AFM 131/ARBUS 101 Textbook Notes

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University of Waterloo
Accounting & Financial Management
AFM 131
Robert Sproule

Chapter 3: Competing in Global Markets September-11-12 2:30 PM The Dynamic Global Market - Exportingis selling goods and services to another country. - Importingis buying goods and services from another country. Why Trade with Other Nations? 1. No country can produce all of the products that its people want and need. 2. Even if a country did become self-sufficient, other nations would seek to trade with that country to meet the needs of their own people. 3. Some nations have an abundance of natural resources and a lack of technological know-how (e.g. China and Russia), while other countries have sophisticated technologybut few natural resources (e.g. Japan and Switzerland). - Global trade enables a nation to produce what is most capable of producing and to buy what it needs from others in a mutually beneficial exchange relationship. This happens through free trade (the movementof goods and servicesamong nations without political or economictrade barriers). - Figure 3.2 (p.72) The Theories of Comparativeand Absolute Advantage - Global trade is the exchange of goods and services across national borders. - Comparativeadvantagetheory states that a country should sell to other countries those products that it produces most effectivelyand efficiently, and buy from other countries those products that it cannot produce as effectivelyor efficiently (early 19th century by David Ricardo -> free economic exchange). - Absoluteadvantage:the advantage that exists when a country has the ability to produce a particular good or service using fewer resources (and therefore at a lower cost) than another country - Trade with other countries permits specialization -> resources are used more productively. Get Involved in Global Trade - The real job potential may be with small businesses. - In Canada, small businesses account for 48% of the total private labour force and about 85% of exports. - Small businesses are becoming more involved in global markets (help of government agencies). Exporting Goods and Services - Competitionis not nearly as intense for producers in global marketscompared to domesticmarkets. - Trade enhances the quality of life for Canadians and contributes to our country's economicwell- being. - Adapting goods and servicesto specific global markets is potentially profitable but can be very difficult. Measuring Global Trade - Measuring effectivenessof global trade: balance of trade & balance of payments - Balanceof trade: a nation's ratio of exports to imports - favourable balanceof trade/tradesurplus : exports > imports ; unfavourable: exports < imports - Balanceof payments: money coming into a country (from exports) - moneyleaving the country (from imports) + money flows coming into or leaving a country from other factors (e.g. tourism) Trading in Global Markets:The Canadian Experience - 1965:AutomotiveProducts Trade Agreement ("Auto Pact") - 1994:North American Free Trade Agreement(NAFTA) Canada's Priority Markets - Technological advances in most fields have shattered the archaic notions of how things ought to function, from production and trade to war and politics. function, from production and trade to war and politics. - The new ways of communicating,organizing, and working are inviting the most remotecorners of the world to be actors on the global economicstage. These emerging economies are enjoying high growth rates, rapid increases in their living standards, and a rising global prominence. - 13 priority markets around the world where Canadian opportunitiesand interests have the greatest potential for growth: the Associationof South East Asian Nations (Brunei Darussalam,Burma, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand, Vietnam), Australia and New Zealand, Brazil, China, Europe, Gulf CooperationCouncil (Saudi Arabia, United Arab Emirates, Kuwait, Qatar, Bahrain and Oman), India, Japan, Korea, Latin America and the Caribbean, Mexico, Russia, and the U.S. Strategies for Reaching Global Markets - Key strategies: Figure 3.5 (p.78) Exporting - Canadian firms may be reluctant to go through the trouble of establishing foreign trading relationships. Specialists called export-trading companies (or export-managementcompanies)are available to step in and negotiate and establish the trading relationships desired. - An export-trading company matches buyers and sellers from different countries and also provides needed services to ease the process of entering global markets. They also help exporters with a key and risky elementof doing business globally: getting paid. - Success in exporting often leads to licensing with a foreign company to produce the product locally to better serve the local market. Licensing - A global strategy in which a firm (the licensor) allows a foreign company (the licensee) to produce its product in exchange for a fee (a royalty) - Company representativesare sent to the foreign producer to help set up the production process. - The licensor may also assist or work with a licensee in such areas as distribution, promotion,and consulting. Pros: - 1. An organization can gain additional revenues from a product that it normally would not have generated in its home market. 2. Foreign licensees must often purchase start-up supplies, componentmaterials, and consulting services from the licensing firm. These firms often enter foreign markets through licensing agreementsthat typically extend into long-term service contracts. 3. Licensors spend little or no money to produce and market their products (licensee pays). - Cons: 1. Often, a firm must grant licensing rights to its product for an extended period, maybe 20 years or longer. 2. If a product experiences remarkable growth and success in the foreign market, the bulk of the revenues earned belong to the licensee. 3. A licensing firm is actually selling its expertise in a product area. If a foreign licensee learns the company's technologyor product secrets, it may break the agreement and begin to produce a similar product on its own. If legal remedies are not available, the licensing firm may lose its trade secrets and agreed-on royalties. Franchising - An arrangement whereby someonewith a good idea for a business sells the rights to use the business name and sell a product or service to others in a given territory - Franchisors have to be careful to adapt their good or service in the countries they serve (e.g. Eating with fingers was too messy for people of Hong Kong.). Contract Manufacturing - A foreign country's production of private-label goods to which a domestic companythen attaches its brand name or trademark;also called outsourcing - Enables a company to experiment in a new market without incurring heavy start-up costs . If the brand name becomesa success, the company has penetrated a new marketwith relativelylow risk. brand name becomesa success, the company has penetrated a new marketwith relativelylow risk. - used to temporarilyto meet an unexpected increase in orders, and labour costs are often very low International Joint Ventures and Strategic Alliances - Joint venture: a partnership in which 2 or more companies (often from different countries) join to undertake a major project or to form a new company - can be mandated by governments,where entry is difficult, as a condition of doing business in the country - Pros: 1. Shared technologyand risk 2. Shared marketing and managementexpertise 3. Entry into marketswhere foreign companies are often not allowed unless goods are produced locally 4. Shared knowledge of the local market,including local customs,governmentconnections, access to local skilled labour and supplies, and awareness of domesticlaws and regulations - Cons: 1. One partner can learn the other's technology and practices, then go off and use what has been learned. 2. Over time, a shared technologymay become obsoleteor the joint venture may becometoo large to be as flexible as needed. - Strategicalliance: a long-term partnership between 2 or more companies established to help each company build competitivemarket advantages - Do not typically involvesharing costs, risks, management, or even profits - Can provide access to markets, capital, and technical expertise -> succeed globally - Flexibility -> can effectivelylink firms from different countries and firms of vastly different sizes Foreign Direct Investment(FDI) - buying permanent property and businesses in foreign nations - Providesbenefits to Canadian firms through the transfer of knowledge, technologyand skills, and increased trade related to investment,all of which contribute to productivitygrowth and competitiveness - Is comparedto how much money foreign creditors owe to a nation and the value of what a nation owns in other countries - High amount of FDI is not necessarily bad (higher the amount, considered a stronger economic leader) - As the size of a foreign market expands, many firms increase FDI and establish a foreign subsidiary (a company that is owned in a foreign country by another company (parent company)). Such a subsidiary would operate like a domesticfirm, with production, distribution, promotion,pricing, and other business functions under the control of the foreign subsidiary's management. - Home country: where the parent firm is located - Host country: where the subsidiary is located - The primary advantage of a subsidiary is that the company maintains completecontrol over any technologyor expertise it may possess. The major shortcomingis that the parent companycommits a large amount of funds and technology within foreign boundaries. Should relations with the host country falter, the firm's assets could be taken over by the foreign government(expropriation). - Con to foreign investment:Canada has been criticized for having a "branch plant economy."This occurs when many subsidiaries are owned by foreign companiesand profits are returned to the home country rather than reinvested in Canada. There are concerns that decisions made by the parent company are not primarily based on the needs of Canadians. One of Canada's competitive problems is the high concentrationof foreign-owned firms that perform little sophisticated production or R&D. - Multinationalcorporation: an organization that manufactures and markets products in many different countries and has multinational stock ownership and multinational management.They are typically extremelylarge corporations, but not all large firms involved in global business are multinationals. Only firms that have manufacturing capacity or someother physical presence in different nations can truly be called multinational. Forces AffectingTrading in Global Markets Forces AffectingTrading in Global Markets Sociocultural Forces - Cultural diversity - Culture is the set of values, beliefs, rules, and institutions held by a specific group of people. It can include social structures, religion, manners and customs, values and attitudes, language, and personal communication. - Ethnocentricity:an attitude that one's own culture is superior to all others - Different nations have different ways of conducting business. (e.g. Canadian negotiators will say no if they mean no, but Japanese negotiators usually say maybe when they mean no.) - Religion is an important part of any society's culture. (McDonald's offended Muslims in Saudi Arabia by putting the Saudi Arabian flag on their packaging.) - Successful companies are those that can understand these differences and develop goods and services accordingly. The focus may be on a large global market or a smaller, yet profitable global market. - Sociocultural differences can be importantwhen managing employees.