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BusinessEssentialsNinthCanadianEdition9thCanadianEditionRONALDJ.EBERT.pdf
BUSINESS ESSENTIALS
N I N T H CA N A D I A N E D I T I O N
RONALD J. EBERT Professor Emeritus, University of Missouri-Columbia
RICKY W. GRIFFIN Texas A&M University
GEORGE DRACOPOULOS Vanier College and McGill University
FREDERICK A. STARKE Professor Emeritus, University of Manitoba
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9780134788852
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Library and Archives Canada Cataloguing in Publication
Ebert, Ronald J., author
Business essentials / Ronald J. Ebert, University of Missouri-Columbia, Ricky W. Griffin, Texas A&M University, Frederick A. Starke, University of Manitoba, George Dracopoulos, Vanier College and McGill University.—Ninth Canadian edition.
Includes bibliographical references and indexes.
ISBN 978-0-13-478885-2 (hardcover)
1. Industrial management—Textbooks. 2. Business enterprises—Textbooks. 3. Industrial management— Canada—Textbooks. 4. Business enterprises—Canada—Textbooks. 5. Textbooks. I. Griffin, Ricky W., author II. Starke, Frederick A., 1942-, author III. Dracopoulos, George, 1970-, author IV. Title.
HD70.C3E32 2018 658 C2018-903860-8
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To Fran, for bringing a lifetime of friendship, fun, and love into our family. —R.J.E.
For Paul and Sherry—Friends for life. —R.W.G.
To Nitsa and Costa Dean. —G.D.
To Ann, Eric, and Grant. —F.A.S.
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01 UNDERSTANDING THE CANADIAN BUSINESS SYSTEM 2
02 THE ENVIRONMENT OF BUSINESS 20
03 CONDUCTING BUSINESS ETHICALLY AND RESPONSIBLY 40
04 ENTREPRENEURSHIP, SMALL BUSINESS, AND NEW VENTURE CREATION 61
05 THE GLOBAL CONTEXT OF BUSINESS 86
PART 1 INTRODUCING THE CONTEMPORARY
BUSINESS WORLD 1
PART 2 THE BUSINESS OF MANAGING 111
PART 4 PRINCIPLES OF MARKETING 261
PART 5 MANAGING FINANCIAL ISSUES 311
PART 3 MANAGING OPERATIONS AND
INFORMATION 213
BRIEF CONTENTS
06 MANAGING THE BUSINESS ENTERPRISE 112
07 ORGANIZING THE BUSINESS ENTERPRISE 136
08 MANAGING HUMAN RESOURCES AND LABOUR RELATIONS 157
09 MOTIVATING, SATISFYING, AND LEADING EMPLOYEES 184
10 OPERATIONS MANAGEMENT, PRODUCTIVITY, AND QUALITY 214
11 UNDERSTANDING ACCOUNTING 240
12 UNDERSTANDING MARKETING PRINCIPLES AND DEVELOPING PRODUCTS 262
13 PRICING, PROMOTING, AND DISTRIBUTING PRODUCTS 287
14 MONEY AND BANKING 312
15 FINANCIAL DECISIONS AND RISK MANAGEMENT 331
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LO-2 The Economic Environment 23 Economic Growth 23 Economic Stability 26
THERE’S AN APP FOR THAT! 26
Managing the Canadian Economy 28
LO-3 The Technological Environment 28 Research and Development (R&D) 28 Product and Service Technologies 28
THE GREENING OF BUSINESS Environmentally Friendly Automobiles 29
LO-4 The Political–Legal Environment 30
DISRUPTIONS IN BUSINESS The Physical Environment 30
LO-5 The Socio-Cultural Environment 31 Customer Preferences and Tastes 31 Ethical Compliance and Responsible Business Behaviour 31 The Business Environment 31 The Industry Environment 32
ENTREPRENEURSHIP AND NEW VENTURES Goldline Curling: Dealing with New Industry Threats 33
LO-6 Emerging Challenges and Opportunities in the Business Environment 33
Outsourcing 34 The Growing Role of Social Media 34 Business Process Management 34
LO-7 Redrawing Corporate Boundaries 34 Mergers and Acquisitions 34 Divestitures and Spinoffs 35 Employee-Owned Corporations 35 Strategic Alliances 35 Subsidiary and Parent Corporations 35
Summary of Learning Objectives 36 Questions and Exercises 37 Team Exercises 37 business case 2 38
03 CONDUCTING BUSINESS ETHICALLY AND RESPONSIBLY 40
Is Legalization of Marijuana a Good Idea? 40
Ethics in the Workplace 42
LO-1 Individual Ethics 42
Business and Managerial Ethics 43 Assessing Ethical Behaviour 43 Encouraging Ethical Behaviour in Organizations 45
LO-2 Corporate Social Responsibility 46
PART 1 INTRODUCING THE CONTEMPORARY BUSINESS WORLD 1
01 UNDERSTANDING THE CANADIAN BUSINESS SYSTEM 2
Spin Master: Canadian Toy Maker Becomes a Global Children’s Entertainment Company 2
LO-1 The Idea of Business and Profit 4
LO-2 Economic Systems Around the World 4 Factors of Production 4 Types of Economic Systems 5
DISRUPTIONS IN BUSINESS Disruptions Are Everywhere! 6
THERE’S AN APP FOR THAT! 8
LO-3 Interactions between Business and Government 8 How Government Influences Business 8
THE GREENING OF BUSINESS Problems in the Ontario Power System 10
How Business Influences Government 11
LO-4 The Canadian Market Economy 11 Demand and Supply in a Market Economy 11
E-BUSINESS AND SOCIAL MEDIA SOLUTIONS The Lucrative Business of App Development 13
LO-5 Private Enterprise and Competition 14 Degrees of Competition 14
Summary of Learning Objectives 16 Questions and Exercises 17 Team Exercises 17 business case 1 18
02 THE ENVIRONMENT OF BUSINESS 20
Growth and Success: A Few Dollars at a Time 20
LO-1 Organizational Boundaries and Environments 22 Organizational Boundaries 22 Multiple Organizational Environments 23
CONTENTS
Preface xv Acknowledgments xix About the Authors xx
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LO-5 Success and Failure in Small Business 76 Reasons for Success 76 Reasons for Failure 77
LO-6 Forms of Business Ownership 77 The Sole Proprietorship 77 The Partnership 77 The Corporation 78 The Co-Operative 80
Summary of Learning Objectives 81 Questions and Exercises 82 Team Exercises 83 business case 4 84
05 THE GLOBAL CONTEXT OF BUSINESS 86
Couche-Tard: Your Global Convenience Store 86
The Contemporary Global Economy 88
LO-1 The Major World Marketplaces 89
LO-2 Emerging Markets: BRICS and Beyond 90
E-BUSINESS AND SOCIAL MEDIA SOLUTIONS The Goose Is Flying East: CanadaGoose.cn 91
LO-3 Forms of Competitive Advantage 92
The Balance of Trade 93 The Balance of Payments 93 Exchange Rates 93
THERE’S AN APP FOR THAT! 94
LO-4 International Business Management 94 Going International 94 Levels of Involvement in International Business 95 International Organizational Structures 96
LO-5 Barriers to International Trade 97 Social and Cultural Differences 97
ENTREPRENEURSHIP AND NEW VENTURES A Better Coconut Water 98
Economic Differences 98 Legal and Political Differences 99 Business-Practice Laws 100
DISRUPTIONS IN BUSINESS Is Supply Management Doomed? 101
LO-6 Overcoming Barriers to Trade 101 General Agreement on Tariffs and Trade (GATT) 101 World Trade Organization 101 The European Union 102 The North American Free Trade Agreement and the
New US-Mexico-Canada Agreement (USMCA) 103 Major New Agreements: TPP and CETA 103 Other Free Trade Agreements Around the World 104
Summary of Learning Objectives 104 Questions and Exercises 106 Team Exercises 106 business case 5 107
LO-3 The Stakeholder Model of Responsibility 47
E-BUSINESS AND SOCIAL MEDIA SOLUTIONS Retailers Are Watching You: Is That Okay? 48
THERE’S AN APP FOR THAT! 49
DISRUPTIONS IN BUSINESS Key Issues in Whistle-Blower Programs 51
THE GREENING OF BUSINESS Which Car Pollutes Less? Electric or Gasoline? 53
Implementing Social Responsibility Programs 55
LO-4 Approaches to Social Responsibility 55
Managing Social Responsibility Programs 55
LO-5 Social Responsibility and the Small Business 56
Summary of Learning Objectives 57 Questions and Exercises 58 Team Exercises 58 business case 3 59
04 ENTREPRENEURSHIP, SMALL BUSINESS, AND NEW VENTURE CREATION 61
Tim Hortons’ Franchisee Challenges: Heroes, and Villains 61
LO-1 Interrelationship of Small Business, New Venture Creation, and Entrepreneurship 63
Small Business 63 The New Venture/Firm 64 Entrepreneurship 64 Intrapreneurs 65
LO-2 The Role of Small and New Businesses in the Canadian Economy 66
Small Businesses 66 New Ventures 66
LO-3 The Entrepreneurial Process 67 Identifying Opportunities 67
E-BUSINESS AND SOCIAL MEDIA SOLUTIONS Shopify: Helping Entrepreneurs Expand and Monetize Their Client Base 69
Accessing Resources 70
THERE’S AN APP FOR THAT! 71
Building the Right Team 72
ENTREPRENEURSHIP AND NEW VENTURES Crowdfunding: Finance from the Masses 73
Assessing the Fit between Elements in the Entrepreneurial Process 73
THE GREENING OF BUSINESS Green Growth in Small Businesses 74
LO-4 Starting Up a Small Business 74 Buying an Existing Business 74 Buying a Franchise 75
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PART 2 THE BUSINESS OF MANAGING 111
06 MANAGING THE BUSINESS ENTERPRISE 112
A Surprising Change in Corporate Strategy at Bombardier 112
Who Are Managers? 114
LO-1 The Management Process 114 Planning 115 Organizing 115 Leading 115 Controlling 115 Management: Science or Art? 116
E-BUSINESS AND SOCIAL MEDIA SOLUTIONS Managing Customer Service Touch Points 116
Becoming a Manager 117
What Should You Expect in a Management Job? 117
ENTREPRENEURSHIP AND NEW VENTURES Innovations in Management 118
LO-2 Types of Managers 118 Levels of Management 118 Areas of Management 119
LO-3 Management Roles and Skills 120 Management Roles 120 Management Skills 121
LO-4 Strategic Management 124 Setting Business Goals 124 Formulating Strategy 125
THERE’S AN APP FOR THAT! 126
Levels of Strategy 127
LO-5 Contingency Planning and Crisis Management 128
Contingency Planning 128 Crisis Management 128
DISRUPTIONS IN BUSINESS When Disaster Strikes 129
LO-6 Management and the Corporate Culture 129
THE GREENING OF BUSINESS Mission Zero 130
Communicating the Culture and Managing Change 131
Summary of Learning Objectives 131 Questions and Exercises 132 Team Exercises 133 business case 6 134
07 ORGANIZING THE BUSINESS ENTERPRISE 136
Building a Foundation and Structure for Long-Term Success 136
What Is Organizational Structure? 138
LO-1 Determinants of Organizational Structure 138
ENTREPRENEURSHIP AND NEW VENTURES Organizing for Growth 139
The Chain of Command 139
The Building Blocks of Organizational Structure 139
LO-2 Job Specialization 139
Departmentalization 141
Establishing the Decision-Making Hierarchy 142
LO-3 Assigning Tasks 142
Performing Tasks 143 Distributing Authority: Centralization and
Decentralization 143 Three Forms of Authority 145
LO-4 Basic Organizational Structures 146 The Functional Structure 146 The Divisional Structure 146 Project Organization 147 Matrix Structure 147 International Structures 149
Organizational Design for the Twenty-First Century 149
Boundaryless Organization 149 Team Organization 150 Virtual Organization 150
E-BUSINESS AND SOCIAL MEDIA SOLUTIONS “Simon Says,” Alexa, What Have You Done? 150
Learning Organization 151
LO-5 The Informal Organization 151 Informal Groups 151 The Organizational Grapevine 151
THERE’S AN APP FOR THAT! 152
Summary of Learning Objectives 152 Questions and Exercises 154 Team Exercises 154 business case 7 155
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08 MANAGING HUMAN RESOURCES AND LABOUR RELATIONS 157
An Avalanche of Sexual Harassment Cases 157
LO-1 The Foundations of Human Resource Management 159
The Strategic Importance of HRM 159 Human Resource Planning 160
LO-2 Recruiting Human Resources 160
THE GREENING OF BUSINESS What Are “Green” Jobs? 161
Selecting Human Resources 162
THERE’S AN APP FOR THAT! 163
E-BUSINESS AND SOCIAL MEDIA SOLUTIONS Artificial Intelligence Meets HR 164
LO-3 Developing Human Resources 164 New Employee Orientation 164 Training 165
ENTREPRENEURSHIP AND NEW VENTURES Are You LinkedIn? 165
Evaluating Employee Performance 166
LO-4 Compensation and Benefits 167 Determining Basic Compensation 167 Incentive Programs 168 Benefits 169
LO-5 The Legal Context of HRM 170 Equal Employment Opportunity 170 Comparable Worth 170 Sexual Harassment 171 Employee Safety and Health 171 Retirement 171
LO-6 New Challenges in the Changing Workplace 172
Managing Workforce Diversity 172 Managing Knowledge Workers 173 Managing Contingent Workers 173
LO-7 Dealing with Organized Labour 173
The Development of Canadian Labour Unions 173
Unionism Today 174 The Future of Unions 174
LO-8 The Legal Environment for Unions in Canada 174
Federal Legislation—The Canada Labour Code 175
Provincial Labour Legislation 175 Union Organizing Strategy 175 Union Security 176 Types of Unions 177
LO-9 Collective Bargaining 177 Reaching Agreement on the Contract’s Terms 177
Contract Issues 177 When Bargaining Fails 178
DISRUPTIONS IN BUSINESS Community College Strike Disrupts Students’ Lives 179
Conciliation, Mediation, and Arbitration 179
Summary of Learning Objectives 180 Questions and Exercises 181 Team Exercises 182 business case 8 183
09 MOTIVATING, SATISFYING, AND LEADING EMPLOYEES 184
Hunter Harrison 184
LO-1 Forms of Employee Behaviour 186
LO-2 Individual Differences among Employees 187 Personality 187 Attitudes at Work 188
E-BUSINESS AND SOCIAL MEDIA SOLUTIONS Caution: Words Matter and Online Posts Can Haunt You 189
LO-3 Matching People and Jobs 189 Psychological Contracts 189 The Person–Job Fit 190
Motivation in the Workplace 190
Classical Theory 190
ENTREPRENEURSHIP AND NEW VENTURES Rebooting with Lessons from Past Ventures 191
Early Behavioural Theory 191
LO-4 Behavioural Theory in the Mid-Twentieth Century 192
Contemporary Motivation Theory 193
LO-5 Strategies for Enhancing Motivation 194 Reinforcement/Behaviour Modification 194 Goal-Setting Theory 195 Participative Management and Empowerment 195 Team Management 196 Job Enrichment and Redesign 196 Modified Work Schedules 197
THE GREENING OF BUSINESS The Compressed Workweek and Telecommuting: Are They Really Green? 199
LO-6 Leadership and Motivation 199 Leadership and Power 200
LO-7 Approaches to Leadership 201
THERE’S AN APP FOR THAT! 202
LO-8 Recent Trends in Leadership 202
DISRUPTIONS IN BUSINESS Women in Leadership 204
Summary of Learning Objectives 205 Questions and Exercises 207 Team Exercises 207 business case 9 209
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PART 3 MANAGING OPERATIONS AND INFORMATION 213
10 OPERATIONS MANAGEMENT, PRODUCTIVITY, AND QUALITY 214
The Robots Keep Coming 214
LO-1 Providing Goods and Services to Customers 216 Changes in Canadian Manufacturing
over Time 216 Industrial Revolutions 217
ENTREPRENEURSHIP AND NEW VENTURES Entrepreneurship That Matters: Speaking Loud and Clear 217
Creating Value through Operations 218
LO-2 Differences between Service and Manufacturing Operations 218
LO-3 Operations Processes 219
Business Strategy as the Driver of Operations 221
LO-4 Operations Planning 222 Capacity Planning 222 Location Planning 222 Layout Planning 222 Quality Planning 224 Methods Planning 224
Operations Scheduling 225
The Master Operations Schedule 225 Detailed Schedules 225 Staff Schedules and Computer-Based
Scheduling 226 Project Scheduling 226
Operations Control 227
Materials Management 227 Production Process Control 227
LO-5 The Productivity–Quality Connection 228
Meeting the Productivity Challenge 228
Meeting the Quality Challenge 229
LO-6 Managing for Quality 230
THERE’S AN APP FOR THAT! 231
Tools for Quality Assurance 231
LO-7 Adding Value Through Supply Chains 233
THE GREENING OF BUSINESS Too Good to Waste 234
Summary of Learning Objectives 235 Questions and Exercises 236 Team Exercises 237 business case 10 238
11 UNDERSTANDING ACCOUNTING 240
Future Directions for the Modern Accountant 240
What Is Accounting, and Who Uses Accounting Information? 242
LO-1 Who Are Accountants and What Do They Do? 243
Financial versus Managerial Accounting 243 Professional Accountants 243
THERE’S AN APP FOR THAT! 244
Accounting Services 244 Private Accountants 245
LO-2 The Accounting Equation 246 Assets and Liabilities 246 Owners’ Equity 246
ENTREPRENEURSHIP AND NEW VENTURES Working with the Accounting Equation 247
LO-3 Financial Statements 247 Balance Sheets 247
LO-4 Income Statements 249 Statements of Cash Flows 250 The Budget: An Internal Financial
Statement 250
LO-5 Analyzing Financial Statements 251 Solvency Ratios: Borrower’s Ability to
Repay Debt 251 Short-Term Solvency Ratios 251
DISRUPTIONS IN BUSINESS Skimming off the Top 251
Long-Term Solvency 252 Profitability Ratios: Earnings Power
for Owners 252 Return on Equity 252 Return on Sales 252 Earnings Per Share 252 Activity Ratios: How Efficiently Is the Firm
Using Its Resources? 253
LO-6 Bringing Ethics into the Accounting Equation 253
Why Accounting Ethics? 253
LO-7 The Evolving Role of the Modern Accountant 254
Summary of Learning Objectives 255 Questions and Exercises 256 Team Exercises 257 business case 11 258
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PART 4 PRINCIPLES OF MARKETING 261
12 UNDERSTANDING MARKETING PRINCIPLES AND DEVELOPING PRODUCTS 262
Maple Leaf: Capitalizing on the Meatless Meat Movement 262
LO-1 What Is Marketing? 264 Delivering Value 264 Goods, Services, and Ideas 265 Relationship Marketing and Customer Relationship
Management 266 The Marketing Environment 266
LO-2 Developing the Marketing Plan 267 Strategy: The Marketing Mix 268
THERE’S AN APP FOR THAT! 268
Product 268 Pricing 269 Place (Distribution) 269 Promotion 269
LO-3 Marketing Strategy: Market Segmentation, Target Marketing, and Positioning 269
Identifying Market Segments 270
LO-4 Marketing Research 271 The Research Process 271 Research Methods 272
E-BUSINESS AND SOCIAL MEDIA SOLUTIONS Crowdsourcing: Wisdom from the Consumer World 273
LO-5 Understanding Consumer Behaviour 274
Influences on Consumer Behaviour 274 The Consumer Buying Process 274
LO-6 Organizational Marketing and Buying Behaviour 274
Business Marketing 275 B2B Buying Behaviour 275
LO-7 What Is a Product? 275 The Value Package 275 Classifying Goods and Services 276 The Product Mix 276
DISRUPTIONS IN BUSINESS Counterfeit Products 277
LO-8 Developing New Products and Branding 277 The New Product Development Process 277 Product Life Cycle 278
ENTREPRENEURSHIP AND NEW VENTURES Copper Branch: Plant-Based Power Food 279
Identifying Products: Branding and Packaging 280
Packaging Products 281 Labelling Products 281
Summary of Learning Objectives 282 Questions and Exercises 284 Team Exercises 284 business case 12 285
13 PRICING, PROMOTING, AND DISTRIBUTING PRODUCTS 287
Amazon Versus the Bay: Past, Present, and Future of Retail 287
LO-1 Determining Prices 289 Pricing to Meet Business Objectives 289 Price-Setting Tools 290
LO-2 Pricing Strategies and Tactics 291 Pricing Strategies 291
THERE’S AN APP FOR THAT! 292
Pricing Tactics 292
LO-3 Promoting Products and Services 293 Promotional Strategies 293 The Promotional Mix 293
LO-4 Advertising Promotions and Media 294 Advertising Media 294 Traditional Media: Changing Times 294 Online: The Power of Consumer
Engagement 294
LO-5 Personal Selling, Sales Promotions, Direct (or Interactive) Marketing, Public Relations, and Publicity 296
Personal Selling 296 Sales Promotions 296 Publicity and Public Relations 297
DISRUPTIONS IN BUSINESS Now Here’s a Story About Disruption! 297
LO-6 The Distribution Mix 298 Intermediaries and Distribution Channels 298
THE GREENING OF BUSINESS Single-Use Packaging Under Fire 299
Distribution Strategies 300 Channel Conflict and Channel Leadership 300
LO-7 The Role of Intermediaries 300 Wholesaling 300 Retailing 301
E-BUSINESS AND SOCIAL MEDIA SOLUTIONS The Long Tail, Revisited 302
LO-8 Physical Distribution 303 Warehousing Operations 303
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Transportation Operations 303 Distribution through Supply Chains as a Marketing
Strategy 303
Summary of Learning Objectives 304 Questions and Exercises 306 Team Exercises 306 business case 13 308
PART 5 MANAGING FINANCIAL ISSUES 311
14 MONEY AND BANKING 312
RBC: A Symbol of Canadian Banking Strength 312
LO-1 What Is Money? 314 The Characteristics of Money 314 The Functions of Money 315 The Spendable Money Supply: M-1 315 M-1 Plus the Convertible Money Supply: M-2 315 Credit Cards and Debit Cards: Plastic Money? 315
LO-2 The Canadian Financial System 316 Financial Institutions 316
Financial Pillar #1—Chartered Banks 316
Services Offered by Banks 317
THERE’S AN APP FOR THAT! 317
Bank Loans 318
E-BUSINESS AND SOCIAL MEDIA SOLUTIONS Real-Time Investing: Just a Click Away 319
Banks as Creators of Money 319 Other Changes in Banking 320
LO-3 The Bank of Canada 320
LO-4 Financial Pillar #2—Alternate Banks 321 Trust Companies 321 Credit Unions/Caisses Populaires 321
Financial Pillar #3—Specialized Lending and Savings Intermediaries 322
Life Insurance Companies 322 Factoring Companies 322 Financial Corporations 322 Venture Capital Firms 322 Pension Funds 323
Financial Pillar #4—Investment Dealers 323
ENTREPRENEURSHIP AND NEW VENTURES Risky Business 323
Other Sources of Funds 324
Government Financial Institutions and Granting Agencies 324
International Sources of Funds 324
LO-5 International Banking and Finance 324 Currency Values and Exchange Rates 324 The International Payments Process 325
THE GREENING OF BUSINESS Is Bitcoin Environmentally Friendly? 326
The International Bank Structure 326
Summary of Learning Objectives 327 Questions and Exercises 328 Team Exercises 328 business case 14 329
15 FINANCIAL DECISIONS AND RISK MANAGEMENT 331
Blockchain and Bitcoin: New Models or Modern-Day Bubbles? 331
LO-1 The Role of the Financial Manager 333 Objectives of the Financial Manager 333 Responsibilities of the Financial Manager 333
LO-2 Why Businesses Need Funds 334 Short-Term (Operating) Expenditures 334 Long-Term (Capital) Expenditures 335
ENTREPRENEURSHIP AND NEW VENTURES Social Capital Is Making the World a Better Place 335
LO-3 Sources of Short-Term Funds 336 Trade Credit 336 Secured Short-Term Loans 336 Unsecured Short-Term Loans 336
LO-4 Sources of Long-Term Funds 337 Debt Financing 337
THE GREENING OF BUSINESS What Are the Prospects for “Green Bonds”? 338
LO-5 Equity Financing 339
Hybrid Financing: Preferred Stock 340 Choosing between Debt and Equity Financing 341 The Risk–Return Relationship 341
Securities Markets 343
Investment Banking 343 Stock Exchanges 344 LO-6 Buying and Selling Securities 345
Financing Securities Purchases 346
DISRUPTIONS IN BUSINESS Short Sellers Are Everywhere 347
LO-7 Other Investments 348 Mutual Funds 348 Exchange-Traded Funds 348 Hedge Funds 348 Commodities 349
THERE’S AN APP FOR THAT! 349
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Securities Regulation 349
Financial Management for Small Businesses 349
Establishing Bank Credit and Trade Credit 350 Venture Capital 350 Planning for Cash-Flow Requirements 350
LO-8 Risk Management 350 Coping with Risk 350
Summary of Learning Objectives 351 Questions and Exercises 353 Team Exercises 354 business case 15 355
APPENDIX A A BRIEF HISTORY OF BUSINESS IN CANADA 359
APPENDIX B BUSINESS LAW 360
APPENDIX C USING TECHNOLOGY TO MANAGE INFORMATION IN THE INTERNET AND SOCIAL MEDIA ERA 364
APPENDIX D MANAGING YOUR PERSONAL FINANCES: A SYNOPSIS 376
APPENDIX E INSURANCE AS RISK MANAGEMENT 378
Endnotes and Source Notes 381 Name and Organization Index 409 Subject Index 415
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and responsibilities, but you’ll also need to understand how to manage other people—how to motivate and reward them, how to lead them, how to deal with conflict among them, and the legal parameters that may affect how you treat them. Chapters 3, 6, 8, and 9 provide a lot of information about how you can best wear this hat, although information about the role of employer is found throughout the book.
