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CHAPTER 1 Managing Within the Dynamic Business Environment LEARNING OBJECTIVES AFTER YOU HAVE READ AND STUDIED THIS CHAPTER, YOU SHOULD BE ABLE TO: LO  1 Describe the relationship of businesses’ profit to risk assumption. LO  2 Discuss the importance of stakeholders and non-profit organizations to business activities. LO  3 Explain how entrepreneurship is critical to the wealth of an economy, and list the five factors of production that contribute to wealth. LO  4 Review the six elements that make up the business environment and explain why the business environment is important to organizations. LO  5 Understand how the service sector has replaced manufacturing as the principal provider of jobs, but why manufacturing remains vital for Canada. PROFILE Getting to Know Mike Lazaridis of Research In Motion Ltd. Mike Lazaridis is known in the global wireless community as a visionary, innovator, and engineer of extraordinary talent. He traces his passion for his work to his hometown of Windsor, Ontario, where his love of science and fascination with electronics were nurtured in supportive family and school environments. Lazaridis studied electrical engineering at the University of Waterloo but dropped out two months before graduation. Using a small loan from his parents and a contract with General Motors, he founded Research In Motion Ltd. (RIM) in 1984. RIM is a competitor in the ICT (information and communications technology—or technologies) sector. ICT is an umbrella term that includes any communication device or application encompassing radio, television, cellular phones, computer and network hardware and software, satellite systems and so on, as well as the various services and applications associated with them, such as videoconferencing and distance learning. The ICT sector contributed $57 billion to Canada’s gross domestic product in 2007, accounting for 4.7 percent of Canadian output. Research and development (R&D) spending in the ICT sector has been steadily increasing over the years and is now at $6.0 billion, representing 38 percent of total Canadian private sector R&D expenditures. ICT sector employment is characterized by a highly educated workforce. The top three industries that employ the largest share of university- educated personnel are communications equipment, software and computer services, and computer equipment. As RIM’s President and Co-CEO, Lazaridis is responsible for product strategy, research and development, product development, and manufacturing. In fiscal 2009 (ended 28 February 2009), the company generated approximately US$11 billion in revenues. Today, RIM is a leading designer, manufacturer, and marketer of innovative wireless solutions for the worldwide mobile communications market. Through the development of integrated hardware, software, and services that support multiple wireless network standards, RIM provides platforms and solutions for seamless access to time-sensitive information. RIM technology also enables a broad array of third-party developers and manufacturers to enhance their products and services with wireless connectivity. RIM’s portfolio of award-winning products, services, and embedded technologies are used by thousands of organizations around the world and include the BlackBerry wireless platform, the RIM BlackBerry Smartphone product line, software development tools, radio-modems, and software/hardware licensing agreements. The brand is becoming more global with products increasingly being introduced in new markets such as Vietnam, Malawi, and Egypt. Students and professionals alike have embraced the products. For example, do you know that a secure BlackBerry Smartphone was developed for U.S. President Barack Obama after he insisted on keeping a BlackBerry? William G. Nickels 128225199.doc 1 Lazaridis advocates for education and scientific research. He is a member of the Natural Sciences and Engineering Research Council of Canada (NSERC), the Ontario Research and Innovation Council, and a Governor of the Information Technology Association of Canada. He supports his community and country through generous philanthropic gifts made possible by his success in business. He has donated $100 million to the University of Waterloo to help establish the Institute for Quantum Computing. His gift of $150 million established the Perimeter Institute for Theoretical Physics. As a result of his leadership and tireless effort, more than $100 million has been generated in additional private and public sector funding for this world centre of excellence, based in Waterloo and affiliated with more than 30 Canadian universities. In recognition of his contributions, Lazaridis has won many awards. Some examples include sharing Canada’s most prestigious innovation prize, The Ernest C. Manning Principal Award. He was named an Officer to the Order of Canada in 2006, chosen as Canada’s Outstanding CEO of the Year in 2006, listed on the TIME 100 List of Most Influential People in 2005, previously recognized as Canada’s Nation Builder of the Year and was a recipient of Ontario’s