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Week 8 Learning Activity

How to fully respond to posting requirements:

1. Post first post by Wednesday May 8th 12 midnight. 

2. Cite the textbook at least 3 times in the analysis with page numbersto demonstrate reading and comprehension of the textbook, course materials or outside references.

3. Cite references in the body and at the end in correct APA format.

Learning Activity

Directions:  Reflect on the material covered over the past weeks. Briefly describe eight business and management concepts (one from each week) that you found interesting or challenging. Be as specific as you can.  Consider information from the course materials or from completing the learning activities.  Whenever referencing concepts from course materials, be sure to provide in-text citations and references. Please please use at least 3 in text citation…………

Week 1

Write on Legal Environment

External Forces

What you’ll learn to do: Identify the external forces that shape the business environment

You are probably aware that businesses do not operate in a vacuum, immune to the forces that shape our everyday life. Just like people, businesses interact with their surroundings, and just like people, businesses react differently to their environment. Later in the course, you will explore these external forces in greater depth when you complete chapters covering topics such as the global business environment, business ethics, and marketing. For the time being, this section will introduce the external forces that have an impact on business operations and decisions, and serve as a foundation for things to come.

Learning Outcomes

· List the external forces that affect businesses

· Give examples of how various external forces affect the participants in a business and its functional areas

External Forces That Shape Business Activities

Businesses do not operate in a vacuum, and they are influenced by forces beyond their control. How they respond—and how quickly they respond—to these external forces can make the difference between success and failure, especially in today’s fast-paced business climate. We can organize the external forces that affect business into the following six categories:

1. Economic environment

2. Legal environment

3. Competitive environment

4. Technological environment

5. Social environment

6. Global environment

Businesses operate in all of these environments simultaneously, and factors in one environment can affect or complicate factors in another.

Economic Environment

The economic environment of business has changed dramatically in recent years. After decades of growth and dominance, the U.S. economy is now challenged by the developing economies of other nations, which are jockeying to be number one. Since the financial crisis in 2008, the U.S. economy and businesses have struggled to recover from the greatest economic crisis since the Great Depression. Long-established companies have closed their doors, costing workers their jobs, retirement savings, and even their homes. Thus far the U.S. economy has proven resilient, and since the Great Recession, progress has been made to stabilize the housing industry, maintain low and affordable interest rates, and provide additional incentives for businesses to open and/or expand. These economic events have all had a direct impact on businesses, regardless of size.

Legal Environment

The legal environment of business is by far the most complex and potentially dangerous external factor a business faces. There is a minefield of regulations, laws, and liabilities that companies must cope with to stay in business—just turn on the TV or listen to the news. Volkswagen teeters on the brink of ruin because it falsified data about its cars’ emissions. Tide is airing commercials not to promote the marvels of its laundry detergent but to warn parents to keep the Tide pods away from children, who may be tempted to eat them. These days it takes five minutes and a sharp instrument to open a bottle of Tylenol—the result of Johnson & Johnson’s move in 1982 to make the product more difficult to open after a tampering incident in 1982 caused a spate of deaths and illness. Legal developments in our culture at large—for instance, the legalization of marijuana and same-sex marriage or the strengthening of privacy laws—can and do have an enormous impact on the way companies do business, on everything from what companies sell to how their products are manufactured, labeled, and marketed.

Competitive Environment

How do businesses stay competitive and still maintain a level of profitability that allows them to be successful? The competitive environment has intensified with the development of new technologies, the opening up of foreign markets, and the rise of consumer expectations. The local hardware store now finds itself competing with “big box” stores such as Lowe’s and Home Depot. These larger stores have enough clout with suppliers that they can often sell a product to the consumer for less than an independent store can purchase it. Customers of these large chains can order online, get their items the same day, and receive loyalty rewards, free delivery, customization, and even service and installation. Staying competitive is a challenge for every business, and business owners are finding that benefits such as customer service, employee knowledge, and high quality can help them survive.

Technological Environment

Almost daily, businesses are driven to rethink the business technology they use to reach customers, produce their products, and provide their services. When we refer to business technology we mean digital tools such as computers, telecommunications, and the internet. The expansion of internet access to virtually every corner of the world has forced many traditional brick-and-mortar businesses into e-commerce or online sales. The advantage to businesses is that their customers no longer have to live near stores to purchase goods and services. Consumers can conveniently shop for products and services without leaving their home, their desk, or phone. The disadvantage to businesses is that consumers are also able to compare competitors’ prices, benefits, features, and services (which shows how one environment—technology, can affect another—the competitive environment). Today’s businesses have to be vigilant about spotting emerging trends not only in technology but also in the way consumers use it.

Animal Rights Protest

Social Environment 

The social environment of business encompasses the values, attitudes, beliefs, wants, and desires of the consuming public. The demographics that describe the American population by gender, age, ethnicity, location, occupation, education and income are constantly evolving. The American population is steadily becoming more ethnically diverse: The US Census Bureau estimates that the Hispanic and Asian populations in the United States will double by 2050. At the same time, America is aging, and with the current median age above 36, it will not be long before a majority of Americans are ready to retire. In addition to ethnic diversity and age, the social environment brings forces such as Corporate Social Responsibility (CSR), which means that more and more consumers are demanding that businesses be “good corporate citizens” by supporting charitable causes and contributing to local communities, adhering to ethical standards in their treatment of workers and others, and adopting environmentally responsible practices. Combine these factors with the whirlwind of changing fads, trends, and “hot topics,” and you have some idea of why the social environment can present the greatest challenge to business.

Global Environment

From a business perspective, it is a small world, and it’s only getting smaller. Free trade among nations has allowed goods and services to flow across international borders more efficiently and cheaply. Formal trade agreements among nations have forged unprecedented links and interdependencies among economies. Look at the items on your desk, and you may see items from China, Mexico, Canada, or Japan. It’s possible that you drive a car that was made in the United States but was produced in a plant owned by a Japanese company. The growth of the Chinese economy has brought a flood of affordable goods into the United States and, along with those cheaper prices, created a reliance on foreign goods and materials. Now, when the Chinese economy slows down, the US economy is affected. When the price of foreign oil increases or decreases, businesses in the United States feel the impact. So, it’s not just the local economy or even the national economy that businesses must track—they must also keep an eye on the world economy in order to anticipate and adapt to changes that will impact their products and services.

Introduction to External Forces from Introduction to Business by Linda Williams and Lumen Learning is available under a Creative Commons Attribution 4.0 International license. UMUC has modified this work and it is available under the original license.

Week 2

Write on Globalization

Globalization

What you’ll learn to do: Explain why nations and US firms engage in global business

In this section you’ll learn about the drivers of the global economy and how companies and countries evaluate whether or not to pursue global opportunities.

Global Business

Learning Outcomes

· Explain the concept of globalization and its impact on global business

· Differentiate between comparative and absolute advantage

· Explain the roles of absolute and comparative advantage in global business

Globalization and Business

There was a time when consumers only had access to goods and services that were available locally. Their choices were limited by what they could access on foot, by horse, or by carriage. This is still the case for many people around the world, and in rural and remote parts of the United States, it’s still necessary for families to make weekly trips to town to stock up on food, household items and other necessities. However, with the rise of internet-based business (think Amazon), there’s been an explosion of international trade, and more and more consumers essentially have the world at their door. Of course, international trade isn’t just a twentieth-century phenomenon. Trade across borders and between cultures has been a feature of human civilization for centuries—there’s evidence of this dating back as far as the nineteenth century BCE. The Silk Road, one of the best-known and most enduring “international” trade routes, began sometime around 200 BCE and for centuries was central to cultural interaction from China through regions of the Asian continent all the way to the Mediterranean Sea.

So, if cultures and nations have been trading with one another for 4,000 years, what makes today’s business landscape different? The answer lies in the distinction between international business and globalization.

International business refers to commerce in which goods, services, or resources cross the borders of two or more nations. This is what the Egyptians were doing when they sent goods across the Red Sea to Assyria. Globalization is broader than international business and describes a shift toward a more integrated world economy in which culture, ideas, and beliefs are exchanged in addition to goods, services, and resources. Globalization implies that the world is “getting smaller”: As a result of new transportation and communication technologies, people around the world can more readily connect with one another—both virtually and geographically.     

Impact of Globalization on Global Business

Let’s take a look at a particular example to think through the various implications of conducting business on a global scale. Consider McDonald’s, which was started by two brothers in San Bernardino, California, 78 years ago. As a result of globalization, nearly 69 million people in 118 different countries eat at McDonald’s every day. The first McDonald’s outside the United States and Canada was established in Costa Rica in 1970, and since the 1990s, most of the company’s growth has taken place in foreign countries. The process of building a global presence, entering new markets, and capitalizing on growing international demand for American fast food has enabled McDonald’s to expand from a single location to a global corporation with revenues in excess of $25.4 billion in 2015 (“McDonald’s,” n.d.). However, entering new markets—whether at home or abroad—means contending with increased competition in those markets, including competition with other globally minded companies. In 2010, Subway surpassed McDonald’s to become the largest single-brand restaurant chain and the largest restaurant operator globally.

What is it like for companies that decide to take advantage of global opportunities as McDonald’s and Subway have? Return to the discussion of “external forces”, but now consider them from a global business perspective. Globalization certainly means that businesses can reach consumers around the world more rapidly and efficiently—thanks to cell phones, airplanes, and the internet, we are all so much more interconnected and “accessible” now. But globalization also means incredible complexity. The list below sketches out just a few of the complexities and challenges that an American fast-food company like McDonald’s faces when it takes on the global business environment.

