Fundamentals of Business

🧭 Overview

🧠 One-sentence thesis

Organizations rely on teams because they improve performance across multiple dimensions—from product quality to profitability—by combining complementary skills, fostering interdependence, and enabling members to achieve goals collectively that they could not accomplish individually.

📌 Key points (3–5)

• What defines a team: A group with complementary skills working interdependently toward a specific shared goal, with collective accountability and decision-making authority.
• Why organizations use teams: Research shows 61–70% of firms report improvements in productivity, quality, and customer service when using team-based operations.
• What makes teams effective vs. ineffective: Success depends on member interdependence, trust, cohesiveness, and appropriate leadership; failure often stems from groupthink, lack of cooperation, or insufficient managerial support.
• Common confusion—groups vs. teams: A group is people working independently toward a shared objective; a team works interdependently with shared accountability and integrated effort.
• Essential team skills: Every team needs a mix of technical skills (task execution), decision-making/problem-solving skills, and interpersonal skills (communication, conflict resolution).

🏗️ What teams are and why they matter

🏗️ Defining a team

Team (or work team): A group of people with complementary skills who work together to achieve a specific goal.

• Not just any collection of individuals—members must have complementary skills that fit together.
• The defining feature is working together toward a specific goal, not just parallel individual work.
• Example: Motorola's RAZR team combined designers and engineers to create an ultra-thin phone that would restore the company's reputation.

🔄 Teams vs. groups

Aspect	Working group	Team
Work style	Independently	Interdependently
Accountability	Individual goals	Shared/collective goals
Focus	Each person's own objectives	Common team objectives
Integration	Meet to share progress	Integrated collaborative effort

• A consultant's distinction: "A group is a bunch of people in an elevator. A team is also a bunch of people in an elevator, but the elevator is broken."
• Example: Department-store managers meeting monthly are a group (each accountable for their own department); a product-development team shares accountability for the final product.

📊 Performance impact

Organizations report measurable improvements when using teams:

Performance area	Percentage reporting improvement
Product/service quality	70%
Customer service	67%
Worker satisfaction	66%
Productivity	61%
Competitiveness	50%
Profitability	45%

• Specific examples: Xerox reported 30% productivity gains; General Mills reported 40% gains in team-organized factories; FedEx reduced service errors by 13% in year one.
• Important caveat: Not all data is objective (companies report successes more than failures), and team-based projects fail 50–70% of the time.

🎯 Five key characteristics of teams

🎯 Shared accountability

• Teams are collectively responsible for achieving specific common goals.
• Unlike groups where each person answers for their own work, team members share the outcome.

🔗 Interdependence

• Members rely on each other to get the job done.
• Work is integrated rather than parallel—one person's contribution connects to another's.

⚓ Stability

• Teams require continuity of membership to develop effective working relationships.
• Constant turnover prevents the team from building the trust and coordination needed.

🔑 Authority and decision-making power

• Teams hold the power to make decisions about their work.
• The degree varies (manager-led vs. self-managed), but some level of autonomy is essential.

🌐 Social context

• Teams operate within an organizational and interpersonal environment.
• Relationships, communication, and group dynamics matter as much as task execution.

🗂️ Types of teams

👔 Manager-led teams

• The manager is the team leader, setting goals, assigning tasks, and monitoring performance.
• Individual members have relatively little autonomy.
• Example: A professional football team—the head coach develops strategy, makes decisions, and interacts with upper management; players execute plays but don't control overall direction.

🔓 Self-managed teams

• Teams have considerable autonomy to control activities needed to achieve goals.
• Often small; may absorb supervisory functions.
• A manager may set overall goals, but the team decides how to reach them.
• Example: Whole Foods Market—each store has 10 departmental teams; every employee belongs to a team with its own leader and performance targets; teams access sales and salary data normally reserved for managers.
• Variation in autonomy: Companies differ on which tasks teams control (e.g., teams often schedule assignments but rarely fire coworkers).

🔀 Cross-functional teams

• Members drawn from different functional areas (operations, marketing, finance, design, engineering, etc.).
• Designed to leverage special expertise from diverse departments.
• Example: IRS cross-functional team studying information-system changes included job analysis, training, change management, industrial psychology, and ergonomics experts.
• Example: Nike product-development teams include designers, marketers, accountants, sports-research experts, coaches, athletes, and consumers.
• Motorola's RAZR team was cross-functional—designers and engineers worked together from the start rather than handing off sequentially.