Entrepreneur of the Year award. He has been inducted into both the Canadian Business Hall of Fame and Canada’s Telecommunications Hall of Fame. The purpose of this text is to introduce you to the exciting and challenging world of business. Each chapter will begin with a story similar to this one. You will meet more successful entrepreneurs who have started a business. You will also learn about people who work for companies and have succeeded far beyond their original expectations. You will learn about all aspects of business: management, human resource management, marketing, accounting, finance, and more. You will also learn about businesses of all sizes. We begin by looking at some key terms and exploring the rapidly changing business environment so that you can prepare to meet tomorrow’s challenges today. William G. Nickels 128225199.doc 2 Sources: “RIM’s Executive Team – Mike Lazaridis,” Research In Motion Ltd., 2009, media/executive/index.shtml; “RIM 2008 Annual Report,” Research in Motion Ltd., 2009, http://www.shareholder.- com/visitors/DynamicDoc/document.cfm?DocumentID=2259&CompanyID=RIMM;“Canadian ICT Sector Profile,” Industry Canada, 10 July 2008,; Brian Banks and Mark Evans, “Two Men and Their Baby,” Financial Post Business, November 2006, 35; and “ICT Definition,”, 14 January 2004,,,sid183_gci 928405,00.html#. BUSINESS AND ENTREPRENEURSHIP: REVENUES, PROFITS, AND LOSSES Thousands of people have learned that one of the best ways to become a success in Canada, or almost anywhere else in the world, is to have a career in business. A business is any activity that seeks to provide goods and services to others while operating at a profit. Profit is the amount of money a business earns above and beyond what it spends for salaries and other expenses. Since not all businesses make a profit, starting a business can be risky. An entrepreneur is a person who risks time and money to start and manage a business. business Any activity that seeks to provide goods and services to others while operating at a profit. profit The amount a business earns above and beyond what it spends for salaries and other expenses. William G. Nickels 128225199.doc 3 entrepreneur A person who risks time and money to start and manage a business. For an up-to-date list of the world’s wealthiest citizens, visit Who is Canada’s wealthiest person? Businesses provide people with the opportunity to become wealthy. Forbes magazine reports that in 2009 there were 790 billionaires around the world, of which 20 were of Canadian citizenship. American business person and philanthropist Bill Gates, founder and Chairman of Microsoft Corporation, was said to be worth US$40 billion, making him the richest person in the world. Maybe someday you will be a billionaire! Businesses don’t just make money for entrepreneurs. Businesses provide all of us with necessities such as food, clothing, housing, medical care, and transportation, as well as other goods and services that make our lives easier and better. Matching Risk with Profit Profit, remember, is the amount of money a business earns above and beyond what it pays out for salaries and other expenses. For example, if you were to start a business selling hot dogs in the summer, you would have to pay for the cart rental, for the hot dogs and other materials, and for someone to run the cart while you were away. After you paid your employee and yourself, paid for the food and materials you used, paid the rent on the cart, and paid your taxes, any money left over would be profit. Keep in mind that profit is over and above the money you pay yourself in salary. You could use any profit you make to rent or buy a second cart and hire other employees. After a few summers, you might have a dozen carts employing dozens of workers. Revenue is the total amount of money a business takes in during a given period by selling goods and services. A loss occurs when a business’s expenses are more than its revenues. If a business loses money over time, it will likely have to cl3se, putting its employees out of work. In fact, approximately 125,000 businesses exit the marketplace each year. Some owners close down one business to start another one or to retire. Even though such closings are not failures, they are reported as exits by Industry Canada. Only a small proportion of firms that exit the marketplace end up filing for bankruptcy, which refers to the liquidation of the business debtor’s assets and the end of the commercial entity’s operations. As discussed later in this textbook, most business failures are due to poor management or problems associated with cash flow. revenue The total amount of money a business takes in during a given period by selling goods and services. loss When a business’s expenses are more than its revenues. William G. Nickels 128225199.doc 4 How well do you know yourself? Are you more excited at the prospect of starting your own small business or would you prefer to work for a large- or medium-sized business? The answer to this question may start with understanding your personal risk tolerance. Starting a business involves