Define and provide examples of marketing, marketing concept, and marketing strategy.

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Exploring BusinessExploring Business

Exploring BusinessExploring Business


U N I V E R S I T Y O F M I N N E S O T A L I B R A R I E S P U B L I S H I N G E D I T I O N , 2 0 1 6 . T H I S E D I T I O N A D A P T E D F R O M A
W O R K O R I G I N A L L Y P R O D U C E D I N 2 0 1 0 B Y A P U B L I S H E R W H O H A S R E Q U E S T E D T H A T I T N O T R E C E I V E

A T T R I B U T I O N .
M I N N E A P O L I S , M N

Exploring Business by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0
International License, except where otherwise noted.


Publisher Information x

Chapter 1: The Foundations of Business

1.1 Introduction 2
1.2 Getting Down to Business 4
1.3 What Is Economics? 9
1.4 Perfect Competition and Supply and Demand 15
1.5 Monopolistic Competition, Oligopoly, and Monopoly 21
1.6 Measuring the Health of the Economy 24
1.7 Government’s Role in Managing the Economy 31
1.8 Cases and Problems 35

Chapter 2: Business Ethics and Social Responsibility

2.1 Misgoverning Corporations: An Overview 40
2.2 The Individual Approach to Ethics 46
2.3 Identifying Ethical Issues 54
2.4 The Organizational Approach to Ethics 61
2.5 Corporate Social Responsibility 65
2.6 Environmentalism 76
2.7 Stages of Corporate Responsibility 82
2.8 Cases and Problems 87

Chapter 3: Business in a Global Environment

3.1 The Globalization of Business 94
3.2 Opportunities in International Business 103
3.3 The Global Business Environment 113
3.4 Trade Controls 123
3.5 Reducing International Trade Barriers 127

3.6 Preparing for a Career in International Business 133
3.7 Cases and Problems 135

Chapter 4: Selecting a Form of Business Ownership

4.1 Factors to Consider 140
4.2 Sole Proprietorship 142
4.3 Partnership 146
4.4 Corporation 151
4.5 Other Types of Business Ownership 156
4.6 Mergers and Acquisitions 162
4.7 Cases and Problems 166

Chapter 5: The Challenges of Starting a Business

5.1 What Is an Entrepreneur? 173
5.2 The Importance of Small Business to the U.S. Economy 182
5.3 What Industries Are Small Businesses In? 188
5.4 Advantages and Disadvantages of Business Ownership 193
5.5 Starting a Business 197
5.6 The Business Plan 204
5.7 How to Succeed in Managing a Business 211
5.8 Cases and Problems 217

Chapter 6: Managing for Business Success

6.1 What Do Managers Do? 223
6.2 Planning 225
6.3 Organizing 233
6.4 Directing 245
6.5 Controlling 249
6.6 Managerial Skills 252
6.7 Cases and Problems 258

Chapter 7: Recruiting, Motivating, and Keeping Quality Employees

7.1 Human Resource Management 266
7.2 Developing Employees 275
7.3 Motivating Employees 280
7.4 What Makes a Great Place to Work? 287
7.5 Performance Appraisal 297
7.6 Labor Unions 305

7.7 Cases and Problems 312

Chapter 8: Teamwork and Communications

8.1 The Team and the Organization 317
8.2 Why Teamwork Works 324
8.3 The Team and Its Members 330
8.4 The Business of Communication 339
8.5 Communication Channels 346
8.6 Forms of Communication 356
8.7 Cases and Problems 363

Chapter 9: Marketing: Providing Value to Customers

9.1 What Is Marketing? 369
9.2 The Marketing Mix 377
9.3 Pricing a Product 385
9.4 Placing a Product 389
9.5 Promoting a Product 400
9.6 Interacting with Your Customers 405
9.7 The Product Life Cycle 413
9.8 The Marketing Environment 418
9.9 Careers in Marketing 428
9.10 Cases and Problems 431

Chapter 10: Product Design and Development

10.1 What Is a Product? 436
10.2 Where Do Product Ideas Come From? 441
10.3 Identifying Business Opportunities 446
10.4 Understand Your Industry 450
10.5 Forecasting Demand 453
10.6 Breakeven Analysis 457
10.7 Product Development 460
10.8 Protecting Your Idea 466
10.9 Cases and Problems 468

Chapter 11: Operations Management in Manufacturing and Service Industries

11.1 Operations Management in Manufacturing 473
11.2 Facility Layouts 480
11.3 Managing the Production Process in a Manufacturing Company 484