• The Consumer Hat. Even if you don’t work for a business, you will still wear the hat of a consumer. Whenever you fill your car with Petro Canada gasoline; buy on Amazon, Zara, or Reitmans; or download a song from iTunes, you’re consuming products or ser- vices created by businesses. To wear this hat effectively, you need to understand how to assess the value of what you’re buying, your rights as a consumer, and so on. We discuss how you can best wear this hat in Chapters 1, 3, 12, and 13.
• The Investor Hat. The final business hat many people wear is that of an investor. You may buy your own business or work for a com- pany that allows you to buy its stock. You may also invest in other companies through the purchase of stocks or shares of a mutual fund. In order for you to invest wisely, you must understand some basics, such as financial markets, business earnings, and the costs of investment. Chapters 4, 11, 14, and 15 will help you learn how to best wear this hat.
Most people wear more than one of these hats at the same time. Regardless of how many hats you wear or when you may be putting them on, you will interface with many different businesses in different ways. Knowing how to best wear all of these hats is what this book is all about.
The world is populated with a breathtaking range of businesses and business opportunities. Big and small businesses, traditional and online businesses, established and new businesses, broad-based and niche businesses, successful and unsuccessful businesses, global and domestic businesses—regardless of where your future plans take you, we hope that you will look back on this course as one of your positive first steps.
Keep in mind that what you get out of this course depends on at least three factors. One factor is this book and the information about business that you will acquire as a result of reading it. Another factor is your instructor, who is a dedicated professional who wants to help you grow and develop intellectually and academically. The third factor is YOU. Learning is an active process that requires you to be a major participant. Simply memorizing the key terms and concepts in this book may help you achieve an acceptable course grade, but true learning requires that you read, study, discuss, question, review, experience, evaluate––and wear the four hats—as you go along. Tests and homework are neces- sary, but we hope that you will finish this course with new knowledge and increased enthusiasm for the world of business. Your instructor will do his or her part to facilitate your learning. The rest, then, is up to you. We wish you success.
PREFACE
HELPING STUDENTS BUILD A SOLID BUSINESS KNOWLEDGE FOUNDATION
Welcome to the ninth Canadian edition of Business Essentials. If you’re like many students, you may be starting this term with some questions about why you’re here. You may be taking this course at a community college, CEGEP, or at a university, and you may be taking it in a traditional classroom setting or online. Whatever the case, you may be wondering just what you’re supposed to get from this course and how it will benefit you. In short, you may be wondering, “How will this help me?”
This is a survey course designed to introduce you to the exciting and challenging world of business, both in Canada and elsewhere. The course is designed to fit the needs of a wide variety of students. You may be taking this course as the first step towards earning a degree in business, or you may be thinking about business and want to know more about it, or you may know you want to study business but are unsure of the area you want to pursue. You may plan to major in another field but want some basic business background and are taking this course as an elective. Or you may be here because this course is required or is a prerequisite for another course. Whatever your situation, this course will be helpful to you.
If you don’t have a lot of work experience, you may be uncertain as to what the business world is all about. If you do have a lot of work experi- ence, you might be a bit skeptical as to what you can actually learn about business from an introductory course. One of our biggest challenges as authors is to write a book that meets the needs of such a diverse student population, especially when we acknowledge the legitimacy of your right to ask, “How will this help me?” We also want to do our best to ensure that you find the course challenging, interesting, and useful. To achieve this goal, we think it is helpful to use the old metaphor about people wearing different “hats” as they go through life. Each individual has different roles to play in different settings. For example, your roles may include student, child, spouse, employee, friend, and/or parent. You can think of each of these roles as needing a different hat—when you play the role of a student, for example, you wear one hat, but when you leave campus and go to your part-time job, you put on a different hat. From the perspective of studying and interfacing with the world of business, there are at least four distinct “hats” that you might wear:
• The Employee Hat. One hat is “worn” as an employee working for a business. Most people wear this hat throughout their working career. To wear the hat successfully, you will need to understand your “place” in the organization—your job duties and responsibili- ties, how to get along with others, how to work with your boss, what your organization is all about, and so on. You’ll begin to see how best to wear this hat as you learn more about organizing business enterprises in Chapter 7, how organizations manage their human resources in Chapter 8, motivation and leadership in Chapter 9, and in several other places in this book.
• The Employer or Boss Hat. Another business hat that many people wear is as an employer or boss hat. Whether you start your own business or get promoted within someone else’s business, people will be working for you. You’ll still need to know your job duties
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Solutions—describes how rapidly changing technology has provided busi- ness firms with many new ways to connect with customers. The second series—Disruptions in Business—explains how existing businesses are being dramatically changed by new ways of doing business, and how entirely new industries are developing with astonishing speed and chal- lenging traditional ways of doing business. The third series—Entrepreneurship and New Ventures—provides real-life examples of entrepreneurs who saw an opportunity to provide a new product or service in the marketplace, and the activities they carried out in order to be successful. The fourth series—The Greening of Business—analyzes the steps that businesses are taking to be more environmentally friendly. Critical thinking questions appear at the end of each boxed insert to motivate students to think about what they have read.
CHAPTER MATERIAL
NEW & UPDATED! Chapter Opening Cases Each chapter begins with a description of a problem or opportunity that is fac- ing a Canadian company, or a general issue that impacts many different businesses in Canada. These chapter opening cases help students to bridge the gap between theory and practice. Topics include coverage of familiar companies that are global leaders in their industries such as Spin Master (toys and entertainment), Maple-Leaf, Couche-Tard (convenience stores), RBC, Tim Hortons, and Bombardier; the impact of the legalization of marijuana; stories about Canadian entrepreneurs and corporate leaders; business successes and failures; the increasing use of robots in business firms; new product marketing; the bitcoin and blockchain phenomenon; and many others that will be of great interest to students. Questions for Discussion at the end of each opening case direct student attention to important issues in the chapter that they should consider.
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directions for developing new products, improving customer
service, and evaluating new lines of business to gain com-
petitive advantage. Beyond just technical expertise, such par-
ticipation requires thorough knowledge of clients’ businesses
and the markets in which they operate. The following trends
have emerged and are contributing to the additional roles of
the modern accountant:
• Fewer restrictions from physical and geographic
boundaries—With increasing globalization, many
foreign-based firms are interacting with firms based
elsewhere around the world. Coupled with modern
technology, accountants and clients in other countries
are working together remotely. An accountant based at
company headquarters, or at a home-office in Halifax,
can provide services to a client located in Saskatoon,
Sao Paulo, or Singapore.
In the future, although an accountant’s knowledge of busi-
ness aided by analytical and technical skills will be essential,
a wider skill set will be necessary to meet market demands
in this changing profession. The traditional accountant’s role
was centred on analyzing historical financial data, creating
financial statements, and providing interpretations of finan-
cial data and documents to facilitate business decisions.
The expectations for the modern CPAs increasingly call for
the more intimate role of leadership in demonstrating finan-
cial implications for many additional parts of the business,
including its overall operations, strategy, data management,
human resources, and technical resources. In consultative
roles, accountants are being asked for guidance on broad
issues, including business development, evaluating stra-
tegic opportunities, assessments of risks and threats, and
strategies for using massive databases to identify promising
Future Directions for the Modern Accountant
Understanding Accounting
LOAFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO: LO-1 Explain the role of accountants, distinguish between the three traditional
professional accounting designations in Canada, and understand the new unified role of the Canadian Chartered Professional Accounting (CPA) designation.
LO-2 Explain how the accounting equation is used. LO-3 Describe three basic financial statements and show how they reflect the
activity and financial condition of a business. LO-4 Explain the key standards and principles for reporting financial statements. LO-5 Explain how computing financial ratios can help in analyzing the financial
strengths of a business. LO-6 Discuss the role of ethics in accounting. LO-7 Describe the evolving role of the modern accountant.
CHAPTER
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NEW & UPDATED! There’s an App for That! Each chapter includes a description of several useful apps that are related to the chapter material. These apps allow students to understand business concepts in new and dynamic ways.
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weakened companies tied to print photography. The Province of Ontario introduced a new law that reduced the revenue pharmacies received for dispensing prescription drugs. Some external threats are unpredictable, like the volcanic eruption in Iceland a few years ago that halted air travel in Europe for a week. Commercial airlines lost hundreds of millions of dollars of revenue, while alternative service providers like trains saw demand for their services soar.
Step 3: Matching The Organization and Its Environment The final step in strategy formulation is matching environmental threats and opportunities with corporate strengths and weaknesses. Matching companies with their environments lays the foundation for successfully planning and conducting business. A firm should attempt to leverage its strengths so as to capitalize on opportunities and counteract threats. It should also attempt to shield its weaknesses, or at least not allow them to derail other activities. For example, knowing how to distribute consumer products (a strength) allows Pepsi to add new businesses and extend existing ones that use the same distribution models. But a firm that lacks a strong understanding of consumer product distribution would be foolish to add new products whose success relies on efficient distribution. Just because two companies are in the same industry does not mean they will use the same strategies. The Toronto-Dominion Bank, for example, aggressively expanded into the U.S. retail banking industry by acquiring U.S. banks, but the Royal Bank of Canada has been much less aggres- sive in this area.37
Understanding strengths and weaknesses may also determine whether a firm takes risks or behaves more conservatively. Either approach can be successful. For example, Google’s reputation as an innovator, its cadre of creative product designers and engineers, and its strong cash reserves all allow the firm to constantly look for new product ideas and quickly test them in the marketplace. But Apple, which has many of the same strengths, is more deliberate in rolling out new products because its products require longer design and manufacturing cycles and, in most cases, more financial investment.
Some Strategy Realities: Sobeys In 2013, Sobeys acquired rival Safeway. At the time, industry observers thought it was a good stra- tegic decision that would create greater efficiencies and give Sobeys a national footprint. But it’s one thing to formulate a strategy, and quite another to successfully implement it. Sobeys integration of Safeway into its business was messy, and consumers complained about higher prices and out-of-stock situations for products they wanted to buy. A loyalty pro- gram at Safeway was also terminated, and some Safeway house brands were replaced with Sobeys-branded goods. Safeway customers were unhappy, and the resulting decline in sales led to a nearly $1 billion loss in a single quarter for Sobeys. The stock price also dropped 22 percent in 2016. As a result, the CEO was removed; the new CEO pledged to get the company back on track. “Project Sunrise,” which was instituted in May 2017, involved integrating regional corporate structures into the national structure, taking advantage of economies of scale, winning back lost cus- tomers, and introducing measures to increase productivity. By late 2017, sales were once again rising, as was the price of the company’s stock.
opened in Shanghai in 2016). Disney has also made a number of strategic acquisitions, including Pixar, Marvel, and Lucas Films. Each of these initia- tives has helped the company increase its revenues and profits. A negative example is the Dieselgate fiasco at Volkswagen (see Business Case 3 in Chapter 3), which caused the company to reconsider its strategic goals.
Step 2: Analyzing The Organization and Its Environment After strategic goals have been set, managers assess both their organiza- tion and its environment using a SWOT analysis. This involves identifying organizational Strengths and Weaknesses, and identifying environmental Opportunities and Threats. Strengths and weaknesses are factors inter- nal to the firm and are assessed using organizational analysis. Strengths might include surplus cash, a dedicated workforce, an ample supply of managerial talent and technical expertise. For example, Pepsi’s strength in beverage distribution through its network of soft-drink distributors was successfully extended to distribution of its Aquafina brand of bottled water. Weaknesses might include a cash shortage, aging factories, and a poor public image. Garden.com’s reliance on the Internet-based e-tailing model was its downfall when the dot-com bubble burst.
THERE’S AN APP FOR THAT! APP DETAILS PLATFORMS
1. McKinsey Insights App Source: McKinsey and Company Key Features: Provides the latest thinking on the big- gest issues facing senior executives, everything from leadership and corporate strategy to globalization and technology’s impact on business and society.
Apple, Android and Windows
2. SWOT Canvas App Source: Chanat Attopakorn Key Features: Allows you to conduct a SWOT analysis on your phone.
Apple and Windows
3. Goal Tracker: GoalsOnTrack App Source: Goal Software for High Achievers Key Features: Helps users develop and reach goals based on the SMART goal setting approach (specific, measurable, achievable, relevant, and time-framed).
Apple and Android
APP DISCOVERY EXERCISE Because app availability changes, conduct your own search for the “Top Three” management apps and identify the key features.
SWOT ANALYSIS Identification and analysis of organizational strengths and weaknesses and environmental opportunities and threats as part of strategy formulation.
Opportunities and threats are factors external to the firm and are assessed using environmental analysis. Opportunities include, for exam- ple, market demand for new products, favourable government legislation, or shortages of a raw material that a company requires. For example, when Pepsi managers recognized a market opportunity for bottled water, they moved quickly to launch their Aquafina brand and position it for rapid growth. Threats include new products developed by competitors, unfavourable government regulations, and changes in consumer tastes. For example, online music services such as iTunes dramatically reduced consumer demand for CDs and CD players. Now, however, streaming music services such as Spotify and SoundCloud have emerged as threats to iTunes. Likewise, the emergence of digital photography dramatically
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NEW & UPDATED! Boxed Inserts on Key Topics The text contains four series of boxed inserts that are positioned at strategic points in the chapters. The first series—E-Business and Social Media
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demands of each unique situation. As the situation changes, the temporary workforce changes in parallel, with some people leaving the organization and others entering it. Facilities and subcontracted services also change. In other words, the virtual organization exists only in response to its own needs.
Global Research Consortium (GRC) is a virtual organization. GRC offers research and consulting services to firms doing business in Asia. As clients request various services, GRC’s staff of three permanent employ- ees subcontracts the work to an appropriate set of several dozen inde- pendent consultants and/or researchers with whom it has relationships. At any given time; therefore, GRC may have several projects under way and 20 or 30 people working in various capacities. As the projects change, so does the composition of the organization. Figure 7.8 illustrates the basic structure of a virtual organization.
Using apps and modern technologies can help us organize our lives. Efficient organization and communication among organization members is vital particularly for virtual organizations. Read the following cautionary tale in the E-Business and Social Media box entitled “‘Simon Says,’ Alexa, What Have You Done?”
Team Organization Team organization relies almost exclusively on project-type teams, with little or no underlying functional hierarchy. People “float” from project to project as dictated by their skills and the demands of those projects. At Cypress Semiconductor, units or groups that become large are simply split into smaller units. Not surprisingly, the organization is composed entirely of small units. This strategy allows each unit to change direction, explore innovative ideas, and try new methods without having to deal with a rigid bureaucratic superstructure. Although few large organizations have reached this level of adaptability, Apple and Xerox are among those moving toward it.
Virtual Organization Closely related to the team organization is the virtual organization. A virtual organization has little or no formal structure. Typically, it has only a handful of permanent employees, a very small staff, and a modest administrative facility. As the needs of the organization change, its managers bring in temporary workers, lease facilities, and outsource basic support services to meet the
AND SOCIAL MEDIA SOLUTIONSE-BUSINESS “Simon Says,” Alexa, What Have You Done? Most of us are very familiar with the children’s game “Simon Says.” It taught us about the importance of paying attention by forcing us to act on instructions only after hearing those magic words. But today a whole new genera- tion of kids may be far more likely to substitute Simon’s name for Amazon’s Alexa or Apple’s Siri or Samsung’s Bixby. After all, they may ask Alexa more questions than they ask their friends or parents on some days.
In the search for efficiency and the quest to effectively organize our lives, complete tasks, and find resources, many people have become reliant on e-assistants. The use of integrated technology is more common in people’s homes than at work; however, these personal assistants are on guard, listening and waiting to engage while sitting on desks, tucked away inside purses, or in the jacket pockets in the workplace. Even if Alexa (and similar devices) have not officially conquered the business world, they are listening and preparing to gain more access in the years ahead. As you read the next paragraph, con- sider the business implications (security and otherwise) and the lessons from the following story that made headlines around the world.
A couple was having a private conversa- tion in their home when their Echo speakers activated Alexa when a word that sounded like “Alexa” was recognized. Apparently, during the conversation that followed, a “send message
command” was also triggered. Fortunately, the private discussion was about hardwood floors and not something more sensitive because Alexa then sent that recorded conversation, ran- domly, to a contact (one of their employees). He later called and told them details of that private conversation and warned them about what hap- pened. Obviously, the couple felt like their pri- vacy had been invaded; quite frankly, it had been totally violated! However, not without their partial cooperation. After the incident, they understand- ably decided to unplug all of their devices! Ama- zon explained the very unlikely string of events that led to this failure, but it did not guarantee that this could not happen again. Instead, their explanation was much more cautious but less reassuring to anyone who was paying attention.
So, what are the potential implications of this type of scenario in the business world? There’s a lot of buzz about the promise of artificial intel- ligence. AI actually dates back to the 1950s; however, today we have computers with the processing power to make advanced decisions that were previously reserved for science fiction
movies. We have seen many technologies creep in from the consumer world to the business world. But what if that recorded conversation had been about the private negotiation details between a manufacturer and a distributor on a potential distribution agreement? What if the management team had been talking about their costs, margins, sales goals, and bottom-line mini- mum price to close the deal? What if Alexa, or her future B2B version, had sent a recorded mes- sage of all those secret strategic details to (1) the other side of the negotiating table or (2) the com- petition or (3) had just simply posted it online?
Advanced technology can help us access and organize information for better decision making. As AI evolves even further, we must not forget that the first word in that term is “arti- ficial.” As kids, “Simon Says” taught us to listen carefully. We were penalized when we made a mistake. So Alexa can learn a lot from Simon.
“Simon Says” that artificial intelligence is impressive, but it remains a shadow of true knowledge.
CRITICAL THINKING QUESTIONS 1. List all the positive ways that you use such
personal assistants. List all the ways a business person can use an e-assistant in his or her day-to-day job.
2. Conduct research to find information about this case and look for other similar stories. What did you find? How does this research impact your perception of e-assistants? How does this impact your perception of the busi- ness applications of this technology today?
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NEW! Examples of Business Practice In addition to the boxed inserts, each chapter contains numerous examples of how actual Canadian and international businesses operate so that students can gain a better understanding of the dynamics of business practice in both Canada and elsewhere. These examples—which range in length from one sentence to several paragraphs—are in addition to the in-depth opening cases and end-of-chapter cases that appear in each chapter. These examples help students understand concepts that are discussed in the text.
NEW & UPDATED! Key Terms In each chapter, the key terms that students should know are highlighted in the text and defined in the margin.
NEW & UPDATED! Figures and Tables The latest avail- able data appear in tables and figures throughout the text.
END-OF-CHAPTER MATERIAL
UPDATED! Summary of Learning Objectives The material in each chapter is concisely summarized, using the learning objectives as the organizing scheme. This helps students understand the main points that were presented in the chapter.
NEW & UPDATED! Two types of questions are included at the end of each chapter: analysis questions (which require students to
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think beyond simple factual recall and apply the concepts they have read about), and application exercises (which ask students to apply what they have learned). The exercises, which are designed to help students increase their understanding of how business firms actually operate, require students to engage in practical activities such as interviewing managers about concepts and issues that are discussed in the chapter.
NEW! Building a Business: Continuing Exercise This team exercise, which is found at the end of each chapter in the text, gives students the opportunity to develop an entirely new business venture that fits with their interests. Questions at the end of each exercise require students to carefully consider how the material in the chapter will influence the decisions they must make about their new venture.
NEW & UPDATED! Building Your Business Skills This feature asks students to examine some specific aspect of business. While working in a group context, students gather data about an interesting business issue and then develop a written report or a class presentation based on the information that was gathered. Each exercise begins with a list of goals, a description of the situation, a step-by-step methodology for proceeding, and follow-up questions to help students focus their responses to the challenge.
NEW & UPDATED! Exercising Your Ethics This exercise describes a situation that contains an ethical dilemma. Students are then asked several questions that focus on how to approach and resolve the dilemma. In the exercise, students take on the role of employee, owner, customer, or investor and examine a chapter-related business ethics dilemma through the perspective of that role. Students learn how to see an ethical dilemma from various points of view, and to decide what outcome is ultimately best in each situation.
NEW & UPDATED! Business Case Each chapter con- cludes with a case study that focuses on a real Canadian or interna- tional company, or on an issue that impacts businesses in general. These cases are designed to help students apply the chapter material to a company or an issue that is currently in the news. At the end of each case, several Questions for Discussion guide students in their analysis.