(e.g. Workers may believe that managers are responsible for the well-being of their workers. The manager used a democratic decision-making style.) EconomicForces - Globally, the U.S. dollar is considered the world's dominant and most stable form of currency. However, it does not mean that the dollar always retains the same market value. - Exchangerate: the value of one nation's currency relative to the currencies of other countries - A high value of the dollar means that a dollar would be traded for more foreign currency than normal. The products of foreign producers would be cheaper because it takes fewer dollars to buy them, but the cost of Canadian-produced goods would become more expensive to foreign purchasers because of the dollar's high value. A low value of the dollar means that a dollar is traded for less foreign currency than normal. Foreign goods become more expensive because it takes more dollars to buy them, but Canadian goods becomecheaper to foreign buyers because it takes less foreign currency to buy Canadian goods. - Global financial marketsoperate under a system called floating exchange rates, in which currencies "float" according to the supply and demand in the global market for the currency. This supply and demand is created by global currency traders, who develop a market for a nation's currency based on the perceived trade and investment potential of the country. - Devaluation:lowering the value of a nation's currency relative to other currencies - Due to a nation's weak currency, the only possibility of trade in many developing nations is through bartering, which is the exchange of merchandise for other merchandise or service for other service with no money involved. - Countertrading:a complex form of bartering in which several countries may be involved, each trading goods for goods or services for services - Trading products for products helps businesses avoid some of the financial problems and currency constraints that exist in global markets. Legal and Regulatory Forces - Conduct and the direction of business are firmly tied to the legal and regulatory environment - In global markets, no central system of law exists, so several groups of laws and regulations may apply. This makes the task of conducting global business extremelydifficult as people find laws and regulations in global markets to be often inconsistent. - Success in global markets -> gain local business people's cooperationand sponsorship (are familiar with laws and regulations) Technological Forces - Technological constraints may make it difficult given the nature of exportable products. (e.g. Houses in most developing countries do not have electrical systemsthat match those of Canadian homes.) Trade Protectionism - The use of governmentregulations to limit the import of goods and services - Supporters of trade protectionismbelieve that it allows domesticproducers to survive and grow, producing morejobs. Those against it argue that it not only impedes global trade, but that it also producing morejobs. Those against it argue that it not only impedes global trade, but that it also adds millions of dollars to the price of products, costing consumers billions of dollars. - Dumping:selling products in a foreign country at lower prices than those charged in the producing country -> used by companiesto dispose of surplus products in foreign marketsor to gain a foothold in a new marketby offering products for lower prices than domestic competitorsdo - Dumping benefits foreign firms, as it generates more sales by intentionally charging lower prices. It benefits purchasers, as they can buy products at a lower price. Dumping usually leads to a lower share of the market if the domestic producers do not lower their prices (less revenues and potential job losses). - Mercantilism: a nation to sell more goods to other nations than it bought from them; that is, to have a favourable balance of trade - Tariff: a tax imposed on imports - Protective tariffs (import taxes) are designed to raise the retail price of imported products so that domesticproducts will be more competitivelypriced. These tariffs are meant to save jobs for domesticworkers and to keep industries (especially infant industries, which consist of new companies in the early stages of growth) from closing down entirely because of foreign competition. - Revenue tariffs are designed to raise money for the government.They are commonlyused by developing countries to help infant industries competein global markets. - Import quota: a limit on the number of products in certain categories that a nation can import (overall goal is to protect companies to preserve jobs) - Embargo:a completeban on the import or export of a certain product or the stopping of all trade with a particular country - Non-tariff barriers are not as specific or formal as tariffs, import quotas, and embargoes but can be as unfavourable. They may include safety, health, and labelling standards. The GATT and the WTO - General Agreementon Tariffs and Trade (GATT): a 1948agreement that established an international forum for negotiating mutual reductions in trade restrictions - Countries agreed to negotiate to create monetaryand trade agreements that might facilitate the exchange of goods, services, ideas, and cultural programs. World Trade Organization(WTO): the international organization that replaced the General - Agreement on Tariffs and Trade, and was assigned the duty to mediate trade disputes among nations • Headquartered in Geneva, Switzerland, an independent entity now composedof 153 member nations • Purpose is to overseecross-bordertrade issues and global business practices among those nations - Trade issues are expected to be resolvedwithin 12-15months. - Legal and regulatory problems often impede trade expansion. The IMF and the World Bank - InternationalMonetary Fund (IMF): an international bank that makes short-termloans to countries experiencing problems with their balance of trade (created in 1944) - Basic objectives: promoteexchange stability, maintain orderly exchange arrangements, avoid competitivecurrency depreciation, establish a multilateral system of payments, eliminate exchange restrictions, create standby reserves - The IMF makes long-term loans at low interest rates to the world's most weakest nations to help them strengthen their economies(functions similar to that of the World Bank). - World Bank (InternationalBank for Reconstructionand Development): an autonomousUnited Nations agency that borrows money from the more prosperous countries and lends it to less- developed countries to develop their infrastructure - The World Bank borrows from more prosperous countries and lends at favourable rates to less- developed countries. Producers' Cartels - Organizations of commodity-producingcountries that are formed to stabilize or increase prices to optimize overall profits in the long run (e.g. Organization of the Petroleum Exporting Countries (OPEC)) - Contradictions to unrestricted free trade and letting the market set prices - Contradictions to unrestricted free trade and letting the market set prices CommonMarkets (Trading Bloc) - A regional group of countries that have a commonexternal tariff, no internal tariffs, and a coordination of laws to facilitate exchange (e.g. NAFTA, EU) The North American Free Trade Agreement (NAFTA) - Agreement that created a free-trade area among Canada, the United States, and Mexico - January 1, 1993(took effect), replaced FTA - Objectives: 1. Eliminate trade barriers and facilitate cross-border movementof goods and services among the three countries 2. Promoteconditions of fair competitionin this free-trade area 3. Increase investmentopportunities in the territoriesof the 3 nations 4. Provide effectiveprotectionand enforcementof intellectual property rights (patents, copyrights, etc.) in each nation's territory 5. Establish a frameworkfor further regional trade cooperation 6. Improveworking conditions in North America - Improved access would spur growth, provide more employmentfor Mexicans, and raise the low standard of living in Mexico. Mexico is still a minor customer for Canada. The European Union (EU) - Began in the late 1950s as an alliance of 6 trading partners (then known as the CommonMarket and later the European EconomicCommunity) - Today the EU is a group of 27 member nations, located primarily in Europe. - Today, the EU is the world's biggest trading power and membernations see this economic integration as the major way to competefor global business, particularly with the United States, China, and Japan. - 1999:EU officially launched its joint currency, the euro (formal EU transition to the euro occurred 3 years later, when 12/15member nations at that time agreed to a single monetaryunit -> EU membersGreat Britain, Sweden, and Denmark elected not to convertat the time) - The euro is a worthy challenger to the U.S. dollar's dominance in global marketsdue to the economicstrength and size of the EU. - A Canada-European Union Trade Agreement was being negotiated in 2009. Globalization and Your Future - The shift (offshoring) in outsourcing manufacturing and services from domestic businesses to primarily low-wagemarkets outside of Canada is getting more attention. Chapter 4: The Role of Government in Business September-20-12 2:30 PM Government Affects Business - 6 categories:Crown corporations,laws and regulations, taxation and financial policies, government expenditures, purchasing policies, and services (Figure 4.1 (p.102)) - Governmentsare trying to respond to business needs (creating laws that create a level playing field to providing services that support business initiatives). Government Involvement in the Economy - Canada = mixed economy:an economicsystem in which some allocation of resources is made by the market and someis made by the government - Every country's governmentis involved in its economy,but the specific ways vary. - When Canada was formed as a country in 1867, the federal governmentwas given the power to "regulate trade and