The Global Economic Environment. McDonald’s is a corporation based in the United States, where all business transactions are conducted using the US dollar, but there are 167 official national currencies in the world, each with a different value and purchasing power. Imagine trying to balance the corporate checkbook at McDonald’s when your deposits have been made in more than a hundred different currencies.

The Global Legal Environment. In Greece, there is a $650 fine for eating ice cream at certain historic, artistic, and culturally important sites. If you are the operator of a McDonald’s near the Parthenon, should you remove the ice cream cones and McFlurries from your menu to protect your customers against being fined, or not?

The Global Competitive Environment. How does McDonald’s recapture the number-one position it lost to Subway in 2010? The company may need to make substantial changes to its operations, menu offerings, and/or marketing tactics. This is a steep, uphill climb in the United States alone, but consider trying to accomplish it in 118 different countries in 188 different markets—where you are competing not only with other global US fast-food companies like Subway and KFC but with local ones, like “McKebab,” as well!

The Global Technological Environment. What does technology have to do with fast food or McDonald’s? Consider the company’s presence in China, where there are nearly 1.3 billion mobile users, and say hello to “McDonald’s Next,” a “modern and progressive” version of the restaurant that first opened in Hong Kong, featuring mobile-phone-charging platforms, free Wi-Fi, and self-ordering kiosks. This next generation of McDonald’s is a response to increased expectations around speed, service, economy, and availability across established and developing economies, mostly fueled by consumers’ growing access to affordable technology. As global businesses respond to demands created by technology, they must also leverage technology to move products, people, and supplies around the globe in a cost-effective and efficient manner.

The Global Social Environment. McDonald’s has had to adapt in countless ways to meet the demands of its customers around the world. While it prides itself on offering a consistent, internationally recognizable menu and brand, the company has also had to cater to local dining preferences and customs. In 1995, for example, the first kosher McDonald’s opened in a Jerusalem suburb. In Arab countries, the restaurant chain offers “halal” menus, which comply with Islamic laws governing the preparation of meat. In 1996, McDonald’s entered India for the first time, where it offered a Big Mac made with lamb called the Maharaja Mac (“History of McDonald’s," n.d.).

McDonald’s Maharaja Mac

McDonald’s is not a complex business—after all, it sells inexpensive burgers and fries, not automobiles or airplanes or pharmaceuticals—but clearly the global environment presents challenges even for them. You may be wondering why nations and businesses decide to take on such challenges, given the ongoing difficulty, risk, and uncertainty. We’ll investigate this question throughout the remainder of this chapter.

Absolute and Comparative Advantage               

Banana Tree

Example: Bananas and Trade

Consider the humble banana. Even if you’re not a big fan of this yellow fruit, you’ve surely seen them in the grocery store or in a market somewhere. If you walked through a US city with a banana and asked people to identify it, it’s unlikely you would encounter anyone who had no idea what it was. What if you did the same thing with a picture of a banana tree? How many people could identify it? Maybe some, but not all. Why is that? In the United States, bananas are grown in Hawaii, and not everyone has been to Hawaii. In fact, most of the bananas in the world are grown in Ecuador. If we Americans love bananas and don’t live in Hawaii and can’t get to Ecuador regularly, without global trade, we’re out of luck: no bananas for cereal in the morning or as snacks during the day, and worse, no banana splits at the local ice cream parlor. Why do Ecuador and Hawaii trade away their bananas instead of keeping them all to themselves? Probably because, although bananas are delicious and nutritious, it’s hard to build houses out of them. Instead, the state of Hawaii and nation of Ecuador choose to trade their bananas for things they lack, while considering the cost and profitability of exporting their product.

Ecuador and Hawaii offer an example of comparative advantage. Because bananas are not grown or readily available everywhere in the world, Ecuador and Hawaii can profitably export theirs to banana-less places like Iowa and Canada. At the same time, Ecuador may need computer systems to keep track of all of those bananas they are selling, but Ecuador is not a technologically advanced economy like the United States. The United States has a comparative advantage in computers, so we sell our computers to Ecuador and let them concentrate on selling us bananas.

The Concept of Advantage

In order to understand why businesses are willing to operate in a complex global environment, we must first understand two fundamental concepts that drive almost all business decisions: absolute and comparative advantage. Countries and companies are willing to assume the risk of engaging in global trade because they believe that they have an advantage over the competition that they can turn into profits. Not all countries have the same natural resources, infrastructure, labor force, or technology. These differences create advantages that can be exploited in global trade, to a country’s (or company’s) benefit.

Absolute Advantage

An entity (country, region, company, or individual) is considered to have an absolute advantage if either of the following conditions exists:

· It is the only source of a particular product, good, or service. This kind of absolute advantage is very rare and usually depends on a particular natural resource being available only within a certain region or country. An example might be the coveted edible red bird’s nests found only in the caves of Thailand (and prized in Chinese cooking as the main ingredient in bird’s nest soup). Similarly, if Ecuador were the only place in the world where bananas could be grown, it would have an absolute advantage. However, suppose some sneaky banana spy goes to Ecuador and pilfers some banana tree seedlings and takes them back to her home country, and begins growing and exporting bananas. At that point, Ecuador no longer has an absolute advantage on the basis of the “only-source” condition.

· An entity is also considered to have an absolute advantage if it is able to produce more of something than another entity while using the same amount of resources (factors of production). When the sneaky banana spy started growing bananas in her home country, she didn’t actually take away Ecuador’s absolute advantage, because Ecuador can produce more bananas using the same amount of resources (labor, land, water, equipment, etc.). Put another way, Ecuador’s direct cost of producing bananas is lower than the banana spy’s. Assuming that the bananas can be grown in the new country, it will take that country a very long time to match Ecuador’s skill, efficiency, and output level, and until it does, Ecuador will retain its absolute advantage.

Comparative Advantage

An entity (country, region, company, or individual) is considered to have a comparative advantage over another in producing a particular good or service if it can produce the good or service at a lower relative opportunity cost.

You’ll recall from the economic environment chapter that opportunity cost is the value of the next best alternative. (The video, below, also includes a refresher on this concept.) Since countries and businesses have limited resources, they are forced to make choices about how they allocate those resources. As a student, you understand opportunity cost better than you think. You have a limited amount of time, and you must choose between reading this chapter and going out with your friends, because you can’t do both. If you choose to go out with your friends, then the opportunity cost might be failure on your next exam because you did not use the time to prepare.

Ecuador has a comparative advantage in bananas over a long list of countries, including the United States. This comparative advantage is even better understood when you consider that their next best alternative product is oil. The Middle Eastern countries have been pumping oil from the ground for as long as Ecuador has been growing bananas. It makes as much sense for Kuwait to attempt to export bananas as it does for Ecuador to export oil. It’s the reality of comparative advantage that encourages countries and businesses to do what they do best—leaving the production of other goods and services to other countries or companies—and in so doing, focusing on producing goods and services where they have advantage, thus maximizing their opportunities in a global environment. 

The following video provides an excellent illustration of comparative and absolute advantage and explains why they are such important considerations in how countries decide to specialize and trade.

https://youtu.be/38hvvAzgXZY

Global Markets and Business Opportunity

Increasingly nations and business use their comparative or absolute advantages to enter global markets driven by the same factor: the immense size of these markets.

Let’s return to the banana for a moment. In 2015, Ecuador exported 6.55 million metric tons of bananas. Without a large global demand for bananas, every man, woman, and child in Ecuador would have to eat 834 pounds of them per year to consume all of the production. Of course that wouldn’t happen: Instead, the country would simply cut back on the production of bananas—but, in so doing, it would lose an export that now accounts for more than 10 percent of its gross domestic product (GDP). Ecuador needs a large and vibrant global market to keep up with its tremendous supply of bananas, and it relies on the revenue from those bananas to purchase the other things it needs (in the same way that you traded cell phones for blue jeans in the island trader simulation).

Later in this chapter we’ll discuss how nations like Ecuador enter foreign markets, but for now let’s look more closely at the size of the world’s largest markets. The following table shows population and GDP data for the top five economies in the world as of 2015 (Central Intelligence Agency, n.d.). You’ll recall from the economic environment chapter that GDP is a monetary measure of the market value of all final goods and services produced in a period, and the GDP growth rate is the increase or decrease in GDP over a period of time, expressed as a percentage.

Country	GDP	Population	GDP Growth Rate
China	$19,390,000,000,000	1,367,485,388	6.90%
European Union	$19,180,000,000,000	513,949,445	2.20%
United States	$17,950,000,000,000	321,368,864	2.40%
India	$7,965,000,000,000	1,251,695,584	7.30%
Japan	$4,830,000,000,000	126,919,659	0.50%

Looking at the figures in this table, it isn’t hard to imagine that a country or company would like to have a foothold in one or all of these markets. Taken together, these five economies represent a lot of people, a lot of purchasing power, and a lot of economic growth. However, the immensity of the global market offers more than just new target customers. Consider some of the following benefits nations and firms realize by entering foreign markets.

Access to Factors of Production

You will recall that the factors of production required for a successful business venture are natural resources, capital, human capital, and entrepreneurship. Access to global markets enables countries and companies to acquire these factors of production when they are nonexistent, scarce, or just too costly at home. For example, India is one of the largest providers of telephone-based customer service (labor) worldwide, which makes sense given that its population is second only to China and almost four times that of the United States. In addition, labor costs in India are significantly lower than in the US.

Innovation and Ideas

Many companies enter global markets and, once there, discover unmet needs or unique products and services. They are then able to use their discoveries to expand an existing product line or introduce new products in other markets or at home. For example, many people credit the United Kingdom with inspiring the development of the craft beer industry in the United States.