END-OF-PART MATERIAL
Crafting a Business Plan The business plan project is tailor- made to match and reinforce text content. It is software-independent and provides students with an easy-to-understand template that they work from as they create their business plans. The business plan project is divided into logical sections, and each part (e.g., marketing, production, finance, etc.) is located at the end of the section where that material is covered. With five parts in all, students can gradually apply the concepts they’ve learned in the chapters to their business plans throughout the course.
APPENDICES There are five appendices in the text.
• Appendix A—A Brief History of Canadian Business in Canada— summarizes the high points of the development of business in Canada during the past 300 years.
• Appendix B—Business Law—includes key topics such as con- tracts, the concept of agency, warranties, copyrights and trade- marks, and bankruptcy.
• Appendix C—Using Technology to Manage Information in the Internet and Social Media Era—focuses on the impact that IT has had on the business world, the IT resources businesses have at their disposal, the threats that information technology poses for businesses, and the ways in which businesses protect themselves from these threats. There is also an important section on the role of social media platforms in the modern business world.
• Appendix D—Managing Your Personal Finances: A Synopsis— presents a down-to-earth, hands-on approach that will help stu- dents manage their personal finances. Included in the supplement is a worksheet for determining personal net worth, insightful examples demonstrating the time value of money, a method for determining
TEAM EXERCISES
ASSIGNMENT Meet with your team members and discuss your new business venture within the context of this chapter. Develop specific responses to the following: 1. Thinking ahead one year, how many employees do you expect
that you will have in your business? How did you come to this conclusion?
2. Draw a sample organization chart for your business in one year. Although you won’t know the names of all your employees, your organization chart should include job titles.
3. Will decision making in your business be centralized or decentral- ized? Be sure to support your conclusion.
4. How do you think that your organizational structure will change over time? Will it be the same in 10 years?
BUILDING A BUSINESS: CONTINUING EXERCISE
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1. Explain the significance of organizational size as it relates to organi- zational structure. Describe the changes likely to occur as an orga- nization grows.
2. Why do some managers have difficulties in delegating authority? Why do you think this problem might be more pronounced in small businesses?
3. Do you think that you would want to work in a matrix organiza- tion, where you were assigned simultaneously to multiple units or groups? Why, or why not?
4. In your own words, explain how a functional structure differs from a divisional structure.
5. Why should managers pay attention to the informal organization? 6. The argument has been made that the divisional structure does
a better job than the functional structure of training managers for top-level positions. Do you agree or disagree with this argument? Explain your reasoning.
QUESTIONS AND EXERCISES
QUESTIONS FOR ANALYSIS
GOAL To encourage students to understand the relationship between orga- nizational structure and a company’s ability to attract and keep valued employees.
SITUATION You are the founder of a small but growing high-tech company that develops new computer software. With your current workload and new contracts in the pipeline, your business is thriving, except for one problem—you cannot find computer programmers for product develop- ment. Worse yet, current staff members are being lured away by other high-tech firms. After suffering a particularly discouraging personnel raid in which competitors captured three of your most valued employees,
you schedule a meeting with your director of human resources to plan organizational changes designed to encourage worker loyalty. You already pay top dollar, but the continuing exodus tells you that program- mers are looking for something more.
METHOD Working with three or four classmates, identify some ways in which spe- cific organizational changes might improve the working environment and encourage employee loyalty. As you analyze the following factors, ask yourself the obvious question, If I were a programmer, what organiza- tional changes would encourage me to stay? • Level of job specialization. With many programmers describing their jobs
as tedious because of the focus on detail in a narrow work area, what
BUILDING YOUR BUSINESS SKILLS
GETTING WITH THE PROGRAM
APPLICATION EXERCISES 7. Select a company where you would like to work one day. Using
online research, determine if the company has a functional, divi- sional, matrix, international, team, virtual, or learning organization. Explain how you arrived at this conclusion. Do you believe that its organizational structure is consistent with the organization’s mis- sion? Do you think that organizational structure is well suited to your working style and preferences?
8. Describe a hypothetical organizational structure for a start-up digital marketing firm. Describe changes that might be necessary as the business grows.
9. Think about the organization where you currently work (or one where you previously worked). Which of the basic structural types was it most consistent with (functional, divisional, project, matrix, and international)? What was the basis of departmentalization in the organization? Why was that basis used?
10. Interview the manager of a local service business (e.g., a fast- food restaurant). What types of tasks does this manager typically delegate? Is the appropriate authority also delegated in each case? What problems occur when authority is not delegated appropriately?
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You may or may not be surprised to hear that subscription streaming services are the fastest-growing form of music listening. According to the 2018 Global Music Report, there are 176 million music streaming subscribers, and the annual growth is tremendous, with 68 million people signing up in the previous 12 months alone. In Canada, streaming rev- enues were up 68.8 percent at the time. That report also marked the first time that such services registered more revenues ($6.6 billion) than physi- cal music sales ($5.2 billion) and digital downloads ($2.8 billion).
Streaming is more than the future of music; it is also the present. For example, The Weeknd, a popular Canadian artist with global appeal, has capitalized on this platform. His song “I Can’t Feel My Face” premiered on Apple Music and was streamed more than 1.5 billion times, on all the various services, in the first two years alone. That sort of exposure and popularity allows artists like The Weeknd to cash in. However, despite these impressive figures, he said, “We live in a world in which artists don’t make the money until they hit the stage.” What does he mean? In fact, royalty payouts are not what they once were; they amount to only about 0.006 to 0.0084 per stream, or less than 1 penny per stream. In addition, 99.9 percent of artists don’t get 1.5 billion plays in their whole career! In other words, under this new streaming model, the nearly free access to music can help build popularity that is then fully monetized and that even- tually pays off with lucrative tours and endorsement deals. In 2017, The Weeknd earned $92 million. That same year, Chance the Rapper earned $33 million without ever selling a physical album or even signing a record deal! His real paydays have come through endorsement deals with Kit Kat and Apple and of course through festival gigs and tour money.
SPOTIFY THE MARKET LEADER AND THE COMPETITION Spotify was originally launched in Stockholm, Sweden, in 2008 by two entrepreneurs named Daniel Ek and Martin Lorentzon. As their website indicates, Spotify has led the fight from a “transaction based” music acqui- sition model to an “access based” model offering more than 35 million tracks to its customers. Spotify has more than 170 million monthly active users, with 75 million premium subscribers, in 65 countries. The com- pany went public in 2018, with an initial public offering (IPO) valued at US$26.5 billion. Its most notable competitors are Pandora, SoundCloud, and Tidal. There is also one other late comer to the party going by a name you are quite familiar with: Apple.
APPLE THE MARKET FOLLOWER Apple is one of the most innovative companies in the world; it helped transform the computer, smartphone, tablet, and music industries. How- ever, the dominant position achieved by Apple iTunes (after the digital revolution disrupted the physical distribution model) is now threatened by streaming services. In fact, the digital download model championed by
Apple’s iTunes saw heavier declines than physical distribution in the previ- ous 12-month period (20.5% vs. 11.2%). Apple saw the writing on the wall a few years back and entered the streaming business in 2015 (albeit as a late arrival). However, despite the delay, once it made the move, it was fully committed. When Apple bought Beats by Dr. Dre for $3 billion back in 2014, many scratched their heads at the high price tag. However, Apple was not simply buying the company for its headphones; part of that move was to acquire the Beats streaming service and brand equity.
CONCLUSION So, where will the music industry be heading next? There have been a few major disruptions in the past couple of decades, from sales of CDs, to an epidemic of illegal streaming, to the emergence of iTunes, to the new rise in subscription streaming. The freemium model is the present hope for the future, but these days you can be sure of one thing: change is just around the corner. Survival of the quickest is the new norm!
QUESTIONS FOR DISCUSSION 1. In terms of degrees of competition, how would you describe the
market for music streaming? Do you think this will change in the next five years? If so, how?
2. How can relatively unknown music artists promote themselves and their new music to help them gain traction on streaming sites? Pro- vide concrete examples of promotional strategies that they can use.
3. Conduct some research and identify the top streaming global artists during the past year. What makes these artists so popular? How has that translated into actual revenues in the past 12 months?
FREEMIUM MUSIC: TAKING OVER THE INDUSTRY
BUSINESS CASE 13
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Study, practise, and explore real business situations with these helpful resources: • Study Plan: Check your understanding of chapter concepts with self-study quizzes. • Dynamic Study Modules: Work through adaptive study modules on your computer, tablet, or mobile device. • Simulations: Practise decision-making in simulated business environments. • Videos: Learn more about the business practices and strategies of real companies.
MyLab Intro to Business
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Chapter 6—New information on McDonald’s planning process as man- agers try to improve the company’s performance, what students should expect in a manager’s job, how social media makes the activities of man- agers more visible to the public, and the practical realities of corporate strategy; new material on corporate culture, the importance of managers having “soft skills” (as opposed to technical skills), decision-making skills, and the importance of contingency planning.
Chapter 7—New information on job specialization in the age of automa- tion and industrial robots; we look at new examples demonstrating the forms of departmentalization and the role of informal groups and the grapevine in an organization.
Chapter 8—New information on the impact of education on employee compensation, differences in salary progression for men and women in various jobs, male vs. female earnings, the salary impact for new employees who graduate from community colleges and universities, the debate about executive compensation, diversity issues at companies like Facebook and Google, union organizing strategies, right-to-work laws, union membership in Canada.
Chapter 9—New material on employee turnover and the importance of understanding the “regression to the mean” phenomenon.
Chapter 10—New material on changes in manufacturing over time, materials management for service organizations, global productivity comparisons, ISO 14000 certification, and supply chain disruptions.
Chapter 11—New and updated information about the CPA accounting designation as well as a look at the evolving role of the modern accoun- tant. An explanation of the role of the International Accounting Standards Board (IASB), which developed International Financial Reporting Standards (IFRS), a sort of “global GAAP.” We distinguish between Part I for publicly accountable enterprises (IFRS) and government private enterprises; Part II Accounting Standards for Private Enterprises (ASPE); Part III for not-for-profit organizations; and Part IV for pension plans.
Chapter 12—New material on niche marketing initiatives by Shop pers Drug Mart with its latest retail concept, Wellwise; we highlight a potential strategic alliance that would see Canadian coffee brand icon Second Cup become involved in the distribution of legalized marijuana; we identify a new low-cost airline; we take an extended look at the evolving topic of marketing observation through the lens of the Facebook scandal involving Cambridge Analytica.
Chapter 13—New examples on price lining are brought to life using the Apple iPad as an example; a new section outlining the redistribution of advertising budgets and the new emphasis on consumer engagement; a new discussion about corporate accountability in the sharing/social media economy is supported by the United Airlines scandal that erupted after a passenger was forcibly removed from a flight. Finally, there is an extensive look at how the retailing landscape is changing with consumers increasingly buying online and ignoring brick-and-mortar stores. Is there a future for traditional retailers and shopping malls?
Chapter 14—New information is presented on alternate financial transac- tion vehicles like Alipay and cryptocurrencies; updated information is given on the top banks and credit unions in Canada, as well as the latest Big Mac Index statistics; a discussion is provided on the role of the IMF in a period where many fundamental institutions are being questioned and tested.
Chapter 15—New information is provided on financial planning, man- aging risk with diversification, return on investment, the time value of money, fantasy stock markets, mutual funds, and securities regulation.
how much money to invest now in order to build a future nest egg of a certain size, suggestions on how to manage credit card debt, guidelines for purchasing a house, and a personalized worksheet for setting financial goals.
• Appendix E—Insurance as Risk Management—provides informa- tion on insurable vs. uninsurable risks, the different types of insur- ance products that are available, and special forms of business insurance.
WHAT’S NEW IN THE NINTH CANADIAN EDITION? New content has been included in all chapters. An illustrative (but not exhaustive) list is as follows:
Chapter 1—New material on government’s role as a regulator with regard to agriculture; details of the bread price-fixing scandal in which the Competition Bureau made allegations and exposed over a decade of collusion between some of Canada’s largest supermarkets: Loblaws, Metro, Sobeys, as well as Walmart; new examples of supply and demand principles linked to the real-world experiences of Atlantic fisherman; a new discussion on supply management that was a major source of dispute in the NAFTA negotiations and a key battle before the ultimate signing of the USMCA agreement.
Chapter 2—New and updated information on GDP, the national debt, and the business cycle; on how inflation is impacted by key social issues such as the push towards a $15 minimum wage in many provinces; and on the economic shocks caused by sudden fuel price changes (especially grocery products). You will also find a new section describing the impor- tant role R&D played in the emergence of the canola industry in Canada; new consumer preferences and tastes are examined as well how the concern for our environment and food supply are a big part of the push for natural products such as cricket-based protein bars and flour. A spotlight is also directed on modern-day strategic alliances between companies like Magna International and Lyft (the ridesharing service).
Chapter 3—New information on corruption and bribes in international business activity, examples of ethical failures such as improper financial management, B Corp certification for businesses that want to be envi- ronmentally responsible, how to incorporate various ethical norms into management decision making, the concept of carbon pricing, the fair trade movement, price fixing, whistle-blowers, counterfeit goods, and the role that consumers play in solving pollution problems.
Chapter 4—New information highlighting entrepreneurial goals and characteristics; a more detailed discussion on accessing resources and bootstrapping for entrepreneurs; a focus on the growing opportunities to buy existing businesses with an aging population of businesspeople heading towards retirement.
Chapter 5—A new look at the global economy through the lens of BREXIT, USMCA, and other major shocks to the economic world order (many of which are originating in the United States). A key underlying question is constantly considered: just how will the rise of protectionist rhetoric and policy shape the next few years? We look at recent tariff threats and policy as well as retaliations across the globe; we examine the implications of Brexit on the European zone, the continued emer- gence of the BRICS trading alliance, and the future of the Comprehensive Economic and Trade Agreement (CETA), as well as other new agree- ments like the Trans Pacific Partnership (TPP).
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ACKNOWLEDGMENTS Julius Bankole, University of Northern British Columbia Barbara Dayton, Dawson College Peter Elenakis, Marianapolis College David Fleming, George Brown College Wayne Greer, Nova Scotia Community College Brent Groen, Trinity Western University Carmen Kuczewski, Dawson College Pauline Langlois, John Abbot College Kathleen Rodenbury, University of Guelph Bernie Warren, Thompson Rivers University
We owe special thanks to Scott Hardie, Portfolio Manager; John Polanszky, Senior Content Manager; Joanne Sutherland, Content Developer; Susan Johnson, Senior Project Manager; Melba Hopper, copyeditor; and others at Pearson Education Canada who assisted with the production, marketing, and sales of this edition.
We also appreciate the insights and suggestions of the following individuals who provided feedback on the eighth edition:
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Mr. Dracopoulos also serves as a lecturer at McGill University. He created an online pilot project, designing courses geared primarily to aboriginal students in remote communities. He was also honoured (among a select group) as “Professor of the Year” by a McGill University publication for his work in the Desautels Faculty of Management. He earned his MBA at McGill, as well as a graduate diploma in Education and a graduate degree in Applied Management. He earned his BA at Concordia University.
Outside his teaching career, Mr. Dracopoulos is an award-winning entrepreneur. George does not simply write about disruptive technology. A few years ago, he co-founded a company called Zero-Ohm Systems after negotiating and acquiring the global licensing and manufactur- ing rights to a patented invention (United States, Europe, and Russia) serving the audio industry. He has successfully marketed the device at international trade shows. In 2017 the company made a breakthrough in Orlando, Florida, when it was honoured with the Best New Product Technology Award at InfoComm (North America’s biggest trade show for the AV market). In this capacity, Mr. Dracopoulos has been interviewed by top industry media and trade publications in North America and Europe.
George is continuously engaged in executing real-world strategies. He provides marketing and management consulting solutions (e.g., brand audits, customer relationship surveys, strategic consultations, and IMC campaigns). He has also built web-based materials and training documents for clients in various industries, including aviation/IT solutions, publishing, and higher education. Mr. Dracopoulos has been invited to provide motivational speeches and/or keynote addresses at events across North America on topics such as Connecting with Millennials, Effective Communication, and Transformational Leadership. He has worked on various other text projects, including Business in Action, 2nd Canadian edition (2009), co-authored with Courtland L. Bovée and John V. Thill; and Business, 8th Canadian edition (2014), co-authored with Ricky Griffin, Ronald J. Ebert, Frederick Starke, and Melanie Lang.
Frederick A. Starke is Emeritus Professor of Organizational Behaviour in the Asper School of Business at the University of Manitoba. He has taught courses in organizational behaviour, organization theory, decision making, and marketing. He has served in several administrative positions, including head of the Department of Business Administration (from 1982 to 1987 and from 1989 to 1994), and as associate dean of the Asper School of Business (from 1996 to 2005).
Dr. Starke earned his BA and MBA from Southern Illinois University and his PhD in Organizational Behaviour from Ohio State University. He has published research articles in scholarly journals such as Administrative Science Quarterly, Journal of Applied Psychology, Academy of Management Journal, Journal of Management Studies, and Journal of Business Venturing. He has also written articles for professional journals, such as the Journal of Systems Management, Information Executive, and the Canadian Journal of Nursing Administration. Dr. Starke also writes textbooks that are used by uni- versity and community college students in business programs across Canada. These titles include Organizational Behaviour, Business Essentials, Management, and Business. Dr. Starke also presents seminars on the topics of decision making and goal setting to practising managers in both the public and private sectors.
Ronald J. Ebert is Emeritus Professor at the University of Missouri-Columbia where he lectures in the Management Department and serves as advisor to students and student organizations. Dr. Ebert draws upon more than 30 years of teaching experience at schools such as Sinclair College, University of Washington, University of Missouri, Lucian Blaga University of Sibiu (Romania), and Consortium International University (Italy). His consulting alliances include firms such as Mobay Corporation, Kraft Foods, Oscar Mayer, Atlas Powder, and John Deere. He has designed and conducted management development programs for clients as diverse as the American Public Power Association, the United States Savings and Loan League, and the Central Missouri Manufacturing Training Consortium.
His experience as a practitioner has fostered an advocacy for integrating concepts with best business practices in business educa- tion. The five business books he has written have been translated into Spanish, Chinese, Malaysian, and Romanian. Dr. Ebert has served as the editor of the Journal of Operations Management. He is a past-president and fellow of the Decision Sciences Institute. He has served as con- sultant and external evaluator for Quantitative Reasoning for Business Studies, an introduction-to-business project sponsored by the National Science Foundation.
Ricky W. Griffin is Distinguished Professor of Management and holds the Blocker Chair in Business in the Mays School of Business at Texas A&M University. Dr. Griffin currently serves as executive associate dean. He previously served as head of the Department of Management and as director of the Center for Human Resource Management at Texas A&M. His research interests include workplace aggression and violence, executive skills and decision making, and workplace culture. Dr. Griffin’s research has been published in journals such as Academy of Management Review, Academy of Management Journal, Administrative Science Quarterly, and Journal of Management. He has also served as editor of Journal of Management. Dr. Griffin has consulted with organiza- tions such as Texas Instruments, Tenneco, Amoco, Compaq Computer, and Continental Airlines.
Dr. Griffin has served the Academy of Management as chair of the organizational behaviour division. He also has served as president of the southwest division of the Academy of Management and on the board of directors of the Southern Management Association. He is a fellow of both the Academy of Management and the Southern Management Association. He is also the author of several successful textbooks, each of which is a market leader. In addition, they are widely used in dozens of countries and have been translated into numerous foreign languages, including Spanish, Polish, Malaysian, and Russian.
George Dracopoulos is a member of the Business Administration Department at Vanier College. He has served as department chairman and is now the International Business Exchange Coordinator. In the past 15 years, George has built bridges with universities, government organi- zations, and multinational corporations throughout France and Belgium. Hundreds of students have benefitted from his initiatives. He is also the co-organizer and co-founder of the national BDC/Vanier Marketing Case Competition and was named the Vanier VIP for his dedication and devo- tion to the community.
ABOUT THE AUTHORS
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01 INTRODUCING THE CONTEMPORARY BUSINESS WORLD PART
01 UNDERSTANDING THE CANADIAN BUSINESS SYSTEM 2
02 THE ENVIRONMENT OF BUSINESS 20
03 CONDUCTING BUSINESS ETHICALLY AND RESPONSIBLY 40
04 ENTREPRENEURSHIP, SMALL BUSINESS, AND NEW VENTURE CREATION 61
05 THE GLOBAL CONTEXT OF BUSINESS 86
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million, which marked the ninth acquisition in a three-year
span. At the time, Anton and Ronnen were also being rec-
ognized on a list of the top 100 wealthiest people in Canada
with an estimated net worth of $1.64 billion dollars each.
So how did they go from Earth Buddies to buying iconic toy
brands? Well, have you heard of Paw Patrol or Hatchimals? Did
you play with Air Hogs or Bakugan when you were younger?
Have you recently purchased a Luvabella doll for your niece?
Do the words Meccano and Zoomer mean something to chil-
dren in your home and neighborhood? If you said yes, you have
part of your answer. If you said no to all these questions, then
where have you been? Let’s dig deeper into the full story.
Then and Now: Evolving Models Spin Master was founded approximately 25 years ago with
one product and a dream. Today it employs over 1500
people globally with offices in Canada, the United States,
Here’s a business success story that will inspire you. After
graduating from university, two young Canadian entrepreneurs
named Anton Rabie and Ronnen Harary formed a company
called Spin Master and were later joined by a third co-founder,
Ben Varadi. They started selling a fad product called Earth
Buddy and managed to secure some significant sales and
distribution. Never heard of it? Like all fads, it had its moment
in the sun, but eventually those sales dried up. It was a nylon
stocking, filled with sawdust, made to look like a head. It was
topped with grass seeds that grew to look like hair. For a
recent example of a big fad, think of the fidget spinner craze.
This initial success gave these entrepreneurs firsthand
experience with real-world sales, manufacturing, finance,
and accounting in an accelerated time frame as they
scrambled to meet demand. Mistakes were made but les-
sons were learned, and their passion and energy were richly
rewarded. In fact, at the beginning of 2018, Spin Master
purchased Gund, a 120-year-old stuffed toy brand for $79.1
Spin Master: Canadian Toy Maker Becomes a Global Children’s Entertainment Company
Understanding the Canadian Business System
AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:
LO-1 Define the nature of Canadian business and identify its main goals. LO-2 Describe different types of global economic systems according to how they
control the factors of production through input and output markets. LO-3 Describe the interactions between business and government in Canada. LO-4 Show how demand and supply affect resource distribution in Canada. LO-5 Identify the elements of private enterprise and explain the various degrees of
competition in the Canadian economic system.
CHAPTER
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Mexico, France, Italy, the United Kingdom, Slovakia, Poland,
Germany, Sweden, the Netherlands, China, Hong Kong,
Japan, Vietnam, and Australia.
Long-term success in any industry demands the ability
to evolve and to find new ways to satisfy customer needs. In
some ways, this task has become more difficult as modern
technologies are altering buying patterns and leaving many
established companies struggling to survive. In other ways,
this task has been greatly enhanced by modern technol-
ogy. For example, today we have YouTube influencers like
Ryan, a six-year-old toy-tester, with a following of 10.2 million
subscribers and more than 17 billion uploads of his toy
reviews. Spin Master teamed with this young millionaire (He
and his parents made more than 14 million in 2017 alone!)
to promote Soggy Doggy in a 10-minute video. That video
was viewed six million times in just two months right before
the peak holiday season.