commerce."When the western provinces later joined this Confederation,it became clear that it would take special efforts to build a unified Canada. - The U.S. developed much faster and with a much larger population and a bigger economy(provided products not available in the provinces,either because they were not made in Canada or because there was no transportation to distribute them). -> led to developmentof NationalPolicy (governmentdirective that placed high tariffs on imports from the U.S. to protect Canadian manufacturing, which had higher costs) by Sir John A. Macdonald - An interventionistgovernmentthat through its activities (e.g. monetary policy and expenditures) tries to create a stable economyfor businesses. Crown Corporations - A company that is owned by the federal or provincial government - Figure 4.2 (p.104) - Set up because: • Provided services that were not provided by businesses (e.g. Air Canada came into being in the 1930s) • Created to bail out a major industry in trouble (Canadian National Railway was put togetherin 1919) • Provided somespecial servicesthat could not otherwisebe made available (Bank of Canada) - Each province owns a variety of Crown corporations. Typically, it owns the province's electric power company (e.g. Hydro-Québec). The Financial Role of Two Special Provincial Crown Corporations - The Alberta Heritage Savings Trust Fund was established in the 1970s,when the Alberta economy was prospering as a result of the oil boom. - The Quebec Deposit and InvestmentFund is a giant fund that was established to handle the funds collected by the Quebec Pension Plan. The fund handles other Quebec governmentfunds. The Role of Government - Since the 1990s,federal and provincial governmentshave tried to reduce the role of governmentin the economy. - Privatization:the process of governmentsselling Crown corporations - Governmentagencies are looking at ways to lower costs and improve efficiencies. Laws and Regulations - The political parties in power can greatly affect the business environment. - Laws are derived from 4 sources: the Constitution,precedents established by judges, provincial and federal statutes, and federal and provincial administrative agencies. - Canada has a legislature in each province and territoryto deal with local matters.The Parliamentin Ottawa makes laws for all Canadians. The Constitution defines the powers that can be exercised by the federal and provincial governments.In the event of a conflict, federal powers prevail. Federal GovernmentResponsibilities - Responsible for issues that affect citizens across Canada - Responsible for issues that affect citizens across Canada - Primary responsibility:to ensure & support the country's economicperformance - Responsibilities that may have an impact on business operations: • Trade regulations (interprovincial& international) • Incorporation of federal companies • Taxation (both direct & indirect) • The banking and monetarysystem • National defence • Unemployment • Immigration • Criminal law • Fisheries - Overseessuch industries: aeronautics, shipping, railways, telecommunications,and atomicenergy - Competitionoccurs both internationally and domestically.Despite trade agreements,new governmentpolicies can create barriers of trade. The federal governmentlobbies other country governmentsto decrease such trade barriers in an attempt to create business opportunities for Canadian firms. - Domestically,the CompetitionBureau listens to business and consumercomplaints and launches investigations to ensure fair competition.Industry Canada is the federal agency that administers a variety of laws affecting businesses and consumers. One of the most relevant pieces of legislation is the CompetitionAct, which aims to ensure that mergers of large corporationswill not restrict competitionand that fair competitionexists among businesses. The Act coversdiscriminatory pricing, price fixing, misleading advertising, and the refusal to deal with certain companies. - There are laws that give consumers the right to cancel contracts or return goods within a certain period of time. Marketing Boards - Organizations that control the supply or pricing of certain agricultural products in Canada - Thus, they often control trade. This supply managementis designed to give some stability to an important area of the economythat is normally very volatile. - To smoothout unusual conditions and to ensure a steady supply of food to consumers at reasonable prices, 6 governmentagencies have been set up to control wheat and barley, dairy products, and poultry: the Canadian Wheat Board, the Canadian Dairy Commission,the Canadian Egg Marketing Agency, Chicken Farmers of Canada, the Canadian Turkey Marketing Agency, and the Canadian Broiler Hatching Egg Marketing Agency. - All of those bodies, except the Canadian Wheat Board, control the amount of production for all of the products under their supervision by allocating quotas to each province that produces them. Provincial agencies administer these quotas and set prices for their province. Each agency controls products that are sold only in its province. - The Canadian system of marketing boards has been under attack by various organizations because it does not permit normal competitiveconditions to operate in this field. They argue that this distorts the whole industry and raises prices to Canadian consumers. Defenders argue that other countries have different systemsthat have the same effect as our marketing boards but are just less visible. - WTO -> main purpose: reduce barriers to trade among countries • If successful: limited protectionfor domestic markets,reduced tariffs and other restrictions,market having a much greater impact on prices & production Provincial GovernmentResponsibilities - Each province has its own government,while the territories are still governed federally. - Responsibilities: • Regulation of provincial trade & commerce • Natural resourceswithin their boundaries • Direct taxation for provincial purposes • Incorporation of provincial companies • Licensing for revenue purposes • The administration of justice • Health & social services • Municipal affairs • Property law • Property law • Labour law • Education - The participation of all provincial governmentsin federal-provincial, shared-cost arrangements for hospital insurance and medicare has helped ensure nationwide standards of service. While the federal governmentis responsible for health care, the provinces still implementthese policies. Both governmentlevels fund programs for post-secondaryeducation. Education - Both the federal and provincial governmentsrun their own student loan programs. - Provincially,the Newfoundland and Labrador governmenthas been improving is post-secondary education policies. Changes to the student loan program include it being the first province to eliminate interest on student loans and extending a long-running freeze on tuition fees. Municipal GovernmentResponsibilities - Municipal governments(cities, towns, villages, countries, districts, and metropolitanregions) are set up by the provincial legislatures. Their authority is defined by the specific province in which they operate. - Municipalities play a role in consumer protection. For example, they have regulations and laws regarding any establishment that serves food. Zoning laws refer to the noise, odours, signs, and other activities that may affect a neighbourhood. - Zoning requirements limit the height of buildings & define how far they must be set back from the road. Speed limits are set by municipal or provincial authorities. - All businesses usually must obtain a municipal licence to operate so the appropriate department can track them to ensure they are following regulations. Many municipalities also have a business tax and a charge for water consumption. - Each level of gvt has its own roles & responsibilities but may overlap (downloading of responsibilities) Taxation and Financial Policies - Taxes are how all levels of governmentredistribute wealth. The revenue that is collected allows governmentsto discharge their legal obligations. This revenue is used to pay for public services, pay down debt, and fund governmentoperations and programs. Taxes have been used as a method of encouraging or discouraging taxpayers. For example, if the governmentwishes to reduce the use of certain classes of products (e.g. cigarettes), it passes a sin tax. It is hoped that the additional cost of the product from increased taxes discourages additional consumption. - The governmentmay encourage businesses to hire new employeesor to purchase new equipment by offering a tax credit (an amount that can be deducted from a tax bill). - Income (personal & business), sales, and property are the major bases of tax revenue. The federal governmentreceives its largest share of taxes from personal income. Stabilizing the EconomyThrough Fiscal Policy - Fiscal policy is the federal government'seffort to keep the economystable by increasing or decreasing taxes or governmentspending. The first half of it involves taxation. High tax rates tend to slow the economybecause they draw money away from the private sector and are remitted to the government.High tax rates may discourage small business ownership because they decrease the profits businesses can make, and this can make the effort less rewarding. Low tax rates would tend to give the economya boost. The governmentcan use taxation to help movethe economyto a desired direction. For example, taxes may be lowered to stimulate the economywhen it is weak. Taxes may be raised when the economyis booming to cool it off and slow down inflation. - Federal and provincial governmentsuse fiscal policy to stimulate specific geographic & industrial areas. All companies that invest in specific activities considered desirable by the government(e.g. tech sector) receive a tax credit and reduces the income tax they have to pay (but many scaled back/eliminateddue to budget constraints). - 2nd half -> governmentspending • Deficit: when a gvt spends over & above the amount it gathers in taxes for a specific period of time - Cut gvt spending -> lessen annual deficits - Each year, there is demand by the provinces & territories for increased transfer payments, the need for funds due to unexpected situations, & more pressure from international bodies to increase for funds due to unexpected situations, & more pressure from international bodies to increase peacekeeping support. The National Debt (Federal Debt) - The accumulation of governmentsurpluses & deficits over time - Way out of recession:eliminate annual deficits and stop debt from growing (cutting expenses & cash outlays as much as possible, including reducing transfers to provinces to pay for health care, education, & welfare, reduced EI paymentsby raising eligibility standards, paying for shorter periods and paying smaller amounts, laid off 