💻 Virtual teams

• Members interact across time and space using technology (videoconferencing, etc.).
• Advantages: participate from any location/time; meetings can last as long as needed (days to months); team size not a barrier.
• Example: Lockheed Martin's F-35 Strike Fighter used a global virtual team drawing designers and engineers from eight international partners across multiple countries.
• The Covid-19 pandemic forced many organizations to adopt virtual team structures for operational continuity.

✅ What makes teams effective

✅ Six factors in effective teamwork

1. Members depend on each other: Reliance on one another drives productivity and efficiency.
2. Members trust one another: Trust is foundational to collaboration.
3. Members work better together than individually: Collective performance exceeds the sum of individual performances.
4. Members become boosters: Mutual encouragement elevates everyone's effort.
5. Team members enjoy being on the team: Satisfaction sustains motivation.
6. Leadership rotates: Shared leadership prevents bottlenecks and develops multiple members.

🧲 Group cohesiveness

Group cohesiveness: The attractiveness of a team to its members.

• High cohesiveness = members find membership satisfying.
• Low cohesiveness = members are unhappy and may try to leave.

Five factors that increase cohesiveness:

Factor	How it works
Size	Smaller teams = higher satisfaction; large teams make close interaction harder, a few dominate, conflict increases
Similarity	People get along better with similar others (shared attitudes/experience)
Success	Winning teams satisfy members and attract others
Exclusiveness	Harder to join = higher value placed on membership; status increases satisfaction
Competition	Motivation to achieve common goals and outperform other teams increases cohesion

• Warning: Too much cohesiveness can backfire if the team loses sight of broader organizational goals while focusing narrowly on immediate team objectives.

⚠️ What makes teams ineffective

🧠 Groupthink

Groupthink: The tendency to conform to group pressure in making decisions, while failing to think critically or consider outside influences.

• Excessive conformity stifles fresh ideas and critical thinking.
• The group may adopt dysfunctional tendencies as "the way we do things."
• Example: The 1986 Challenger space shuttle explosion—engineers warned the launch might be risky due to weather, but were persuaded to set aside concerns by NASA officials who wanted to proceed on schedule.

😞 Motivation and frustration

• Team members are people subject to psychological ups and downs.
• Low motivation = low effectiveness and productivity.
• Maintaining high motivation is the chief cause of frustration among team members.
• This is why employers now prioritize hiring managers who can develop and sustain motivation.

🚧 Three additional obstacles

1. Unwillingness to cooperate: Members don't or won't commit to a common goal/activities.

   • Example: Half a product-development team wants a brand-new product; half wants to improve an existing one—the team gets stuck for weeks or months.
   • Lack of cooperation between teams also creates problems.

2. Lack of managerial support: Teams need organizational resources (funding, personnel) to achieve goals.

   • If management won't commit needed resources, the team will likely fall short.

3. Failure of managers to delegate authority: Successful supervisors often become team leaders but struggle to adapt.

   • Supervisors give day-to-day instructions and expect compliance.
   • Team leaders must build consensus and let people make their own decisions—a different skill set.

🎓 Succeeding in team-based work

🎓 Why teamwork skills matter

• Over two-thirds of students report participating in organized teams; business students almost certainly will.
• In the workplace: 79% of Fortune 1000 companies use self-managing teams; 91% use other employee work groups.
• Employer priorities: The ability to work in teams is the most valued skill in new employees.
• Former Chrysler Chairman Lee Iacocca: "A major reason that capable people fail to advance is that they don't work well with their colleagues."
• Survey of 60+ top organizations: 60% cited "inability to work in teams" as why high-potential leaders derail; only 9% blamed "lack of technical ability."

Don't confuse: The question is not whether you'll work in teams (you will), but whether you'll know how to participate successfully.

🛠️ Three essential skill sets

Every team needs some mixture of:

1. Technical skills: Abilities to perform specific tasks.

   • Example: If a project requires extensive math work, you need someone with quantitative skills.

2. Decision-making and problem-solving skills: Abilities to identify problems, evaluate alternatives, and decide on best solutions.

   • Every task encounters problems; handling them requires good decision-making.

3. Interpersonal skills: Abilities in listening, providing feedback, resolving conflict, communicating goals/needs to outsiders.

   • Teams depend on direction, motivation, and communication.

• Key point: The right mix matters more than having all skills from day one.
• Teams often gain skills when members volunteer for tasks and develop abilities through performing them.
• Effective teamwork develops over time—it's always work in progress.

🎭 Team member roles

🎭 Two basic challenges every team faces

1. Accomplishing the assigned task
2. Maintaining or improving group cohesiveness

Your impact depends on whether you help or hinder the team in meeting these challenges.