risk. Risk is the chance an entrepreneur takes of losing time and money on a business that may not prove profitable. Even among companies that do make a profit, not all make the same amount. Those companies that take the most risk may make the most profit. Decades ago, there was a lot of risk involved in, for example, producing automobiles to replace horse-drawn carriages. Today, we see investors betting on information highway pioneers such as Google as a way to prosper. Such is the nature of risk and reward in business. risk The chance an entrepreneur takes of losing time and money on a business that may not prove profitable. As a potential business owner, you need to do research (e.g., talk to other business people and read business publications) to find the right balance between risk and profit for you. Different people have different tolerances for risk. To decide which is the best choice for you, you have to calculate the risks and the potential rewards of each decision. The more risks you take, the higher the rewards may be. In Chapter 7, you will learn more about the risks and rewards that come with starting a business. Responding to the Various Business Stakeholders Stakeholders are all of the people who stand to gain or lose by the policies and activities of a business. As noted in Figure 1.1, stakeholders include many different groups such as customers, employees, financial institutions (e.g., banks and credit unions), investors (e.g., stockholders), environmentalists, and government (e.g., federal, provincial, and municipal). All of these groups are affected by the products, policies, and practices of businesses, and their concerns need to be addressed. Don’t forget that businesses can also influence government policies through the activities and efforts of their associations, lobbyists, and trade unions. stakeholders All the people who stand to gain or lose by the policies and activities of a business. William G. Nickels 128225199.doc 5 FIGURE 1.1 A Business and Its Stakeholders Often the needs of a firm’s various stakeholders will conflict. For example, paying employees more may cut into stockholders’ profits. Balancing such demands is a major role of business managers. DEALING with CHANGE Cirque du Soleil Tumbles to Success With annual sales of more than US$700 million and nearly 10 million visitors a year, Cirque du Soleil is a Canadian (and international) success story. The company was formed in 1984 by a group of street performers that had a dream to create a Quebec circus and take it around the world. Since that time, it has become an international entertainment organization, growing to 18 shows in over 200 cities on five continents. Each show is a theatrical blend of circus arts and street performance, with spectacular costumes and fairyland sets. Due to its fast-paced growth and the complexi- ty of staging shows around the world, Cirque du Soleil has outsourced its information technology needs in a $130- million, 10-year contract with Montreal-based CGI Group Inc. As part of this contract, CGI hired 84 of Cirque’s employees that already were doing the job. CGI will help Cirque with everything from payroll to managing costume inventory to its Internet cafés that are set up when its shows travel. William G. Nickels 128225199.doc 6 Guy Laliberté is the founder, majority owner, and CEO of Cirque du Soleil. A former street performer himself, he guides the company that has a mission to invoke the imagination, provoke the senses, and evoke the emotions of people around the world. Creativity is the cornerstone of the organization’s identity. Every concept and scenic ele- ment is created at the Studio, a training facility in Montreal. There, more than 1,000 employees work together to cre- ate new shows and costumes. Laliberté juggles the demands of creative and financial types and walks a tightrope among the almost 4,000 employees from over 40 different countries. With such diversity, you can see why the com- pany’s great strength is its ability to develop material that resonates with audiences worldwide. Sources: Lori McLeod and Gordon Pitts, “From Quebec’s Streets to Dubai,” The Globe and Mail, 7 August 2008, B4; “Cirque du Soleil At a Glance,” Cirque du Soleil, 26 July 2008 pdf/pressroom/en/cds_en_bref_en.pdf; Telios Demos, “Cirque du Balancing Act,” Fortune, 12 June 2006,; and Shirly Won, “Cirque Faces New Balancing Act,” The Globe and Mail, 7 April 2006, B3. The challenge of the twenty-first century will be for organizations to balance, as much as possible, the needs of all stakeholders. For example, the need for the business to make profits must be balanced against the needs of employees for sufficient income. The need to stay competitive may call for offshoring jobs to other countries, recognizing that this sound business strategy might do harm to the community because jobs would be lost. 5 Offshoring entails sourcing part of the purchased inputs outside of the country. Outsourcing means contracting 7 with other companies to do some or all of the functions of a firm, such as production or accounting. One of the major themes of