11.4 Graphical Tools: PERT and Gantt Charts 489
11.5 The Technology of Goods Production 493
11.6 Operations Management for Service Providers 496
11.7 Producing for Quality 505
11.8 Cases and Problems 511

Chapter 12: The Role of Accounting in Business

12.1 The Role of Accounting 517
12.2 Understanding Financial Statements 523
12.3 Accrual Accounting 537
12.4 Financial Statement Analysis 547
12.5 The Profession: Ethics and Opportunities 559
12.6 Cases and Problems 566

Chapter 13: Managing Financial Resources

13.1 The Functions of Money 572
13.2 Financial Institutions 577
13.3 The Federal Reserve System 585
13.4 The Role of the Financial Manager 592
13.5 Understanding Securities Markets 601
13.6 Financing the Going Concern 608
13.7 Careers in Finance 612
13.8 Cases and Problems 615

Chapter 14: Personal Finances

14.1 Financial Planning 633
14.2 Time Is Money 645
14.3 The Financial Planning Process 650
14.4 A House Is Not a Piggy Bank: A Few Lessons from the Subprime Crisis 662
14.5 Cases and Problems 671

Chapter 15: Managing Information and Technology

15.1 Data versus Information 674
15.2 Managing Data 681
15.3 Types of Information Systems 686
15.4 Computer Networks and Cloud Computing 693
15.5 Data Communications Networks 700
15.6 Security Issues in Electronic Communication 707

15.7 Careers in Information Management 715
15.8 Cases and Problems 717

Chapter 16: The Legal and Regulatory Environment of Business

16.1 Law and the Legal System 721
16.2 Criminal versus Civil Law 725
16.3 Negligence Torts 731
16.4 Product Liability 738
16.5 Some Principles of Public Law 752
16.6 Cases and Problems 770

Please share your supplementary material! 772

Publisher Information

Exploring Business is adapted from a work produced and distributed

under a Creative Commons license (CC BY-NC-SA) in 2010 by a

publisher who has requested that they and the original author not receive

attribution. This adapted edition is produced by the University of

Minnesota Libraries Publishing through the eLearning Support Initiative.

This adaptation has reformatted the original text, and replaced some images and figures to make the resulting

whole more shareable. This adaptation has not significantly altered or updated the original 2010 text. This work

is made available under the terms of a Creative Commons Attribution-NonCommercial-ShareAlike license.


Chapter 1: The Foundations of Business

1.1 Introduction

1.2 Getting Down to Business

1.3 What Is Economics?

1.4 Perfect Competition and Supply and Demand

1.5 Monopolistic Competition, Oligopoly, and Monopoly

1.6 Measuring the Health of the Economy

1.7 Government’s Role in Managing the Economy

1.8 Cases and Problems


1.1 Introduction

As the story of Apple suggests, today is an interesting time to study business. Advances in technology are bringing

rapid changes in the ways we produce and deliver goods and services. The Internet and other improvements

in communication (such as smartphones, video conferencing, and social networking) now affect the way we

do business. Companies are expanding international operations, and the workforce is more diverse than ever.

Corporations are being held responsible for the behavior of their executives, and more people share the opinion

that companies should be good corporate citizens. Plus—and this is a big plus—businesses today are facing

the lingering effects of what many economists believe is the worst financial crisis since the Great Depression

(Hilsenrath, et. al., 2008). Economic turmoil that began in the housing and mortgage industries as a result of

troubled subprime mortgages quickly spread to the rest of the economy. In 2008, credit markets froze up and banks

stopped making loans. Lawmakers tried to get money flowing again by passing a $700 billion Wall Street bailout,

yet businesses and individuals were still denied access to needed credit. Without money or credit, consumer

confidence in the economy dropped and consumers cut back their spending. Businesses responded by producing

fewer products, and their sales and profits dropped. Unemployment rose as troubled companies shed the most

jobs in five years, and 760,000 Americans marched to the unemployment lines1. The stock market reacted to

the financial crisis and its stock prices dropped by 44 percent while millions of Americans watched in shock as

their savings and retirement accounts took a nose dive. In fall 2008, even Apple, a company that had enjoyed

strong sales growth over the past five years, began to cut production of its popular iPhone. Without jobs or cash,

consumers would no longer flock to Apple’s fancy retail stores or buy a prized iPhone (Gallagher, 2008). Things

have turned around for Apple, which reported blockbuster sales for 2011 in part because of strong customer

response to the iPhone 4S. But not all companies or individuals are doing so well. The economy is still struggling,

unemployment is high (particularly for those ages 16 to 24), and home prices remain low.