1000sof people, reduced pension payments to wealthier senior citizens) - Reductions in spending = Canada's slow recoveryfrom recession - Increased gvt borrowing & spending stimulates an economy.Cuts slow down the economy. - Why is it important to control debt? A lower debt means that less money will need to go toward paying down the national debt and any outstanding interest. Reducing governmentspending on interest charges will allow the governmentto spend more money on social programs or to lower taxes. Lowertaxes will stimulate the economy,as companies & individuals will have more disposable income. - A lower debt load means that in times of economicslowdown or when unexpected events occur, the governmentmay have funds available to alleviate the ensuing pressures. - Reductions in the national debt have been the result of surpluses (an excess of revenues over expenses). As the debt comes down, the annual interest costs are also reduced. This reduction in the national debt has translated into a savings of billions each year on debt interest payments. The Federal Budget - A comprehensivereport that reveals governmentfinancial policies for the coming year • Shows how much revenue the governmentexpects to collect, any changes in income and other taxes, and whether a deficit or a surplus is expected - Reviewedby businesses, consumers,and other countries (info affects all stakeholders). It reflects revenues (from taxation) and expenditures (e.g. CPP payments) for the past year. The government will communicateprogram changes for the future and forecasted growth projections. - Promisesmade by the federal governmentin a budget are not necessarily permanent (new elected party -> reverse decisions and announce its own initiatives). The Reversal of a Trend: Federal Budget Deficits - After over 10 years of budget surpluses, Canada will experience a budget deficit in 2009-2010.As a result of these economicconditions, the federal governmenthas been trying to stimulate the economythrough initiatives such as increased spending (e.g. infrastructure) and lowering taxes. The federal governmenthas predicted that the budget will be balanced by 2013-2014,but economists disagree. Increased pressure will come from an aging population that will demand more health-care spending. Using MonetaryPolicy to Keep the EconomyGoing - Crown corporation:Bank of Canada lends money to federal governmentwhen it spends morethan it collects in taxes -> role: "to promotethe economicand financial well-being of Canada" • Responsible for day-to-day administration of monetarypolicy - Monetary policy is the management of the money supply & interest rates and is controlled by the Bank of Canada. When the economyis booming, the Bank of Canada tends to raise interest rates to control inflation. This makes money more expensive to borrow. The economyslows as business people spend less money on everything. Raising and lowering interest rates help control business cycles. - The Bank of Canada also controls the money supply. The moremoney it makes available to business people and others, the faster the economygrows. To slow the economy,it lowers the money supply. - The economicgoal is to keep the economygrowing so that more people can rise up the economic ladder and enjoy a satisfying quality of life. The Subprime Mortgage Crisis - Subprime mortgages are loans for people who couldn't qualify for regular mortgagesbecause their credit records were not good enough or they did not have a credit history. Some were also interest- only loans and lower in cost as no principal was being paid down. Initially, these loans came with very low rates (subprime). At the end of this term, two interest rates were much higher and people couldn't afford to make their payments. As housing prices started to fall, they often found they could no longer afford to sell the home either. no longer afford to sell the home either. - To further stimulate the economyand encourage banks to continue lending money,the Bank of Canada continued to lower its lending rate, effectivelyhitting 0.25%, the lowest it can go using conventionalmonetarypolicy. Government Expenditures - Governmentsin Canada help disburse old-age pension plans, allowances to low-incomefamilies or individuals, EI, welfare, workers' compensation,and various other payments to individuals. These transfers give Canadians more purchasing power & the creation of a more viable marketfor businesses. - As people spend their money, large #s of Canadian companies & their employeesbenefit as a result of this purchasing power. - Governmentsprovide aid through direct and indirect governmentprograms designed to help businesses (e.g. the Canadian Subsidy Directory).Governmentsintervene on an ad hoc (special or unplanned) basis in important cases. Financial Aid - All levels of governmentoffer a variety of direct assistance programs to businesses, including grants, loans, loan guarantees, consulting advice, information, and other aids that are designed to achieve certain purposes. - Some governmentaid is designed to help industries or companiesthat are deemed to be very important: at the cutting edge of technology,providing highly skilled jobs, and oriented toward exports. - Unions, municipalities, and provincial and federal governmentsall work to save the jobs and economiesof the area. Equalization of Transfer Payments - Transfer payments:direct payments from governmentsto other governmentsor to individuals. Federal transfer payments to individuals include elderly benefits and EI (payments provide social security & incomesupport). Equalizationis a federal governmentprogram for reducing fiscal disparities among provinces. While - provinces are free to spend the funds on public services according to their own priorities, these payments are intended to fund medicare, post-secondaryeducation, and smaller programs. - 1957:the system of transfer paymentsto poorer provinces is financed by wealthier provinces Purchasing Policies - The federal and provincial governmentsuse their enormouspurchasing power to favour Canadian companies. The provinces favour these companies in their own territoriesand have even set up trade barriers between provinces. When advanced technology items (civilian or military) must be obtained from foreign companies, our governmentsusually insist that a certain minimum portion be manufactured in Canada. This enables Canadian companies to acquire advanced technology know- how and to provide employment. - Contracts are awarded most often to help Canadian businesses even if they are sometimesmore expensive than bids by non-Canadian companies. Services - 2 important depts.: Industry Canada & Foreign Affairs and International Trade Canada Industry Canada - The federal governmenthas implementedprograms to help small businesses get started. These programs are part of a larger one that involves setting up Canada Business service centres in every province and territory. These centres are operated jointly with provincial governmentsand certain local organizations. Industry Canada publishes brochures, booklets,and guides informing business people of the help available and how and where to get it. It also participates in the production of publications to promoteCanadian businesses internationally. - Other programs are designed to encourage businesses to establish themselvesor expand in economicallydepressed areas of the country. These are populated regions that are industrially underdeveloped, have high unemployment,and have lower standards of living. The programs underdeveloped, have high unemployment,and have lower standards of living. The programs include help for the tourism industry & for Aboriginal residents of remoteareas who want to create businesses. The National Research Council (NRC) - A federal agency that began in 1916, reports to Parliament through Industry Canada - Plays a significant role in research that helps Canadian industry remain competitive& innovative - provide substantial resourcesto help Canada become1 of the world's top 5 R&D performers - Benefits from the efforts of guest workers, drawn from Canadian and foreign universities, companies, and public- and private-sectororganizations Foreign Affairs and International Trade Canada - Because exports are particularly important to Canada's economicwell-being, the governmenthas a very large and elaborate system to assist companiesin their exporting and foreign-investment activities. The federal governmentand most provincial and all large municipal governmentshave various ministries, departments, and agencies that provide a variety of such services. These include information,marketing, financial aid, insurance and guarantees, publications, and contracts. All major trading countries provide similar support to their exporters. Role of the Canadian Government  Some Final Thoughts - Some people believe that the best way to protect the Canadian economyis for the federal governmentto reverseits current direction of privatization. Instead of withdrawing from active direction and participation in the economy,it should develop a long-term industrial policy of leadership and an active role in shaping the future of the economy.An industrialpolicy is a comprehensive,coordinated governmentplan to guide and revitalize the economy.It requires close consultation with business and labour to develop a comprehensiveprogram for long-term sustainable industrial development. - Others are opposed in principle to such governmentinvolvement.The 1980switnessed the start of a movementtoward deregulation, privatization, and less governmentinvolvementwithin Canada and other countries. Some believe that these were the right steps for the government to take, and that it should continue with these activities. When events (SARS or recession)appear, somegroups that normally lobby for less governmentinvolvementin their industries suddenly believe that governmentshould step in to provide financial assistance (troubled times = more government involvement). - The Constitution Act outlines the powers of all levels of government.Each level of governmentis focused on creating a competitiveenvironmentfor businesses of all sizes. The federal government will continue to focus on international trade initiatives to provide opportunities for Canadian businesses. - It is natural for disputes to arise as industries and countries attempt to act in their best interests. These disputes may arise even between established trading partners (e.g. Canada & U.S.). Trade agreementscreate opportunities. Chapter 16: Understanding Accounting and Financial Information October-04-12 2:30 PM The Importance of Accounting and Financial Information What is Accounting? - Accounting:the recording, classifying, summarizing, and interpreting of financial events to provide managementand other interested parties the information they need to make good decisions • The measurementand reporting