Risk Reduction

Given the complexity of operating a business globally, it may seem like a contradiction that risk reduction is one of the benefits of a large global market, but it’s actually true. If a country or a company trades or does business with multiple foreign partners, they are less dependent on the success of any single partnership. Likewise, if a nation or business has multiple global sources for factors of production, then if one source “dries up,” they will still have access to what they need. For example, in 2010 China halted its export of rare earth minerals to Japan after the two countries were unable to resolve a territory dispute. Japan used these minerals in the production of everything from cars to computer chips, and to say that the Japanese were in a state of distress is an understatement. As a result of this, albeit brief, reduction in Chinese supply, Japan established a trade agreement with India for the import of the needed materials. Japan will no longer be totally dependent upon the Chinese for these important resources.

In summary, globalization makes business on a global scale possible, and the size of the global market makes it attractive. By using their absolute and comparative advantages, countries and companies can leverage their resources to produce and trade the things that benefit them the most.

Globalization from Introduction to Business by Linda Williams and Lumen Learning is available under aCreative Commons Attribution 4.0 International license. UMUC has modified this work and it is available under the original license.

Week 3

Write on Ethical and Legal Behavior

Ethical and Legal Behavior

What you’ll learn to do: differentiate between ethical and legal behavior

Legal and ethical behavior are two different concepts, and both raise significant issues for businesses. In this section, you’ll get an introduction to ethics and learn why it is an especially challenging issue for companies that are trying to do the right thing.

Smoking on the Job

Learning Objectives

· Define ethical behavior

· Define legal behavior

· Differentiate between ethical and legal behavior

Smoking and Ethics

Let’s begin with a hypothetical—but very feasible—case study. Consider this scenario:

While evaluating its employee health-care benefits, financial services company American Express discovered that its employees who smoked were costing the firm $5,000 to $6,000 more per year to cover than nonsmokers. With the company’s health-care expenses rising 10 to 15 percent annually, its board of directors was considering whether American Express should stop hiring smokers.

Nationwide, about 6,000 companies already refuse to hire smokers (Lecker, 2009). Health care costs are driving this trend. According to researchers, compared to a nonsmoking employee, a smoker has a 50 percent higher absenteeism rate, and, when present, loses 39 minutes a day to smoking breaks—totalling 1,817 hours in lost productivity per year (Lecker, 2009). And given the well-known health effects of smoking, smokers can cost their employers considerably more than nonsmokers to insure.

Few people would fault a company for trying to control costs and maintain productivity, but how far should companies be allowed to go in pursuit of these goals? George Koodray, assistant US Director of the Citizens Freedom Alliance, told the Baltimore Sun in 2014, “What these folks are saying is they're going to deny a person's livelihood due to the fact that people are consuming a perfectly legal product that does not necessarily adversely affect their health” (Mirabella, 2014). Koodray asked if employers would seek to apply the same reasoning to eliminate other potentially “costly” staff: “Would they dare to make a law like this that's against people who are obese or overweight?” (Mirabella, 2014)

Hypotheticals like these can raise serious questions beyond deciding whom to hire. For example, since a company’s board of directors is charged with increasing shareholder wealth, they are tasked with acting in the best interest of a company’s financial health. Should employers promote shareholders’ interests above those of the individual or society?

When faced with situations such as these, managers should consider a company’s ethical behavior as well as its social responsibilities. Ethical decision making refers to the effort to do what’s right and avoid what’s wrong. Social responsibility refers to the broad goal of pursuing policies that benefit society. Should an employer protect an individual’s right to smoke if that places a burden on society? Is it ethical to promote the rights of society if they infringe on the rights of the individual?

If you were in charge at American Express, what would you do?

This scenario exposes some of the fundamental questions that often arise when dealing with complex ethical and legal issues in the business world. It also highlights the tension between our ideals and real-world scenarios. Sometimes, acting in ways that are ethical and legal are the same thing. Other times, they are not.

Ethical Behavior

When organizations or companies want to promote ways of behaving that reflect their ethics, they often codify specific ethical behaviors for their members. These codes of ethics serve to guide the behavior of organization members and company employees so they reflect the specific values of the groups they represent. For example, in the medical profession, newly minted doctors take the Hippocratic Oath, in which they pledge to “First, do no harm.” The American Society of Mechanical Engineers has a professional code that states, “Engineers shall hold paramount the safety, health, and welfare of the public in the performance of their professional duties.”   

Legal Behavior

Legal behavior follows the dictates of laws, which are interpreted by the courts. In decision making, determining the legality of a course of action can be facilitated by the existence of statutes, regulations, and codes. Unlike ethical considerations, there are established penalties for behaving in ways that conflict with the law. However, as society evolves, what constitutes legal behavior can change.

For example, until recently, the possession or use of marijuana was illegal in The United States. Now, several states permit the lawful use of recreational marijuana, and the majority of states allow marijuana use for medical reasons. As a result of the legalization of marijuana, existing laws are being reinterpreted, and additional laws are being enacted to govern what was previously illegal behavior. Whether or not a person thinks it is ethical to use marijuana, in some states, the law now permits such behavior.

With this in mind, let’s return to American Express.

Ethical Considerations

If American Express decides not to hire smokers, the company would essentially be interfering in an individual’s right to engage in a legal activity. One may then ask: If the company can make this personal choice for its employees, what else could they get to decide for them? The National Institutes of Health has reported that, in 2008, the aggregate national cost of overweight and obesity combined was $113.9 billion (Tsai, Williamson, & Glick, 2010). Should American Express also set a maximum body mass index limit for its potential employees in an effort to reduce the cost of insuring those who are overweight? Such decisions are complex, and, the ACLU argues, a potentially slippery slope: “If reducing health-care costs is accepted as a legitimate reason for employers to regulate the off-the-job conduct of their employees, then virtually every aspect of our private lives could be subject to employer control” (American Civil Liberties Union).

Legal Considerations

Would American Express’s decision not to hire smokers constitute lifestyle discrimination? A company can require its employees not to smoke during their shift or on company grounds, but does it have the right to require employees not to smoke when not at work? Twenty-nine states and the District of Columbia prohibit discrimination based on legal activities outside the workplace. However, those laws also contain exceptions that do permit employers to charge smokers higher insurance premiums (Workplace Fairness). Clearly, American Express is dealing with a legal issue when considering a nonsmoker policy, but as with ethical issues, it’s not cut and dry. 

People take positions and make choices within different frameworks, and those frameworks—while overlapping—are not always completely aligned. While the legal framework incorporates the laws that govern the behavior of individuals and organizations, the ethical framework incorporates standards and rules adopted by individuals within groups or professions to reflect specific values.

When companies try to do the “right thing”—by the law, their shareholders, their employees, or their customers—there is often a complex interplay of ethical and legal considerations at work. Such considerations can complicate even seemingly straightforward decisions

Ethical and Legal Behavior from Introduction to Business by Linda Williams and Lumen Learning is available under a Creative Commons Attribution 4.0 International license. UMUC has modified this work and it is available under the original license.

Week 4

Write on Sole Proprietorships

Sole Proprietorships

What you’ll learn to do: Discuss the advantages and disadvantages of creating a business as a sole proprietorship

There are several pros and cons to establishing a sole proprietorship. Which are most relevant to you?

Learning Outcome

· Define what a sole proprietorship is and discuss its advantages and disadvantages

A sole proprietorship is the simplest and most common legal structure of a company. It’s an unincorporated business owned and operated by one individual in which there is no distinction between the business and the owner. If you own a sole proprietorship, you are entitled to all profits and are responsible for all of your business’s debts, losses, and liabilities.

Forming a Sole Proprietorship

You don’t have to take any formal action to form a sole proprietorship. As long as you are the only owner, this status automatically arises from your business activities. In fact, you may already own a business without knowing it. If you are a freelance writer, for example, you are a sole proprietor.

But as is the case when you own any type of business, you may need to obtain necessary licenses and permits. For example, certain businesses, like ones that sell alcohol or firearms, require a federal license or permit. Some states have requirements for other specific types of companies. And some professionals, such as certified public accountants (CPAs) may be subject to licensing or certification requirements before they can promote themselves as engaging in a specific business or trade. Regulations for different types of professions and businesses vary by industry, state, and locality.

Another consideration: If you choose to operate under a name different from your own, you will most likely have to file a “fictitious name” (also known as an assumed name, trade name, or DBA name—short for “doing business as”). The legal document necessary to create a fictitious name is usually filed in the records of the county or city in which you do business. The law requires business owners to inform the public of a business’s legal ownership in the event that a customer or client wants to contact (or sue) the person running a specific company.

You must choose an original name; it cannot already be claimed by another business. To determine the availability of a specific business name, potential business owners may search databases maintained by your state's Secretary of State.

Sole Proprietor Taxes

If you decide to become a sole proprietor, you and your business are one and the same. Therefore, the business itself is not taxed separately—the sole proprietorship income is your income. It’s your responsibility to withhold and pay all income taxes, including self-employment and estimated taxes.

Advantages of a Sole Proprietorship

There can be some significant advantages to being a sole proprietor:

· It is an easy and inexpensive way to establish a business. A sole proprietorship is the simplest and least expensive legal structure to establish. Legal costs are limited to obtaining the necessary license or permits.

· It gives you complete control over your company. Because you are the sole owner of the business, you have complete control over all decisions. You aren’t required to consult with anyone else when you want to make changes.

· Your company’s tax preparation is simple. Your business is not taxed separately, so it’s easy to fulfill the tax reporting requirements for a sole proprietorship. The tax rates are also the lowest of the legal structures. However, sole proprietors are encouraged to consult a tax adviser regarding taxes they may have to pay once a former employer is no longer withholding and remitting tax payments on their behalf.