this text is managing change. There are special boxes called “Dealing with Change” throughout the text that discuss the rapidly changing business environment and the need to adjust to these changes. This first Dealing with Change box discusses how Cirque du Soleil is adapting to change. offshoring Sourcing part of the purchased inputs outside of the country. outsourcing Assigning various functions, such as accounting, production, security, maintenance, and legal work to outside orga- nizations. You may be wondering, how are the terms outsourcing and offshoring that different? A Statistics Canada report highlights the distinction. As stated, “Outsourcing decisions affect the boundaries of the firm—what production takes place within the firm and what is purchased from outside the firm. Changes in offshoring may be, but are not necessarily, related to changes in outsourcing. They involve decisions both to purchase outside of the firm and to do so from abroad. Considerations to do the latter are at the heart of the study of international trade. Interest in outsourcing arises because it may foretell changes in industrial structure. Interest in offshoring arises because it may signify changes in international trading patterns.”8 Companies have gone from outsourcing production jobs to offshoring research and development and design functions. Such decisions may prove disastrous to these firms doing the offshoring if the overseas companies use the 9 information to produce their own competitive products. In Canada, most of the offshoring that occurs is with the United States, though there has been some increase over the last decade with developing countries. Canada is also an attractive offshoring location for U.S.-based firms, says Peter McAdam, president and CEO of Everest Group Canada: Canada has essentially the same culture and many of the same companies have locations on both sides of the border. Education is similar and so is the concern for privacy and individual rights. You get all this plus polite, friendly, and helpful people at less cost. Companies are comfortable offshoring to Canada and callers/users are comfortable calling there. They find little difference between Canadians and American counterparts. 11 This is especially true in the areas of software development related to business intelligence, industry-specific applications, business process outsourcing, and customer service-oriented call centres. It is legal to outsource and offshore, but is that best for all stakeholders, including workers? Business leaders must make decisions based on all factors, including the need to make a profit. As you can see, pleasing all William G. Nickels 128225199.doc 7 stakeholders is not easy and it calls for trade-offs that are not always pleasing to one or another stakeholder. Keep in mind that regardless of temptations, company officials do have a responsibility to their stakeholders. Such trade-offs are also apparent in the political arena. As will be discussed in Chapter 4, governments make policies that affect many stakeholders. However, budget limitations force governments to make difficult choices, and these decisions are often not popular. Consequently, after years of insufficient funding, any changes in the areas of the environment, health care, and education generate a lot of attention. As you will learn, balancing the demands of stakeholders is not limited to for-profit businesses. For more information about non-profit organizations, visit the Charity Village Web site at www.charityvil- This site is dedicated to supporting Canada’s charities and non-profit organizations as well as the stakeholders who support them. Using Business Principles in Non-Profit Organizations Despite their efforts to satisfy all of their stakeholders, businesses cannot do everything that is needed to make a community all it can be. Non-profit organizations—such as schools, hospitals, and charities—also make a major contribution to the welfare of society. A non-profit o12anization is an organization whose goals do not include making a personal profit for its owners or organizers. Non-profit organizations often do strive for financial gains13 but such gains are used to meet the stated social or educational goals of the organization rather than personal profit. non-profit organization An organization whose goals do not include making a personal profit for its owners or organizers. William G. Nickels 128225199.doc 8 Non-profit organizations use for-profit business principles to achieve results. Canadian Blood Services is a national not-for-profit charitable organization whose mission is to manage the blood and blood products supply for Canadi- ans. Did you know that approximately every minute of every day, someone in Canada needs blood? The good news is that one blood donation—in just one hour—can save up to three lives. This is a poster that has been used in schools across Canada with the purpose of encouraging people to donate blood. Social entrepreneurs are people who use business principles to start and manage non-profit organizations and help countries with their