of financial information to internal & external users - Accountingsystem: method used to record and summarize accounting data into reports (Figure 16.1 (p.482)) - Major purposes: • help managers evaluate the financial condition & operating performanceof firm (to make well- informed decisions) • To report financial informationto people outside the firm (e.g. owners, creditors, investors, gvt, etc.) - Figure 16.2 (p.483) Areas of Accounting - Accounting profession -> 5 key working areas: managerial accounting, financial accounting, compliance (auditing), tax accounting, & governmentaland not-for-profit accounting Managerial Accounting - Providesinformation & analyses to managers within the organization to assist them in decision making - Management accounting -> forward looking data in the form of budgets - Results are compared with plans to see if the results are achieving the targets. When they do not, managementmust figure out how performance can be improved. Financial Accounting - Accounting information and analyses prepared for people outside the organization - External users -> interested in the org.'s profits, ability to pay its bills, & other important financial info - Management must also be knowledgeable about the financial accounting info (deal w/ external parties). - Financial accounting -> historical information - Annualreport: a yearly statementof the financial condition, progress, & expectations of an organization (required by law for the shareholders of all public corp.) Accounting Designations - Chartered accountant(CA): accountant who has met the examination,education, & experience requirements of the Canadian Institute of Chartered Accountants (CICA) - Certified managementaccountant(CMA): accountant who has met the examination,education, & experience requirements of the Society of ManagementAccountants of Canada (CMA Canada) • 2-year professional developmentprogram - Certified generalaccountant(CGA): accountant who has met the examination,education, & experience requirements of the Certified General Accountants Association of Canada (CGA-Canada) • Offer expertise in taxation, finance, information technology,strategic business management - 1/3 CAs work in industry; 1/3 are sole practitioners or work for accounting firms, rest primarily work in governmentand education; managerial accountants generally choose to get the CMA designation. Many CGAs are employedby different levels of government,others are in public practice. Private and Public Accountants - Private accountant: accountant who works for a single firm, governmentagency, or non-profit org. - Publicaccountant: accountant who provides accounting services to individuals or businesses (fee basis) - Forensic accounting:a relativelynew area of accounting that focuses its attention on fraudulent activity Compliance - The job of reviewing & evaluating the records used to prepare a company's financial statements - Private accountants perform internal audits. Public accountants conduct independent audits. Financial auditors examine financial health & looks into operational efficiencies & effectiveness. - Most important function & income generator for public accounting firms: performing independent audits(an evaluation & unbiased opinion about the accuracy of a company's financial statements). Tax Accounting - Federal & provincial governmentsrequire submission of tax returns filed at specific times & format. - Tax accountant -> preparing tax returns or developing tax strategies Governmentaland Not-for-ProfitAccounting - Primary users of governmentacct info: citizens, special interest groups, legislative bodies, creditors • Ensure that governmentis fulfilling obligations & making proper use of taxpayers' money - Not-for-profitorgs.: need accountants to see exactly how & where funds contributed are spent The Accounting Cycle - 6-step procedure: results in the prep & analysis of the 2 major financial statements(Figure 16.4 (p.489)) - Bookkeeping:the recording of business transactions - Accountants classify & summarize financial data provided by bookkeepersand then interpret the data and report the information to management. They suggest strategies for improving the financial condition and progress of the firm and are important in financial analysis and income tax preparation. - Bookkeeperdivides firm's transactions into categories:sales documents,purchasing receipts, shipping documents -> record financial data into journal:record book/cpt prog. where acct data are first entered The Fundamental Accounting Equation Double-entrybookkeeping:every business transaction affects at least 2 accounts - - Accounts:different types of assets, liabilities, and owners' equity - Fundamentalaccounting equation: Assets = Liabilities+ Owners' Equity - Ledger: specialized accounting book in which information from accounting journals is accumulated into accounts and posted so that managers can find all of the information about a specific account in 1 place - Trial balance: summaryof all data in the account ledgers to show if figures are correct & balanced Understanding Key Financial Statements - Financialstatement: summary of all the transactions that have occurred over a particular period • Indicate a firm's financial health and stability and are a key factor in managementdecision making - Key financial statements: balance sheet, incomestatement,cash flow statement Balance Sheet - The financial statementthat reports a firm's financial condition at a specific time (end of period) Assets - Economicresources (things of value) owned by a firm - Intangibles (e.g. brand names) can be one of the firm's mostvaluable assets. Goodwill is the value that can be attributed to factors (e.g. reputation, location, and superior products). - Liquidity:how fast an asset can be convertedinto cash - Current assets: items that can or will be convertedinto cash within 1 year - Capitalassets: assets that are relativelypermanent and acquired to produce products for a business - Intangibleassets: long-term assets that have no real physical form but have value (e.g. copyrights) Liabilities and Owners' Equity Accounts - Liabilities: what the business owes to others/debts(current -> due in 1 year, long-term -> ≥ 1 year) - Accounts payable: money owed to others for merchandise or servicespurchased on credit, not yet - Accounts payable: money owed to others for merchandise or servicespurchased on credit, not yet paid - Note payable: short-termor long-term liabilities (e.g. bank loans) that a business promisesto repay by a certain date - Bonds payable: long-term liabilities that represent money lent to the firm that must be paid back - Taxes payable: sales taxes & GST collected, income tax payable - Owners' equity: the amount of the business that belongs to the owners minus any liabilities owed - Common stock: amount shareholders invest (corporation) - Retained earnings: accumulated profit that remains after dividends have been paid Income Statement - Shows a firm's profit after costs, expenses, and taxes; summarizes all of the resources that have come into the firm (revenue),all of the resources that have left the firm, and the resulting net income - Net Income or Net Loss = Revenues - Expenses - Revenue - COGS = Gross Profit (Gross Margin) - Operating Expenses = NI before taxes - Taxes = NI/NL Revenue - Value of what is received for goods sold, servicesrendered, & other financial sources - Not the same as sales; most revenue comesfrom sales - Net Sales = Gross Sales - (Sales Returns and Allowances+ Sales Discounts) Cost of Goods Sold (Cost of Goods Manufactured) - Measure of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale - Gross profit (gross margin): how much a firm earned by buying/making & selling merchandise Operating Expenses - Costs involved in operating a business (e.g. rent, utilities, salaries) 2 categories: - • Selling expenses: expenses related to marketing & distribution of the firm's goods/services • General expenses: administrativeexpenses of a firm (e.g. office salaries, amortization,insurance, rent) The Cash Flow Statement - Reports cash receipts & disbursements related to a firm's 3 major activities: • Operations: cash transactions associated with running the business • Investing: cash used in or provided by the firm's investing activities (normally including capital assets) • Financing: cash raised from issuing of new debt/equity capital/cash used to repay loans/co. dividends - Gives firm some insight into how to handle cash better to avoid cash flow problems The Importance of Cash Flow Analysis - Cash flow: the difference between cash coming in and cash going out of a business - "Business can be viewed as a triangle of operations: making, selling, and scorekeeping. If you devote yourself only to production and neglect the other sides, the imbalance will show up in the bottom line and shake the confidence of potential investors in the future." - challenge for businesses of all sizes -> seasonal businesses (e.g. ski resorts): cash flow is not consistent - Business' relationship with its banker(s) is critical -> prevents cash flow problems that often develop Applying AccountingKnowledge in Business Generally Accepted Accounting Principles - Guidelines to help accountants make proper & consistent decisions, published in CICA handbook Amortization,LIFO, and FIFO Amortization,LIFO, and FIFO - Amortization:systematicwriteoff of the cost of a tangible asset over its estimated useful life - First in, first out (FIFO): inventory valuation; first goods to come in are the first to go out - Last in, first out (LIFO): inventory valuation; last goods to come in are the first to go out AnalyzingFinancial Statements: Ratio Analysis - Ratio analysis: assessmentof a firm's financial condition & performance through calculations & interpretations of financial ratios developed from the firm's financial statements Liquidity Ratios - Measure a company's ability to turn assets into cash to pay its short-termdebts - Current Ratio = Current Assets ÷ Current Liabilities - Acid Test Ratio = (Cash + A/R + Marketable Securities)÷ Current Liabilities Leverage(Debt) Ratios - Measures the degree to which a firm relies on borrowed funds in its operations - Debt to Owner's Equity = Total Liabilities÷ Owner's Equity • Measures the degree to which the company is financed by borrowedfunds that must be repaid Profitability(Performance)Ratios - Measures how effectivelya firm is using its various resources to achieve profits - EPS reported as: basic & diluted • Basic: determinesthe amount of profit earned by a co. for each share of outstanding commonstock • Diluted: measures amount of profit earned by a co. for each share of outstanding commonstock, takes into consideration stock options, warrants, preferred stock, & convertibledebt securities • Basic EPS = Net Income After Taxes ÷ Average # of Common Stock Shares Outstanding - Return on Sales = Net