As you go through the course with the aid of this text, you’ll explore the exciting world of business. We’ll

introduce you to the various activities in which businesspeople engage—accounting, finance, information

technology, management, marketing, and operations. We’ll help you understand the roles that these activities play

in an organization, and we’ll show you how they work together. We hope that by exposing you to the things that

businesspeople do, we’ll help you decide whether business is right for you and, if so, what areas of business you’d

like to study further.

1“How the Economy Stole the Election,”,

gallery.economy_election/index.html (accessed January 21, 2012).



Gallagher, D., “Analyst says Apple is cutting back production as economy weakens,” MarketWatch, November

3, 2008,

story.aspx?guid=%7B7F2B6F99-D063-4005-87AD-D8C36009F29B%7D&dist=msr_1 (accessed January 21,


Hilsenrath, J., Serena Ng, and Damian Paletta, “Worst Crisis Since ’30s, With No End Yet in Sight,” Wall Street

Journal, Markets, September 18, 2008, (accessed

January 21, 2012).

1 . 1 I N T R O D U C T I O N • 3

1.2 Getting Down to Business

Learning Objective

1. Identify the main participants of business, the functions that most businesses perform, and the
external forces that influence business activities.

A business is any activity that provides goods or services to consumers for the purpose of making a profit. When

Steve Jobs and Steve Wozniak created Apple Computer in Jobs’s family garage, they started a business. The

product was the Apple I, and the company’s founders hoped to sell their computers to customers for more than it

cost to make and market them. If they were successful (which they were), they’d make a profit.

Before we go on, let’s make a couple of important distinctions concerning the terms in our definitions. First,

whereas Apple produces and sells goods (Mac, iPhone, iPod, iPad), many businesses provide services. Your bank

is a service company, as is your Internet provider. Hotels, airlines, law firms, movie theaters, and hospitals are

also service companies. Many companies provide both goods and services. For example, your local car dealership

sells goods (cars) and also provides services (automobile repairs).

Second, some organizations are not set up to make profits. Many are established to provide social or educational

services. Such not-for-profit (or nonprofit) organizations include the United Way of America, Habitat for

Humanity, the Boys and Girls Clubs, the Sierra Club, the American Red Cross, and many colleges and

universities. Most of these organizations, however, function in much the same way as a business. They establish

goals and work to meet them in an effective, efficient manner. Thus, most of the business principles introduced in

this text also apply to nonprofits.

Business Participants and ActivitiesBusiness Participants and Activities

Let’s begin our discussion of business by identifying the main participants of business and the functions that most

businesses perform. Then we’ll finish this section by discussing the external factors that influence a business’s




Every business must have one or more owners whose primary role is to invest money in the business. When a

business is being started, it’s generally the owners who polish the business idea and bring together the resources

(money and people) needed to turn the idea into a business. The owners also hire employees to work for the

company and help it reach its goals. Owners and employees depend on a third group of participants—customers.

Ultimately, the goal of any business is to satisfy the needs of its customers in order to generate a profit for the


Functional Areas of BusinessFunctional Areas of Business

Figure 1.1

Hospitals specialize in an intangible product—health care.

ReSurge International – CC BY-NC-ND 2.0.

The activities needed to operate a business can be divided into a number of functional areas: management,

operations, marketing, accounting, and finance. Let’s briefly explore each of these areas.


Managers are responsible for the work performance of other people. Management involves planning for,

organizing, staffing, directing, and controlling a company’s resources so that it can achieve its goals. Managers

plan by setting goals and developing strategies for achieving them. They organize activities and resources

1 . 2 G E T T I N G D O W N T O B U S I N E S S • 5

to ensure that company goals are met. They staff the organization with qualified employees and direct them

to accomplish organizational goals. Finally, managers design controls for assessing the success of plans and

decisions and take corrective action when needed.


All companies must convert resources (labor, materials, money, information, and so forth) into goods or services.

Some companies, such as Apple, convert resources into tangible products—Macs, iPhones, iPods, iPads. Others,

such as hospitals, convert resources into intangible products—health care. The person who designs and oversees

the transformation of resources into goods or services is called an operations manager. This individual is also

responsible for ensuring that products are of high quality.


Marketing consists of everything that a company does to identify customers’ needs and designs products to meet

those needs. Marketers develop the benefits and features of products, including price and quality. They also decide

on the best method of delivering products and the best means of promoting them to attract and keep customers.

They manage relationships with customers and make them aware of the organization’s desire and ability to satisfy

their needs.