Disadvantages of a Sole Proprietorship

There are also potential disadvantages to sole proprietorship:

· You maintain unlimited personal liability for your business. Because there is no legal separation between you and your business, you can be held personally liable for all of the debts and obligations of the business. This risk extends to any liabilities incurred as a result of employee actions. Individuals running a business as a sole proprietorship should carefully review their insurance policies on business vehicles and equipment and verify that they have adequate liability coverage should an accident occur. Some businesses may require sole proprietors to possess specialized forms of insurance, such as worker’s compensation, liability, or errors and omissions. Potential sole proprietors should review their insurance coverage with a reputable insurance agent to identify potential risks and ensure they are adequately protected.

· It can be difficult to raise money. Sole proprietors often face challenges when trying to raise money. Because you can’t sell stock in the business, people won’t often invest. Banks are also reluctant to lend to a sole proprietorship because of the perceived risk and uncertainty regarding the repayment of funds if the business fails.

· It can be a heavy personal burden. The flip side of having complete control over a company is the burden and pressure it can bring. You alone are ultimately responsible for the successes and failures of your business.

Example: TW’s Construction

Tom is a construction worker who wants to be his own boss. He decides that, given the ease of establishing a sole proprietorship, he will pursue this business model. He doesn’t need to borrow any money to start his business, and since he will be doing all the work himself, at this point he isn’t worried that this type of ownership will add additional burdens or stress. He also likes the idea that he is in control of which jobs he takes and who his customers are.

Tom visits his accountant’s office and asks her about the tax implications of establishing a sole proprietorship. She explains that when Tom was working for Bob the Builder, his employer withheld federal and state income taxes from his paychecks. Bob the Builder sent those funds to the IRS and state department of revenue on Tom’s behalf. Those were the taxes he got credit for when he filed his tax return at the end of the year. Bob the Builder also paid half of Tom’s Social Security and Medicare taxes and paid into the state unemployment insurance fund.

His accountant tells Tom that, as a sole proprietor, he will need to plan for paying his own taxes throughout the year—not just in April. No one else will withhold or pay his taxes for him. Tom finds this to be depressing news, but he’s happy to learn that he may be able to deduct many of the expenses he incurs in the course of operating his business. These things include his work van, tools he purchases, office supplies, and possibly the small office he has set up in his home. Tom’s accountant recommends that he visit her at the end of each fiscal quarter to ensure he is on track with maintaining his taxes for the year. Tom schedules the appointments on the spot.

After leaving his accountant’s office, Tom goes to the courthouse and files his DBA certificate (for the name of his business), and he officially begins operating as a sole proprietorship: TW’s Construction. Lastly, he stops by his insurance agent and makes sure that he has the proper insurance on his vehicles and equipment, verifying that he has sufficient liability insurance to cover any potential claims against him.

Tom heads home to start calling homeowners and setting up appointments to bid on jobs. He has joined the ranks of the self-employed!

Introduction to Sole Proprietorships from Introduction to Business by Linda Williams and Lumen Learning is available under a Creative Commons Attribution 4.0 International license. UMUC has modified this work and it is available under the original license.

Week 5

Write on Production Processes

Production Processes

What you’ll learn to do: Describe the four main categories of production processes

When businesses know what they want to produce, they must still decide which kind of production process will be the most efficient and effective for their product. In this section you’ll learn about the four main categories of production processes they can choose from.

Learning Outcomes

· Describe project- or job-based production

· Describe batch production

· Describe mass production

· Describe continuous or flow production

Introduction 

The best way to understand operations management in manufacturing and production is to consider the things you use on a daily basis: They were all produced or manufactured by someone, somewhere, and a great deal of thought and planning were needed to make them available.

Businesses know what they want to produce, but the challenge is to select a process that will maximize the productivity and efficiency of production. Senior management looks to their operations managers to inform this decision. As we examine the four major types of production processes, keep in mind that the most successful organizations are those that have their process and product aligned.

Project- or Job-Based Production

Project-based production is one-of-a-kind production in which only one unit is manufactured at a time. This type of production is often used for very large projects or for individual customers. Because the customer’s needs and preferences play such a decisive role in the final output, it’s essential for the operations manager to maintain open and frequent communication with that customer. The workers involved in this type of production are highly skilled or specialists in their field.

The following are examples of project- or job-based production:

· custom-home construction

· haircutting

· yacht building

Batch Production

Batch production is used to produce similar items in groups, stage by stage. In batch production, similar products go through each stage of the process together before moving on to the next stage. The degree to which workers are involved in this type of production depends on the type of product. It is common for machinery to be used for the actual production and workers to participate only at the beginning and end of the process.

Examples of batch production include the following:

· bakeries

· textiles

· furniture

Mass Production

Mass production is used by companies that need to create standardized products in large quantities as economically as possible. Products are mass produced in order to generate the inventory needed to meet high market demand. This type of production usually requires heavy investment in machinery and equipment, and, generally, workers to assemble component parts to make the finished good.

The following goods are mass produced:

· toilet paper

· cell phones

· automobiles

Flow or Continuous Production

Flow production, also known as continuous production, occurs when a process runs 24 hours a day. Companies whose products are homogeneous use this production approach to reduce cost and increase efficiency. These systems are highly automated, and workers act as monitors rather than active participants.

The following are produced using flow production:

· gas and oil

· steel

· chemicals

While these production methods are different from one another and suitable for different production needs, it’s a mistake to conclude that products are manufactured according to one—and only one—process. Consider your home. When the house was built, the contractor used a job process, and highly skilled workers were brought in to install the plumbing, heating, and electrical systems. The carpet that was installed, however, was produced according to a batch process. The carpet manufacturer ran up a batch of carpeting in the color and style that now covers your floors. The kitchen and bathroom light fixtures from a home improvement store, however, were probably mass produced. The paint on the walls, meanwhile, likely came from continuous or flow process.

So, even though you may not spend a lot of time thinking about the processes used to make different products, they surround you every day. Every time you come in your front door, eat a meal, or even drive your car, you interact with things that were made by combinations of job-based, batch, mass, and flow production processes.

Introduction to Production Processes from Introduction to Business by Linda Williams and Lumen Learning is available under a Creative Commons Attribution 4.0 International license.  UMUC has modified this work and it is available under the original license.

Week 6

Write on Need-Based Theories

Need-Based Theories

What you’ll learn to do: Explain need-based theories of worker motivation

In this section we will look at four main theories about how human needs are satisfied: Maslow’s hierarchy of needs, Alderfer’s ERG theory, Herzberg’s two-factor theory, and McClelland’s acquired-needs theory.

Learning Outcomes

· List the levels of needs in Maslow’s hierarchy

· Explain the impact that Maslow’s levels of needs have on worker motivation

· Summarize the changes to Maslow’s hierarchy of needs in Alderfer’s ERG theory

· Explain the difference between intrinsic and extrinsic motivators in Herzberg’s two-factor theory

· Describe how employees might be motivated using McClelland’s acquired-needs theory

Maslow’s Hierarchy of Needs 

Human motivation can be defined as the fulfillment of various needs. These needs can encompass a range of human desires, from basic, tangible needs of survival to complex emotional needs surrounding an individual’s psychological well-being.

Abraham Maslow, a social psychologist, was interested in a broad spectrum of human psychological needs, rather than individual psychological problems. He is best known for his hierarchy-of-needs theory. Depicted in the pyramid below, the theory organizes the different levels of human psychological and physical needs in order of importance.

Maslow’s Hierarchy of Needs

Managers can apply Maslow’s hierarchy to better understand employees’ needs and motivation, and address them in ways that lead to high productivity and job satisfaction.

Physiological Needs

At the bottom of the pyramid are the physiological, or basic human survival needs: food, shelter, water, sleep, etc. Once physical needs are satisfied, individual safety takes precedence. Safety and security needs include personal security, financial security, and health and well-being.

After they have basic nutrition, shelter, and safety, people seek to fulfill higher-level needs.     

Connection: The Third Level of Need

The third level of needs—love and belonging—are the desire to share and connect with others. Neglect, shunning, or ostracism can impact a person’s ability to form and maintain emotionally significant relationships. Humans need to feel a sense of belonging and acceptance, whether from a large social group or a small network of family and friends. Without these attachments, they may be vulnerable to loneliness, social anxiety, and depression.

Higher-Level Needs 

The fourth level is esteem—the normal human desire to be valued and validated by others—as well as self-esteem. People with low self-esteem may find that external validation by others—through fame, glory, accolades, etc.—only partially or temporarily fulfills their needs at this level.

Finally, at the top of the pyramid is self-actualization. At this stage, people feel that they have reached their full potential. Self-actualization may occur after reaching an important goal or overcoming a particular challenge, and it may be marked by a new sense of self-confidence or contentment. But it is rarely a permanent state. Rather, self-actualization is an ongoing need for personal growth and discovery that people have throughout their lives.       

Hierarchy of Needs and Organizational Theory

Maslow’s hierarchy of needs is relevant to organizational theory because both are concerned with human motivation. Understanding what people need—and how their needs differ—is an important part of effective management. For example, some people work primarily for money (and fulfill their other needs elsewhere), but others like to go to work because they enjoy their coworkers or feel respected by others and appreciated for their good work.

In the workplace, Maslow’s hierarchy of needs suggests that if a lower need is not met, then the higher ones will be ignored. For example, if employees lack job security, they will be far more concerned about their financial well-being and paying their bills than about friendships and respect at work. However, if employees receive adequate financial compensation (and have job security), meaningful group relationships and praise for good work may be more important motivators.     