These entrepreneurs have built an organization with the
ability to pivot and thrive in changing times. Spin Master has
received 92 Toy of The Year (TOTY) nominations and has 21
wins across a variety of product categories. As if this kind of
success was not enough, Spin Master has branched out into
the production of television series, including shows such as
Bakugan, Battle Brawlers, and the current big hit PAW Patrol,
which is broadcast in more than 160 countries and territories.
The Future Spin Master is no longer just a toy company. It describes
itself as “a leading global children’s entertainment com-
pany that creates, designs, manufactures, licenses and
markets a diversified portfolio of innovative toys, games,
products and entertainment properties.” It’s a good thing
too. The toy industry is under tremendous pressure with
more and more children asking mom and dad for smart-
phones rather than stuffed animals at younger ages. The
recent shutdown of the iconic Toys “R” Us outlets in the
United States is yet another sign of the times. Although
much of that failure is due to the shift toward online sales,
in favor of companies like Amazon, industry experts have
estimated that this closure may further reduce toy sales by
10 percent in the United States. The future of Toys “R” Us
in Canada is also unclear.
So what does the future hold for Spin Master? Time will
tell, but with their track record of success and their diversifi-
cation experience, they clearly have the will to fight and the
capacity to meet new challenges.
QUESTIONS FOR DISCUSSION
1. Based on what you read in the preceding case, what are the
primary reasons for the long-term success of Spin Master?
2. In what ways does Spin Master demonstrate the basic
principles of business, the power of entrepreneurship and
creativity in a global economy?
3. In this chapter, we will discuss the different types of eco-
nomic systems. After reading that section, answer the fol-
lowing question. What features of the Canadian economy
helped make Spin Master’s success a reality? In what ways
would this task have been more difficult in a command
economy? Explain.
4. What are the greatest challenges facing Spin Master today?
What does the company need to do to thrive for another
25 years or more?
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HOW WILL THIS HELP ME?
All businesses are subject to the influences of
economic forces. But these same economic
forces also provide smart managers and entre-
preneurs with opportunities for profits and
growth. The ideas presented in this chap-
ter will help you to better understand
(1) how managers deal with the chal-
lenges and opportunities resulting
from economic forces and (2) how
consumers deal with the chal-
lenges and opportunities of price
fluctuations.
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LO-1 THE IDEA OF BUSINESS AND PROFIT The opening Spin Master case provides an inspiring example of entre- preneurship and a free-market economy. It shows how businesses must evolve and stay in touch with new industry trends. It also shows how business managers must pay attention to issues such as corporate strat- egy, brand strategy, business–government relations, international busi- ness opportunities, mergers, and many other concepts that you will read about in this text.
Let’s begin by asking what you think of when you hear the word business. Do you think of large corporations like Shoppers Drug Mart and Walmart or smaller companies like your local supermarket or favor- ite restaurant? Do you think about successful companies like Netflix, CN, and Telus? Each of these firms is a business—an organization that produces or sells goods or services to make a profit. Businesses produce most of the goods and services that we consume, and they employ most of the workforce in Canada. Taxes paid by businesses help support government at all levels. In addition, businesses help support charitable causes and provide community leadership. For example, Spin Master has donated domestically to local causes and has even created a global initiative called the Toy Movement; during the holiday season of 2017, Spin Master delivered more than 45 000 toys to underprivileged children in South Africa.1
Each year Forbes magazine evaluates and ranks 153 countries for ease of conducting business transactions. In 2017, the United Kingdom ranked first, followed by New Zealand, the Netherlands, Sweden, and Canada.2
Profit is what remains after a business’s expenses have been sub- tracted from its revenues. Profits reward the owners of businesses for taking the risks involved in investing their time and money. Profits can be very large if a company produces something that consumers really like. For example, the Hunger Games series of movies have generated large profits for Lions Gate and achieved combined total gross revenues of approximately $1.5 billion.3
Many organizations in Canada do not try to make a profit. These not- for-profit organizations use the funds they generate from government grants or from the sale of goods or services to provide services to the public. Charities, educational institutions, hospitals, labour unions, and
government agencies are examples of not-for-profit organizations. Busi- ness principles are helpful to these not-for-profit organizations as they try to achieve their service goals.
FACTORS OF PRODUCTION The resources used to produce goods and services: labour, capital, entrepreneurs, and natural resources.
ECONOMIC SYSTEM The way in which a nation allocates its resources among its citizens.
PROFIT What remains (if anything) after a business’s expenses are subtracted from its sales revenues.
BUSINESS An organization that seeks to earn profits by providing goods and services.
NOT-FOR-PROFIT ORGANIZATION An organization that provides goods and services to customers, but does not seek to make a profit while doing so.
LO-2 ECONOMIC SYSTEMS AROUND THE WORLD A Canadian business is different in many ways from one in China, and both are different from businesses in Japan, France, or Argentina. A major determinant of how organizations operate is the kind of economic system that characterizes the country in which they do business. An economic system allocates a nation’s resources among its citizens. Economic sys- tems differ in terms of who owns and controls these resources, known as the “factors of production.”
Factors of Production The key difference between economic systems is the way in which they manage the factors of production—the basic resources that a country’s businesses use to produce goods and services. The factors of production are labour, capital, entrepreneurs, natural resources, and information.4
Labour The people who work for a company represent the first factor of pro- duction—labour. Sometimes called human resources, labour is the mental and physical capabilities of people. Carrying out the business of a huge company, such as Suncor Energy, requires a labour force with a wide variety of skills ranging from managers to geologists to truck drivers.
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< The Hunger Games Series has been a huge success for Lions Gate.
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consumers through the Petro Canada retail brand) makes use of a wide variety of natural resources. It obviously has vast quantities of crude oil to process each year. But Suncor Energy also needs the land where the oil is located, as well as land for its refineries and pipelines.
Information Information includes the specialized knowledge and expertise of people who work in businesses, as well as information contained in market fore- casts and various other forms of economic data. Information is a key fac- tor of production because, unlike land, labour, and capital, information can be shared without being diminished. For example, if two people exchange apples, they still each have only one apple, but if two people exchange ideas, each person now has two ideas instead of one.5
Types of Economic Systems Different types of economic systems manage the factors of production in different ways. In some systems, ownership is private; in others, the government owns the factors of production. Economic systems also differ in the ways decisions are made about production and allocation. A command economy, for example, relies on a centralized government to control all or most factors of production and to make all or most pro- duction and allocation decisions. In a market economy, individuals— producers and consumers—make production and allocation decisions through the mechanism of supply and demand.
The boxed insert entitled “Disruptions Are Everywhere” is the opening box of a series that provides you with an overview of topics you will see throughout this book and how disruptive business models are changing the business landscape.
Capital Capital refers to the funds required to start a business and to keep it oper- ating and growing. For example, Petro Canada needs capital to pay for its annual drilling costs, which run into millions of dollars each year. Major sources of capital for businesses are personal investment by owners, the sale of stock to investors, profits from the sale of products and services, and funds borrowed from banks and other lending institutions.
Entrepreneurs Entrepreneurs are people who accept the opportunities and risks involved in creating and operating businesses. Sergey Brin and Larry Page (Google), Mark Zuckerberg (Facebook), and Tobias Lutke (Shopify) are well-known entrepreneurs.
Natural Resources Natural resources include all physical resources, such as land, water, mineral deposits, and trees. Suncor Energy (which sells products to
MARKET ECONOMY An economic system in which individuals con- trol all or most factors of production and make all or most production decisions.
COMMAND ECONOMY An economic system in which government controls all or most factors of production and makes all or most pro- duction decisions.
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< You are probably very familiar with Petro Canada, but (since 2009) the company behind the retail brand is Suncor Energy.
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< Starbucks uses various factors of production, including labour (a Starbucks barista), entrepreneurs (CEO Howard Schultz), and natural resources (such as coffee beans).
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e-commerce. People usually think of e-commerce as being business- to-consumer (B2C) transactions, such as buying household goods from Amazon for personal use. But business-to-business (B2B) transactions far exceed B2C transactions in dollar value.
In a market economy, B2C and B2B exchanges take place without much government involvement. To understand how a market economy works, consider what happens when a customer goes to a fruit stand to buy apples. Assume that one vendor is selling apples for $1 per kilogram,
Command Economies The two basic forms of command economies are communism and social- ism. As originally proposed by nineteenth-century German economist Karl Marx, communism is a system in which the government owns and oper- ates all sources of production. Marx envisioned a society in which indi- viduals would ultimately contribute according to their abilities and receive economic benefits according to their needs. He also expected govern- ment ownership of production factors to be only temporary (historical examples would tell us otherwise). During the past few decades, most countries have abandoned communism in favor of a more market-based economy. Even countries that still claim to be communist (e.g., China, Vietnam, and Cuba) now contain clear elements of a market-based econ- omy. However, in China’s case, that should not be confused with easing of political control. In 2018, Chinese leader Xi Jinping and his party eliminated term limits, which gave him the potential ability to stay in power for life. This was not a step forward toward continued reform.6
In a less extensive command economic system called socialism, the government owns and operates only selected major industries. Smaller busi- nesses such as clothing stores and restaurants may be privately owned. Although workers in socialist countries can usually choose their occupations or professions, a substantial proportion generally work for the government. Many government-operated enterprises are inefficient because management positions are frequently filled based on political considerations rather than on ability. Extensive public welfare systems have also resulted in very high taxes. Because of these factors, socialism is generally declining in popularity.7
Market Economies A market is a mechanism for exchange between the buyers and sell- ers of a good or service. For example, the internet is a technologically sophisticated market that brings buyers and sellers together through
MARKET An exchange process between buyers and sellers of a particular good or service.
COMMUNISM A type of command economy in which the govern- ment owns and operates all industries.
Disruptions are Everywhere! Much has been said in the news lately about how technological change is disrupting traditional business practices. Of course, disruptions have been occurring for thou- sands of years. Think of the electric light disrupting the whale oil business or the automobile disrupting the wagon business. But those changes occurred at a time when the rate of change in society overall was much slower than it is now. Now everything seems to be changing all the time. Consider what has happened in just the past couple of decades:
• The business of travel agents was threat- ened and severely impacted by online reservations.
• The business of video rental (think Block- buster) was disrupted by Netflix.
• Traditional food outlets such as Sobeys and Loblaw’s are threatened by Amazon’s purchase of Whole Foods.
• Uber and Lyft, the ride-hailing companies, have created great concern among both taxi companies and rental car companies.
• The abolition of the Canadian Wheat Board has resulted in substantial changes in the way crops are marketed and transported.
• The music industry has been severely dis- rupted by file sharing and iTunes.
• Robo-advisors have disrupted the invest- ment advice industry.
• Vaporizers and e-cigarettes have disrupted the cigarette industry.
• Airbnb has disrupted the hotel industry. • Self-driving cars may take the jobs of pro-
fessional drivers (taxi, delivery, long-haul). • If electric cars become popular, the oil
industry may be disrupted because such cars will sharply reduce the demand for oil.
Disruption has become so common that companies cannot ignore it. In subsequent chapters, some of the disruptions mentioned above will be explained in more detail. All the changes that are occurring mean significant improvements for consumers in the form of new and useful products and services, but they also pose a real threat to the financial health of certain businesses, to the investors who buy their stock, and to the managers and workers who are employed by them. This is the reality of the dynamic world of business.
CRITICAL THINKING QUESTION Consider the following statement: The dis- ruptions that are increasingly evident in the Canadian economy increase stress levels and the complexity of people’s lives. We should be more concerned about our quality of life than we are about new gadgets and new ways of doing things. Do you agree or disagree with the statement? Explain your reasoning.
IN BUSINESSDISRUPTIONS
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< Xi Jinping is General Secretary of the Communist Party of China, President of the People’s Republic of China, and Chair- man of the Central Military Commission. With the recent change in rules and the elimination of term limits, he can theoretically remain in power until his death.
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and another is charging $1.50. Both vendors are free to charge what they want, and customers are free to buy what they want. If both vendors’ apples are of the same quality, the customer will likely buy the cheaper ones. But if the $1.50 apples are fresher, the customer may buy them instead. Both buyers and sellers enjoy freedom of choice.
Input and Output Markets A useful model for understanding how the factors of production work in a pure market economy is shown in Figure 1.1.8 In an input market, firms buy resources from households that supply the resources. In an output market, firms supply goods and services in response to demand on the part of the households. The activi- ties of these two markets create a circular flow. Ford Motor Company, for example, buys labour directly from households, which may also sup- ply capital from accumulated savings in the form of stock purchases. Consumer buying patterns provide information that helps Ford decide which models to produce and which to discontinue. In turn, Ford uses these inputs in many ways and becomes a supplier to households when it designs and produces various kinds of automobiles, trucks, and sport- utility vehicles and offers them for sale to consumers.
Individuals are free to work for Ford or an alternative employer and to invest in Ford stock or alternative forms of saving or consumption. Similarly, Ford can create whatever vehicles it chooses and price them at whatever value it chooses. Consumers are free to buy their next car from Ford, Toyota, BMW, or any other manufacturer. The political basis for the free-market economy is called capitalism, which allows private ownership of the factors of production and encourages entrepreneurship by offering profits as an incentive. This process contrasts markedly with that of a command economy, in which individuals may be told where they can and cannot work, companies may be told what they can and cannot manufacture, and consumers may have little or no choice as to what they purchase or how much they pay for items.
CAPITALISM An economic system in which markets decide what, when, and for whom to produce.
OUTPUT MARKET Firms supply goods and services in response to demand on the part of consumers.
INPUT MARKET Firms buy resources that they need in the produc- tion of goods and services.
FIRMS • Supply products in output markets • Demand resources in input markets
HOUSEHOLDS • Demand products in output markets • Supply resources in input markets
INPUT MARKETS Labour Capital
Entrepreneurs Natural resources
Information resources
OUTPUT MARKETS Goods
Services
Su pp
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Demand
Su
pp ly
<<< figure 1.1 Circular flow in a market economy
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< The People’s Republic of China has used a planned economic model for many years but is now moving toward a mixed mar- ket economy. But Hong Kong has been using the mixed market model for years. These signs on a busy Hong Kong street are promoting a variety of goods and services provided by mer- chants along the street.
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Mixed Market Economies Command and market economies are two extremes, or opposites. Most countries rely on some form of mixed market economy that features characteristics of both command and market economies. One trend in mixed market economies that began back in the 1990s is privatization— converting government enterprises into privately owned companies. In Canada, for example, the air traffic control system was privatized, and the federal government sold several other corporations, including Petro Canada, Canadian National Railway, and Air Canada. The Organization for Economic Co-operation and Development (OECD) said that Canada Post’s monopoly should be ended, and it should be privatized.9
Deregulation means a reduction in the number of laws affecting busi- ness activity and in the powers of governmental enforcement agencies. A study by the Conference Board of Canada showed that deregulation (in tandem with privatization and increased competition) caused a sharp increase in productivity in sectors such as freight and airlines.10
THERE’S AN APP FOR THAT! APP DETAILS PLATFORMS
1. The Economist App Source: The Economist Key Features: Free access to the editor’s top six must-read articles; access to the full maga- zine for subscribers.
Apple, Android, Windows, BlackBerry
2. Khan Academy App Source: Khan Academy Education Key Features: More than 10 000 educational videos with a wide selection of economics vid- eos explaining core theory and concepts.
Apple, Android, Windows
3. Financial Post App Source: Postmedia Canada Network Inc. Key Features: Up-to-date source of Canadian business and investing news as well as market and financial data.
Apple, Android
APP DISCOVERY EXERCISE Because app availability changes, conduct your own search for “top 3” economic statistics apps and identify the key features.
DEREGULATION A reduction in the number of laws affecting busi- ness activity.
PRIVATIZATION The transfer of activities from the government to the private sector.
MIXED MARKET ECONOMY An economic system with elements of both a command economy and a market economy, which in prac- tice is typical of most nations’ economies.
LO-3 INTERACTIONS BETWEEN BUSINESS AND GOVERNMENT
In Canada’s mixed market economy, there are many important interac- tions between business and government. The ways in which government influences business and the ways business influences government are described next.
How Government Influences Business Government plays several key roles in the Canadian economy, and each of these roles influences business activity in some way. The roles govern- ment plays are as follows.
Government as a Customer The government buys thousands of different products and services from business firms, including office supplies, office buildings, computers, bat- tleships, helicopters, highways, water treatment plants, and management and engineering consulting services. Many businesses depend on govern- ment purchasing, if not for their survival, then at least for a certain level of prosperity. Total government expenditures in 2017 were $311.3 billion.11
Government as a Competitor The government also competes with business through Crown corpora- tions, which are accountable to a minister of parliament for their conduct. Crown corporations such as Hydro-Quebec and Canada Post generate
billions of dollars of revenue and account for significant economic activity in Canada. Crown corporations exist at both provincial and federal levels.
Government as Regulator Federal and provincial governments in Canada regulate many aspects of business activity through administrative boards, tribunals, and commis- sions, but there is a continuing debate about how much influence govern- ment regulators have and how much they should have. From 1935 until 2012, the Canadian Wheat Board regulated the price of wheat and pro- hibited farmers from selling their wheat directly to U.S. elevators. Instead, farmers were required to sell their wheat through the Wheat Board. That monopoly ended when the government introduced legislation to allow farmers to sell direct. The last step in the process occurred in 2015, when 50.1 percent of the organization was sold for US$250 million to the Global Grain Group (G3), a joint venture between the food company Bunge Ltd. and a unit of Saudi Agricultural and Livestock Investment Co. known as SALIC Canada Ltd. The rest of the shares were made available to farm- ers who chose to work with the organization, which has now promised to open new markets for farmers.12
The reasons for regulating business activity include protecting com- petition, protecting consumers, achieving social goals, and protecting the environment.
Promoting Competition Competition is crucial to a market econ- omy, so government regulates business activity to ensure that healthy
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the Toronto Real Estate Board (TREB) that its practices were anticompeti- tive because brokers weren’t being allowed to share information over the internet. TREB appealed, but in 2017, the courts upheld the initial ruling.18
Protecting Consumers The federal government has initiated many programs that protect consumers. Consumer and Corporate Affairs Canada administers many of these. Important legislation includes the Tobacco Act (which prohibits cigarette advertising on billboards and in stores), the Weights and Measures Act (which sets standards of accuracy for weighing and measuring devices), the Consumer Packaging and Label- ling Act (which stipulates labelling requirements for products), the Textile Labelling Act (which regulates the labelling, sale, importation, and advertis- ing of consumer textile articles), and the health care Food and Drug Act (which prohibits the sale of food that contains any poisonous or harmful substances).
Achieving Social Goals Social goals, which promote the well- being of Canadian society, include things such as universal access to health care, safe workplaces, employment insurance, and decent pen- sions. All these goals require the interaction of business firms and the Canadian government. But the decisions of foreign governments—as they pursue their own social goals—can also affect Canadian businesses.
Protecting the Environment Government legislation designed to protect the environment includes the Canada Water Act (which controls water quality in fresh and marine waters), the Fisheries Act (which controls the discharge of any harmful substance into water), and the Environmental Contaminants Act (which establishes regulations for airborne substances that are a danger to human health or the environment).
competition exists among business firms. Without these restrictions, a large company with vast resources could cut its prices and drive smaller firms out of the market. The guidelines for Canada’s competition policy are contained in the Competition Act, which prohibits a variety of practices (see Table 1.1).
The Act prohibits agreements among companies that are designed to reduce competition. Formerly, the government had to prove that such agreements reduced competition, but recent changes to the legislation mean that the mere existence of a conspiracy is assumed to be proof that competition has been reduced.13 Another major change is the dramati- cally increased fines for misleading marketing practices by corporations (formerly $100 000 for the first offence, now $10 million).14
In recent years, Loblaws has been under the microscope as it relates to the issue of competitive fairness. First, when Loblaws acquired Shop- pers Drug Mart, the Competition Bureau imposed limits on how much the company could squeeze Shoppers’ suppliers by demanding that those suppliers reduce their prices. Loblaw was also required to sell 18 stores and 9 pharmacies because the Bureau was concerned about anticom- petitive practices.15 Second, in 2018, Loblaws along with six other com- panies including Metro., Walmart, and Sobeys were accused of conspiring to inflate the price of bread for a period stretching back over a decade. According to the Competition Bureau, these companies committed illegal activities that violated the Competition Act.16 Loblaws, for its part, has apologized and also offered its customers a $25 gift card in an attempt to recover some goodwill from upset customers. Accepting the gift card did not remove the legal rights of those customers to participate in a class action lawsuit against the company.17 This story will surely be in the news for a few years to come as more legal actions are taken.
Businesses often complain that the Competition Bureau is too slow in making decisions and that it makes decisions that are unfriendly to busi- ness. One highly visible recent case has pitted the Competition Bureau against the Canadian Real Estate Association (CREA). The dispute began in 2010 when the Bureau alleged that CREA was acting in an anticompeti- tive manner because it was refusing to allow online, low-cost real estate brokers access to its Multiple Listing Service (MLS). The Bureau also told
Section 45 Prohibits conspiracies and combinations formed to unduly lessen competition in the production, transportation, or storage of goods. Persons convicted may be imprisoned for up to five years, fined up to $1 million, or both.
Section 50 Prohibits illegal trade practices. A company may not, for example, cut prices in one region of Canada while selling at a higher price everywhere else if this substantially lessens competition. A company may not sell at “unreasonably low prices” if this substantially lessens competition. (This section does not prohibit credit unions from returning surpluses to their members.)
Section 51 Prohibits giving allowances and rebates to buyers to cover their advertising expenses, unless these allowances are made available proportionally to other purchasers who are in competition with the buyer given the rebate.
Section 52 Prohibits marketing (promotion) activities that are false or misleading. Includes telemarketing activities.
Section 53 Prohibits the deceptive notice that a person has won a prize if the recipient is asked to pay money as a condition of winning the prize.
Section 54 Prohibits charging the higher price when two prices are shown on a product.
Section 55.1 Prohibits pyramid selling (a participant in the plan receives compensation for recruiting other individuals into the plan).
Section 61 Prohibits resale price maintenance. No person who produces or supplies a product can attempt to influence upward, or discourage reduction of, the price of the good in question. It is also illegal for the producer to refuse to supply a product to a reseller simply because the producer believes the reseller will cut the price.
Section 74 Prohibits bait-and-switch selling. No person can advertise a product at a bargain price if there is no supply of the product available to the consumer. (This tactic baits prospects into the store, where salespeople switch them to higher-priced goods.) This section also controls the use of contests to sell goods and prohibits the sale of goods at a price higher than the advertised one.
< < < table 1.1 The Competition Act
COMPETITION ACT Prohibits a variety of business practices that lessen competition.
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Problems in the Ontario Power System Ontario’s Green Energy Act came into effect about a decade ago and was designed to make the province a world leader in renew- able energy. But things didn’t quite work out as planned, and electricity bills for consum- ers have doubled over the past decade. This increase has occurred even though the cost of generating electricity has declined to about 3 cents per kilowatt hour (kWh) due to the shale gas revolution. The “all-in” cost of electricity (which includes generation costs, transmis- sion costs, and taxes) is now about 25 cents per kWh in Ontario, but only 16.5 cents in the United States.