Income ÷ Net Sales • How current performancecompares to past performanceand if they are doing as well as competitorsin generating income from the sales they achieve - ↑ risk = ↑ return expected Return on Equity = Net Income ÷ Average Total Owner's Equity - • Measures how much was earned for each $ invested by owners Activity Ratios - Measure the effectivenessof a firm's managementin using the available assets - Inventory Turnover = COGS ÷ Average Inventory • Measures the speed of inventory moving through firm & conversioninto sales • More efficient a firm manages its inventory = the ↑ return • Lower-than-averageratio: obsolete merchandise on hand/poor buying practices • Higher-than-average ratio: lost sales (inadequate stock) Chapter 14: Marketing: Building Customer and Stakeholder Relationships October-09-12 2:30 PM What is Marketing? - Marketing: the process of determining customerneeds and wants and then developing goods and services that meet or exceed these expectations - Market: a group of people with unsatisfied wants and needs who have the resources and the willingness to buy products - Green marketing:marketing efforts to produce, promote,and reclaim environmentally-sensitive products The Evolution of Marketing - 4 eras: production, sales, marketing concept, customer relationship The Production Era - For the time the first European settlers arrived in Canada until the start of the 1900s, the general philosophy of business was to produce as much as possible -> limited production capabilities - Manufacturers focused on production, as most goods were bought as soon as they became available. The greatest marketing need was for distribution & storage. The Sales Era - 1920s:businesses had developed mass production techniques (e.g. automobileassembly lines) & production capacity often exceeded the immediatemarket demand - Business philosophy: emphasis on production to an emphasis on selling The Marketing Concept Era - After WWII (1945): tremendousdemand for goods/servicesamong returning soldiers (new careers) - Postwaryears launched the baby boom (sudden ↑ in birth rate) & consumer spending ↑ - Competitionfor the consumer's dollar was fierce. Organizations recognized the need to be responsive to consumers if they wanted to get business (philosophy:marketing concept emerged in the 1950s). - Marketing concept:3-part business philosophy: customer,service, & profit orientation 1. A customer orientation. Find out what consumers want and provide it for them. 2. A service orientation. Ensure that everyonein the organization has the same objective: customer satisfaction. This should be a total and integrated organizational effort. 3. A profit orientation. Focus on those goods and services that will earn the most profit and enable the organization to survive & expand to serve more consumer wants and needs. - Implementationof marketing concept was slow during 1960s-1970s;more aggressive app. in 1980s The Customer Relationship Era - 1990s:managers extended the marketing concept by adopting the concept of customer relationship management (the process of learning as much as possible about customersand doing everything you can to satisfy themoreven exceed their expectationswithgoods/servicesover time). • Enhances customersatisfaction and stimulate long-term customer loyalty Non-Profit Organizations Prosper from Marketing - Marketing is a critical part for all organizations, whether for-profit or non-profit. • e.g. charities -> to raise funds/to obtain other resources, churches -> to attract new members & to raise funds, politicians -> to get votes, provinces -> to attract new businesses & tourists The Marketing Mix - The ingredients that go into a marketing program: product, price, place, and promotion(4 Ps) Applying the Marketing Process - Figure 14.2 (p.425) - Without clearly understanding your target market, the marketing mix is of little value. Designing a Product to Meet Needs - Four Ps of marketing begin when you have researched consumer needs and found a target market. - Four Ps of marketing begin when you have researched consumer needs and found a target market. - Product: any physical good, service,or idea that satisfies a want or need - Concept testing: develop an accurate desc. of product & ask people if the concept appeals to them - Test marketing:the process of testing products among potential users - Brand name: a word, device (design, shape, sound, or colour), or combination of these used to distinguish a seller's goods/servicesfrom those of competitors Setting an Appropriate Price - Price: the money or other consideration(including other goods & services)exchanged for the ownership or use of a good/service Getting the Product to the Right Place - Focus of place: decide how best to get your products to the consumer - Intermediaries: in the middle of a series of orgs. that distribute goods from producers to consumers - Getting the product to consumerswhen & where they want it is critical to market success. Developing an Effective PromotionalStrategy - Promotion:all of the techniques sellers use to motivatecustomersto buy their products • Includes advertising, personal selling, public relations, coupons, & samples - Promotionincludes relationship building with customers.It includes responding to suggestions consumers may make to improvethe products or their marketing (including price and packaging). - Marketing is an ongoing process. To remain competitive,companiesmust continually adapt to changes in the market and to changes in consumer wants and needs. Listening to customersand responding to their needs is the key to marketing. Providing Marketers with Information - Marketing research: the analysis of markets to determine opportunities and challenges, and to find the information needed to make good decisions • Helps determine what customers have purchased in the past & what situational changes have occurred to alter not only what consumerswant now but also what they're likely to want in the future • Marketersconduct research on business trends, the ecologicalimpact of their decisions, international trends, & more. - Businesses need informationto competeeffectively,& marketing research gathers the information. The Marketing Research Process - Consists of at least 4 key steps: 1. Defining the question (problem or opportunity) and determining the present situation 2. Collecting data 3. Analyzing the research data 4. Choosing the best solution and implementing it Defining the Question and Determining the Present Situation - What the present situation is, what the problems/opportunitiesare, what the alternatives are, what information is needed, and how to go about gathering and analyzing data Collecting Data - Secondarydata: informationthat has already been compiled by others and published in journals and books or made available online - Primary data: data that you gather yourself (not from secondary sources like books & magazines) - Figure 14.4 (p.429) - Primary research technique: observation (observe people & record the actions of potential buyers) - Primary data can be gathered by developing a list of questions & conducting a survey. - To increase the response and accuracy rate, marketersuse personal interviews. Personal interviews are a face-to-faceopportunity to ask consumers prepared questions. - Focus group: a small group of people who meet under the direction of a discussion leader to communicatetheir opinions about an organization, its products, or other issues Analyzing the Research Data - The data collectedmust be turned into useful information. Honest interpretationof the data collected can help a companyfind useful alternatives to specific marketing challenges. collected can help a companyfind useful alternatives to specific marketing challenges. Choosing the Best Solution and Implementing It - After collecting & analyzing the data, market researchers determinealternative strategies & make recommendationsas to which strategy may be best & why. This final step in a research effort involves following up on the actions taken to see if the results were as expected. If not, the company can take correctiveaction and conduct new studies in the ongoing attemptto provide consumer satisfaction at the lowest cost. Marketing research is a continuous process of responding to changes in the marketplace& changes in consumer preferences. The Marketing Environment - Environmentalscanning: the process of identifying the factors that can affect marketing success - Figure 14.5 (p.431) -> global, technological,sociocultural, competitive,economicinfluences Global Factors - Most dramatic global change -> growth of the Internet - Globalization of marketing puts more pressure on those whose responsibility it is to deliver products. Technological Factors - Most important technological changes: involve the Internet & growth of consumer databases - Using consumerdatabases, companies can develop products & servicesthat closely match the needs of consumers. - Flexible manufacturing & mass customizationare also major influences on marketers. Sociocultural Factors - Social trends that marketers must monitor to maintain their close relationship with customers • e.g. population growth & changing demographics Competitive Factors - Companies have to adjust to competitorswho can deliver products quickly or provide excellent service. Economic Factors - As the economyslowed, marketershad to adapt by offering products that were less expensive & more tailored to consumers with modest incomes. Legal and Regulatory Forces - Governmentsenact laws & regulations to protect consumers & businesses. Two Different Markets: Consumer and Business-to-Business(B2B) - Consumermarket: all individuals/households that want goods & services for personal consumption/use - Business-to-business(B2B)market: all individuals & organizations that want goods & services to use in producing other goods & services or to sell, rent, or supply goods to others • e.g. cash registers, display cases, office desks, public accounting audits, corporatelegal advice - The buyer's reason for buying/the end use determinesif a product is a consumer or a B2B product. The Consumer Market - Market segmentation:the process of dividing the total market into groups whose members have similar characteristics - Target marketing: marketing directed toward those groups (market segments) an organization decides it can serve profitably Segmenting the Consumer Market - Geographicsegmentation: dividing the market by geographic area - Demographicsegmentation: dividing the market by age, income, & education level • Most used segmentation variable, but not the best (information gathered is just a starting point) - Psychographicsegmentation: dividing the market according to personality or lifestyle (activities, interests, or opinions) - Behaviouralsegmentation: dividing the market based on behaviour with or toward a product • Benefits