Consequences of Unmet Needs

When their needs aren’t met, employees can become very frustrated. For example, if someone works hard for a promotion and doesn’t get the recognition it represents, she may lose motivation and put in less effort. Also, after a need is met, it will no longer serve as a motivator: The next level up in the needs hierarchy will become more important. Therefore, keeping employees motivated can seem like a moving target. People seldom fit neatly into pyramids or diagrams; their needs are complicated and often change over time.

Assessing Needs Accurately

Maria is a long-time employee who is punctual, does high-quality work, and is well liked by her coworkers. However, her supervisor begins to notice that she is coming in late and seems distracted. He concludes that Maria is bored with her job and wants to leave. But when he raises these issues in her semiannual performance appraisal, he learns that Maria’s husband lost his job six months ago and, unable to keep up with mortgage payments, the couple has been living in a hotel. Maria has moved down the needs pyramid and, if the supervisor wants to be an effective manager, he must adapt the motivational approaches he uses. In short, a manager’s best strategy is to recognize this complexity and try to remain attuned to what employees say they need.

Alderfer’s ERG Theory

Old-Growth Forest

Clayton Paul Alderfer, an American psychologist, used Maslow’s hierarchy of needs in developing the Alderfer’s ERG theory, which refers to core needs in three areas:

· existence

· relatedness

· growth

These three areas align, respectively, with Maslow’s levels of physiological, social, and self-actualization needs.

Alderfer proposed that when needs in one category are not met, people will redouble their efforts to fulfill needs in a lower category. For example, if their self-esteem (an area of need in the growth category) is suffering, people will invest more effort in the relatedness category of needs.

Herzberg’s Two-Factor Theory

American psychologist Frederick Herzberg is regarded as one of the great original thinkers in management and motivational theory. He set out to determine the effect of attitude on motivation by simply asking people to describe the times when they felt really good, and really bad, about their jobs. What he found was that people who felt good gave very different responses from people who felt bad.

The results from this inquiry form the basis of Herzberg’s Motivation-Hygiene Theory, sometimes called Herzberg’s two-factor theory (1968), which hypothesized that two sets of factors govern job satisfaction and job dissatisfaction: hygiene factors, or extrinsic motivators, and motivation factors, or intrinsic motivators.

Hygiene factors, or extrinsic motivators, tend to represent more tangible, basic needs like those noted in both the existence category of ERG theory and in the lower levels of Maslow’s hierarchy of needs. Extrinsic motivators include status, job security, salary, and fringe benefits. It’s important for managers to realize that not providing the appropriate and expected extrinsic motivators will sow dissatisfaction and decrease motivation among employees.

Motivation factors, or intrinsic motivators, tend to be less tangible. They are tied more to  emotional needs like those identified in the “relatedness” and “growth” categories in the ERG theory and at the higher levels of Maslow’s hierarchy of needs. Intrinsic motivators include challenging work, recognition, relationships, and growth potential. Managers need to recognize that while these needs may fall outside the traditional scope of what a workplace ought to provide, they can be critical to strong individual and team performance.

The factor that differentiates two-factor theory from the others is the role of employee expectations. According to Herzberg, intrinsic motivators and extrinsic motivators have an inverse relationship. That is, intrinsic motivators tend to increase motivation when they are present, while extrinsic motivators tend to reduce motivation when they are absent. This is due to employees’ expectations. Extrinsic motivators (e.g., salary, benefits) are expected, so they won’t increase motivation when they are in place, but they will cause dissatisfaction when they are missing. Intrinsic motivators (e.g., challenging work, growth potential), on the other hand, can be a source of additional motivation when they are available.

If managers want to increase employees’ job satisfaction, they should be concerned with the nature of the work itself—opportunities for employees to gain status, assume responsibility, and achieve self-realization. If, on the other hand, management wishes to reduce dissatisfaction, then the focus should be on the job environment—policies, procedures, supervision, and working conditions. To ensure a satisfied and productive workforce, managers must pay attention to both sets of job factors.

McClelland’s Acquired-Needs Theory

An achievement-oriented tendency is to strive for mastery.

Psychologist David McClelland’s acquired-needs theory splits the needs of employees into three categories:

· achievement

· affiliation

· power

Employees who are strongly achievement motivated are driven by the desire for mastery. They prefer working on tasks of moderate difficulty in which outcomes are the result of their effort rather than luck. They value receiving feedback on their work.

Employees who are strongly affiliation-motivated are driven by the desire to create and maintain social relationships. They enjoy belonging to a group and want to feel loved and accepted. They may not make effective managers because they may worry too much about how others will feel about them.

Employees who are strongly power-motivated are driven by the desire to influence, teach, or encourage others. They enjoy work and place a high value on discipline. However, they may take a zero-sum approach to group work—for one person to succeed, another must fail. If channeled appropriately, their motivation can positively support group goals and help others in the group feel competent.

The acquired-needs theory doesn’t claim that people can be neatly categorized as one of the three types. Rather, it asserts that all people are motivated by all of these needs to varying degrees. Also, needs do not necessarily correlate with competencies; it is possible for an employee to be strongly affiliation-motivated, for example, but still be successful in a situation that doesn’t meet her affiliation needs.

McClelland proposes that people in top management generally have a high need for power and a low need for affiliation. He also believes that although individuals with a need for achievement can make good managers, they are not generally suited to being in top management positions.         

Introduction to Need-Based Theories from Introduction to Business by Linda Williams and Lumen Learning is available under a Creative Commons Attribution 4.0 International license. UMUC has modified this work and it is available under the original license.

Week 7

Write on Place: Distribution Channels

Place: Distribution Channels

What you’ll learn to do: Explain common product distribution strategies and how organizations use them

Distribution channels—which is place in the four P's—cover all the activities needed to transfer the ownership of goods and move them from the point of production to the point of consumption. In this section you’ll learn more about distribution channels and some of the common strategies companies use to take advantage of them.

Learning Outcomes

· List the characteristics and flows of a distribution channel

· Describe the partners that support distribution channels

· Explain the role of wholesale intermediaries

· Describe the different types of retailers businesses use to distribute products

· Differentiate between supply chains and distribution channels

Evolution of Distribution Channels 

As consumers, we take for granted that when we go to a supermarket the shelves will be filled with the products we want; that when we are thirsty there will be a Coke machine or drive-through nearby; and that we can go online and find any product we need with quick delivery. Of course, if we give it some thought, we realize that this magic is not a given and that hundreds of thousands of people plan, organize, and labor long hours to make this convenience possible. It has not always been this way, and is still not this way in many regions of the world.

Looking back, the channel structure in primitive culture was virtually nonexistent. The family or tribal group was almost entirely self-sufficient. In these groups were both communal producers and consumers of whatever goods and services could be made available. As economies evolved, people began to specialize in particular aspects of economic activity, like farming, hunting, fishing, or a craft. Eventually their specialized skills produced excess products, which they exchanged or traded for others’ goods. This exchange process, or barter, marked the beginning of formal channels of distribution. These early channels involved a series of exchanges between parties who were producers of one product and consumers of another.

Specialization. With the growth of specialization, particularly industrial specialization, and improvements in transportation and communication, channels of distribution have become longer and more complex. Thus, corn grown in Illinois may be processed into corn chips in West Texas, which are then distributed throughout the United States. Or, turkeys raised in Virginia are sent to New York so that they can be shipped to supermarkets in Virginia. Channels do not always make sense.

The channel mechanism also operates for service products. In the case of medical care, the channel mechanism may consist of a local physician, specialists, hospitals, ambulances, laboratories, insurance companies, physical therapists, home care professionals, and so on. All of these individuals are interdependent and could not operate successfully without the cooperation and capabilities of all the others.

We define a channel of distribution, also called a marketing channel, as sets of interdependent organizations involved in the process of making a product or service available for use or consumption, as well as providing a payment mechanism for the provider.

This definition implies several important characteristics of the channel.

First, the channel consists of organizations, some under the control of the producer and some outside the producer’s control. Yet all must be recognized, selected, and integrated into an efficient channel arrangement.

Second, the channel management process is continuous, requiring ongoing monitoring and reappraisal. The channel operates 24 hours a day and exists in an environment where change is the norm.

Finally, channels should have certain distribution objectives guiding their activities. The structure and management of the marketing channel is thus, in part, a function of a firm’s distribution objective. It’s also a part of the marketing objectives—especially the need to make an acceptable profit. Channels usually represent the largest costs in marketing a product.

Channel Flows 

One traditional framework that has been used to express the channel mechanism is the concept of flow. Flows reflect the many linkages that tie channel members and other agencies together in the distribution of goods and services. From the perspective of the channel manager, there are five important flows.

· product—movement of the physical product from the manufacturer through all the parties who take physical possession of the product until it reaches the ultimate consumer

· negotiation—institutions that are associated with the actual exchange processes

· ownership—transfer of title through the channel

· information—individuals who participate in the flow of information either up or down the channel

· promotion—flow of persuasive communication in the form of advertising, personal selling, sales promotion, and public relations

Energy Drinks: From Product to Promotion

The figure below maps the channel flows for the Monster Energy drink (and many other energy drink brands). Why is Monster’s relationship with Coca-Cola so valuable? Every single flow passes through bottlers and distributors before before reaching consumers at supermarkets.

Coca-Cola explains the importance of the bottlers in the distribution network:

While many view our company as simply ‘Coca-Cola,’ our system operates through multiple local channels. Our company manufactures and sells concentrates, beverage bases and syrups to bottling operations, owns the brands and is responsible for consumer brand marketing initiatives. Our bottling partners manufacture, package, merchandise, and distribute the final branded beverages to our customers and vending partners, who then sell our products to consumers.