social issues. Canadian-born Jeff Skoll, eBay’s first president, is one example. He left eBay to focus on philanthropic activities. The Skoll Foundation supports social entrepreneurs and innovative non- profit organizations around the world. The Spotlight on Small Business box features the Canadian Social Entrepreneurship Foundation. Would you consider becoming a social entrepreneur? Your interests may lead you to work for a non-profit organization. Millions of professionals, staffers, volunteers, and donors work for Canada’s approximately 200,000 charities and non-profit organizations. This doesn’t mean, however, that you shouldn’t study business. If you want to start or work in a non-profit organization, you’ll need to learn business skills such as information management, leadership, marketing, and financial management. Therefore, the knowledge and skills you acquire in this and other business courses will be useful for careers in any organization, including non-profits. Starting any business, profit or non-profit, can be risky. Once an entrepreneur has started a business, there is usually a need for good managers and other workers to keep the business going. Not all entrepreneurs are skilled at being managers. We shall explore entrepreneurship right after the Progress Assessment. William G. Nickels 128225199.doc 9 SPOTLIGHT ON Small Business Social Entrepreneurship The Canadian Social Entrepreneurship Foundation (CSEF) site, sixty percent a virtual organization, was created in 2004 by Jason Carvalho to spur innovation and “bridge the gap” that was developing between the non-profit, busi- ness, and government sectors. Carvalho is an entrepreneur focused on creating sustainable value in a changing glob- al economy. The motto of the CSEF is taken from a famous line which is as follows: “Some men and women see things as they are and say, ‘Why?’ I dream things that never were and say, ‘Why not?’” To begin to bridge this gap, the CSEF looks for social entrepreneurs who are under the age of 40 that want to de- velop and take a new service or product to market. Although social entrepreneurs share some characteristics and techniques with traditional business entrepreneurs—for example, an emphasis on innovation and the utilization of time-tested business theories and practices—their work and impact span the private, non-profit, and governmental sectors. The CSEF provides access to funding, provincial/national/international networks, a wide variety of start-up re- sources, mentorship, and evaluation resources. It invests in Canadian social enterprises that focus on specific areas such as children and youth (e.g., employing at-risk youth), human rights, environment (e.g., clean technologies and energy efficiency), and economic development. Social economy enterprises are organizations that are run like busi- nesses, producing goods and services, but which manage their operations on a not-for-profit basis. Instead, they di- rect any surpluses to the pursuit of social and community goals. Can you see yourself as a social entrepreneur? You could become a small-business owner in Canada, but you could also use the business skills you learn in this course to be a social entrepreneur in Canada and other countries. Think of the possibilities. Source: The Canadian Social Entrepreneurship Foundation. Copyright 2009, Used with permis- sion. Progress Assessment • What is the difference between revenue and profit? • What is risk, and how is it related to profit? • What do the terms stakeholders, offshoring, and outsourcing mean? ENTREPRENEURSHIP VERSUS WORKING FOR OTH- ERS There are two ways to succeed in business. One is to rise up through the ranks of large companies such as Royal Bank of Canada or Manulife Financial. The advantage of working for others is that somebody else assumes the entrepreneurial risk and provides you with benefits such as paid vacation time and health insurance. Most people choose that option, which can lead to a happy and prosperous life. The other, riskier path, is to start your own business and become an entrepreneur. When you consider Canada’s wealthiest citizens, you will find that they arrived at their wealth as a result of this entrepreneurial spirit. Some well known billionaires and their companies include the Thomson family (Thomson-Reuters), Ted Rogers Jr. (Rogers Communications), Galen Weston (Loblaw Cos. Ltd.), and Paul Desmarais Sr. (Power Corp.). Mike Lazaridis, the focus of this chapter’s profile, also ranks in the top ten list of most affluent Canadians. While you may hear about the success stories, keep in mind that many small businesses fail each year; thus, it takes a brave person to start a William G. Nickels 128225199.doc 10 small business or to turn a business around. Furthermore, as an entrepreneur you don’t receive any benefits such as paid vacation time and health insurance. You have to provide them for yourself! Before you take on the challenge of entrepreneurship it makes sense to study the experiences of those who have succeeded to learn the process. Consider the example of Ron Joyce, who in 1963 purchased a Dairy