Why did electricity rates go up so much in Ontario when the cost of generating electric- ity went down? The answer becomes clear when we look at something called the Global Adjustment (GA) tax, which is a surcharge that is added on to everyone’s electric bill. This surcharge helps to cover the costs that were incurred as the province began its move to green energy sources like wind and solar. The province signed contracts that paid produc- ers of wind-generated electricity 13.5 cents
per kWh and paid solar generators even more. But the market price at the time was only 2.5 cents per kWh for electricity that was generated from traditional sources like hydro, natural gas, and coal. The impact of the GA has been dramatic. For example, at Automatic Coating Inc., the bill for one sample month showed a charge for electricity of $6500, but the GA added about $25 000 more. In defending its decisions, the government says that closing coal plants saved $4.4 billion in health care costs, and that thousands of new jobs will be created by the move to renewable energy. Critics reject both of these claims as false and note that the recent cancelling of several wind projects shows that the govern- ment is finally accepting the fact that there are big problems in the power generation industry.
At the beginning of the millennium, coal accounted for 20 percent of Ontario’s elec- tricity supply. It seemed like a good idea to replace coal-generated electricity with renew- ables like solar and wind power to reduce air pollution. So, the province decided to close all the coal-generated power plants (the last plant was shut down in 2014). But the business of generating electricity is a complex one, and
organizations like Ontario’s Society of Profes- sional Engineers have been highly critical of the government for mismanaging the process of changing from coal to renewables. As well, Ontario’s auditor general has estimated that it will cost about $130 billion to “go green” over the next 30 years. The most general criticism of the Ontario government is that politics and ideology have driven decisions, not economic analysis. Critics point out, for example, that coal plants could have been ret- rofitted to reduce pollution for a small fraction of the costs that have actually been incurred in paying subsidies to wind and solar power companies.
CRITICAL THINKING QUESTION 1. Consider the following statement: “The
criticisms that have been levelled at the Ontario government are unfair. While elec- tric bills have gone up, the fact is that the movement to green energy sources like wind and solar is necessary to cope with the threat of climate change. The Ontario government has done the right thing by protecting the long-term quality of life for its citizens.” Do you agree or disagree with the statement? Defend your reasoning.
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Government as a Taxation Agent Taxes are imposed and collected by the federal, provincial, and local gov- ernments. Revenue taxes (e.g., income taxes) are levied by governments
primarily to provide revenue to fund various services and programs. Pro- gressive revenue taxes are levied at a higher rate on higher-income tax- payers and at a lower rate on lower-income taxpayers. Regressive revenue taxes (e.g., sales tax) are levied at the same rate regardless of a person’s income. They cause poorer people to pay a higher percentage of their income for these taxes than rich people pay. Restrictive taxes (e.g., taxes on alcohol, tobacco, and gasoline) are levied partially for the revenue they provide, but also because legislative bodies believe that the products in question should be controlled.
Government as a Provider of Incentives and Financial Assistance Federal, provincial, and municipal governments offer incentive pro- grams that attempt to stimulate economic development. Accord- ing to a recent study, more than $29 billion is spent annually by the federal government and the four largest provinces: Ontario, Quebec, British Columbia, and Alberta.19 In one high-profile example, prov- inces from across the nation have given hundreds of millions of dollars in subsidies to film companies to motivate them to make major films in their cities.20
Industry Canada offers many different programs designed to help small businesses. The Canada Business program, for example, provides
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Branislav/E+/Getty Images
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Provincial and municipal governments provide streets, sewage and sanitation systems, police and fire departments, utilities, hospitals, and edu- cation. All these activities create the kind of stabil- ity that encourages business activity.
In public–private partnerships (called P3s), the government pays a private sector company to build, finance, and operate organizations such as hospi- tals and transit lines. But studies show that P3s cost more money than the traditional approach in which the government puts up the money and then hires contractors to do the necessary work.21
How Business Influences Government Businesses also try to influence the government by using lobbyists, trade associations, and advertising (see Figure 1.2). A lobbyist is a person hired by a company or industry to represent that company’s interests with government officials. The Canadian Association of Con- sulting Engineers, for example, regularly lobbies the federal and provin- cial governments to make use of the skills possessed by private-sector consulting engineers on projects such as city water systems. Some business lobbyists have training in the industry, public relations experi- ence, or a legal background. A few have served as legislators or gov- ernment regulators.
The federal Lobbying Act requires lobbyists to register with the Com- missioner of Lobbying so that it is clear which individuals are being paid for such activity. It also sets rules for accountability and transparency and requires lobbyists to report detailed information about their com- munications with what are known as Designated Public Office Holders (DPOHs).22 For many lobbying efforts, there are opposing points of view. For example, the Canadian Cancer Society and the Tobacco Institute present very different points of view on cigarette smoking and cigarette advertising.
Employees and owners of small businesses that cannot afford lobby- ists often join trade associations, which may act as an industry lobby to influence legislation. They also conduct training programs relevant to the industry, and they arrange trade shows at which members display their products or services to potential customers. Most publish newsletters featuring articles on new products, new companies, changes in owner- ship, and changes in laws affecting the industry.
information on government programs, services, and regulations to improve the start-up and survival rates of small- and medium-sized businesses. It also encourages businesses to focus on sound business planning and the effective use of market research. The Department of Foreign Affairs, Trade and Development (DFATD) mandate helps Canadian companies doing business internationally by promoting Canada as a good place in which to invest and carry on business activities. It also assists in negotiating and administering trade agreements.
Governments also offer incentives through the many services they provide to business firms through government organizations. Examples include the Export Development Corporation (which assists Canadian exporters by offering export insurance against non-payment by foreign buyers and long-term loans to foreign buyers of Canadian products), Natural Resources Canada (which provides geological maps of Canada’s potential mineral-producing areas), and Statistics Canada (which pro- vides data and analysis on almost every aspect of Canadian society). Industry Canada offers many different programs designed to help small businesses.
There are many other government incentive programs, including municipal tax rebates for companies that locate in certain areas, design assistance programs, and deal with the remission of tariffs on certain advanced technology production equipment. Government incentive pro- grams may or may not have the desired effect of stimulating the econ- omy. They may also cause difficulties with our trading partners, as we shall see in Chapter 5.
Government as a Provider of Essential Services The various levels of government facilitate business activity through the services they supply. The federal government provides highways, the postal service, the minting of money, the armed forces, and statisti- cal data on which to base business decisions. It also tries to maintain stability through fiscal and monetary policy (discussed in Chapter 2).
Lobbyists AdvertisingTrade Associations
Business
Government
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< figure 1.2 How business influences government
TRADE ASSOCIATION An organization dedicated to promoting the interests and assisting the members of a particular industry.
LOBBYIST A person hired by a company or an industry to represent its interests with government officials.
LO-4 THE CANADIAN MARKET ECONOMY Understanding the complex nature of the Canadian economic system is essential to understanding Canadian business. In this sec- tion, we will examine the workings of our market economy, includ- ing markets, demand, supply, private enterprises, and degrees of competition.
Demand and Supply in a Market Economy In economic terms, a market is not a specific place, like a supermarket, but an exchange process between buyers and sellers. Decisions about
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production in a market economy are the result of millions of exchanges. How much of what product a company offers for sale and who buys it depends on the laws of demand and supply.
The Laws of Supply and Demand In a market economy, decisions about what to buy and what to sell are determined primarily by the forces of demand and supply. Demand is the willingness and ability of buyers to purchase a product or service. Supply is the willingness and ability of producers to offer a good or service for sale. The law of demand states that buyers will purchase (demand) more of a product as its price drops. Conversely, the law of supply states that producers will offer (supply) more for sale as the price rises.23
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DEMAND AND SUPPLY SCHEDULES
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Demand Curve
When the price of pizza is high, fewer people are willing to pay for it. But when the price goes down, more people are willing to buy pizza. At the lower price, in other words, more people “demand” the product.
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EQUILIBRIUM PRICE (DEMAND AND SUPPLY)
When the price of pizza is low, more people are willing to buy pizza. Pizza makers, however, do not have the money to invest in making pizzas and so they make fewer. Supply, therefore, is limited, and only when the price goes up will pizza makers be willing and able to increase supply.
When the pizza makers increase supply in order to satisfy demand, there will be a point at which the price that suppliers can charge is the same as the price that a maximum number of customers is willing to pay. That point is the market price, or equilibrium price.
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< figure 1.3 Demand and supply Source: Adapted from Karl E. Case and Ray C. Fair, Principles of Economics, 8th ed., updated (Upper Saddle River, NJ: Prentice Hall, 2007).
SUPPLY The willingness and ability of producers to offer a good or service for sale.
DEMAND The willingness and ability of buyers to purchase a prod- uct or service.
MARKET An exchange process between buyers and sellers of a particular good or service.
LAW OF SUPPLY The principle that producers will offer (supply) more of a product as price rises.
LAW OF DEMAND The principle that buyers will purchase (demand) more of a product as price drops.
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decreases, and supply increases as price increases. When the demand and supply curves are plotted on the same graph, the point at which they intersect is the market price, or equilibrium price—the price at which the quantity of goods demanded and the quantity of goods sup- plied are equal. In Figure 1.3, the equilibrium price for pizzas is $10. At this point, the quantity of pizzas demanded and the quantity of pizzas supplied are the same—1000 pizzas per week.
The E-Business and Social Media Solutions box entitled “The Lucra- tive Business of App Development” describes some of the success stories and major players in the social media environment.
Demand and Supply Schedules To appreciate these laws in action, consider the market for pizza in a small town. If everyone is willing to pay $25 for a pizza (a relatively high price), the local pizzeria will produce a large supply. If, however, everyone is willing to pay only $5 (a relatively low price), the restaurant will make fewer pizzas. Through careful analysis, we can determine how many pizzas will be sold at different prices. These results, called a demand and supply schedule, are obtained from marketing research and other systematic studies of the market. Properly applied, they help managers understand the relationships among different levels of demand and supply at different price levels.
Demand and Supply Curves The demand and supply schedule can be used to construct demand and supply curves for pizza. A demand curve shows how many products—in this case, pizzas—will be demanded (bought) at different prices. A supply curve shows how many pizzas will be supplied (cooked) at different prices.
Figure 1.3 shows the hypothetical demand and supply curves for pizzas in our illustration. As you can see, demand increases as price
MARKET PRICE (EQUILIBRIUM PRICE) Profit-maximizing price at which the quantity of goods demanded and the quantity of goods supplied are equal.
SUPPLY CURVE Graph showing how many units of a product will be supplied (offered for sale) at different prices.
DEMAND CURVE Graph showing how many units of a product will be demanded (bought) at different prices.
DEMAND AND SUPPLY SCHEDULE Assessment of the relationships between different levels of demand and supply at different price levels.
AND SOCIAL MEDIA SOLUTIONSE-BUSINESS The Lucrative Business of App Development Snap Inc., the maker of Snapchat, joins the ranks of notable companies started by individuals who have resisted big buyout offers from Facebook. Snap Inc. passed on an offer of $3 billion for the company back in 2013, two years after the company was cre- ated by two Stanford college roommates. As CEO and founder, Evan Spiegel eventually decided to sell shares to the public in the form of an initial public offering (IPO) of stock (listed as SNAP: NYSE) and raised almost $5 billion establishing a market value of $33 billion for the company.
Jack Dorsey, who founded Twitter, turned down a $500 million offer from Facebook and then five years later took the company public. By the end of the day, the company had reached a value of more than $32 billion. But not everyone sells their shares on a stock market in order to reap the rewards of inno- vation. At about the same time, JackMa was starting up Alibaba, two former employees of Yahoo! quit their jobs, took a sabbatical, and then applied for jobs with Facebook but got turned down. Ever the entrepreneurs, Jan Koum and Brian Acton saw future opportunities in mobile apps and designed WhatsApp—one of the first messaging appli- cations for smartphones. In an ironic turn of events, Facebook bought WhatsApp for a whopping $19.3 billion.
Of course, any success in business, whether traditional or in the social media realm, is based on real numbers. In Snapchat’s case, 187 million people globally spend time on the social media app every day. The Economist reported that approximately 41 percent of Americans aged 18 to 34 use Snapchat every day. However, for people in emerging markets, Snapchat’s data-intensive app is costly to access, and it doesn’t have as wide an appeal to the public or advertisers as Facebook or even Twitter do. Whether Snap Inc. will be able to withstand all the competition, only time will tell. But the early results are promising. In fact, Snapchat has a stronger reputation among teenagers while companies like Facebook (that
has made gains with an older crowd) are los- ing favour with this key demographic.
Based on the short history of social media applications, we know that there is always room for innovation and for a new technology to feed a tech-savvy population increasingly glued to their phones and devices. It’s also true that no company can get too comfort- able, as change is inevitable.
CRITICAL THINKING QUESTION 1. Look at the most recent statistics available
on Snapchat. Is their user base still grow- ing? Do you believe Snapchat is gaining popularity, or do you see another new application eating into Snapchat’s base?
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< Snapchat is a popular photo messaging application that allows users to share. On average 700 million videos and photos are shared per day. Users set a time limit of one to ten seconds for their snaps. After that time, the message is deleted.
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rewards can vary greatly between seasons. Cape Breton fisherman Albert Sampson and his crew brought in over $500 000 worth of lobsters in one two-month season a couple of years ago. That was a particularly good year because the high demand for lobsters meant that he received $8 per pound, whereas he had received only $5.75 to $6.00 per pound the previ- ous year. The supply is dependent on the overall catch of all fisherman, but when it comes to demand, many factors are at play. For example, the relative weakness of the Canadian dollar helped increase demand and contributed to higher prices for Albert and his fellow fisherman that season.25
Surpluses and Shortages What would happen if the owner tried to increase profits by making more pizzas to sell? Or what if the owner wanted to reduce overhead, cut back on store hours, and reduce the number of pizzas offered for sale? In either case, the result would be an inefficient use of resources. For example, if the restaurant supplies 1200 pizzas and tries to sell them for $10 each, 200 pizzas will not be purchased. The demand schedule clearly shows that only 1000 pizzas will be demanded at this price. The pizza maker will therefore have a surplus—a situation in which the quantity supplied exceeds the quantity demanded. The restaurant will thus lose the money that it spent making those extra 200 pizzas.
Conversely, if the pizzeria supplies only 800 pizzas, a shortage will result, because the quantity demanded will be greater than the quantity supplied. The pizzeria will “lose” the extra money it could have made by producing 200 more pizzas. Even though consumers may pay more for piz- zas because of the shortage, the restaurant will still earn lower profits than it would have if it had made 1000 pizzas. In addition, it may risk angering customers who cannot buy pizzas. To optimize profits, therefore, all busi- nesses must constantly seek the right combination of price charged and quantity supplied. This “right combination” is found at the equilibrium point.
These supply and demand ideas apply to all sorts of commodities. The price of expensive truffles (an edible root) is also affected by the weather. Prices declined from about $5000 a pound to $2000 a pound in 2014 because good growing conditions caused large harvests of the product (more supply). That price declined as low as $1200 per pound in the next two years. However, in 2017 an unusually hot summer in Italy led to the worst crop in a decade, and with a minimal supply available, the price jumped back up to $4000 per pound.24
Atlantic fisherman must deal with supply and demand conditions. Even if they bring in a similar total catch from one year to the next, the
SURPLUS Situation in which quantity supplied exceeds quantity demanded.
LO-5 PRIVATE ENTERPRISE AND COMPETITION Market economies rely on a private enterprise system—one that allows individuals to pursue their own interests with minimal government restric- tion. Private enterprise requires the presence of four elements: private property rights, freedom of choice, profits, and competition.
• Private property. Ownership of the resources used to create wealth is in the hands of individuals.26
• Freedom of choice. You can sell your labour to any employer you choose. You can also choose which products to buy, and producers can usually choose whom to hire and what to produce.
• Profits. The lure of profits (and freedom) leads some people to abandon the security of working for someone else and to assume the risks of entrepreneurship. Anticipated profits also influence individuals’ choices of which goods or services to produce.
• Competition. Competition is evident when two or more businesses vie for the same resources or customers. While profits motivate individuals to start businesses, competition motivates them to operate their busi- nesses efficiently. Competition forces businesses to make products better and/or cheaper.
Degrees of Competition Economists have identified four basic degrees of competition within a private enterprise system: perfect competition, monopolistic competition, oligopoly, and monopoly.
Perfect Competition In perfect competition, all firms in an industry are small, the number of firms in the industry is large, and the products produced by the differ- ent firms are virtually identical. Under these conditions, no single firm is powerful enough to influence prices, so the market forces of supply and demand determine them. Canadian agriculture is a good example of per- fect competition. The wheat produced on one farm is the same as that on another. Both producers and buyers are aware of prevailing market prices. It is relatively easy to start producing wheat and relatively easy to stop when it is no longer profitable.
Monopolistic Competition In monopolistic competition, there are fewer sellers, but many buyers. Businesses may be large or small, and small clothing stores, for example, can compete successfully with large apparel retailers such as Reitmans. Whatever their size, sellers try to make their products at least seem dif- ferent from those of competitors, and this product differentiation (through
PRIVATE ENTERPRISE An economic system characterized by pri- vate property rights, freedom of choice, profits, and competition.
PERFECT COMPETITION A market or industry characterized by a very large number of small firms producing an identical product so that none of the firms has any ability to influence price.
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< Atlantic fisherman are all very familiar with the power of supply and demand.
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of dollars annually in recent years.28 There have been repeated calls to end its monopoly on letters weighing less than 500 grams (competition from compa- nies such as FedEx and UPS is allowed for parcels and express mail). During the10 years since it became a Crown corporation, Canada Post has raised its rates by 41 percent. By contrast, postal rates have dropped in countries where the post office has been privatized (e.g., Germany and the Netherlands).29
Producers in several industries in Canada operate under a system called supply management, which has some of the characteristics of a monopoly. Domestic production quotas are established for commodities such as dairy products, maple syrup, eggs, chickens, and turkeys. Pro- ducers of these commodities are not allowed to produce more than the quota they have been granted. To prevent foreign competitors from enter- ing the market, high tariffs are charged on imports of these commodities (e.g., the tariff on butter is 299 percent, on cheese 246 percent, and on milk 241 percent).30 The supply management system continues to oper- ate despite evidence that it increases costs to consumers, encourages smuggling, reduces innovation, and inhibits exports.
The recent North American Free Trade Agreement renegotiation talks put supply management back on the front pages. An article in MacLean’s magazine put it this way: “Why Is Canada Jeopardizing NAFTA to Protect 13,500 Farmers?” Not only did the United States repeatedly point to the dairy, poultry, and egg producers supply system, but this issue was also a sticking point in the Trans-Pacific trade negotiations. In addition, this is not simply an issue with foreign governments; many opponents exist within Canada. One study estimated that supply management leads to approxi- mately $399 in extra food costs annually, and because these extra amounts are attached to basic goods, they hit low-income families particularly hard.31
Clearly, supply management creates artificial barriers and is anti-free trade. Yet the Canadian government refuses to eliminate this system. The US maintains similar “America First:” policies that also go against the spirit of free trade. Despite these positions, in late 2018, Canada signed the newly named USMCA ( NAFTA 2.0). In order to make the deal, the Cana- dian government agreed to further open up the dairy market by 3.59% to American Dairy farmers (this topic will be discussed in detail in chapter 5).
traditional media advertising, social media, and other brand-building tools) gives sellers some control over prices. For instance, even though a shirt sold at The Bay (from a fairly unknown brand) may look pretty much like a Ralph Lauren Polo shirt, the latter can be priced $20 higher.
Oligopoly When an industry has only a handful of very large sellers, an oligopoly exists. Entry into an oligopolistic market is difficult because large capital investment is usually necessary. Thus oligopolistic industries (such as the automobile, rubber, and steel industries) tend to stay oligopolistic.
Companies in an oligopoly market have more control over their strat- egies than monopolistically competitive firms do, but the actions of one firm can significantly affect the sales of every other firm in the industry. For example, when one firm cuts prices or offers incentives to increase sales, the others usually protect sales by doing the same. Likewise, when one firm raises prices, others generally follow. Therefore the prices of com- parable products are usually similar. Ultimately, the firms usually realize that they are better off fighting for market share on features and benefits rather than price. In simple terms, cooperation in this industry leads to better profits for all. Overly aggressive actions (especially price cuts) hurt all companies in an oligopoly industry.
To understand oligopoly competition, look no further than your game console. Nintendo, Sony, and Microsoft have been going head-to-head for years. The industry was worth US$36.2 billion in 2017. These three major console manufacturers literally own that market. Sony leads the pack (main console: PS4), Microsoft is second (main console: Xbox One), and Nintendo ranks third.27
Monopoly When an industry or market has only one producer, a monopoly exists. Being the only supplier gives a firm complete control over the price of its product. Its only constraint is how much consumer demand will fall as its price rises. In Canada, laws such as the Competition Act forbid most monopolies. So-called natural monopolies—such as provincial electric utilities—are closely watched by provincial utilities boards, and the assumption that there is such a thing as a natural monopoly is increasingly being challenged. For example, the volume of mail that Canada Post handles has declined, and it has been losing millions
MONOPOLISTIC COMPETITION A market or industry character- ized by a large number of firms supplying products that are similar but distinctive enough from one another to give firms some ability to influence price. OLIGOPOLY A market or industry characterized by a small number of very large firms that have the power to influence the price of their product and/or resources. MONOPOLY A market or industry with only one producer that can therefore set the prices of its products and resources.
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< Reitmans was founded in 1926 and serves Canadian men and women with 640 stores under the following retail banners: Reitmans, Penningtons Addition Elle, Thyme Maternity, RW&CO., and Hyba.
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< Nintendo, Sony, and Microsoft exemplify oligopoly conditions in the game console industry, as these three literally own the market.
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SUMMARY OF
LEARNING OBJECTIVES
LO-1 DEFINE THE NATURE OF CANADIAN BUSINESS AND IDENTIFY ITS MAIN GOALS.
Businesses are organizations that produce or sell goods or services to make a profit. Profits are the difference between a business’s revenues and expenses. The prospect of earning profits encourages individuals and organizations to open and expand busi- nesses. The benefits of business activities also extend to wages paid to workers and to taxes that support government functions.
LO-2 DESCRIBE DIFFERENT TYPES OF GLOBAL ECONOMIC SYSTEMS ACCORDING TO HOW THEY CONTROL THE FACTORS OF PRODUCTION THROUGH INPUT AND OUTPUT MARKETS.
An economic system is a nation’s system for allocating its resources among its citi- zens. Economic systems differ in terms of who owns or controls the five basic factors of production: labour, capital, entrepreneurs, natural resources, and information. In command economies, the government controls all or most of these factors. In market economies, which are based on the principles of capitalism, individuals and busi- nesses control the factors of production and exchange them through input and output markets. Most countries today have mixed market economies that are dominated by one of these systems but include elements of the other. The processes of deregulation and privatization are important means by which many of the world’s planned econo- mies are moving toward mixed market systems.