All bottling partners work closely with customers—grocery stores, restaurants, street vendors, convenience stores, movie theaters and amusement parks, among many others—to execute localized strategies developed in partnership with our company. Customers then sell our products to consumers at a rate of more than 1.9 billion servings a day (Coca-Cola).

Revisiting the five channel flows, we find that the bottlers and distributors play a role in each one. Examples of the flows are listed below. Remember, while the consumer is the individual who eventually consumes the drink, the supermarkets, restaurants, and other outlets are Coca-Cola’s customers.

· Product flow. Bottlers receive and process the bases and syrups.

· Negotiation flow. Bottlers buy concentrate, sell product, and collect revenue from customers.

· Ownership flow. Distributors acquire the title of the syrups and own the product until it’s sold to supermarkets.

· Information flow. Bottlers communicate product options to customers, and communicate demand and needs to Coca-Cola.

· Promotion flow. Bottlers communicate benefits and provide promotional materials to customers.

Marketing Channels

While channels can be very complex, there is a common set of channel structures that can be identified in most transactions. Each channel structure includes different organizations. Generally, the organizations that collectively support the distribution channel are referred to as channel partners.

The direct channel is the simplest channel. In this case, the producer sells directly to the consumer. The most straightforward examples are producers who sell in small quantities. If you visit a farmers’ market, you can purchase goods directly from farmers and craftsmen. There are also examples of very large corporations using the direct channel effectively, especially for B2B transactions. Services may also be sold through direct channels, and the same principle applies: An individual buys a service directly from the provider who delivers it.

Examples of the direct channel include

· Etsy.com online marketplace

· farmers’ markets

· Oracle’s sales team working with businesses

· a bake sale

Retailers are companies in the channel that focuses on selling directly to consumers. You are likely to participate in the retail channel almost every day. The retail channel is different from the direct channel in that the retailer doesn’t produce the product, but markets and sells goods on behalf of the producer. For consumers, retailers provide tremendous contact efficiency by creating one location where many products can be purchased. Retailers may sell products in a store, online, in a kiosk, or on your doorstep. The emphasis is not the specific location but on selling directly to the consumer.

Examples of retailers include

· Walmart discount stores

· Amazon online store

· Nordstrom department store

· Dairy Queen restaurant

From a consumer’s perspective, the wholesale channel looks very similar to the retail channel, but it also involves a wholesaler. A wholesaler is primarily engaged in buying and, usually, storing and physically handling goods in large quantities, which are then resold (usually in smaller quantities) to retailers, or industrial or business users. The vast majority of goods produced in an advanced economy have wholesaling involved in their distribution. Wholesale channels also include manufacturers operating sales offices to perform wholesale functions, and retailers operating warehouses or engaging in other wholesale activities.  

Examples of wholesalers include:

· Christmas-tree wholesalers who buy from growers and sell to retail outlets

· restaurant food suppliers

· clothing wholesalers that sell to retailers

The broker or agent channel includes one additional intermediary. Agents and brokers are different from wholesalers in that they do not take title to the merchandise. In other words, they do not own the merchandise because they neither buy nor sell. Instead, brokers bring buyers and sellers together and negotiate the terms of the transaction. Agents represent either the buyer or seller, usually on a permanent basis, whereas brokers bring parties together on a temporary basis. Think about a real-estate agent. They do not buy your home and sell it to someone else; they market and arrange the sale of the home. Agents and brokers match buyers with sellers, or add expertise to create a more efficient channel.

Examples of brokers include:

· an insurance broker, who sells insurance products from many companies to businesses and individuals

· a literary agent, who represents writers and their works to publishers, and theatrical and film producers

· an export broker, who negotiates and manages transportation requirements, shipping, and customs clearance on behalf of a purchaser or producer

It’s important to note that the larger and more complex the flow of materials from the initial design through purchase, the more likely it is that multiple channel partners may be involved, because each channel partner will bring unique expertise that increases the efficiency of the process. If an intermediary is not adding value, they will likely be removed over time, because the cost of managing and coordinating with each intermediary is significant.

The Role of Wholesale Intermediaries 

While the retail channel is the most familiar one, wholesalers play an important role as intermediaries. Intermediaries act as a link in the distribution process, but the roles they fill are broader than simply connecting channel partners. Wholesalers, often called “merchant wholesalers,” help move goods between producers and retailers.

Let’s look at each of the functions that a merchant wholesaler fulfills:

Purchasing 

Wholesalers purchase very large quantities of goods directly from producers or from other wholesalers. By purchasing large quantities or volumes, they can secure significantly lower prices.

Imagine that a farmer has a very large crop of potatoes. If he sells all of them to a single wholesaler, he will negotiate one price and make one sale. Because this is an efficient process that allows him to focus on farming (rather than searching for additional buyers), he will likely be willing to negotiate a lower price. Even more important, because the wholesaler has such strong buying power, it can force a lower price on every farmer selling potatoes.

The same is true for almost all mass-produced goods. When a producer creates a large quantity of goods, it is most efficient to sell all of them to one wholesaler, rather than negotiating prices and making sales with many retailers or an even larger number of consumers. Also, the bigger the wholesaler is, the more likely that it will have significant power in price-setting.

Warehousing and Transportation 

Once the wholesaler has purchased a mass quantity of goods, it needs to get them to a place where they can be purchased by consumers. This is a complex and expensive process. A company might operate eighty distribution centers around the country, each with more than 500,000 square feet. This requires state-of-the art inventory tracking systems. Some wholesalers also operate transportation networks using their own fleet of trucks.

Grading and Packaging 

Wholesalers buy a very large quantity of goods and then break it down into smaller lots. The process of breaking large quantities into smaller lots that will be resold is called bulk breaking. Often this includes physically sorting, grading, and assembling the goods. Returning to our potato example, the wholesaler would determine which potatoes are of a size and quality to sell individually and which will be packaged for sale in five-pound bags.

Risk Bearing

Wholesalers either take title to the goods they purchase, or they own them. There are two primary consequences of this. First, the wholesaler finances the purchase of the goods and carries the cost of the goods in inventory until they are sold. Because this is a tremendous expense, it drives wholesalers to be accurate and efficient in their purchasing, warehousing, and transportation processes.

Second, wholesalers also bear the risk for the products until they are delivered. If goods are damaged in transport and cannot be sold, then the wholesaler is left with the goods and the cost. If there is a significant change in the value of the products between the time of the purchase from the producer and the sale to the retailer, the wholesaler will absorb that profit or loss.

Marketing 

Often, the wholesaler will fill a role in promoting the products distributed. This might include creating displays for the wholesaler’s products and providing the display to retailers to increase sales. The wholesaler may advertise the products that are carried by many retailers.

Wholesalers also influence which products the retailer offers. For example, McLane Company was a winner of the 2016 Convenience Store News Category Captains award, recognizing innovations in providing the right products to customers. McLane created unique packaging and products featuring movie themes, college football themes, and other special occasion branding designed to appeal to impulse buyers. They also shifted the transportation and delivery strategy to get the right products in front of consumers at the time they were most likely to buy. Its convenience store customers as well as McLane saw sales growth (Durtschi, 2016).

Distribution

As distribution channels have evolved, some retailers, such as Walmart and Target, have grown so large that they have taken over aspects of the wholesale function. Still, it is unlikely that wholesalers will ever go away. Most retailers rely on wholesalers: They simply do not have the capability or expertise to manage the full distribution process. Plus, many of the functions that wholesalers fill are performed most efficiently at scale. Wholesalers are able to focus on creating efficiencies for their retail channel partners that are very difficult to replicate on a small scale.

Retailers

Introduction

Retailing comprises all the activities required to market goods and services to consumers seeking to satisfy their individual or families’ needs.

By definition, B2B purchases are not included in the retail channel since they are not made for individual or family needs. In practice this can be confusing because many retail outlets—like Home Depot—serve both consumers and business customers. Generally, retailers that have a significant B2B or wholesale business report those numbers separately in their financial statements, acknowledging that they are separate lines of business within the same company. Those with a pure retail emphasis do not seek to exclude business purchasers; they simply focus their offering to appeal to individual consumers, knowing that some businesses may also choose to purchase.

When we think of a retail sale, we typically think of a store even though retail sales occur in other places and settings. For instance, they can be made by a Pampered Chef salesperson in someone’s home. Retail sales also happen online, through catalogs, by automatic vending machines, and in hotels and restaurants. Nonetheless, despite tremendous growth in both nontraditional retail outlets and online sales, most retail sales still take place in brick-and-mortar stores.

Beyond the distinctions in the products they provide, there are structural differences among retailers that influence their strategies and results. One of the reasons the retail industry is so large and powerful is its diversity. For example, stores vary in size, in the kinds of services that are provided, the assortment of merchandise, and their ownership and management structures.

Department Stores 

Department stores are characterized by their wide product mixes. That is, they carry many different types of merchandise, which may include hardware, clothing, and appliances. The depth of the product mix depends on the store, but department stores’ primary distinction is the ability to provide a wide range of products within a single store.

Chain Stores 

The 1920s saw the evolution of the chain store movement. Because chains were so large, they were able to buy a wide variety of merchandise in large quantity discounts. The discounts substantially lowered their cost compared to costs of single unit retailers. As a result, they could set retail prices that were lower than those of their small competitors and thereby increase their share of the market. Furthermore, chains were able to attract many customers because of their convenient locations made possible by their financial resources and expertise in selecting where to locate.