Queen outlet. Two years later, he invested $10,000 to become a franchisee in the first Tim Hortons. (We will discuss franchising in Chapter 6.) By 1967, he became a full partner in the company with Tim Horton. In the early years, both partners worked on expanding the business. When Horton died in 1974, Joyce became the sole owner of the chain. In the following years, he continued to develop the business, spending hundreds of hours piloting his plane in search of new franchise opportunities and doing everything from training new store owners to baking donuts. When Joyce sold the chain to Wendy’s for US$450 million in 1995, there were more than 1,000 Tim Hortons restaurants. Today, Tim Hortons is Canada’s largest national chain in the coffee and fresh-baked goods segment, with 3,238 systemwide restaurants, including 2,930 in Canada and 527 in the United States. 18 What you can learn from successful entrepreneurs like Ron Joyce and Mike Lazaridis is that you need to find something that you love to do. Before he became an entrepreneur, Joyce was a police officer. He started to get experience in business with his Dairy Queen outlet, and from there went on to great success with his Tim Hortons restaurants. While there were many challenges along the way, he was willing to put in the long hours needed to be successful. In addition to the original coffee and donut offerings, he continuously added new products to the restaurants to meet his customers’ needs. Small businesses and entrepreneurs contribute enormously to the Canadian economy. While these terms have been briefly mentioned in this chapter, be aware that more time will be spent discussing their significance in Chapters 6 and 7. After all, without the initial ideas and risks taken by entrepreneurs, we would not have successful businesses today. Charles Chang started Sequel Naturals Ltd. in his basement in 2001. Today the company, which manufactures pre- mium natural health products and nutritional supplements (including the award-winning Vega brand of plant-based whole food products) is the eighth fastest-growing company in Canada with over 2,000 retailers carrying the com- pany’s products. Do you have a new product idea that could be turned into a successful business? William G. Nickels 128225199.doc 11 The Importance of Factors of Production to the Creation of Wealth Have you ever wondered why some countries are relatively wealthy and others are poor? Economists have been studying the issue of wealth creation for many years. They began the process by studying potential sources of wealth to determine which are the most important. Over time, they came up with five factors that seemed to contribute to wealth, which they called factors of production. Figure 1.2 describes those five factors, which are: 1. Land (or natural resources) 2. Labour (workers) 3. Capital Goods (This includes machines, tools, buildings, or whatever else is used in the production of goods. It does not include money. Money is used to buy factors of production—it is not a factor itself.) 4. Entrepreneurship 5. Knowledge factors of production The resources used to create wealth: land, labour, capital goods, entrepreneurship, and knowledge. Traditionally, business and economics textbooks have emphasized only four factors of production: land, labour, capital, and entrepreneurship. But management expert and business consultant Peter Drucker says that the most important factor of production in our economy is and always will be knowledge. The young workers in the high-tech industries are sometimes called knowledge workers. When high-tech businesses began to fail in the early 2000s, many knowledge workers had to find new jobs in other parts of the country, but their education and experience made this transition easier. Today, the environment is more competitive as new graduates are increasingly being sought by tech companies, such as Research In Motion Ltd. and Google Inc., looking to expand their operations domestically and internationally. FIGURE 1.2 The Five Factors of Production LAND: Land and other natural resources are used to make homes, cars, and other products. LABOUR: People have always been an important resource in producing goods and services, but many people are now being replaced by technology. CAPITAL GOODS: Capital includes machines, tools, buildings, and other means of manufacturing. ENTREPRENEUR- All the resources in the world have little value unless en- SHIP: trepreneurs are willing to take the risk of starting businesses to use those resources. KNOWLEDGE: Information technology has revolutionized business, making it possible to quickly determine wants and needs and to respond with desired products. Such results should motivate today’s students to get as much education as possible to prepare themselves for knowledge-oriented jobs and to be prepared to change jobs as the economy demands. Note that information is not the same as knowledge. There is usually too much information available and information management is critical. We will study the importance of using technology to manage information in the appendix at the