Managers need accurate, relevant, timely financial information, and accountants provide it. Accountants measure,

summarize, and communicate financial and managerial information and advise other managers on financial

matters. There are two fields of accounting. Financial accountants prepare financial statements to help users, both

inside and outside the organization, assess the financial strength of the company. Managerial accountants prepare

information, such as reports on the cost of materials used in the production process, for internal use only.


Finance involves planning for, obtaining, and managing a company’s funds. Finance managers address such

questions as the following: How much money does the company need? How and where will it get the necessary

money? How and when will it pay the money back? What should it do with its funds? What investments should

be made in plant and equipment? How much should be spent on research and development? How should excess

funds be invested? Good financial management is particularly important when a company is first formed, because

new business owners usually need to borrow money to get started.

Figure 1.2 Business and Its Environment

6 • E X P L O R I N G B U S I N E S S

External Forces that Influence Business ActivitiesExternal Forces that Influence Business Activities

Apple and other businesses don’t operate in a vacuum: they’re influenced by a number of external factors. These

include the economy, government, consumer trends, and public pressure to act as good corporate citizens. Figure

1.2 “Business and Its Environment” sums up the relationship among the participants in a business, its functional

areas, and the external forces that influence its activities. One industry that’s clearly affected by all these factors is

the fast-food industry. A strong economy means people have more money to eat out at places where food standards

are monitored by a government agency, the Food and Drug Administration. Preferences for certain types of foods

are influenced by consumer trends (eating fried foods might be OK one year and out the next). Finally, a number

of decisions made by the industry result from its desire to be a good corporate citizen. For example, several fast-

food chains have responded to environmental concerns by eliminating Styrofoam containers (Baron, 2006). As

you move through this text, you’ll learn more about these external influences on business. (Section 1.3 “What Is

Economics?” will introduce in detail one of these external factors—the economy.)

Key Takeaways

• The main participants in a business are its owners, employees, and customers.

• Businesses are influenced by such external factors as the economy, government, consumer trends,
and public pressure to act as good corporate citizens.

• The activities needed to run a business can be divided into five functional areas:

1 . 2 G E T T I N G D O W N T O B U S I N E S S • 7

1. Management involves planning, organizing, staffing, directing, and controlling resources to
achieve organizational goals.

2. Operations transforms resources (labor, materials, money, and so on) into products.

3. Marketing works to identify and satisfy customers’ needs.

4. Finance involves planning for, obtaining, and managing company funds.

5. Accounting entails measuring, summarizing, and communicating financial and managerial


1. (AACSB) Analysis
The Martin family has been making guitars out of its factory in Nazareth, Pennsylvania, factory for
more than 150 years. In 2004, Martin Guitar was proud to produce its millionth instrument. Go to to link to the Martin Guitar Web site and read about the company’s long
history. You’ll discover that, even though it’s a family-run company with a fairly unique product, it
operates like any other company. Identify the main activities or functions of Martin Guitar’s business
and explain how each activity benefits the company.

2. (AACSB) Analysis
Name four external factors that have an influence on business. Give examples of the ways in which
each factor can affect the business performance of two companies: Wal-Mart and Ford.


Baron, D., “Facing-Off in Public,” Stanford Business, April 15, 2006,

sbsm0308/feature_face_off.shtml (accessed January 21, 2012).

8 • E X P L O R I N G B U S I N E S S

1.3 What Is Economics?

Learning Objectives

1. Define economics and identify factors of production.

2. Explain how economists answer the three key economics questions.

3. Compare and contrast economic systems.

To appreciate how a business functions, we need to know something about the economic environment in which

it operates. We begin with a definition of economics and a discussion of the resources used to produce goods and


Resources: Inputs and OutputsResources: Inputs and Outputs

Economics is the study of the production, distribution, and consumption of goods and services. Resources are the

inputs used to produce outputs. Resources may include any or all of the following:

• Land and other natural resources

• Labor (physical and mental)

• Capital, including buildings and equipment

• Entrepreneurship

Resources are combined to produce goods and services. Land and natural resources provide the needed raw

materials. Labor transforms raw materials into goods and services. Capital (equipment, buildings, vehicles, cash,

and so forth) are needed for the production process. Entrepreneurship provides the skill and creativity needed to

bring the other resources together to produce a good or service to be sold to the marketplace.