Supermarkets

Supermarkets evolved in the 1920s and 1930s. For example, Piggly Wiggly, founded by Clarence Saunders around 1920, introduced self-service and checkout counters. In 2018, there were were 38,571 supermarkets—including large, small and warehouse stores—in the United States (Nielsen, 2018). and the average store now carries nearly 44,000 products in roughly 46,500 square feet of space. The supermarket approach is to offer a large assortments goods at each store at a minimal price.

Discount Retailers

Discount retailers, like Ross Stores and Grocery Outlet, focus on price as their main sales appeal. Merchandise assortments are generally broad and include both hard and soft goods, but assortments are typically limited to the most popular items, colors, and sizes. They are usually large, self-service operations with long hours, free parking, and relatively simple decor. Online retailers such as Overstock.com have aggregated products and offered them at deep discounts. Generally, customers sacrifice having a reliable assortment of products to receive deep discounts.

Warehouse Retailers

Warehouse retailers provide a bare-bones shopping experience at very low prices. They streamline all operational aspects of their business and pass on the savings to customers. Costco generally uses a cost-plus pricing structure and provides goods in large quantities.

Franchises

The franchise approach brings together national chains and local ownership. When a buyer purchases a franchise, he or she gains the right to use the firm’s business model and brand for a set period of time. Often, the franchise agreement includes well-defined guidance for the owner, as well as training and ongoing support. The owner, or franchisee, builds and manages the local business. Entrepreneur magazine posts a list each year of the 500 top franchises according to an evaluation of financial strength and stability, growth rate, and size.

Malls and Shopping Centers

Malls and shopping centers provide customers with an assortment of products in different stores, usually with one or more major tenant or anchor store. Strip malls are a common string of stores along major traffic routes, while isolated locations are freestanding sites not necessarily in high-traffic areas. Stores in isolated locations must use promotion or another aspect of their marketing mix to attract shoppers.

Online Retailing

Online retailing is unquestionably a dominant force in the retail industry, but today it accounts for only a small percentage of total retail sales. Companies like Amazon and Geico complete all or most of their sales online. Many other online sales result from traditional retailers, such as Nordstrom.com. Online marketing plays a significant role in preparing the buyers who shop in stores. In a similar integrated approach, catalogs that are mailed to customers’ homes drive online orders. In a survey on its website, Lands’ End found that 75 percent of customers who were making purchases had reviewed its catalog first (Ruiz, 2015).

Estimated US Retail E-Commerce Sales as a Percent of Total Retail Sales

First Quarter 2009 through Second Quarter 2018 (Not Adjusted and Adjusted for Seasonal Variation)

US Census Bureau (2018)

Catalogs 

Catalogs have long been used to drive phone and in-store sales. As online retailing began to grow, it had a significant impact on catalog sales. Many retailers who depended on catalog sales—Sears, Lands’ End, and J.C. Penney, to name a few—suffered as online retailers and online sales from traditional retailers pulled convenience shoppers away from catalog sales. Catalog mailings peaked in 2009 and saw a significant decrease through 2012. In 2013, there was a small increase in catalog mailings. Industry experts note that catalogs are changing, as is their role in the retail marketing process. Despite significant declines, US households still receive 11.9 billion catalogs each year (Geller, 2012).

Nonstore Retailing 

Beyond those mentioned in the categories above, there are a wide range of traditional and innovative retailing approaches. Although the “Avon lady” largely disappeared at the end of the last century, there are still in-home sales from Arbonne facial products, Cabi women’s clothing, WineShop at Home, and others. Many of these models are based on the idea of women using their personal networks to sell products to friends, and friends of friends, often in a party setting.

Also, vending machines and conveniently placed kiosks have long been a popular retail device. Today they are becoming more targeted. Companies now use them in airports to sell sundries to travelers who have forgotten something.

Each of these retailing approaches can be customized to meet the needs of the target buyer or combined to include a range of needs.

Marketing Channels vs. Supply Chains

What Is a Supply Chain?

We have discussed the channel partners, the roles they fill, and the structures they create. Marketers have long recognized the importance of managing distribution channel partners. As channels have become more complex and the flow of business has become more global, organizations have recognized that they need to manage more than just the channel partners; they need to manage the full chain of organizations and transactions, from raw materials through final delivery to the customer—in other words, the supply chain.

The supply chain is a system of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. Supply chain activities involve the transformation of natural resources, raw materials, and components into a finished product that is delivered to the end customer (Nagurney, 2006).

The marketing channel generally focuses on how to increase value to the customer by having the right product in the right place at the right price at the moment when the customer wants to buy. The emphasis is on providing value to the customer, and the marketing objectives usually focus on what is needed to deliver that value.

Supply chain management takes a different approach. The Council of Supply Chain Management Professionals (CSCMP) defines supply chain management as follows:

Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers (CSCMP).

Supply Chain vs. Marketing Channels

The supply chain and marketing channels can be differentiated as follows:

· The supply chain is broader than marketing channels. It begins with raw materials and delves deeply into production processes and inventory management. Marketing channels are focused on bringing together the partners who can most efficiently deliver the right marketing mix to the customer in order to maximize value. Marketing channels provide a more narrow focus within the supply chain.

· Marketing channels are purely customer facing. Supply chain management seeks to optimize how products are supplied, which adds a number of financial and efficiency objectives that are more internally focused. Marketing channels emphasize a stronger market view of customer expectations and competitive dynamics in the marketplace.

· Marketing channels are part of the marketing mix. Supply chain professionals are specialists in the delivery of goods. Marketers view distribution as one element of the marketing mix, in conjunction with product, price, and promotion. Supply chain management is more likely to identify the most efficient delivery partner. A marketer is more likely to balance the merits of a channel partner against the value offered to the customer. For instance, it might make sense to keep a channel partner who is less efficient but provides an important benefit in the promotional strategy.

Successful organizations develop effective, respectful partnerships between the marketing and supply chain teams. When the supply chain team understands the market dynamics and the points of flexibility in product and pricing, they are better able to optimize the distribution process. When marketing has the benefit of effective supply chain management—which is analyzing and optimizing distribution within and beyond the marketing channels—greater value is delivered to customers.

Introduction to Place: Distribution Channels from Introduction to Business by Linda Williams and Lumen Learning is available under a Creative Commons Attribution 4.0 International license. UMUC has modified this work and it is available under the original license.

Week 8

Write on Financial Ratio Analysis

Financial Ratio Analysis

What you’ll learn to do: Use financial statements to calculate basic financial ratios that can measure the profitability and health of a business

Financial ratios allow consumers of financial information to compare how companies are doing relative to their industry or how they are faring from one period (month, quarter, year) to another. For the purposes of this course, you will be working with just a couple of these ratios—namely, liquidity and profitability. There are other financial ratios, and you will explore those when you take full courses in finance and accounting.

Photo of a cross-section of a nautilus shell

Learning Outcomes

· explain how financial ratios are used

· calculate the current ratio using information from financial statements

· calculate the acid-test (quick) ratio using information from financial statements

· calculate inventory turnover using information from financial statements

Sometimes it’s not enough to know if your company is in relatively “good” or “bad” financial health, particularly if you’re trying to compare your company to a competitor. To make comparisons like that easier, it helps to assign numbers to measures of a business’ general fiscal health.

Financial ratios allow companies to determine their profitability, inventories, assets and asset use, liabilities, and the different costs associated with their business’ finances. Financial ratios can be used to determine how quickly people pay their bills, how long it takes a company to recover its costs for new equipment, how much cash a company has relative to its debts, and a company’s return (or profit) on each dollar it invests. Financial ratios give company leaders the detailed information they need to compare themselves to other businesses in the same industry.

The following video explains how that can be done.

https://youtu.be/TZZFBkbC2lA

There are logical relationships among certain accounts or items on a company’s financial statements. These accounts may appear on the same statement or on two different statements. To determine relationships among accounts, you can express them in fractions called ratios. Some of these ratios include:

Ratio	Use	Components
Liquidity ratio	indicate a company’s short-term debt-paying ability	current (or working capital) ratio; acid-test (quick) ratio; cash flow liquidity ratio; accounts receivable turnover; number of days sales are in accounts receivable; inventory turnover; total assets turnover
Profitability test	create an important measure of a company’s operating success	rate of return on operating assets; net income to net sales; net income to average common stockholders’ equity; cash flow margin; earnings per share of common stock; times interest earned ratio; times preferred dividends earned ratio
Market test	help investors and potential investors assess the relative merits of the various stocks in the marketplace	earnings yield on common stock; price-earnings ratio; dividend yield on common stock; payout ratio on common stock; dividend yield on preferred stock; cash flow per share of common stock

Many of these ratios are beyond the scope of this course; however, we will examine the three in bold, which are key to evaluating any business.

Current (or Working Capital)

The ratio that relates current assets to current liabilities is the current (or working capital) ratio. It indicates the ability of a company to pay its current liabilities from its current assets, illustrating the strength of a company’s working capital position.

You can compute the current ratio by dividing a company’s current assets by its current liabilities, as follows:

Current ratio=Current assetsCurrent liabilitiesCurrent ratio=Current assetsCurrent liabilities

This ratio relates the number of dollars of a company’s current assets to each dollar of its current liabilities (although the dollar signs usually are omitted). For example, let’s say that, in 2010, a company named “Synotech” had current assets that totaled $2,846.7 million and current liabilities that totaled $2,285.2 million. Accordingly, Synotech’s current ratio was 1.25:1, meaning that the company had $1.25 of current assets for each $1.00 of its current liabilities.