sought, usage rate, user status - Figure 14.6 (p.436) - The best segmentationstrategy is to use a combinationof these bases to come up with a consumer profile (a target market or more) that is sizable, reachable, and profitable. profile (a target market or more) that is sizable, reachable, and profitable. Reaching Smaller Market Segments - Niche marketing: the process of finding small but profitable market segments and designing or finding products for them - One-to-one(individual)marketing: developing a unique mix of goods & services for each individual customer Moving Toward Relationship Marketing - Mass marketing: developing products & promotionsto please large groups of people • Little segmentation;sells to as many people as possible using mass media (TV, radio, newspapers) • Marketing managers often got so caught up with their products & competitionthat they became less responsive to the market. - Relationship marketing: marketing strategy with the goal of keeping individual customersover time by offering them products that exactly meet their requirements • Latest technologyenables sellers to determine consumers' wants and needs & to develop goods/servicesspecifically designed for them ○ Relationship marketing combined with enterprise resource planning (ERP) • Airlines, rental car companies,and hotels have frequent-user programs through which loyal customerscan earn special services & rewards. The Consumer Decision-MakingProcess - Major part of the marketing discipline: consumer behaviour - Figure 14.7 (p.439) - Other factors important in the consumer decision-making process include: • Learning involves changes in an individual's behaviour resulting from previous experiences & information (e.g. tried a particular brand of shampoo & you don't like it, you may never buy it again). • Reference group is the group that an individual uses as a reference point in the formation of his/her beliefs, attitudes, values, or behaviours (e.g. student with briefcase instead of a backpack may see business people as his/her reference group). • Culture is the set of values, beliefs, rules, & institutions held by a specific group of people. Those are transmitted from one generation to another in a given society (e.g. changing attitudes & values in Canada include more women working outside of the home). • Subculture is the set of values, attitudes, & ways of doing things that results from belonging to a certain ethnic group, religious group, or other group with which one closely identifies. The subculture is one small part of the larger culture. (Your subculture may prefer rap, while your parents' subculture may prefer light jazz.) • Cognitive dissonance is a type of psychological conflict that can occur after a purchase. Consumers who make a major purchase may have doubts about whether they got the best product at the best price. Marketers must therefore reassure such consumers that they made a good decision after the sale. (An auto dealer may send the customerpositive press articles about the particular car purchased.) The Business-to-Business Market - B2B marketersinclude manufacturers, intermediariessuch as retailers, institutions (e.g. hospitals, schools, and charities), and the government. The B2B market is larger than the consumer market because items are often sold and resold several times in the B2B process before they are sold to the final consumer. The marketing strategies often differ from those in consumermarketing because business buyers have their own decision-making process. Several factors make B2B marketing different: 1. The number of customers in the B2B market is relatively few. 2. The size of business customers is relatively large. 3. B2B marketstend to be geographically concentrated. 4. Business buyers are generally thought to be more rational (as opposed to emotional) than ultimate consumers in their selection of goods & services. 5. B2B sales tend to be direct. 6. There is much more emphasis on personal selling in B2B markets than in consumer markets. - Figure 14.8 (p.441) - Figure 14.8 (p.441) Chapter 15: Managing the Marketing Mix: Product, Price, Place, and Promotion October-16-12 2:30 PM Product Development and the Total Product Offer - Value: good quality at a fair price (Value = Benefits - Costs) - Adapting products to new competitionand new markets is an ongoing necessity.Companies must constantly monitorchanging consumerwants & needs, and adapt products & policies accordingly. - Product development -> key activity in any modern business Developing a Total Product Offer - Totalproductoffer (value package): everything that consumers evaluate when deciding whether to buy something(Figure 15.1 (p.450)) -> attributes may be tangible (product & package) or intangible (rep.) - Price -> important part of the perception of product value (high price may indicate exceptional quality) Product Lines and the Product Mix - Productline: a group of products that are physically similar or are intended for a similar market • Usually face similar competition - Productmix: the combinationof product lines offered by a manufacturer • Mix may include both goods & services to ensure all needs are met , diversified mix -> minimize risks Product Differentiation - The creation of real or perceived product differences - Actual product differences are sometimesquite small, so markets must use a creative mix of pricing, advertising, & packaging (value enhancers) to create a unique & attractiveimage. Packaging Changes the Product - used to change and improvethe basic product & may help make a product more attractiveto retailers - Today, packaging carries moreof a promotionalburden than in the past. Many products that were once sold by salespeople are now being sold in self-serviceoutlets, & the package has been given more sales responsibility. - Functions: 1. To protect the goods inside, stand up under handling & storage, be tamperproof,deter theft, and yet be easy to open & use 2. To attract the buyer's attention 3. To describe the contents 4. To explain the benefits of the good inside 5. To provide information on warranties, warnings, & other consumer matters 6. To indicate price, value & uses - When combining goods & services into one package, it's important not to include so much that the price becomestoo high. It's best to work with customersto develop value enhancers that meet their individual needs. Branding and Brand Equity - Brand names give products a distinction that tends to make them attractiveto consumers. For a buyer, a brand name assures quality, reduces search time, & adds prestige to purchases. - Trademark: a brand that has been given exclusive legal protection for both the brand name and the pictorial design (e.g. Nike swoosh) • Need to be protectedfrom other companies that may want to trade on the trademarkholder's reputation & image Generating Brand Equity and Loyalty - A major goal of markets in the future is to leverage their companies' and products' brand equity: the - A major goal of markets in the future is to leverage their companies' and products' brand equity: the combination of factors (e.g. awareness, loyalty, perceived quality, images, and emotions)that people associatewith a given brand name. - Brand loyalty: the degree to which customers are satisfied, enjoy the brand, and are committedto further purchase (core of brand equity) - Brand awareness: how quickly or easily a given brand name comes to mind when a product category is mentioned (advertising helps build strong brand awareness) Brand Management - Brand manager (productmanager): a manager who has direct responsibility for one brand or one product line (responsibilityincludes all elementsof the marketing mix) • Many large consumer product companies created the position to have greater control over new- product developmentand product promotion.Brand management teams bolster the overall effort. • Make marketing decisions (applying to 4 Ps) throughout the life cycle of each product & service Competitive Pricing - Pricing is the only elementof the 4 Ps that generates revenue. It is one of the most difficult of the 4 Ps for a manager to control. Price is a critical ingredient in consumer evaluations of the product. Pricing Objectives - Popular objectives: 1. Achieving a target return on investment or profit. Ultimately,the goal of marketing is to make a profit by providing goods and services to others. Naturally, one long-run pricing objectiveof almost all firms is to optimize profit. 2. Building traffic. Supermarkets often advertise certain products at or below cost to attract people to the store. These products are called loss leaders. The long-run objective is to make profits by following the short-run objectiveof building a customer base. 3. Achieving greater market share. 4. Creating an image. Products may be priced higher to give an image of exclusivityand status. 5. Furthering social objectives. A firm may want to price a product low so that people with little money can afford the product. - A firm may have short-run objectivesthat differ greatly from its long-run objectives.Pricing objectivesshould be influenced by other marketing decisions regarding product design, packaging, branding, distribution, and promotion.All these marketing decisions are interrelated. Major Approaches to Pricing Cost-Based Pricing - Producers often use cost as a primary basis for setting price. They develop elaborate cost accounting systemsto measure production costs, add in somemargin of profit, and come up with a price. In the long run, the market determines what the price will be. Pricing should take into account costs, but it should also include the expected costs of product updates ,the objectivesfor each product, and competitorprices. Demand-Based Pricing - This strategy considers factors underlying customertastes & preferences when selecting the price. - Bundling: grouping 2 or more products together & pricing them as a unit • e.g. pricing a unit of a washer & dryer at a cheaper price than if they were each purchased separately - Psychologicalpricing: pricing goods & services at price points that make the product appear less expensive than it is (e.g. pricing a house at $299,000and make it sound a lot less than $300,000) - Target costing:designing a product so that it satisfies customers& meets the profit margins desired by the firm, makes the final price an input to the product developmentprocess (not an outcomeof it) • Target Cost of Production = Selling Price People Willingto Pay - Desired Profit Margin Competition-Based Pricing - Pricing strategy based on what all the other competitorsare doing. The price can be set at, above, or below competitors'prices. Pricing depends on customerloyalty, perceived differences, & the competitiveclimate. - Price leadership:the procedure by which one or more dominant firms set the pricing practices that - Price leadership:the procedure by which one or