LO-3 DESCRIBE THE INTERACTIONS BETWEEN BUSINESS AND GOVERNMENT IN CANADA.
Government plays many important roles within the Canadian economic system, and in so doing, it influences business firms. Government can play the role of customer, competitor, regulator, taxation agent, provider of incentives, and provider of essential services. Businesses can influence government by lobbying, joining trade associa- tions, and trying to convince voters to support or oppose certain regulations.
LO-4 SHOW HOW DEMAND AND SUPPLY AFFECT RESOURCE DISTRIBUTION IN CANADA.
The Canadian economy is strongly influenced by markets, demand, and supply. Demand is the willingness and ability of buyers to purchase a good or service. Supply is the willingness and ability of producers to offer goods or services for sale. Demand and supply work together to set a market or equilibrium price—the price at which the quantity of goods demanded and the quantity of goods supplied are equal.
LO-5 IDENTIFY THE ELEMENTS OF PRIVATE ENTERPRISE AND EXPLAIN THE VARIOUS DEGREES OF COMPETITION IN THE CANADIAN ECONOMIC SYSTEM.
The Canadian economy is founded on the principles of private enterprise: private property rights, freedom of choice, profits, and competition. Degrees of competi- tion vary because not all industries are equally competitive. Under conditions of pure competition, numerous small firms compete in a market governed entirely by demand and supply. In monopolistic competition, there are fewer sellers, and each one tries to make its product seem different from the products of competitors. An oligopoly involves only a handful of sellers who compete with each other. A monopoly involves only one seller.
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TEAM EXERCISES
Build a team of three to five classmates. You will be working with this team throughout the semester to make decisions about the launch of a new product.
ASSIGNMENT Meet with your team members and develop specific responses to the following: 1. Have each team member work individually to identify at least three
trends that will create business opportunities. Come together as a group and create a master list of trends.
2. Which trend do you think creates the greatest opportunity for suc- cess? Why?
3. Identify a product, either a good or a service, that will allow your team to take advantage of this opportunity. Although you will refine this throughout the semester, write a four- to six-sentence descrip- tion of your product and how it will spark buyer interest.
4. Who is your competition for this product, either direct competi- tion or substitute products? Is competition a good sign for your business?
BUILDING A BUSINESS: CONTINUING EXERCISE
1. Give an example of a situation in which a surplus of a product led to decreased prices. Similarly, give an example of a situation in which a shortage led to increased prices. What eventually happened in each case? Why?
2. The Canadian government has provided export assistance to Bom- bardier Inc. with its Technology Transfer Program. Is this consistent with the principles of a free market system? Explain how this might distort the system.
3. Explain how current economic indicators, such as inflation and unemployment, affect you personally. Explain how they may affect you as a manager.
4. Familiarize yourself with a product or service that is sold under condi- tions of pure competition. Explain why it is an example of pure com- petition and identify the factors that make it so. Then do the same for a product in each of the other three competitive situations described in the chapter (monopolistic competition, oligopoly, and monopoly).
5. Government plays a variety of roles in the Canadian mixed economy (customer, regulator, taxation agent, provider of services, and so on). Consider each of the roles discussed in this chapter and state your view as to whether government involvement in each role is exces- sive, insufficient, or about right. What criteria did you use to make your assessments?
QUESTIONS AND EXERCISES
QUESTIONS FOR ANALYSIS
GOAL To encourage students to understand how competition affects a prod- uct’s price.
SITUATION Assume that you are the owner of a local gym and fitness studio. You’ve worked hard to build a loyal customer base, and your facility is top- notch, with the latest equipment and a variety of classes for customers at all fitness levels. Within your geographical area, there are three other gyms, each charging the same price ($40 per month for individuals, $60 per month for couples, and $75 per month for families). However, you’ve become concerned because one of your competitors has just announced that it is reducing membership costs by $10 per month
for each of the three categories of memberships. Rumour has it that another facility plans to follow suit in the near future. You can’t afford to get into a price war because you are just barely making a profit at your current price structure.
METHOD Divide into groups of four or five people. Each group is to develop a general strategy for handling competitors’ price changes. In your dis- cussion, take the following factors into account: • how the demand for your product is affected by price changes • the number of competitors selling the same or a similar product • the methods—other than price—you can use to attract new custom-
ers and retain current customers
BUILDING YOUR BUSINESS SKILLS
ANALYZING THE PRICE OF DOING BUSINESS
APPLICATION EXERCISES 6. Visit a local shopping mall or shopping area. List each store that you
see and determine what degree of competition it faces in its imme- diate environment. For example, if there is only one store in the mall that sells shoes, that store represents a monopoly. Note those busi- nesses with direct competitors (e.g., two jewellery stores) and show how they compete with one another.
7. Pick a specific product that you use. Explain how the factors of pro- duction work together to make that product available.
8. Interview a business owner or senior manager. Ask this individual to describe for you the following things: (1) how demand and supply affect the business, (2) what essential factors of production are most central to the firm’s operations, and (3) how fluctuations in economic indicators affect his or her business.
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“Google is not a conventional company. We do not intend to become one.” The co-founders also said: “As part of that, we also said that you could expect us to make ‘smaller bets in areas that might seem very speculative or even strange when compared to our current businesses.’ From the start, we’ve always strived to do more, and to do important and meaningful things with the resources we have.” Sergey Brin and Larry Page represent the fundamental idea and driving force behind the company that now has over 80 000 employees worldwide and that has created multiple platforms that satisfy consumer needs, such as Search, Gmail, Google Maps, and Chrome. The co-founders recently chose to reorganize and name their new holding company Alphabet because they felt that it held a dual meaning, as a collection of letters that represent language and as a reference to the investment term alpha (returns above a benchmark).
Just as you observed in our opening case, the co-founders met at university (Who’s sitting next to you now?). They were graduate students in computer science. At the time, Page was working on a software develop- ment project designed to create an index of websites by scouring sites for keywords and other links. Brin joined him on the project, and when they were satisfied that they’d developed something with commercial value, they tried to license the technology to other search companies. Fortu- nately, they couldn’t find a buyer and settled instead for finding enough investment capital to keep refining and testing their product.
At the turn of the century, Brin and Page ran across the description of a business model based on the concept of selling advertising in the form of sponsored links and search-specific ads. They adapted it to their own concept and went into business for themselves, eventually building Google into the world’s largest search engine. But their ambitions and
ALPHABET: G IS FOR GOOGLE
BUSINESS CASE 1
ANALYSIS Develop specific pricing strategies based on each of the following situations: • A month after dropping prices by $10 per month, one of your com-
petitors returns to your current pricing level. • Two of your competitors drop their prices even further, reducing
membership costs by a further $5 per month. As a result, your busi- ness falls off by 25 percent.
• One of your competitors announces that it will keep its prices low, but it will charge members $2 per session for high-demand classes such as Pilates.
• Each of the competitors that lowered their price makes an adjust- ment, with reduced rates for families and couples, but they plan to return to $40 per month for singles.
• All four providers (including you) have reduced their monthly fees. One gym goes out of business, and you know that another one is in poor financial health.
FOLLOW-UP QUESTIONS 1. Discuss the role that various inducements other than price might
play in affecting demand and supply in the market. 2. Is it always in a company’s best interest to feature the lowest
prices? 3. Eventually, what form of competition is likely to characterize this
market?
THE SITUATION You are the owner of a small company that provides heating oil to residen- tial and business customers in Central Canada. The business has been in your family for several generations, and you are a well-respected member of the community.
Although the business had once provided a steady income for you and your family, increased energy efficiency and a move away from oil heat have cut your profits to almost nothing in recent years.
THE DILEMMA After the retirement of your long-time marketing manager, you’ve hired a recent college graduate named Seema. She has analyzed your firm’s financial position, as well as the most up-to-date demographic and market information. In the prior heating season, oil prices were quite high, and your customers became accustomed to paying more than $1.15 per litre. You’ve done your research, though, and know that it’s very likely that the price that you must pay suppliers will be much lower
EXERCISING YOUR ETHICS
GETTING CAUGHT OUT IN THE COLD
this winter because of an increase in the supply of heating oil as more and more customers in other geographic areas switch to natural gas. While you’re hoping to pass these cost savings on to your customers, Seema is recommending just the opposite. She proposes that you send out a “special offer” to your customers, allowing them to lock into a price of $1.05 per litre for the upcoming heating season, although you think that you could sell profitably at a much lower price. She believes that many of your customers will jump at the opportunity and that you will be able to make a significant profit during the upcoming winter. On the one hand, it would be nice to generate a large profit and rebuild your savings, but on the other hand, you’re wondering if this is really the right thing to do.
QUESTIONS TO ADDRESS 1. What are the roles of supply and demand in this scenario? 2. What are the underlying ethical issues? 3. What would you do if you were faced with this situation?
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innovations didn’t stop there. By 2018, they had purchased well over 200 companies, such as Android, YouTube, and DoubleClick, always striv- ing to further their mission: to organize the world’s informa- tion and make it universally accessible and useful. To bet- ter separate all the different directions the business had taken, Brin and Page created a holding company called Alpha- bet in 2015 and turned the control of Google over to an up-and-coming star manager named Sundar Pichai. Alpha- bet’s annual revenue rose to US$110.9 billion in 2017 (up approximately 23%), as Google, its major sub- sidiary, provided more than 80 percent of the world’s search market.
Brin and Page have been extremely effective in attracting talented, cre- ative employees, like Pichai, and providing them with a work environment and culture that fosters productivity and innovation. They’ve also remained at the forefront of Alphabet’s search for innovations, but nobody knows for sure what Brin and Page have on the drawing board. In fact, outsid- ers—notably potential investors—often criticize Google for being a “black box” whereas they want a few more details on the company’s long-range strategy. “We don’t talk about our strategy,” explains Page, “… because it’s strategic. I would rather have people think we’re confused than let our competitors know what we’re going to do.”
One of the reasons for creating Alphabet was to pro- vide greater transparency, but the company seems to have missed that mark. What we do know is that Alpha- bet’s semi-secret research facility “X,” also known as the “moonshot factory,” is currently working on a self- driving car, fuel from sea- water, and other long-shot, innovative projects that may or may not pan out. If there is a long-term strategic vision, it may be simply to provide the resources and freedom to some of the best and
brightest dreamers in the world and then to let their ideas develop into the reality of the future.35
QUESTIONS FOR DISCUSSION 1. What are the secrets to Google’s success? What role, if any, did
luck play? 2. Describe the factors of production as they relate to Alphabet. How does
this example demonstrate the foundations of free market economies? 3. What role do governments play in the day-to-day operations of a
company like Alphabet? Describe some of the ways governments can help this global organization as well as ways that governments may hurt this organization.
Study, practise, and explore real business situations with these helpful resources: • Study Plan: Check your understanding of chapter concepts with self-study quizzes. • Dynamic Study Modules: Work through adaptive study modules on your computer, tablet, or mobile device. • Simulations: Practise decision-making in simulated business environments. • Videos: Learn more about the business practices and strategies of real companies.
MyLab Intro to Business
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LO-1 Explain the concepts of organizational boundaries and multiple organizational environments.
LO-2 Explain the importance of the economic environment to business and identify the factors used to evaluate the performance of an economic system.
LO-3 Describe the technological environment and its role in business. LO-4 Describe the political–legal environment and its role in business. LO-5 Describe the socio-cultural environment and its role in business. LO-6 Identify emerging challenges and opportunities in the business environment. LO-7 Understand recent trends in the redrawing of corporate boundaries.
LO
The Environment of Business
AFTER READING THIS CHAPTER, YOU SHOULD BE ABLE TO:
accept credit cards. The dollar store is now also the $4 store;
more than 67 percent of company sales now come from prod-
ucts priced above $1.25.
Dollarama Origins How did this story take shape? Dollarama was founded in
1992 by Larry Rossy, but arguably this success goes back to
1910 when his grandfather Salim Rossy opened his first shop,
S-Rossy Inc. Larry Rossy earned his stripes running that family
business from 1973 to 1992. As a third-generation member of
this business dynasty, Larry Rossy drew on a wealth of knowl-
edge and experience in the retail trade, which he applied as the
founder and chairman of Dollarama in 1992. Like most business
success stories, the key ingredients to Dollarama’s success
were an innate ability to understand an ever-changing external
environment; good, timely decisions; and strong execution.
Off-price retailers have always been in the market-
place, but Dollarama was formed to embrace the dollar
Quick, look at these numbers. In 2018, Dollarama had 1160
retail locations across Canada, with annual sales of $3.27
billion and a total market capitalization of $13 billion. The stock
had already appreciated 1800 percent since going public
nine years earlier! Are you impressed yet? You should be. At
a time when retailers are struggling, Dollarama continues to
grow and exceed market expectations. In 2018, revenues
were up 10 percent, and same-store sales (a key retail metric)
increased by 5.5 percent, while average customer transac-
tions increased by 5.8 percent. Profits were also up 17 percent
(at $519 million). At the time, Dollarama had also announced
a 3-for-1 stock split. Those who invested in Dollarama shares
at the initial public offering were richly rewarded. Plenty of ana-
lysts still predicted more sustained growth ahead. Irene Nan-
tel, from RBC Dominion Securities, believed the stock could
continue to appreciate in the15-to-20-percent growth range.
Such positive reviews were based largely on projections of
more store openings, higher price points, and the decision to
Growth and Success: A Few Dollars at a Time
02 CHAPTER
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retail concept that was gaining prominence across North
America at the time. Later, in 2009 when Dollarama went
public with a stock market IPO, the economy was suffering,
and consumers were scrambling for low-price solutions. The
timely funding gave the company more financial tools to
expand and establish a dominant place in Canadian retail.
Dollarama satisfied the low-cost, no-frills niche and created
a mega-success in the process. After presiding over the rise
of the Dollarama empire, Larry Rossy officially stepped down
in 2018 passing the reins to his son Neil Rossy (CEO and
fourth-generation retailer) and Stephen Gunn (chairman).
Competition, Always Threatening Success inevitably leads to new competition. Dollarama
already has plenty of domestic dollar stores to contend with,
but a new entry into the Canadian landscape threatens to
put up a real fight. Miniso, based out of Japan, recently
opened a handful of stores with plans to open 50 in British
Columbia, Alberta, Quebec, and Ontario by the end of
2018. It also announced ambitious intentions to open 500
locations across Canada by the end of 2021.
According to CEO Neil Rossy, “The retail environment
is relatively stable. It is always very competitive. Competitors
enter, and others leave.” Dollarama has found a way to meet
all challenges. That does not mean the company is resting on
its previous success. In 2018, Dollarama invested heavily in
its e-commerce platform to begin selling some of its products
in bulk online. In addition, it was also adding new technology,
giving associates hand-held scanners to improve efficiency,
while also adding smart cameras in stores. A new emphasis
was placed on analytic tools to help improve merchandising
and identify risks. In addition, Dollarama was in the process of
doubling the size of its primary distribution centre to 500,000
square feet by the end of 2019.
Looking Abroad? Foreseeing the upper limits of your potential expansion may
be a difficult exercise in that everyone wants to imagine that
the good times will continue forever, but there are limits to
growth. Perhaps the future of Dollarama’s story lies in inter-
national markets. With that in mind, Dollarama has already
forged a relationship to sell products to Dollar City, which
has 77 stores in El Salvador and Columbia. Dollarama has
an option to buy the Latin American chain in 2020. Is this
the beginning of a new phase?
Legal Questions and Government Challenges International markets are a definite path to consider for
growth, but such moves bring new challenges from foreign
governments looking to protect local interests. Moreover,
Dollarama faces legal issues at home; it has not always lived
a squeaky-clean life in Canada. It is notorious for selling
knock-off products such as “Might be Mars” chocolates and
look-alike Milk-Bone treats for dogs. In fact, Dixon, maker of
the classic yellow HB pencils that we all used in elementary
school, is suing Dollarama for blatantly copying its product.
Should Dollarama be worried? Well, the Canadian govern-
ment did update its counterfeit laws in 2015 and promised a
tougher stance. However, because of a lack of enforcement,
the new laws have not changed practices so far. In one recent
year, only 50 shipments were seized at Canadian customs for
counterfeiting, whereas 36,500 shipments were seized in the
United States. If the government decides to get aggressive in
this matter, it may force Dollarama to make changes.
Moving Forward According to Dollarama’s own estimates, it is near the per-
ceived saturation point for new stores in Canada. However,
new competitors are entering from abroad. Will Dollarama
rethink that maximum? The company is also looking at new
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LO-1 ORGANIZATIONAL BOUNDARIES AND ENVIRONMENTS
technology to help build bulk sales. If indeed the company
is nearing a saturation point in Canada, it is not yet clear
where the future resources will be placed. To continue this
run of growth, the company will need to do what it has done
in the past. Its leaders must ensure that they are effectively
analyzing the external environment and executing strategies
to take advantage of the key emerging trends. Based on
their track record, it is hard to bet against them.
QUESTIONS FOR DISCUSSION
1. What are the biggest competitive challenges to long-term
success and profitability for Dollarama?
2. How do the external factors other than competition
(economy, technology, socio-cultural, and political–legal)
impact Dollarama?
3. Form a group of four to six people and divide them into two
groups. One group will provide arguments in favour of inter-
national expansion. The other group will prepare opposing
arguments. Debate the main points.
EXTERNAL ENVIRONMENT Everything outside an organization’s boundaries that might affect it.
All businesses, regardless of their size, location, or mission, operate within a larger external environment that plays a key role in determining their suc- cess or failure. The external environment consists of everything outside an organization that might affect it. Managers must understand the key features of the external environment and then operate proactively to compete within it. The opening case on Dollarama is a great example of a company that under- stood external forces and made strategic decisions to exploit opportunities.
To better explain the environment of business, we begin by discuss- ing organizational boundaries and multiple organizational environments.
Organizational Boundaries An organizational boundary separates the organization from its environ- ment. Consider the simple case of a neighbourhood grocery store that includes a retail customer area, a storage room, and the owner or manag- er’s office. In many ways, the store’s boundary coincides with its physical structure; when you walk through the door, you’re crossing the boundary into the business, and when you leave and return to the sidewalk, you
<<< Bauer has been around since 1927, and in that time, it has adjusted to many external shocks (especially technological and economic ones). It has not been all smooth sailing in recent years, but the new owners, Peak Achievement Athletics, are monitoring the environment to meet the needs of consumers of a brand that’s synonymous with hockey.
HOW WILL THIS HELP ME? By understanding the material in this chapter,
you’ll be better able to assess (1) the impact
that events outside a business can have on its
owners and managers, (2) how envi-
ronmental change impacts you as a
consumer, and (3) the challenges
and opportunities that environ-
mental change provides to you
as an employee or an investor.
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Multiple Organizational Environments Organizations have multiple environments. Some conditions, such as cur- rent economic conditions, affect the performance of almost every busi- ness. But other environmental dimensions are much more specific. The neighbourhood grocery store, for example, will be influenced not only by an increase in unemployment in its area but also by the pricing and other marketing activities of its nearest competitors.
Figure 2.1 shows the major elements of the external environment: economic conditions, technology, political–legal considerations, social issues, the global environment, issues of ethical and social responsibility, the business environment itself, and emerging challenges and opportuni- ties. We will cover ethical and global issues in detail in Chapters 3 and 5, respectively, so here we discuss ethical and global issues only as they relate directly to the other areas covered in this chapter.
cross the boundary back into the environment. But this is an oversimpli- fication. During the business day, distributors of soft drinks, snack foods, ice, and bread products may enter the store, inventory their products, and refill coolers and shelves just as though they were employees. These distributors are normally considered part of the environment rather than the organization, but while inside the store, they are essentially part of the business. Customers may even assume these distributors are store employees and ask them questions as they restock shelves.
Now consider cases of large domestic businesses (e.g., GM Canada) that are owned by even larger international corporations (e.g., U.S.-based General Motors). Domestic businesses have complex networks of relation- ships with other businesses. For example, Magna International conducts research and builds components for GM. GM Canada also deals with companies that supply tires, glass, steel, and engines. But GM Canada also functions within the boundaries of its international parent, which has its own network of business relationships, some overlapping and some distinct from GM Canada’s network.
AGGREGATE OUTPUT Total quantity of goods and services produced by an economic system during a given period.
ECONOMIC ENVIRONMENT Conditions of the economic system in which an organization operates.
BUSINESS CYCLE Pattern of short-term ups and downs (expansions and contractions) in an economy. GROSS DOMESTIC PRODUCT (GDP) Total value of all goods and services produced within a given period by a national economy through domestic factors of production.
LO-2 THE ECONOMIC ENVIRONMENT The economic environment refers to the conditions of the economic sys- tem in which an organization operates.1 In recent years, the economic envi- ronment has been characterized by low growth, fairly low unemployment rates, and low inflation. During periods of rising unemployment, people are less likely to make unnecessary purchases, and they may delay the purchase of a new car or new furniture. The fear of a potential job loss or an uncertain pay cheque is a very powerful enemy of the economy. It’s only rational to reduce your spending in tougher times, but this also means that less needs to be produced, which can ultimately lead to more job losses for the economy. In a positive economic period, momentum pushes unem- ployment down as consumers spend more.
Despite low overall inflation, rising costs (i.e., from labour laws increas- ing minimum wage) have put economic pressure on businesses in many sectors. Restaurants and grocery stores have increased prices, reduced shifts, or reduced package sizes to compete. For example, Loblaws raised the price of its President’s Choice Granola cereal from $4.99 to $5.79, while shrinking the package from 800 to 750 grams.2 As seen in the open- ing case, many companies that cater to low-cost interests of consumers, such as Dollarama and Costco, thrive in the tough economic times as consumers search for cheaper prices.
Economic Growth At one time, about half of the Canadian population was involved in pro- ducing the food that we eat. Today, approximately 2.1 percent of the population works in agriculture, mainly because agricultural efficiency has improved so much that far fewer people are needed to produce the food we need.3 We can therefore say that agricultural production has grown because the total output of the agricultural sector has increased. We can apply the same idea to a nation’s economic system, but the computations are much more complex, as we will see.
Aggregate Output and the Standard of Living How do we know whether an economic system is growing? The main measure of growth is aggregate output: the total quantity of goods and
services produced by an economic system during a given period.4 To put it simply, an increase in aggregate output is economic growth.5 When output grows more quickly than the population, two things usually follow: output per capita (the quantity of goods and services per person) goes up, and the system provides relatively more of the goods and services that people want.6 And when these two things occur, people living in an eco- nomic system benefit from a higher standard of living—the total quantity and quality of goods and services they can purchase with the currency used in their economic system.
The Business Cycle The growth (and contraction) pattern of short-term ups and downs in an economy is called the business cycle. It has four recognizable phases: peak, recession, trough, and recovery (see Figure 2.2). A recession is usu- ally defined as two consecutive quarters when the economy shrinks, but it is probably more helpful to say that a recession starts just after the peak of the business cycle is reached and ends when the trough is reached.7 A depression occurs when the trough of the business cycle extends two or more years. Periods of expansion and contraction can vary from several months to several years.
