business output is sharply
reduced

1-20

Hyperinflation
Inflation can be harmful if individuals incomes
do not increase at the same pace as rising
prices, reducing their buying power

The worst case of hyperinflation occurred in

Hungary in 1946

At one point, prices were doubling every 15.6

hours

One of the most recent cases of hyperinflation

occurred in Zimbabwe

Suffered from hyperinflation so severe that its

inflation percentage rate rose into the hundreds of
million

The elimination of the Zimbabwean dollar and certain

2-21

Business Ethics
Business Ethics
Principles and standards that determine
acceptable conduct in business
Acceptable behavior is
determined by:

The organization
Stakeholders and interest groups
Competitors
Government regulators
The public
The individuals personal
principles

New York Yankees 3rd

baseman Alex Rodriguez was
suspended after evidence
suggested he had been using
performance-enhancing
drugs

2-22

Social Responsibility
Social Responsibility
A businesss obligation to maximize its positive impact
and minimize its negative impact on society

Ethics refers to
individuals or work
groups decisions

Social
responsibility and
ethics are not the
same

Social responsibility
is the impact of the
entire organizations
activities on society

2-23

Four Dimensions of Social Responsibility

2-24

Recognizing Ethical Issues

Ethical Issue
An identifiable 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
Recognizing ethical issues is the most
important step in understanding
business ethics
Best way to judge the ethics of a
decision is to look at a situation from a
customers or competitors viewpoint

2-25

Bribery
Many business issues seem straightforward and
easy to resolve on the surface, but are in reality
very complex

Bribery
Payments, gifts or special favors intended to influence
the outcome of a decision
Experience with the culture in which a business
operates is critical to understanding what is
ethical or unethical
One of the principal causes of unethical behavior
in organizations is overly aggressive financial or
business objectives

2-26

Misuse of Company Time

Theft of time is a common
area of misconduct observed
in the workplace
Many employees spend an
average of 1 hour each day
using social media sites or
watching YouTube
Time theft costs are estimated to cost companies
hundreds of billions of dollars annually

2-27

Abusive and Intimidating Behavior

Abusive or intimidating
behavior is the most
common ethical problem
for employees

Bullying is associated with a hostile

workplace when a person or group is
targeted and is threatened,
harassed, belittled, verbally abused,
or overly criticized
Within the concept
of abusive
behavior, intent
should be a
consideration

Abusive behavior is
difficult to assess and
manage because of
diversity in culture and
lifestyle

2-28

Misuse of Company Resources

Misuse of company resources has been identified
as a leading issue in observed misconduct in
organizations

Issues might include:

Spending an excessive amount of time on personal emails

Submitting personal expenses on company expense

reports

Using the company copier for personal use

Many companies have implemented official policies

delineating acceptable use of company resources

2-29

Conflict of Interest

Conflict of
Interest

Exists when a person must choose

whether to advance his or her own
personal interests or those of others
To avoid, employees must be able to
separate their personal financial interests
from their business dealings
Insider trading is the buying or selling of
stocks by insiders who possess material
that is still not public

My Way

Your
Way

2-30

Fairness and Honesty for Employees

Employees Must

Abide by
the laws

Cause no
harm
through
dishonesty

Use
company
resources
fairly and
honestly

Be aware Recognize
of company
ethical
policies
behavior

2-31

Fairness and Honesty for Companies

Companies Must
Give full
Use fair
disclosure
competition of potential
practices
harm by a
product

Be truthful
in
advertising

Keep
company
secrets

Meet
obligations

Avoid
undue
pressure
forcing
others to
act
unethically

2-32

Fairness and Honesty

Plagiarism
Taking someone
elses work and
presenting it as
your own
without mention
the source, is
another ethical
issue
Trunitin is an Internet service that allows teachers
to determine if their students have plagiarized
content

2-33

Making Decisions about Ethical Issues

o

It can be difficult to recognize specific ethical issues and

people often need years of experience to accurately
recognize and react to ethical situations

3-34

The Role of International Business

International Business
The buying, selling and trading of goods and
services across national boundaries

Most of the worlds

population and two-thirds of
its total purchasing power
are outside the U.S.