more dominant firms set the pricing practices that all competitorsin an industry follow (e.g. practice among oil & cigarette companies) Break-Even Analysis - Processused to determineprofitability at various levels of sales - Break-even point: point where revenue = costs - Break-even point (BEP) = Total Fixed Cost (FC) ÷ (Price of One Unit (P) - Variable Cost (VC) of One Unit) - Totalfixed costs: all expenses that remain the same no matterhow many products are made or sold - Variablecosts: costs that change according to the level of production Pricing Strategies for New Products - Skimmingprice strategy: a strategy in which a new product is priced high to make optimum profit while there's little competition - Penetrationprice strategy: a strategy in which the product is priced low to attract many customers & discourage competitors Retailer Pricing Strategies - Everyday low pricing(EDLP): setting prices lower than competitors& then not having any special sales - High-lowpricing strategy: set prices that are higher than EDLP stores, but have many special sales where the prices are lower than competitors How Market Forces Affect Pricing - Different consumers may be willing to pay different prices, markets sometimesprice on the basis of consumer demand called demand-oriented pricing. - New pricing problem: customerscan now compare prices of goods/serviceson the Internet. - Price competitionis ↑ since consumershave more access to price info -> non-price competitionwill ↑ Non-Price Competition - Marketersoften competeon product attributes other than price. Typically, you will not see price used as a major promotionalappeal. Instead, markets tend to stress product image & consumer benefits such as comfort,style, convenience,& durability. - Organizations of all sizes promotethe services that accompany basic products rather than price to be competitive.Often marketersemphasize non-price differences because prices are so easy to match. However,few competitorscan match the image of a friendly, responsive,consumer-oriented company. Other strategies to avoid price wars include adding value, educating consumers on how to use the product, & establishing relationships. Customerswill pay extra for goods & services when they have a friendly relationship with the seller. The Importance of Channels of Distribution - Marketing intermediaries: organizations that assist in moving goods & services from producers to business & consumerusers - Channelof distribution: a set of marketing intermediaries, such as agents, brokers, wholesalers,and retailers, that join together to transport and store goods in their path/channel from producers to consumers - Agents and brokers: marketing intermediaries that bring buyers and sellers together and assist in negotiating an exchange but don't take title to the goods - Wholesaler: a marketing intermediary that sells to other organizations - Retailer: an organization that sells to ultimate consumers - Channels of distribution ensure communicationflows and the flow of money and title to goods. They also help ensure that the right quantity & assortmentof goods will be available when & where needed (Figure 15.2 (p.459)). Why Marketing Needs Intermediaries: Creating Exchange Efficiency - Intermediaries perform certain marketing tasks (e.g. transporting, storing, selling, advertising, relationship building), faster and cheaper than most manufacturers could. relationship building), faster and cheaper than most manufacturers could. - Some economistshave said that intermediaries add costs and need to be eliminated. Marketerssay that intermediaries add value and that the value greatly exceeds the cost. While marketing intermediaries can be eliminated, their activities cannot if consumers are to have access to products and services. Retailing - Figure 15.3 (p.460) Retail Distribution Strategy - Intensivedistribution: distribution that puts products into as many retail outlets as possible • Including vending machines, e.g. candy, cigarettes, gum, popular magazines - Selective distribution:distribution that sends products to only a preferred group of retailers in an area • Helps assure producers of quality sales & service • Used by manufacturers of shopping goods (appliances, furniture, clothing) - Exclusive distribution: distribution that sends products to only one retail outlet in a given geographic area • The retailer has exclusive rights to sell the product and is likely to carry a large inventory,give exceptional service, & pay more attention to this brand than to others. • Used by auto manufacturers & producers of specialty goods (skydiving equipment, fly-fishing products) Non-Store Retailing - Categories:electronic retailing, telemarketing,vending machines, kiosks, and carts, & direct selling - Small businesses can use non-store retailing to open up new channels of distribution for their products. Electronic Retailing - Selling goods & servicesto ultimate customers over the Internet - When electronic retailers fail to have sufficient inventoryor fail to deliver goods on time (especially during busy periods), customersgive up and go back to brick-and-mortarstores. - Sometimeselectronic retailers are not good at handling complaints, taking back goods that customersdon't like, and providing personal help. Web sites are trying to improve customerservice by adding help buttons that lead customersto almost instant assistance from a real person. - Traditional brick-and-mortarstores are also rapidly going online. Telemarketing - The sale of goods & services by telephone - Used to supplement or replace in-store selling and to complementonline selling - Many telemarketerssend a catalogue to consumers and let them order by calling a toll-free #. Vending Machines, Kiosks, and Carts - A vending machine dispenses conveniencegoods when consumersdeposit sufficient money in the machine. They carry the benefit of location. - Kiosks and carts have lower overhead costs than stores do; they can offer lower prices on items. Kiosk workers often dispense coupons & provide all kinds of helpful informationto consumers, who tend to enjoy the interaction. Many kiosks serve a gateway to the Internet, so consumers can shop at a store and still have access to all of the products available on the Internet in one place. Direct Selling - Selling to consumersin their homes or where they work (e.g. Avon) Choosing the Right Distribution Mode - A primary concern of supply-chain managers is selecting a transportationmode that will minimize costs & ensure a certain level of service. Generally, the faster the mode of transportation, the higher the cost. Today, supply chains involve all kinds of activities (processing orders & taking inventory). The job of the supply-chain manager is to find the mostefficient combination of these forms of transportation. Promotion and the Promotion Mix - Figure 15.5 (p.463) - Figure 15.5 (p.463) - Promotionmix: the combinationof promotionaltools an organization uses - Each target group calls for a separate promotionmix. For example, large homogeneousgroups of consumers (e.g. groups whose membersshare specific similar traits) are usually most efficiently reached through advertising. Large organizations are best reached through personal selling. - Integratedmarketing communication(IMC): a technique that combines all promotionaltools into one comprehensive& unified promotionalstrategy • The idea is to use all promotionaltools & company resources to create a positive brand image & to meet the strategic marketing and promotionalgoals of the firm. Advertising: Fighting to Keep Consumer Interest - Advertising:paid, non-personal communicationthrough various media by organizations & individuals who are in some way identified in the advertising message • Various categories:product, online, & comparison advertising (compares competitiveproducts) - The public benefits from advertising expenditures. Ads are informative.Advertising not only informs us about products but also provides us with free TV, communitynewspapers, & radio programs: the money advertisersspend for commercialtime pays for the production costs. Advertising also covers the major costs of producing newspapers & magazines. - Figure 15.6 (p.464) - Marketersmust choose which media can best be bused to reach the audience they desire. Radio advertising, for example,is less expensive than TV advertising & often reaches people when they have few other distractions, such as driving in their cars. Global Advertising - Involves developing a product & promotionalstrategy that can be implementedworldwide - Would save companies money in research & design - However,experts think that promotionstargeted at specific countries/regionsmay be more successful than global promotionssince each country/regionhas its own culture, language, and buying habits. - Today, advertising is moving from globalism (one ad for everyonein the world) to regionalism (specific ads for each country or for specific groups within a country). In the future, marketerswill prepare more custom-designed promotionsto reach smaller audiences (audiences as small as one person). Personal Selling: Providing Personal Attention - Personalselling: face-to-facepresentation & promotionof goods & services • Involves the search for new prospects & follow-up service after the sale • Benefit: there is a person there to help you completea transaction - Costly to provide customerswith personal attention The Business-to-Consumer (B2C) Sales Process - Figure 15.7 (p.466) 1. Approach. The idea is to show the customerthat you are there to help & that you are friendly & knowledgeable. 2. Ask questions. 3. Make presentation. Show customershow the products meet their needs. You answer questions that help them choose the products that are right for them. The more you learn about the customers' specific wants, the better you are able to help them choosethe right product(s) to meet those wants. 4. Close sale. The salesperson must respect the customerand give them time & space, but still be clearly available when needed. 5. Follow up. Public Relations: Building Relationships - The management function that evaluates public attitudes, changes policies & procedures in response to the public's requests, and executes a program of action & informationto earn public understanding & acceptance - Responsibility of the PR dept. to maintain close ties with the media, communityleaders, government officials, & other corporate stakeholders - Idea is to establish & maintain a dialogue with all stakeholdersso that the co. can respond to - Idea is to establish & maintain a dialogue with all stakeholdersso that the co. can respond to inquiries, complaints& suggestions quickly Publicity: The Talking Arm of PR - Any information about an individual, product, or organization that's distributed to the public through the media & that's not pai
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