Gross Domestic Product and Gross National Product The term gross domestic product (GDP) refers to the total value of all goods and services produced within a given period by a national economy through
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GDP is now the key measure of economic growth because it tracks an economy’s performance over time. However, some argue that such measures are flawed. According to one study, more attention should be paid to other indicators, such as rising debt. An article in The Economist even referred to GDP as a “grossly deceptive product.”12
Real Growth Rates GDP is the preferred method of calculating national income and output. The real growth rate of GDP—the growth rate of GDP adjusted for inflation and changes in the value of the country’s currency—is what counts. Remember that growth depends on output increasing at a faster rate than population. If the growth rate of GDP exceeds the rate of population growth, then our standard of living should be improving.
domestic factors of production. Canada’s GDP in 2017 was $2.1 trillion.8 According to Statistics Canada, that represented a 3 percent increase, which was the best result in six years.9 Global GDP was approximately $76 trillion; the top five countries were the United States, China, Japan, Germany, and the United Kingdom.10 If GDP rises, a nation experiences economic growth.
GDP measures all business activity within a nation’s borders, and it has widely replaced gross national product (GNP), which refers to the total value of all goods and services produced by a national economy within a given period regardless of where the factors of production are located. For example, Bombardier is a Canadian company that manufac- tures planes and trains and has a total of 73 production and engineering facilities spread across 28 countries.11 All the manufacturing that occurs in its foreign plants (including Kansas, Mexico, Ireland, and Morocco) is included in the Canadian GNP but not in its GDP—because its output is not produced in Canada. Conversely, those figures are included in the GDP of those nations (United States, Mexico, Ireland, and Morocco, respectively) but not their GNP—because the output is produced inside their borders by a Canadian company.
GROSS NATIONAL PRODUCT (GNP) Total value of all goods and services produced by a national economy within a given period regardless of where the factors of production are located.
Economic Environment
Political–Legal Environment
Technological Environment
Global Business Environment
The Business Organization
Socio-cultural Environment
Business Environment
Emerging Challenges and Opportunities • Outsourcing • The Growing Role of Social Media • Business Process Management
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< figure 2.1 Dimensions of the external environment
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it takes 1 Canadian worker and 50 Canadian dollars to make 10 pairs of leather boots in an 8-hour workday. Let’s also say that it takes 1.2 Spanish workers and the equivalent of $60 (in euros, the official currency used in Spain) to make 10 pairs of equivalent leather boots in the same 8-hour workday. We can say, then, that the Canadian boot manufacturing industry is more pro- ductive than the Spanish boot manufacturing industry.
The two factors of production in this simple case are labour and capital. According to the Organisa- tion for Economic Co-operation and Development (OECD) rankings, Canada stood in sixteenth place with a productivity ratio of 48.9 percent. Ireland, Luxembourg, and Norway were the most produc- tive nations at 83.1, 81.2, and 79.2 percent, respec- tively.15 If more products are being produced with fewer factors of production, what happens to the prices of these products? They go down. Therefore as a consumer, you will need less of your currency to purchase the same quantity of these products. Thus your standard of living—at least with respect to these products—has improved.
The Balance of Trade and the National Debt Several factors can help or hinder the growth of an economic system, but here we focus on just two of them: balance of trade and the national debt.
Balance of Trade The balance of trade is the economic value of all the products that a country exports minus the economic value of its imported products. For decades, Canada had a positive balance of trade. For example, from 2006 to 2008, Canada received $43 to $47 billion more from exports than it spent on imports annually, but that long trend was reversed in 2009 when Canada had a trade deficit of $6 billion, mainly because of the sharp rise in the Canadian dollar relative to the U.S. dollar at the time. However, in recent years, despite the fact that the Canadian dollar is once again weaker relative to that of the United States (its main trading partner), Canada had an overall trade deficit of $23.7 billion in 2017 (following deficits of $25.8 and $23.7 billion in the two previous years).16 So what has changed? More manufacturing has moved over- seas (e.g., more companies are shifting manufacturing to China and other countries with low labour costs), so even with a cheaper Canadian dollar, fewer products are being made in Canada to sell abroad.
A trade deficit negatively affects economic growth because the money that flows out of a country can’t be used to invest in productive enter- prises, either at home or overseas.
GDP Per Capita GDP per capita means GDP per person. We get this figure by dividing total GDP by the total population of a country. As a measure of the economic well-being of the average person, GDP per capita is a better measure than GDP. Luxembourg has the highest GDP per capita (approximately US$100 738), followed by Switzerland (US$79 887), Macao SAR, China (US$74 017), and Norway (US$70 068). Canada ranked eighteenth at US$42 183 GDP per capita.13
Real GDP Real GDP means that GDP has been adjusted. To under- stand why adjustments are necessary, assume that pizza is the only prod- uct in an economy. Assume that a pizza cost $10 in 2018 and $11 in 2019. In both years, exactly 1000 pizzas were produced. In 2018, the GDP was $10 000 ($10 × 1000); in 2019, the GDP was $11 000 ($11 × 1000). Has the economy grown? No. Because 1000 pizzas were produced in both years, the aggregate output remained the same. If GDP is not adjusted for 2019, it is called nominal GDP, that is, GDP measured in current dollars.14
Purchasing Power Parity In our example, current prices would be 2019 prices. On the other hand, we calculate real GDP when we account for changes in currency values and price changes. When we make this adjustment, we account for both GDP and purchasing power parity—the principle that exchange rates are set so that the prices of similar products in different countries are about the same. Purchasing power parity gives us a much better idea of what people can buy. In other words, it gives us a better sense of standards of living across the globe.
Productivity A major factor in the growth of an economic system is productivity, which is a measure of economic growth that compares how much a system pro- duces with the resources needed to produce it. Let’s say, for instance, that
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< figure 2.2 The business cycle
BALANCE OF TRADE The total of a country’s exports (sales to other countries) minus its imports (purchases from other countries).
PRODUCTIVITY Measure of economic growth that compares how much a system produces with the resources needed to produce it.
PURCHASING POWER PARITY Principle that exchange rates are set so that the prices of similar products in different countries are about the same.
REAL GDP GDP calculated to account for changes in currency values and price changes.
GDP PER CAPITA Gross domestic product per person.
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to buy available products, prices go up. Before long, high prices will erase the increase in the amount of money injected into the economy. Purchas- ing power therefore declines. The stated goal of the Bank of Canada is to help maintain steady prices in the economy and see modest increases on a year-to-year basis of between 1 to 3 percent, with a midpoint target of 2 percent per year.18
Inflation varies widely across countries. One dramatic example occurred in Zimbabwe about a decade ago, when inflation reached an astonishing annual rate above 40 million percent (most countries have rates between 2 and 15 percent). Within a three-year span, one Zimba- bwean dollar would have been worth 1 trillion Zimbabwean dollars. Many workers simply stopped going to their jobs because their pay was not enough to cover their bus fare.19 The problem was finally solved when the government began allowing people to pay their bills using other curren- cies, such as the U.S. dollar and the South African rand.20 Inflation was 4 percent at the beginning of 2018 in South Africa (the rand is a more stable measure of value in the region).21
Measuring Inflation: The CPI The Consumer Price Index (CPI) measures changes in the cost of a “basket” of goods and services that a typical family buys. What is included in the basket has changed over the years. For example, the first CPI in 1913 included items such as coal and spirit vinegar, whereas today it includes bottom-freezer fridges, flat-screen TVs, energy-saving light bulbs, and laser eye surgery.22 These changes in the CPI reflect changes that have occurred in the pattern of consumer purchases. Figure 2.3 shows how inflation has varied over the past 30 years in Canada.
National Debt A country’s national debt is the amount of money the government owes its creditors. Like a business, the government takes in revenues (e.g., taxes) and has expenses (e.g., military spending, social programs). For many years, the government of Canada incurred annual budget deficits; that is, it spent more money each year than it took in. These accumulated annual deficits created a huge national debt (estimated to be above $651.5 billion at the beginning of 2018). This figure amounts to approximately $17 500 per citizen. When you include the debt of the federal crown corporations, Canadian debt surpassed the 1-trillion-dollar debt marker for the first time in its history in the 2018–2019 fiscal year.17
How does the national debt affect economic growth? When the gov- ernment of Canada sells bonds to individuals and organizations (both at home and overseas), this affects economic growth because the Canadian government competes with every other potential borrower—individuals, households, businesses, and other organizations—for the available supply of loanable money. The more money the government borrows, the less money is available for the private borrowing and investment that increase productivity.
Take a look at the following “There’s an App for That!” feature, which outlines three economics apps.
Economic Stability A key goal of an economic system is stability, a condition in which the amount of money available in an economic system and the quantity of goods and services produced in it are growing at about the same rate. Several factors threaten stability—namely, inflation, deflation, and unemployment.
Inflation Inflation is evident when the amount of money injected into an economic system outstrips the increase in actual output. When inflation occurs, people have more money to spend, but there will still be the same quantity of products available for them to buy. As they compete with one another
THERE’S AN APP FOR THAT! APP DETAILS PLATFORMS
1. Inflation Calculator App Source: Cal Stephens Key Features: Provides up-to-date data for 18 international currencies.
Apple
2. The Economist World in Figures App Source: The Economist Key Features: Provides facts and figures for 190 sovereign states (GDP, inflation, population, etc.).
Apple, Android, Windows
3. State Debt–Public Debt Clock App Source: Appisode Key Features: Provides figures on the public debt of 50 countries (including debt per person and debt as percentage of GDP).
Android
APP DISCOVERY EXERCISE Because app availability changes, conduct your own search for the “Top Three” economics apps and identify the key features.
NATIONAL DEBT The total amount of money that a country owes its creditors. BUDGET DEFICITS The result of the government spending more in one year than it takes in during that year.
CONSUMER PRICE INDEX (CPI) Measure of the prices of typical products purchased by consumers living in urban areas.
INFLATION Occurrence of widespread price increases throughout an economic system.
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< The balance of trade looks at all products, including popular imports such as the Sony PlayStation. Of course, Sony is a very popular Japanese game console manufacturer that makes prod- ucts in Japan and China.
Epa european press photo agency b.v./Alamy Stock Photo
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< figure 2.3 Price increases in Canada23
During the past 20 years, the rate of price increases in Canada has been low and quite stable.
Source: Bank of Canada website, CPI Statistics, https://www.bankofcanada.ca/rates/price-indexes/cpi/?page_moved=1, [April 1, 2018].
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< figure 2.4 Historical unemployment rate30
Source: Statistics Canada, Labour Force Report.
UNEMPLOYMENT The level of jobless- ness among people actively seeking work in an economic system.
DEFLATION A period of generally falling prices.
years, Maple Leaf Foods has increased prices based on rising costs for inputs such as corn and wheat, which have risen 95 per- cent and 102 percent, respectively, in one 12-month period alone.24 What does this mean for consumers? According to Canada’s Food Price report (drafted by researchers from Dalhousie University and the University of Guelph), average household food costs were set to increase by $348 for a family of four in 2018.25
Understanding the true source of inflation is not a simple task; it cannot be simplified and linked to just one issue. For example, lower oil prices logically lead to lower trans- port costs and therefore lower prices for food. However, lower oil prices tend to drive the Canadian dollar down (since Canada is an oil- producing country), and because Canadians rely on many food products from the United States (including meat, fruits, and vegetables), it becomes more expensive to buy those goods with a weaker exchange rate.26 The government continuously monitors all known variables to try to make good decisions based on the reality in your local cities and shops.27
Deflation Deflation (falling prices) is evident when the amount of money injected into an economic system lags behind increases in actual output. Prices may fall because industrial productivity is increasing and cost savings are being passed
on to consumers (this is good) or because con- sumers have high levels of debt and are there- fore unwilling to buy very much (this is bad).
Unemployment At the beginning of 2018, 8.5 million men and 7.6 million women (over age 25) were working in Canada’s labour force.28 Many additional peo- ple wanted a job but could not get one. Unem- ployment is the level of joblessness among people actively seeking work. There are various types of unemployment: frictional unemploy- ment (people are out of work temporarily while looking for a new job), seasonal unemploy- ment (people are out of work because of the seasonal nature of their jobs), cyclical unem- ployment (people are out of work because of a downturn in the business cycle), and struc- tural unemployment (people are unemployed because they lack the skills needed to perform available jobs). Unemployment rates have var- ied greatly over the years, as Figure 2.4 shows,
As mentioned earlier, even though official inflation rates, as measured by the CPI, have remained low, price (caused by issues such as increased fuel prices or minimum wage increases) has put pressure on companies in all sectors. Food manufacturers are particularly vulnerable. In recent
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(see Chapter 14), the government can influence the ability and willingness of banks throughout the country to lend money. The power of the Bank of Canada to make changes in the supply of money is the centrepiece of the Canadian government’s monetary policy. The principle is fairly simple:
• Higher interest rates make money more expensive to borrow and thereby reduce spending by companies that produce goods and ser- vices and consumers who buy them. When the Bank of Canada restricts the money supply, we say it is practising a “tight” monetary policy.
• Lower interest rates make money less expensive to borrow and thereby increase spending by both the companies that produce goods and services and the consumers who buy them. When the Bank of Canada loosens the money supply, we say it is practising an “easy” monetary policy. During a financial crisis, central banks tend to cut their interest rates to stimulate their countries’ economies.
with the rates for men generally being higher than the rates for women. At the beginning of 2018, the Canadian unemployment rate stood at 5.8 percent, which was the lowest rate in four decades!29
When unemployment is low, there is a shortage of labour available for busi- nesses. As businesses compete with one another for the available labour sup- ply, they raise the wages they are willing to pay. Then, because higher labour costs eat into profit margins, businesses raise the prices of their products. If prices get too high, consumers will respond by buying less. Businesses will then reduce their workforces because they don’t need to produce as much. But this causes unemployment to go up, and the cycle starts all over again.
Managing the Canadian Economy The federal government manages the Canadian economic system through two sets of policies: fiscal and monetary. Fiscal policies involve the collec- tion and spending of government revenues. For example, when the growth rate of the economy is decreasing, tax cuts will normally stimulate renewed economic growth. Monetary policies focus on controlling the size of the nation’s money supply. Working primarily through the Bank of Canada
FISCAL POLICIES Policies whereby governments collect and spend revenues. MONETARY POLICIES Policies whereby the government controls the size of the nation’s money supply.
LO-3 THE TECHNOLOGICAL ENVIRONMENT As applied to the environment of business, technology generally includes all the ways firms create value for their constituents. Technology includes human knowledge, work methods, physical equipment, electronics and telecommunications, and various processing systems that are used to perform business activities.
Research and Development (R&D) Technological improvements and innovation in general are important con- tributors to the economic development of a country. The innovation pro- cess includes research and development (R&D), which provides new ideas for products, services, and processes (see Chapter 12). There are two types of R&D. Basic (or pure) R&D involves improving knowledge in an area without a primary focus on whether any discoveries that might occur are immediately marketable. For example, chemists in a laboratory might examine how certain chemical compounds behave. The knowledge gained from this activity might or might not result in a marketable product. Applied R&D, on the other hand, means focusing specifically on how a technological innovation can be used in the making of a product or service that can be sold in the marketplace.
Do not simply link the importance of R&D to the new tech gadgets that consume all of us. Consider the canola industry, which is worth $8.6 billion and is still growing.31 It was invented by Canadian scientists back in 1974 after they managed to remove undesirable elements from the rapeseed plant. Today canola oil is popular in cooking and deep frying because it is rich in fatty acids that lower bad cholesterol, and it does not have artery-clogging trans fats.32 This crop occupies a large percentage of Canadian farmers’ fields—25 percent of the total acres in Canada—and is surpassed only by wheat at 27 percent of farmers’ land.33
The Canadian private sector accounted for about 54 percent of R&D, and universities supplied another 37 percent.34 For a look at the important role and the long road from R&D to commercialization, read the boxed insert “Environmentally Friendly Automobiles.”
Product and Service Technologies Although many people associate technology with manufacturing, it is also a significant factor in the service sector. Just as an automobile follows a predetermined pathway along an assembly line, a hamburger at McDon- ald’s is cooked, assembled, and wrapped as it moves along a predefined path. All aspects have been enhanced by technological developments with the latest being the ability to purchase a Big Mac trio via mobile order and payment systems.35 The rapid advancement of the internet and
RESEARCH AND DEVELOPMENT (R&D) Those activities that are necessary to provide new products, services, and process.
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< Thanks to R&D conducted by Canadian Scientists, canola oil is now a staple product with $8.6 billion worth of demand. In recent decades, many farmers have converted their fields to take advantage of this demand.
Smileus/Shutterstock
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social media into all types of business functions, from human resources to marketing, to financial transactions, is also a reflection of the technological environment.
Companies must constantly be on the lookout for technological breakthroughs that might make their current products or services obso- lete and thereby threaten their survival. Many breakthroughs do not come from direct competitors or even from the company’s own industry. Technology is the basis of competition for some companies, especially when their goal is to be the technology leader in their industry. Apple revolutionized the home computer business and transformed the smart- phone and music industries. More recently, the company has invested its resources in developing the Apple Watch. In 2018, Apple expected to increase annual sales from 16 million to anywhere between 22 and 24 million. To put this in perspective, traditional Swiss watchmakers were projected to sell 24 million watches as well.36 Do you think those Swiss watchmakers saw Apple as a threat a decade ago? Times change.
Because of the rapid pace of new developments, keeping a leadership position based on technology is increasingly difficult. Technology transfer refers to the process of getting a new technology out of the lab and into the marketplace where it can generate profits for the company. Efficient technology transfer means an increased likelihood of business success,
Environmentally Friendly Automobiles At the 2017 Montreal Auto show, an impres- sive array of new electric vehicles (EVs) were on display. Included were Volkswagen’s e-Golf, Honda’s Clarity, Hyundai’s Ioniq, and Nissan’s Leaf. Suddenly there are lots of EVs to choose from; almost 50 new versions will come on the market by 2022. Toyota also introduced its Mirai fuel cell electric vehicle in 2018 in Quebec. In 2017, Volvo announced that all the new models it introduces in 2019 and later will be either hybrids or EVs. Countries such as France, Britain, Norway, China, and India have all announced plans to reduce or ban the sale of gas- and diesel-pow- ered vehicles over the next couple of decades.
China has the largest number of registered EVs (336 000), but that is only 1.3 percent of the country’s total car market. Worldwide in 2016, only 0.1 percent of the cars on the road were electric. But the number will likely rise to 10 percent of new cars sold by 2025, and by that year, EVs might constitute 4.5 percent of total vehicles on the road. At the time, electric car sales in Canada were 0.56 percent of total car sales. The Bourgeois Chevrolet Buick GMC car dealership in Rawdon, Quebec, is the top seller of EVs in Canada.
To date, the sale of EVs has been influ- enced by several factors: limited range, high
purchase price, long charging times, and too few charging stations. But progress is being made in dealing with those shortcomings. For example, Toyota is intro- ducing a hydrogen fuel cell vehicle that will get 1000 km per fill-up. That is double what the best EVs get now, and the fuel cell car can be refueled in just three min- utes. Improved efficiencies in batteries have reduced battery prices, and this may make EVs cheaper than gas-powered cars by 2025. Work on further improvements in battery tech- nology is ongoing at Dalhousie University and at Hydro Quebec’s Montreal research lab.
Ontario has invested $200 million to build more charging stations and that increased availability should make consumers more will- ing to purchase an EV. Quebec and Ontario also pay subsidies to consumers who buy EVs. Ontario gives $13 000 to consumers who purchase a BMW i3 (the list price of the car is $48 000). Quebec also mandates mini- mum levels for sales of EVs. Starting in 2018, 3.5 percent of all auto sales in Quebec must be electric, hybrid, or hydrogen fuel cell vehi- cles. By 2025, the minimum increases to 15.5 percent. It is hoped that these incentives will
result in a big increase in the number of EVs that are on the road. However, critics say that subsidizing electric cars is both expensive and ineffective. The Montreal Economic Institute says that the subsidies offered by Ontario and Quebec could cost those provinces a total of about $17 billion by 2030, but they will cut emissions by only 4 percent.
CRITICAL THINKING QUESTION 1. Consider the following statement: “Giving
money to consumers so they will be moti- vated to purchase an electric car is a bad idea. In a democratic, free-market society, it is much better to let consumers consider the various costs and benefits of each type of car and make their own decisions about which type they will purchase.” Do you agree or disagree with the statement? Explain your reasoning.
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Pawan Kumar/Alamy Stock Photo
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competitive if they can decrease cycle times, many companies now focus on decreasing cycle times in areas such as developing products, making deliveries, and collecting credit payments.
as discussed above. A related challenge is meeting the constant demand to decrease cycle time—the time from beginning to end that it takes a firm to accomplish a recurring activity or function. Since businesses are more
The Physical Environment In this chapter, we focus on the impact of several “environments”—economic, tech- nological, socio-cultural, political–legal, and emerging business trends—that have an impact on how business is conducted in Can- ada. But there is another “environment”—the physical environment—that also influences businesses activity. Extreme temperatures, floods, earthquakes, tornadoes, hurricanes, and drought can influence companies in both negative and positive ways. Consider how unusually cold weather can negatively affect business activity:
• Freight companies may have difficulty moving products from manufacturers to consumers because rivers are frozen or because highways are snow-covered.
• Airlines and railroads may have trouble keeping to their schedules because cold weather complicates operations.
• Retail outlets may experience decreased store traffic because fewer consumers are willing to venture out during freezing weather.
• Consumers pay more for natural gas and other heating fuels because prices rise as demand for those products rises.
• Cattle farmers lose money because cattle must expend more energy keeping warm in cold weather, and they therefore lose weight (and value).
• Consumers pay more for insurance because more claims are filed for things like ice damage.
But cold (and snowy) weather can be beneficial to companies like ski resorts, airlines that fly to tropical destinations, and retailers that sell products like heavy-duty car batteries, snow shovels, snow blowers, snowmobiles, and other winter products because winter weather increases the demand for these products and services. By contrast, warm (and sunny) weather benefits companies that
sell products like sunglasses, air condition- ers, fans, sporting events, soft drinks, and barbecues.
Business firms cannot do much to change the physical environment. Their best strategy is to adapt to the conditions the physical environment imposes. For example, retailers can adapt by having a good supply chain that allows them to quickly stock products (e.g., snow shovels, air conditioners, electric gen- erators, etc.) that consumers need in varying weather conditions. Service providers such as commercial airlines can adapt by having contin- gency plans to move airplanes away from areas that are predicted to have a heavy snowfall.
CRITICAL THINKING QUESTION 1. How important is the physical environment
compared to the other “environments of business” that are discussed in this chapter? Explain your reasoning.