end of this chapter. William G. Nickels 128225199.doc 12 If you were to analyze rich countries versus poor countries to see what causes the differences in the levels of wealth, you’d have to look at the factors of production in each country. Such analyses have revealed that some relatively poor countries often have plenty of land and natural resources. Russia and China, for example, both have vast areas of land with many resources, but they are not rich countries (yet). In contrast, Japan and Hong Kong are relatively rich countries but are poor in land and other natural resources. Therefore, land isn’t the critical element for wealth creation. Most poor countries have many labourers, so labour is not the primary source of wealth today. Labourers need to find work to make a contribution; that is, they need entrepreneurs to provide jobs for them. Furthermore, capital— machinery and tools—is now becoming available in world markets, so capital isn’t the missing ingredient. Capital is not productive without entrepreneurs to put it to use. What makes countries rich today is a combination of entrepreneurship and the effective use of knowledge. Together, lack of entrepreneurship and the absence of knowledge among workers, along with lack of freedom, contribute to keeping countries poor. The Reaching Beyond Our Borders box discusses the importance of freedom to economic development. Entrepreneurship also makes some provinces and cities in Canada rich while others remain relatively poor. The business environment either encourages or discourages entrepreneurship. In the following section, we’ll explore what makes up the business environment and how to build an environment that encourages growth and job creation. Progress Assessment • What are some of the advantages of working for others? • What benefits do you lose by being an entrepreneur, and what do you gain? • What are the five factors of production? Which factors are key to wealth? Reaching Beyond Our Borders Freedom Equals Prosperity Recent studies have found that the freer a country is, the wealthier its citizens are. Freedom includes freedom from excess taxation, government regulations, and restrictions on trade. The average per capita gross domestic product (GDP)—the total value of all final goods and services produced in a country divided by the number of people in the country—for the freest countries greatly exceeds that in less-free countries. For example, Hong Kong is considered the freest country, and it has a per capita GDP of $39,062. Singapore, the second freest country, has a per capita GDP of $49,708. Canada’s per capita GDP is $36,713. At the other end of the scale (less-free countries), you will find Libya with a per capita GDP of $11,622. Some countries make even less than that per capita: Haiti, for exam- ple, has a per capita GDP of $1,224 and Burundi’s is just $333. As more countries become free (e.g., freedom from corruption), the standard of living around the world increases. And this is a good thing. The 2009 Index of Economic Freedom covers 183 countries across 10 specific freedoms which include business freedom, trade freedom, fiscal freedom, government size, monetary freedom, investment freedom, financial free- dom, property rights, freedom from corruption, and labour freedom. Canada’s seventh place ranking was 0.3 per- centage points higher than the year before, partly as a result of improved competitiveness in fiscal freedom accom- panied by a reduced perception of corruption. Canada scores very high in seven of the 10 economic freedoms, espe- cially business freedom, property rights, and freedom from corruption. The process for conducting a business is straightforward and encourages entrepreneurial activity. Overall, regulation is thorough but transparent. A strong rule of law ensures property rights, a low level of corruption, and transparent application of the commercial code. Canada trails the world average only in size and expense of government. Its elaborate social programs raise govern- William G. Nickels 128225199.doc 13 ment spending. However, it has been able to establish sound fiscal management and federal budget surpluses in re- cent years, providing a competitive edge. Numbers are always a good starting point when beginning to understand a situation. Keep in mind that the wealth of a country does not necessarily equate to health and happiness for all citizens, or even equity among citizens. Oth- er sources, such as the Human Development Index or Genuine Progress Indicators, may shed more light on these is- sues. Source: 2008 Index of Economic Freedom, Kim R. Holmes et al., eds., The Heritage Foundation and Dow Jones & Co., Inc., Washington, DC, 2008. THE BUSINESS ENVIRONMENT The business environment consists of the surrounding factors that either help or hinder the development of businesses. Figure 1.3, which summarizes some of the points discussed in this chapter, shows the six elements in the business environment: 1. The legal and regulatory environment 2. The economic environment 3. The technological environment 4. The competitive environment 5. The social