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Chapter 1

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Rita Cossa

McMaster University Commerce: Understanding Canadian Business Commerce 1E03 Chapter 1: Managing Within the Dynamic Business Business and Entrepreneurship: Revenues, Profits, Losses Terminology: - 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. - Entrepreneur: A person who risks time and money to start and manage a business. - 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. - Risk: the chance an entrepreneur takes of losing time and money on a business that may not provide profitable. - Stakeholders: all the people who stand to gain or lose by the policies and activities of a business. - 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 organization. - Non-profit organization: an organization whose goals do not include making a personal profit for its owners or organizers. - Factors of production: the resources used to create wealth: land, labour, capital goods, entrepreneurship, and knowledge. - Business environment: the surrounding factors that either help or hinder the development of business. - Regulations: rules or orders made by government to carry out the purposes set out in statutes. - Technology: inventions or innovations from applied science or engineering research. - Productivity: The amount of output that is generated given the amount of input. - E-commerce: the buying and selling of goods and services over the internet. - E-business: any information system or application that empowers business processes. - Database: an electronic storage file in which information is kept; one use of databases is to store vast amount of information about customers. - Identity theft: obtaining personal information about a person and using that information for illegal purposes. - Empowerment: Giving front-line workers the responsibility, authority and freedom to respond quickly to customer requests. - Demography: the statistical study of the human population with regard to its size, density, and other characteristics such as age, race, gender, and income. - Baby-boom echo: a demographic group of Canadians that were born in the period from 1980 to 1995; the children of the baby boomers. - Baby boomers: a demographic group of Canadians that were born in the period from 1947 to 1966. - Goods: Tangible product such as computers, food, clothing, cars, and appliances. - Services: Intangible products (i.e. products that can’t be held in your hand) such as education, health care, insurance, recreation, and travel and tourism. Summary: Describe the relationship of businesses’ profit-to-risk assumptions 1. A business is any activity that seeks to provide goods and services to other while operating at a profit. What are the relationship between risk, profit, and business? Profit is money a business earns above and beyond the money it spends for salaries and other expenses. Business people make profits by taking risks. Risk is the chance an entrepreneur takes of losing time and money on a business that may not prove profitable. A loss occurs when a business’s cost and expenses are more than its revenue. Discuss the importance of stakeholders and non-profit organizations to business activities 2. Stakeholders include customers, employees, investors (eg. Stockholders), suppliers, dealers, people in the local community, environmentalists, and government. . Which stakeholders are most important to a business? The goal of business leaders is to try to balance the needs of all stakeholders and still make a profit. Some businesses put the needs of stockholders above the other interests, but most businesses today seek a balance among the needs of the various stakeholders. Explain how entrepreneurship is critical to the wealth of an economy, and list the five factors of production that contribute to wealth. 3. Entrepreneurs are people who risk time and money to start a business. What importance does entrepreneurship hold in the list of the five factors of production? Businesses use five factors of production: land (natural resources), labour (workers), Capital goods (buildings and machinery), Entrepreneurship and knowledge. Of these, the most important are entrepreneurship and knowledge (managed information), because without them land, labour, and capital are not of much use. Review the six elements that make up the business environment and explain why the business environment is important to organizations. 4. The business environment consists of the surrounding factors that either help or hinder the development of business. The six elements are the legal and regulatory environment, the economic environment, the technological environment, the competitive environment, the social environment, and the global environment. Explain why the business environment is important to organizations. Scanning the business environment on a continual basis is important to organizations so that they can take advantage of trends. These trends could affect the organization’s ability to achieve its objectives, steer clear of threats, or take advantage of new opportunities. Understand how the service sector has replaced manufacturing as the principal provider of jobs, but why manufacturing remains vital for Canada. 5. Canada has evolved from an economy base on manufacturing to one based on services. Why is manufacturing still a vital industry for Canada? While the services-producing sector employs a little more than 76 percent of the working population, the manufacturing industry employs a little over 7 percent of workers. Every $1 of manufacturing in Canada generates $ 3.05 in total economic activity. Directly, manufacturing accounts for 17 percent of economic activity, and two-thirds of Canada’s exports of goods and services. Business and Entrepreneurship: Revenues, Profits, and Losses Businesses don't just make money for entreprenuers. Business provide all of us with necessities such as food, clothing, housing, medical care, and transporatation, as well as other goods and services that make our lives easier and better. Matching Risk with Profit A loss occurs when a business’s expenses are more than its revenues. If a business lose money over time, it will likely have to close, putting its employees out of work. Some owners close down one business to start another one or to retire, Even though such closings are not failures, they are reported as exists 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. 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. 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 (Figure-Pg. 5) 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 with other companies to do some or all of the functions of a firm, such as production or accounting. Difference between Outsourcing and Offshoring 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. 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. It is legal to outsource and offshore, pleasing all 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. Using Business Principle 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. Non-profit organizations often do strive for financial gains, but such gains are used to meet the stated social or educational goals of the organization rather than personal profit. Non-profit organizations use for-profit business principles to achieve results. Social entrepreneurs are people who use business principles to start and manage non-profit organizations and help countries with their social issues 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. Entrepreneurship versus Working for Others 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. 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. The Importance of Factors of Production to the Creation of Wealth 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 (The young workers in the high-tech industries are sometimes called knowledge workers.) 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. ENTREPRENEURS All the resources in the world have little value unless HIP: entrepreneurs 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. Information is not the same as knowledge. There is usually too much information available and information management is critical. What make countries rich today are 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. Entrepreneurship also makes some provinces and cities in Canada rich while others remain relatively poor. The business environment either encourages or discourages entrepreneurship. The Business Environment 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 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. 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. (figure Pg. 12) 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. Other examples of laws include the Canada Small Business Financing Act, the Consumer Packaging and Labeling Act, and the Trade Unions Act. As you can imagine, these laws are relevant to many businesses Law 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. 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 community and the
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