LO-4 THE POLITICAL–LEGAL ENVIRONMENT The political–legal environment reflects the relationship between business and government, including government regulation of business. The legal system defines what an organization can and can’t do. Although Canada is a free-market economy, there is still significant regulation of business activ- ity, as we saw in Chapter 1. At times, government policy can be tremen- dously advantageous to businesses. For example, the Yukon government has not raised taxes (royalties) on the extraction of gold since 1906. So the 2.5 percent export royalty is still based on a price of $15 per ounce of gold, which translates into a royalty of only 37.5 cents an ounce at a time when gold is selling at approximately US$1355 per ounce. In another case aimed to encourage an industry, there are over 100 000 electric vehicles (EVs) in Norway out of a population of 5 million. According to the government, there may not be any gas-fueled cars sold in the country by 2025. Why the boom? The government does not tax new electric vehicle purchases (other cars are taxed 25 percent). EVs also get a break on annual fees: they don’t have to pay tolls, and they can use bus lanes to avoid traffic.37 These are extreme examples of government-sponsored business-friendly practices.38
On the other hand, Shoppers Drug Mart has been very vocal about its opposition to Ontario government regulations that cut the price of generic drug payments to as low as 20 percent of the original brand name prod- uct’s cost, down from 50 percent. This regulation is saving the province $55 million in costs but has hurt profits for pharmacies.39 Recently, a similar fight took place between the Quebec government and Jean Coutu,
POLITICAL–LEGAL ENVIRONMENT Conditions reflecting the rela- tionship between business and government, usually in the form of government regulation.
and that public fight was a major reason behind a 30 percent decrease in the share price for the company.40
Society’s general view of business (pro or anti) is also important. During periods of antibusiness sentiment, companies may find their competitive activities restricted. Even in positive times, the threat of government con- trol is always there. Google was recently hit with a fine of 2.42 billion euros by European regulators! Why? The reason given was that Google was using its dominant search engine to favour its own shopping service.41
Political stability is also an important consideration, especially for multi- national firms. No business wants to set up shop in another country unless trade relationships with that country are relatively stable. Thus Canadian firms are more likely to do business in England than in Iraq. Relations between sovereign governments can also affect business activity. On a smaller scale, similar issues occur at local and provincial levels. A new mayor or provincial leader can have an impact on organizations, especially small firms that do business in a single location and are subject to zoning restrictions, property and school taxes, and the like.
Read the following boxed insert, “The Physical Environment,” to consider yet another important challenge for businesses that is beyond their control.
IN BUSINESSDISRUPTIONS
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LO-5 THE SOCIO-CULTURAL ENVIRONMENT
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< Are you ready for a cricket-based protein powder? Entomo Farms is just one company of many across the nation leading this charge.
Bloomberg/Getty
The socio-cultural environment includes the customs, values, attitudes, and demographic characteristics of the society in which a company oper- ates. It influences the customer preferences for goods and services and what standards of business conduct are acceptable.
Customer Preferences and Tastes Customer preferences and tastes vary both across and within national boundaries. In some countries, consumers are willing and able to pay premium prices for designer clothes with labels such as Armani. But the same clothes have virtually no market in other countries. Product usage also varies between nations. In China, bicycles are primarily seen as a mode of transportation, but in Canada, they are marketed primarily for recreational purposes. Although differences in tastes across national borders are sometimes clear and obvious, it is impor- tant to avoid stereotypical assumptions. Would you be surprised to hear that Canadian lingerie retailers such as La Senza and La Vie en Rose have a significant presence in the Middle East? Behind the conservative, strict exterior dress code, there is a significant market for lingerie.42
Consumer preferences and tastes also change over time. That’s exactly what Loblaws is counting on since it recently added cricket flour to its shelves. Approximately 80 percent of the world’s population consume bugs on a regular basis. Canadians are part of the minority. Many people also claim to be more environmentally friendly than previous generations. So, because people are concerned about food supply and because 2.5 tablespoons of cricket flour contain 13 grams of protein, perhaps the time has come. Maybe you start with cricket flour, or maybe you have already taken the leap and enjoyed a cricket-based protein bar? Times are changing.43
Ethical Compliance and Responsible Business Behaviour An especially critical element of the socio-cultural environment is the practice of ethical conduct and social responsibility. Keeping up with today’s increasingly fast-paced business activities is putting a strain on the accounting profession’s traditional methods for auditing, financial reporting, and time-honoured standards for professional ethics. The stakeholders of business firms—employees, stockholders, consumers, labour unions, creditors, and the government—are entitled to a fair accounting so they can make enlightened personal and business deci- sions, but they often get a blurred picture of a firm’s competitive health.
Mountain Equipment Cooperative (MEC) has always stood out from the crowd of retailers. From its initial founding in British Columbia, the company’s mission has placed sustainability at its core. Many of the retail locations are among the most environmentally friendly commer- cial buildings in Canada, with a focus on reducing heating and cooling and the effective use of roof space. Solar panels are just the begin- ning; some locations collect rainwater to use for their sprinkler systems and for other non-drinkable uses for the stores. MEC is a coopera- tive, so the members are technically the owners. Those members led the charge recently and took an ethical stand against Vista Outdoor Inc. when they realized that the supplier that sold water bottles and stand-up paddleboards to MEC also made assault weapons like the ones used at yet another shooting in the United States, in Parkland, Florida. The movement that began from this tragedy led to an online petition and quick action from the executive team to cut all ties with this supplier.44
The Business Environment Business today is faster-paced, more complex, and more demanding than ever before. As businesses aggressively try to differentiate themselves, there has been a trend toward higher-quality products, planned obso- lescence, and product life cycles measured in weeks or months rather than years. This, in turn, has created customer expectations of instant gratification. Consumers and business customers want high-quality goods and services—often customized—for lower prices and with immediate delivery. Sales offices, service providers, and production facilities are shift- ing geographically as new markets and resources emerge in other coun- tries. Employees want flexible working hours and opportunities to work at home. Shareholders’ expectations also add pressure for productivity increase, growth in market share, and larger profits. At the same time, however, a more vocal public demands more honesty, fair competition, and respect for the environment.
SOCIO-CULTURAL ENVIRONMENT Conditions including the customs, values, attitudes, and demographic characteristics of the society in which an organization functions.
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Read the Entrepreneurship and New Ventures box entitled “Goldline Curling: Dealing with New Industry Threats” to see how one organiza- tion used technological advancements to gain attention while upsetting traditionalists.
Suppliers The amount of bargaining power suppliers have in relation to buyers helps determine how competitive an industry is. When only a few suppliers are in an industry, they tend to have great bargaining power. The power of suppliers is influenced by the number of substitute products available (i.e., products that perform the same or similar functions). When only a few substitute products are available, suppliers obviously have more power.
Buyers When there are only a few buyers and many suppliers, the buyers have a great deal of bargaining power. For example, retail powerhouse Walmart is often
described as a buyer that puts tremendous pres- sure on its suppliers to reduce their prices. It can do this because it buys so much from them. In another example, when Canadian Tire purchased Forzani (owner of Sport Chek and Hockey Experts stores) for $771 million a few years ago, it was not necessarily good news for suppliers. When two of your biggest customers merge, the power relationship is somewhat altered. Bauer CEO Scott Davis indicated that this merger may lead to price pressure on his company.49
Substitutes If many substitute products are available, the industry is more competitive. For example, vari- ous synthetic fibres can be used as substitutes for cotton. The internet has changed the way people pay bills. Because of online banking, people use postal services much less than they did in the past and thus spend less on stamps. This is bad news for Canada Post, as the threat from substitutes is expected to reduce mail vol- ume by another 50 percent in the next decade.50
The Industry Environment Every business firm operates in a specific industry, and every industry has different characteristics. The intensity of the competition in an industry has a big influence on how a company operates. To be effective, manag- ers must understand the competitive situation and then develop a strategy to exploit opportunities in the industry.
One of the most popular tools to analyze competitive situations in an industry is Michael Porter’s five forces model.45 The model (see Figure 2.5) helps managers analyze five important sources of competitive pressure and then decide what their competitive strategy should be. We briefly discuss each of the elements of the model in the following paragraphs.
Rivalry Among Existing Competitors The amount of rivalry among companies varies across industries. Rivalry can be seen in activities such as intense price competition, elaborate advertising campaigns, and an increased emphasis on customer service. For many years, Tim Hortons has dominated the Canadian coffee industry with its extensive coverage of the market and strong brand equity. More recently, however, we have seen stronger competitive efforts from the likes of Starbucks and McDonald’s. McDonald’s has made some aggressive moves (e.g., free coffee for a week and adding fireplaces to McCafé locations) to gain market share.46
Threat of Potential Entrants When new competitors enter an industry, they may cause big changes. If it is easy for new competitors to enter a market, competition will likely be intense, and the industry will not be very attractive. Some industries (e.g., automobile manufacturing) are very capital-intensive and are there- fore difficult to enter, but others (e.g., home cleaning and lawn-care services) are relatively easy to enter. Holt Renfrew has new competition with the entry of Nordstrom, Inc. north of the border. This American retailer is taking it slow with five locations across the nation: one in Calgary, one in Ottawa, one in Vancouver, and two in Toronto.47 The company also opened its first Nordstrom Rack location (its off-price retail brand) in 2018, with plans to open 15 locations across the country.48
Threat of New Entrants
Threat of Substitutes
Bargaining Power of Suppliers
Industry Rivalry
Bargaining Power of
Consumers
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< figure 2.5 Michael Porter’s five forces model
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< Nordstrom is taking it slow, but it is committed to building its presence in Canada. RosaIreneBetancourt 7/Alamy Stock Photo
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Goldline Curling: Dealing with New Industry Threats When it comes to the sport of curling, Doug Flowers and his family can only be described as authentic entrepreneurs who represent the values of the sport and the spirit of the game. The company was founded by his father, Ed Flowers, back in 1967. Doug joined the business in the early eighties, and now his daughter Erin is the third genera- tion to be involved in the business. Accord- ing to Doug, his daughter began working for Goldline when she was only 7 years old by assembling brushes; today she has the true passion needed to ensure that Goldline continues to hold its place in the competi- tive curling landscape for years to come. In fact, Goldline is one of the most recogniz- able names in the sport and was awarded the right to be the official uniform supplier by Curling Canada for all teams at the Tim Hortons Brier, for the Scotties Tournament of Hearts, and for Team Canada at the 2018 Winter Olympics and Paralympics in Pyeong Chang, South Korea. These gar- ments were proudly made in Canada, and the company created the Goldline Authentic Wear Program to provide royalties to Curling Canada and to the provincial and territorial associations.
The Game and the Market According to the World Curling Federation (WCF), which sets the official rules and regula- tions for the game, curling is a game of skill and tradition; true curlers play to win, but they play fair. They never distract opponents, and no referees are needed because honour and fair play are core values of the sport. Forget the
AND NEW VENTURESENTREPRENEURSHIP bravado of more mainstream sports like foot- ball, basketball, and hockey, where there is a completely separate set of player expectations.
The curling industry is worth approximately $18 million at retail. Canada represents the industry’s largest market with approximately 80 percent of sales. To put this in perspec- tive, there are more than 1300 curling clubs in Canada. The United States ranks second with approximately 130 clubs. The average curler spends approximately $1000 per year to curl, with about 30 percent of that money spent on equipment. It was predicted that, from 2017 to 2021, the curling equipment market would see considerable growth with an expected compound annual growth rate (CAGR) of 2.01 percent.
New Competitors, New Rules Goldline had revenues of approximately $5 million and their products are sold through five brick and mortar stores in Alberta and Ontario and are also sold national and inter- national dealers and direct to chains such as Sport Check and Canadian Tire. Its next strongest competitor had sales of approxi- mately $2 million. The key players included Ashram Curling Supplies and Equipment, Balance Plus, Hardline, Olson, Performance, and Ultima.
A few years ago, the curling brush market was disrupted by a revolutionary product by Hardline (a more recent entry into the market). Innovation is part of all businesses, so why should curling be any different? The problem was that the new Hardline brush was made of a more abrasive material that marked rather than smoothed the ice and made even begin- ners experts capable of making impossible shots. In other words, the art of shot-making was gone! The respectful, cordial spirit of the
game was tested as curlers began to feel cheated and accused each other of using an unfair advantage. The federation eventu- ally stepped in and banned the new brush head after two Canadian scientists from the National Research Council of Canada tested it and confirmed the extreme effects of the material. With this information, the federation, with the support of top players, banned the new material and announced that all sanc- tioned events would require curlers to use Nylon Oxford 420D fabric to compete. The ban did not change what recreational curlers chose to do on a Sunday afternoon. How- ever, when Doug Flowers launched his new line called the “Air” brush, little thought was given to copying Hardline. Doug Flowers was a traditionalist. Will that decision cost him? Time will tell, but Doug believes in the purity of the game.
CRITICAL THINKING QUESTION 1. Debate the following. Should Doug con-
tinue to uphold the spirit of the game, or should he create a sub-line for those recre- ational curlers who want that extra edge? Who is it hurting after all? Choose a side and debate with your classmates.
LO-6 EMERGING CHALLENGES AND OPPORTUNITIES IN THE BUSINESS ENVIRONMENT
The most successful firms are dealing with challenges and oppor- tunities in today’s business environment by focusing on their core competencies—the skills and resources with which they compete best and create the most value for owners. They outsource non-core business processes and pay suppliers and distributors to perform them, thereby increasing their reliance on suppliers. These new busi- ness models call for unprecedented coordination—not only among
internal activities but also among customers, suppliers, and strategic partners—and they often involve globally dispersed processes and supply chains.
In this section, we discuss some of the most popular steps that com- panies have taken to respond to challenges and opportunities in the busi- ness environment. These include outsourcing, the growing role of social media, and business process management.
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processes, payroll departments perform employee-payment processes, purchasing departments perform processes related to ordering materi- als, accounting departments perform financial reporting processes, and marketing departments perform processes involved in taking orders from customers.
Business process management means moving away from orga- nizing around departments and moving toward organizing around process-oriented team structures that cut across old departmental boundaries. Companies often begin by asking, “What must we do well to stay in business and win new orders?” Next, they identify the major processes that must be performed well to achieve these goals. Then they organize resources and skills around those essential processes. By organizing according to processes rather than functional depart- ments, decision-making is faster and more customer-oriented, materi- als and operations are coordinated, and products get to customers more rapidly.53
Outsourcing Outsourcing is the strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials or services. For example, the cafeteria in a museum may be important to employees and customers, but the museum’s primary focus is on exhibits that will interest the public, not on food-service operations. That’s why museums usually outsource cafeteria operations to food-service management companies. The result is more attention to museum exhibits and better food service for customers. Firms today outsource numerous activities, including payroll, employee training, and research and development.
The Growing Role of Social Media Social media sites and applications such as Facebook and Snapchat are now an important part of everyday life for consumers (especially the youth market). Companies are addressing this new reality by providing content and creating various links to connect with consumers. Most organizations are being careful about their online presence because they don’t want it to be an imposition, but rather a natural extension of their real-world relationship with clients. As we discuss throughout this book in the E-Business and Social Media Solu- tions boxes, some companies are making strong inroads as this new model evolves and companies learn to deal with an empowered consumer base.
Viral marketing predates the social media craze and first gained promi- nence through basic email transfer; it describes word-of-mouth marketing that spreads information like a virus from customer to customer and relies on the internet to replace face-to-face communications. Messages about new cars, sports events, and numerous other goods and services are transferred from consumer to consumer. Using various formats—games, contests, and instant messaging—marketers encourage potential custom- ers to try out products and tell other people about them.51 Viral marketing works because people increasingly rely on social media for information they used to get from traditional media and because the customer becomes a participant in the process of spreading the word by forwarding information to friends and followers. For example, think of all the crowdsourcing con- tests companies offer in which they ask their customers to develop a new flavour, a new design, or a new slogan in return for prizes, with the ultimate purpose of gaining information and increasing customer engagement.
Business Process Management A process is any activity that adds value to an input, transforming it into an output for a customer (whether external or internal).52 For example, human resources departments perform interviewing and hiring
OUTSOURCING Strategy of paying suppliers and distributors to perform certain business processes or to provide needed materials or services. BUSINESS PROCESS MANAGEMENT Approach by which firms move away from department-oriented organization and toward process-oriented team structures that cut across old departmental boundaries.
LO-7 REDRAWING CORPORATE BOUNDARIES Successful companies are responding to challenges in the external envi- ronment by redrawing traditional organizational boundaries and by joining together with other companies to develop new goods and services. Sev- eral trends have become evident in recent years: acquisitions and merg- ers, divestitures and spinoffs, employee-owned corporations, strategic alliances, and subsidiary/parent corporations.
Mergers and Acquisitions In an acquisition, one firm simply buys another firm. For example, the Hudson’s Bay Company (HBC) purchased Saks Inc. (Saks Fifth Avenue) for US$2.4 billion.54 The transaction is like buying a car that becomes your property. In contrast, a merger is a consolidation of two firms, and the
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< Instagram is a community of more than 800 million people who capture and share the world’s moments on the service.
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arrangement is more collaborative. In 2017, mergers and acquisitions in Canada reached a total value of $243.5 billion.55
When companies in the same industry merge, it is called a horizontal merger. When one of the companies in the merger is a supplier or cus- tomer to the other, it is called a vertical merger. For example, the French company Essilor, the world’s biggest lens maker, merged with the Ital- ian company Luxottica, the largest eyewear frame maker in the world. The merger, valued at $70 billion, created Essilor Luxottica, which touted having well-known brands such as Oakley and Ray-Ban in its portfolio and had enormous industry power at all levels. On the other hand, when merged companies are in unrelated businesses, it is called a conglomer- ate merger.
A merger or acquisition can take place in one of several ways. In a friendly takeover, the acquired company welcomes the acquisition, per- haps because it needs cash or sees other benefits in joining the acquiring firm. For example, BCE Inc. bought Manitoba Telecom Services Inc. (MTS) for $3.1 billion in 2017. In the joint announcement, BCE talked about how it was going to invest heavily in building network improvements in the province and how it was going to offer its Fibe-branded services in Mani- toba.56 In a hostile takeover, the acquiring company buys enough of the other company’s stock to take control, even though the other company is opposed to the takeover.
Companies that want to fight a takeover attempt have options. A poison pill is a defence tactic that management adopts to make a firm less attractive to an actual or potential hostile suitor in a takeover attempt. The objective is to make the “pill” so distasteful that a potential acquirer will not want to swallow it. A few years ago, Air Canada announced plans to institute a poison pill provision that would give all Class A and Class B shareholders the right to purchase stocks at a discounted price the moment any group or person announced the intention to buy more than 20 percent of the outstanding shares.57
Divestitures and Spinoffs A divestiture occurs when a company decides to sell part of its existing business operations to another corporation. When Pfizer Inc. decided to divest its infant-nutrition and animal-health units, competitors jumped at the chance. Nestlé and Groupe Danone both showed interest in the strong infant-nutrition assets, and Nestlé eventually won the auction with a bid of US$11.85 billion.58 Recently, Mosaic purchased Vale SA’s fertilizer business for US$2.5 billion in cash and stock.59
In other cases, a company might set up one or more corporate units as a new, independent company because a business unit might be more valuable as a separate company. This is known as a spinoff. For example, PepsiCo spun off Pizza Hut, KFC, and Taco Bell into a new, separate corporation known as Yum! Brands, Inc.
Employee-Owned Corporations Corporations are sometimes owned by their employees. The current pat- tern is for this ownership to take the form of employee stock owner- ship plans, or ESOPs. A corporation might decide to set up an ESOP to increase employee motivation or to fight a hostile takeover attempt. The company first secures a loan that it then uses to buy shares of its stock on the open market. Some of the future profits made by the corporation are used to pay off the loan. The stock, meanwhile, is controlled by a bank or other trustee. Employees gradually gain ownership of the stock, usually
SPINOFF Strategy of setting up one or more corporate units as new, independent corporations.
DIVESTITURE Occurs when a company sells part of its existing business operations to another company.
POISON PILL A defence that management adopts to make a firm less attractive to an actual or potential hostile suitor in a takeover attempt.
STRATEGIC ALLIANCE An enterprise in which two or more per- sons or companies temporarily join forces to undertake a project.
MERGER The union of two companies to form a single new business.
ACQUISITION The purchase of a company by another, larger firm that absorbs the smaller company into its operations.
based on seniority. Even though they might not have physical possession of the stock for a while, they control its voting rights immediately.
Strategic Alliances A strategic alliance, or joint venture, involves two or more enterprises cooperating in the research, development, manufacture, or marketing of a product. For example, Magna International, the Canadian auto parts giant, invested $200 million to partner with Lyft, the ridesharing service, to jointly develop, finance, and manufacture self-driving systems. This deal brought together a traditional industry giant, with extensive manu- facturing knowledge, and a new-age firm that is on the leading edge of disruptive new models.60 Companies form strategic alliances for two main reasons: (1) to help spread the risk of a project and (2) to get something of value (such as technological or industry expertise) from their strategic partner.
Subsidiary and Parent Corporations A subsidiary corporation is one that is owned by another corporation. The corporation that owns the subsidiary is called the parent corporation. For example, the Hudson’s Bay Company (HBC) is the parent corporation of Home Outfitters.
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< Magna International and Lyft formed an alliance to jointly develop, finance, and manufacture self-driving systems.
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SUMMARY OF
LEARNING OBJECTIVES
LO-1 EXPLAIN THE CONCEPTS OF ORGANIZATIONAL BOUNDARIES AND MULTIPLE ORGANIZATIONAL ENVIRONMENTS.
All businesses operate within a larger external environment consisting of everything outside an organization’s boundaries that might affect it. An organizational boundary is that which separates the organization from its environment. Organizations have multiple environments: economic conditions, technology, political–legal consider- ations, social issues, the global environment, issues of ethical and social responsibil- ity, the business environment itself, and numerous other emerging challenges and opportunities.
LO-2 EXPLAIN THE IMPORTANCE OF THE ECONOMIC ENVIRONMENT TO BUSINESS AND IDENTIFY THE FACTORS USED TO EVALUATE THE PERFORMANCE OF AN ECONOMIC SYSTEM.
The economic environment is the economic system in which business firms operate. The key goals of the Canadian system are economic growth, economic stability, and full employment. Gross domestic product (GDP) is the total value of all goods and ser- vices produced within a given period by a national economy domestically. The govern- ment manages the economy through fiscal and monetary policies.
LO-3 DESCRIBE THE TECHNOLOGICAL ENVIRONMENT AND ITS ROLE IN BUSINESS.
Technology refers to all the ways firms create value for their constituents, including human knowledge, work methods, physical equipment, electronics and telecommu- nications, and various processing systems. The innovation process includes research and development (R&D), which provides new ideas for products, services, and pro- cesses. There are two general categories of business-related technologies: product and service technologies and business process technologies.
LO-4 DESCRIBE THE POLITICAL–LEGAL ENVIRONMENT AND ITS ROLE IN BUSINESS.
The political–legal environment reflects the relationship between business and government. The legal system defines what an organization can and can’t do. Various government agencies regulate important areas, such as advertising prac- tices, safety and health considerations, and acceptable standards of business con- duct. Pro-business or antibusiness sentiment in government can further influence business activity.
LO-5 DESCRIBE THE SOCIO-CULTURAL ENVIRONMENT AND ITS ROLE IN BUSINESS.
The socio-cultural environment includes the customs, values, and demographic characteristics of society. Socio-cultural processes determine the goods and services as well as the standards of business conduct that a society values and accepts. The shape of the market, the political influence, and the attitudes of its workforce are only a few of the many ways in which culture can affect an organization.
LO-6 IDENTIFY EMERGING CHALLENGES AND OPPORTUNITIES IN THE BUSINESS ENVIRONMENT.
Successful companies focus on their core competencies. The innovative ways in which companies respond to emerging challenges and opportunities include outsourc- ing, the role of social media, and business process management.
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