environment 6. The global environment business environment The surrounding factors that either help or hinder the development of businesses. Businesses grow and prosper in a healthy environment. The results are job growth and the wealth that makes it possible to have a high quality of life. The wrong environmental conditions, in contrast, lead to business failure, job losses, and a poor quality of life. In short, creating the right business environment is the foundation for social progress of all kinds, including good schools, clean air and water, good health care, and low rates of crime. Companies should be aware of these elements and make it a practice to continuously assess the business environment for changes in trends. These trends could affect the organization’s ability to achieve its objectives, steer clear of threats, or take advantage of new opportunities. William G. Nickels 128225199.doc 14 FIGURE 1.3 Today’s Dynamic Business Environment The Legal and Regulatory Environment People are willing to start new businesses if they believe that the risk of losing their money isn’t too great. Part of that decision is affected by how governments work with businesses. Governments can do a lot to lessen the risk of starting and running a business through the laws (also known as Acts) that are passed by its elected officials. The Constitution Act defines the powers that can be exercised by the different levels of government (i.e., federal and provincial). In Chapter 4, we will review some of the responsibilities of these different levels. An important piece of legislation is the Competition Act. The purpose of the Competition Act is to: … maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy, in order to expand opportunities for Canadian participation in world markets while at the same time recognizing the role of foreign competition in Canada, in order to ensure that small- and medium- sized enterprises have an equitable opportunity to p21ticipate in the Canadian economy and in order to provide consumers with competitive prices and product choices. Other examples of laws include the Canada Small Business Financing Act, the Consumer Packaging and Labelling Act, and the Trade Unions Act. As you can imagine, these laws are relevant to many businesses. Each legislation authorizes an agency (such as Industry Canada) to write regulations that interpret the law in more detail and indicate how it will be implemented and enforced. Consequently, regulations are rules or orders William G. Nickels 128225199.doc 15 made by government to carry out the purposes set out in statutes. These regulations exist to protect consumers as well as businesses. In Chapter 4, you will be introduced to some government departments that deal with businesses. regulations Rules or orders made by government to carry out the purposes set out in statutes. Laws Affect Business Businesses need to be aware of the laws that are in place (or may be passed) that will affect their business. For example, a government can keep taxes and regulations to a minimum, thereby encouraging entrepreneurship and increasing wealth. Entrepreneurs are looking for a high return on investment (ROI), including the investment of their time. If the government takes away much of what the business earns through high taxes, ROI may no longer be worth the risk. Provinces and territories that have high taxes and restrictive regulations tend to drive entrepreneurs out, while areas with low taxes and less restrictive regulations can attract entrepreneurs. The government can also lessen the risks of entrepreneurship by passing laws that enable business people to write contracts that are enforceable in court. You can read more about the importance of business law in Canada in the appendix at the end of Chapter 4. There are many laws in Canada that are intended to minimize corruption, and businesses can flourish when these laws are followed. Nonetheless, corrupt and illegal activities at some companies do negatively affect the business 23 community and the economy as a whole. You hear about sports scandals (e.g., the taking of performance- enhancing drugs), church scandals, government scandals, and business scandals. In one high-profile case, a jury convicted media baron Conrad Black of obstructing justice and defrauding shareholders of his former newspaper company, Hollinger International Inc. As a result, he was sentenced to a 6½-year sentence. His three co-accused, namely John Boultbee, Peter Atkinson, and Mark Kipnis, were also convicted of mail fraud. 24 Such scandals cross borders and organizations. (Think of the sub-prime mortgage scandal.) Ethics is so important to the success of businesses and the economy as a whole that we feature ethics boxes in each chapter and devote Chapter 5 to the subject. The Making Ethical Decisions box highlights the importance of individual ethical decision making. The Economic Environment The economic environment affects businesses as well as consumers. For our discussion, the focus will be on businesses. The economic envi
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