Global marketing requires

balancing global brands with
the needs of local
consumers

3-35

Why Nations Trade

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 efficient
producer of an item

Comparative Advantage
The basis of most international trade, when a country
specializes in products that it can supply more efficiently or
at a lower cost than it can produce other items

Outsourcing
The transferring of manufacturing or other tasks such as
data processing to countries where labor and supplies are
less expensive

3-36

International Trade Barriers

Completely free trade seldom exists, due to:

Economic barriers
Ethical, legal and political barriers
Social and cultural barriers
Technological barriers

Some countries have

copyright and patent laws
that are less strict than
those of the U.S., and
some countries fail to
honor U.S. laws

3-37

Exchange Controls
Exchange Controls
Regulations that restrict the amount of currency
that can be bought or sold

Some countries control their foreign trade by forcing

businesspeople to buy and sell foreign products
through a central bank

When foreign currency is in short supply

Government uses foreign currency to purchase

necessities and capital goods and produce other
products locally

Limiting its need for foreign imports

3-38

Tariffs and Trade Restrictions

Quota
Restriction on the number of units of a particular
product that can be imported into a country

Embargo
A prohibition on trade for a particular product

Dumping
The act of a country or business selling products at
less than what it costs to produce them

3-39

Getting Involved in International Business

Trading Company
A firm that buys goods in one country and sells them to buyers of another
country
Handles all trade activities; similar to export agents but their role is broader

Licensing
A trade agreement in which one company the licensor allows another
company the licensee to use its company name, products, patents, brand,
trademarks, raw materials and/or production processes in exchange for a fee
or royalty
An attractive alternative to direct investment when political stability is in doubt

Franchising
A form of licensing in which a company the franchiser agrees to provide a
franchisee a name, logo, methods of operation, advertising, products and
other elements associated with a franchisers business, in return for a financial
commitment and the agreement to conduct business in accord with the
franchisers standard of operation

3-40

Contract Manufacturing and Outsourcing

Contract
Manufacturing

The hiring of a foreign company to produce a

specified volume of the initiating companys
product to specification; the final product
carries the domestic firms name
For example, Reebok uses contract
manufacturers to produce many of its shoes

As defined earlier is transferring tasks to other

countries where costs are lower

Outsourcing

Insourcing, where foreign companies transfer

tasks to U.S. companies, happens more often

3-41

Offshoring and Joint Venture

Offshoring

Joint Venture

The relocation of business

processes by a company,
or subsidiary, to another
country
Different from
outsourcing: the company
retains control by not
subcontracting to another
company

The sharing of the costs

and operation of a
business between a
foreign company and a
local partner
Used in countries
forbidding direct
investment from foreign
companies or when the
company lacks resources
or expertise

3-42

Strategic Alliance and Direct Investment

Strategic Alliance

Direct Investment

A partnership formed to
create competitive
advantage on a
worldwide basis
Used when competition
is fierce and costs are
high
Becoming predominant
in the automobile and
computer industries

The ownership of
overseas facilities
For companies who
want more control and
are willing to invest
considerable resources
May involve new
facilities or the
purchase of an existing
operation

3-43

International Business Strategies

Multinational Corporation (MNC)
A corporation that operates on a worldwide scale,
without significant ties to any one nation or region
They often have greater assets than the countries in
which they operate
Many MNCs are targeted by antiglobalization
activists, including some violent protests
Activists contend the MNCs increase the gap
between rich and poor, misuse scarce resources,
exploit the labor markets in LDCs and harm natural
environments

3-44

Global Strategy and Multinational Strategy

Global
Strategy
(Globalizati
on)

A strategy that involves

standardizing products
(promotion and
distribution) for the whole
world as if it were a
single entity

Multinational
Strategy

A plan used by international

companies that involves
customizing products,
promotion and distribution
according to cultural
technological, regional and
national differences