The current ratio provides a better index of a company’s ability to pay its current debts than does its absolute amount of working capital. To illustrate, assume that we are comparing Synotech to Company B. For this example, use the following totals for current assets and current liabilities:

	Synotech	Company B
Current assets (a)	$2,846.7	$120.0
Current liabilities (b)	$2,285.2	$53.2
Working capital (a – b)	$561.5	$66.8
Current ratio (a/b)	1.25:1	2.26:1

Synotech has eight times as much working capital as Company B. However, Company B has a superior debt-paying ability since it has $2.26 of current assets for each $1.00 of its current liabilities.

Short-term creditors are particularly interested in a company’s current ratio, since the conversion of its inventory and accounts receivable into cash is the primary source from which a company obtains the cash to pay them. Long-term creditors are also interested in the current ratio, because a company that is unable to pay its short-term debts may be forced into bankruptcy. For this reason, many bond indentures, or contracts, contain provisions requiring borrowers to maintain at least a certain minimum current ratio. A company can increase its current ratio by issuing long-term debt or capital stock or by selling noncurrent assets.

A company must also guard against maintaining a current ratio that is too high, especially if it is caused by idle cash, slow-paying customers, and/or slow-moving inventory. Decreased net income can result when too much capital that could be used profitably elsewhere is tied up in current assets.

Acid-Test (Quick) Ratio

The current ratio is not the only measure of a company’s short-term debt-paying ability. Another measure, called the acid-test (quick) ratio, is the ratio of quick assets (cash, marketable securities, and net receivables) to current liabilities. The formula for the acid-test ratio is the following:

Acid test ratio=Quick assetsCurrent liabilitiesAcid test ratio=Quick assetsCurrent liabilities

Short-term creditors are particularly interested in this ratio, which relates a company’s pool of cash and immediate cash inflows to immediate cash outflows. For example:

Synotech’s acid–test ratios for 2010 and 2009
(USD millions)	2010	2009	Amount of increase or (decrease)
Quick assets (a)	$1,646.6	$1,648.3	($1.7)
Current liabilities (b)	$2,285.6	$2,103.8	$181.8
Net quick assets (a – b)	($639.0)	($455.5)	($183.5)
Acid-test ratio (a/b)	.72:1	.78:1

In deciding whether an acid-test ratio is satisfactory, investors consider the quality of a company’s marketable securities and receivables. An accumulation of poor quality marketable securities or receivables, or both, could cause an acid-test ratio to appear deceptively favorable. When referring to marketable securities, poor quality means securities likely to generate losses when sold. Poor quality receivables may be uncollectible or not collectible until long past due. The quality of receivables depends primarily on their age, which can be assessed by preparing an aging schedule or by calculating a company’s accounts receivable turnover.

Inventory Turnover

A company’s inventory turnover ratio shows the number of times its average inventory is sold during a period. You can calculate inventory turnover as follows:

Inventoryturnover=CostofgoodssoldAverageinventoryInventoryturnover=CostofgoodssoldAverageinventory

When comparing an income statement item with a balance sheet item, both should be measured in comparable dollars. Notice that both the numerator and denominator are measured in cost rather than sales dollars. Inventory turnover relates a measure of sales volume to the average amount of goods on hand to produce this sales volume.

Consider this scenario: Synotech’s inventory on January 1, 2009 was $856.7 million. The following schedule shows that the inventory turnover decreased slightly from 5.85 times per year in 2009 to 5.76 times per year in 2010. To convert these turnover ratios to the number of days it takes the company to sell its entire stock of inventory, divide 365 by the inventory turnover. Thus, Synotech’s average inventory sold in about 63 days and 62 days (365/5.76 and 365/5.85) in 2010 and 2009, respectively.

Synotech's Inventory Turnover, 2009-2010
(USD millions)	2010	2009	Amount of increase or (decrease)
Cost of goods sold (a)	$5,341.3	$5,223.7	$117.6
Merchandise inventory
January 1	$929.8	$856.7	$73.1
December 31	$924.8	($929.8)	($5.0)
Total (b)	$1,854.6	$1,786.5	$68.1
Average inventory (c) (b/2 = c)	$927.3	$893.3
Turnover of inventory (a/c)	5.76	5.85

Other things being equal, a manager who maintains the highest inventory turnover ratio is the most efficient. But other things are not always equal. For example, a company that achieves a high inventory turnover ratio by keeping extremely small inventories on hand may incur larger ordering costs, lose quantity discounts, and lose sales due to lack of adequate inventory.

To earn satisfactory income, management must balance the costs of inventory storage and obsolescence and the cost of tying up funds in inventory against possible losses of sales and other costs associated with keeping too little inventory on hand.

Considered in isolation of other information, a single financial ratio may not be sufficiently informative. Investors can gain more insight by computing and analyzing several related ratios for a company. Financial analysis relies heavily on informed judgment. As guides to aid comparison, percentages and ratios are useful in uncovering a company’s potential strengths and weaknesses. But financial analysts should also seek the basic causes behind changes and established trends.

Summary of Ratios
Liquidity Ratios	Formula	Significance
Current (or working capital) ratio	current assets / current liabilities	test of debt-paying ability
Acid-test (quick) ratio	quick assets (cash + marketable securities + net receivables) / current liabilities	test of immediate debt-paying ability
Inventory turnover	cost of goods sold / average inventory	test of whether or not a sufficient volume of business is being generated relative to inventory

Interpretation and Use of Ratios

Analysts must ensure their comparisons are valid—especially when those comparisons are of items for different periods or different companies. They should follow consistent accounting practices if valid inter-period comparisons are to be made. Some things analysts and potential investors should keep in mind when examining financial ratios include the following:

· When comparing a company’s ratios to industry averages provided by an external source such as Dun & Bradstreet, calculate the company’s ratios in the same manner as the reporting service. Thus, if Dun & Bradstreet uses net sales (rather than cost of goods sold) to compute inventory turnover, do the same.

· Facts and conditions not disclosed in financial statements may affect their interpretation. A single important event may have been largely responsible for a given relationship. For example, a company’s competitor may have put a new product on the market, making it necessary for the company to reduce the selling price of a product suddenly rendered obsolete. Such an event would severely affect net sales or profitability, but there might be little chance the event would occur again.

· Consider general business conditions within the industry of the company under study. A corporation’s downward trend in earnings, for example, is less alarming if the industry trend or the general economic trend is also going down.

· Consider the seasonal nature of some businesses. If a company’s balance sheet date reflects the seasonal peak in business volume, for example, the ratio of current assets to current liabilities may be much lower than when the balance sheet date reflects a season of low activity.

· Consider the market risk associated with the prospective investment. This can be determined by comparing changes in the company’s stock price in relation to changes in the average price of all stocks.

· Acquiring the ability to make informed judgments is a long process and does not occur overnight. Using ratios and percentages without considering any possible underlying causes may lead to inaccurate conclusions.

· Even within the same industry, variations may exist. Acceptable current ratios, gross margin percentages, debt-to-equity ratios, and other relationships vary widely, depending on the unique conditions within an industry. Therefore, it is important to know the workings of a particular industry to be able to make comparisons that have real meaning.

Demonstration Problem

The balance sheet and supplementary data for Xerox Corporation follow:

Xerox Corporation Balance Sheet 20XX December 31 (in millions)
	20XX
Assets
Cash	$1,741
Accounts receivable, net	$2,281
Finance receivables, net	$5,097
Inventories	$1,932
Deferred taxes and other current assets	$1,971
Total current assets	$13,022
Finance receivables due after one year, net	$7,957
Land, buildings, and equipment, net	$2,495
Investments in affiliates, at equity	$1,362
Goodwill	$1,578
Other assets	$3,061
Total assets	$29,475
Liabilities and stockholders’ equity
Short-term debt and current portion of long-term debt	$2,693
Accounts payable	$1,033
Accrued compensation and benefit costs	$662
Unearned income	$250
Other current liabilities	$1,630
Total current liabilities	$6,268
Long-term debt	$15,404
Liabilities for post-retirement medical benefits	$1,197
Deferred taxes and other liabilities	$1,876
Discontinued policyholders’ deposits and other operations liabilities	$670
Deferred ESOP benefits	($221)
Minorities’ interests in equity of subsidiaries	$141
Preferred stock	$647
Common shareholders’ equity ($108.1 million)	$3,493
Total liabilities and shareholders’ equity	$29,475

· Cost of goods sold, $6,197

· Net sales, $18,701

· Inventory, January 1, $2,290

· Net interest expense, $1,031

· Net income before interest and taxes, $647

· Net accounts receivable, January 1, $2,633

· Total assets on January 1, $28,531

Compute the following ratios:

1. Current ratio

2. Acid-test ratio

3. Inventory turnover

Solution to Demonstration Problem

1. Current ratio:

CurrentAssets=$13,022,000,000=2.08:1Currentliabilities$6,268,000,000CurrentAssets=$13,022,000,000=2.08:1Currentliabilities$6,268,000,000

2. Acid test ratio: 

QuckAssets=$9,119,000,000=1.45:1Currentliabilities$6,268,000,000QuckAssets=$9,119,000,000=1.45:1Currentliabilities$6,268,000,000

3. Inventory turnover: 

Netsales=18,701,000,000=8.86timesAverageInventory$2,111,000,000Netsales=18,701,000,000=8.86timesAverageInventory$2,111,000,000

2,111 million is the average of $2,290 million and $1,932 million, the inventories at the beginning and end of the year.

Introduction to Financial Ratios from Introduction to Business by Linda Williams and Lumen Learning is available under a Creative Commons Attribution 4.0 International license. UMUC has modified this work and it is available under the original license.