Because a business uses resources to produce things, we also call these resources factors of production. The

factors of production used to produce a shirt would include the following:

• The land that the shirt factory sits on, the electricity used to run the plant, and the raw cotton from which


the shirts are made

• The laborers who make the shirts

• The factory and equipment used in the manufacturing process, as well as the money needed to operate the


• The entrepreneurship skill used to coordinate the other resources to initiate the production process and the

distribution of the goods or services to the marketplace

Input and Output MarketsInput and Output Markets

Many of the factors of production (or resources) are provided to businesses by households. For example,

households provide businesses with labor (as workers), land and buildings (as landlords), and capital (as

investors). In turn, businesses pay households for these resources by providing them with income, such as wages,

rent, and interest. The resources obtained from households are then used by businesses to produce goods and

services, which are sold to the same households that provide businesses with revenue. The revenue obtained

by businesses is then used to buy additional resources, and the cycle continues. This circular flow is described

in Figure 1.3 “The Circular Flow of Inputs and Outputs”, which illustrates the dual roles of households and


• Households not only provide factors of production (or resources) but also consume goods and services.

• Businesses not only buy resources but also produce and sell both goods and services.

Figure 1.3 The Circular Flow of Inputs and Outputs

1 0 • E X P L O R I N G B U S I N E S S

The Questions Economists AskThe Questions Economists Ask

Economists study the interactions between households and businesses and look at the ways in which the factors of

production are combined to produce the goods and services that people need. Basically, economists try to answer

three sets of questions:

1. What goods and services should be produced to meet consumers’ needs? In what quantity? When should

they be produced?

2. How should goods and services be produced? Who should produce them, and what resources, including

technology, should be combined to produce them?

3. Who should receive the goods and services produced? How should they be allocated among consumers?

1 . 3 W H A T I S E C O N O M I C S ? • 1 1

Economic SystemsEconomic Systems

The answers to these questions depend on a country’s economic system—the means by which a society

(households, businesses, and government) makes decisions about allocating resources to produce products and

about distributing those products. The degree to which individuals and business owners, as opposed to the

government, enjoy freedom in making these decisions varies according to the type of economic system. Generally

speaking, economic systems can be divided into two systems: planned systems and free market systems.

Planned SystemsPlanned Systems

In a planned system, the government exerts control over the allocation and distribution of all or some goods

and services. The system with the highest level of government control is communism. In theory, a communist

economy is one in which the government owns all or most enterprises. Central planning by the government

dictates which goods or services are produced, how they are produced, and who will receive them. In practice,

pure communism is practically nonexistent today, and only a few countries (notably North Korea and Cuba)

operate under rigid, centrally planned economic systems.

Under socialism, industries that provide essential services, such as utilities, banking, and health care, may be

government owned. Other businesses are owned privately. Central planning allocates the goods and services

produced by government-run industries and tries to ensure that the resulting wealth is distributed equally. In

contrast, privately owned companies are operated for the purpose of making a profit for their owners. In general,

workers in socialist economies work fewer hours, have longer vacations, and receive more health care, education,

and child-care benefits than do workers in capitalist economies. To offset the high cost of public services, taxes

are generally steep. Examples of socialist countries include Sweden and France.

Free Market SystemFree Market System

The economic system in which most businesses are owned and operated by individuals is the free market system,

also known as capitalism. As we will see next, in a free market, competition dictates how goods and services

will be allocated. Business is conducted with only limited government involvement. The economies of the United

States and other countries, such as Japan, are based on capitalism.

How Economic Systems CompareHow Economic Systems Compare

In comparing economic systems, it’s helpful to think of a continuum with communism at one end and pure

capitalism at the other, as in Figure 1.4 “The Spectrum of Economic Systems”. As you move from left to right, the

amount of government control over business diminishes. So, too, does the level of social services, such as health

care, child-care services, social security, and unemployment benefits.

Figure 1.4 The Spectrum of Economic Systems

1 2 • E X P L O R I N G B U S I N E S S

Mixed Market EconomyMixed Market Economy

Though it’s possible to have a pure communist system, or a pure capitalist (free market) system, in reality many

economic systems are mixed. A mixed market economy relies on both markets and the government to allocate

resources. We’ve already seen that this is what happens in socialist economies in which the government controls

selected major industries, such as transportation and health care, while allowing individual ownership of other

industries. Even previously communist economies, such as those of Eastern Europe and China, are becoming

more mixed as they adopt capitalistic characteristics and convert businesses previously owned by the government

to private ownership through a process called privatization.

The U.S. Economic SystemThe U.S. Economic System

Like most countries, the United States features a mixed market system: though the U.S. economic system is

primarily a free market system, the federal government controls some basic services, such as the postal service

and air traffic control. The U.S. economy also has some characteristics of a socialist system, such as providing

social security retirement …