🔧 Task-facilitating roles

Address challenge #1 (accomplishing goals):

Role	Example
Direction giving	"Jot down a few ideas and we'll see what everyone has come up with."
Information seeking	"Does anyone know if this is the latest data we have?"
Information giving	"Here are the latest numbers from…"
Elaborating	"I think a good example of what you're talking about is…"
Urging	"Let's try to finish this proposal before we adjourn."
Monitoring	"If you'll take care of the first section, I'll make sure we have the second by next week."
Process analyzing	"What happened to the energy level in this room?"
Reality testing	"Can we make this work and stay within budget?"
Enforcing	"We're getting off track. Let's try to stay on topic."

• Especially valuable when assignments aren't clear or progress is too slow.

🤝 Relationship-building roles

Address challenge #2 (maintaining/improving cohesiveness):

Role	Example
Supporting	"Now, that's what I mean by a practical application."
Harmonizing	"Actually, I think you're both saying pretty much the same thing."
Tension relieving	"Before we go on, would anyone like a drink?"
Confronting	"How does that suggestion relate to the topic we're discussing?"
Energizing	"It's been a long time since I've had this many laughs at a meeting in this department."
Developing	"If you need help pulling the data together, let me know."
Consensus building	"Do we agree on the first four points even if number five needs a little more work?"
Empathizing	"It's not you. The numbers are confusing."
Summarizing	"Before we jump ahead, here's what we've decided so far."

• Improve team "chemistry" through activities from empathizing to confronting.

⚠️ Three important points about roles

1. Teams are most effective with good balance between task facilitation and relationship-building.
2. It's hard for one person to perform both types—some focus better on tasks, others on relationships.
3. Overplaying any role can be counterproductive.
   • Example: Elaborating may not help when the team needs a quick decision.
   • Example: Consensus building may cause the team to overlook important disagreements.

🚫 Blocking roles

Blocking roles: Behavior that inhibits team performance or individual member performance.

Common blocking behaviors:

Behavior	Tactics
Dominate	Talk as much as possible; interrupt and interject
Overanalyze	Split hairs and belabor every detail
Stall	Frustrate efforts to conclude: decline to agree, sidetrack discussion, rehash old ideas
Remain passive	Stay on the fringe; minimize interaction; wait for others to take on work
Overgeneralize	Blow things out of proportion; float unfounded conclusions
Find fault	Criticize and withhold credit whenever possible
Make premature decisions	Rush to conclusions before setting goals, sharing information, or clarifying problems
Present opinions as facts	Refuse to seek factual support for personally favored ideas
Reject	Object to ideas from people who tend to disagree with you
Pull rank	Use status/title to push through ideas rather than seek consensus on value
Resist	Throw up roadblocks; look on the negative side
Deflect	Refuse to stay on topic; focus on minor points rather than main points

• Every member should recognize blocking behavior.
• If teams don't confront dysfunctional members, they can destroy morale, hamper consensus, create conflict, and hinder progress.

📚 Advice for class team projects

📚 Seven student-tested strategies

1. Draw up a team charter: Include goals, ways to ensure all ideas are considered, meeting timing/frequency. Or set informal ground rules everyone agrees to.

2. Contribute your ideas: Share them with the group. Worst case: they won't be used (same as if you stayed quiet).

3. Never miss a meeting or deadline: Schedule weekly meetings like a class. Write it in your calendar. Never skip.

4. Be considerate of each other: Be patient, listen to everyone, involve everyone in decisions, avoid infighting, build trust.

5. Create a process for resolving conflict: Do this before conflict arises. Set up rules for how the group will handle disagreements.

6. Use the strengths of each team member: All students bring different strengths. Utilize each person's unique value.

7. Don't do all the work yourself: Work with your team to get it done. The experience is often more important than the output.

👑 Leading a team

👑 The core leadership task

A leader must help members develop the attitudes and behavior that contribute to team success: interdependence, collective responsibility, shared commitment, and so forth.

• Leaders must influence team members (not command/control directly—that rarely works well).
• Work with members rather than on them.
• Gain and keep trust—people won't be influenced by someone they perceive as dishonest or selfishly motivated.

🔑 Eight key leadership skills and behaviors

1. Demonstrate integrity: Do what you say you'll do; act according to stated values; be honest in communication; follow through on promises.

2. Be clear and consistent: Let members know you're certain about what you want; clarity and consistency reinforce credibility.

3. Generate positive energy: Be optimistic; compliment team members; recognize their progress and success.

4. Acknowledge common points of view: Even when proposing change, recognize the value of views members already hold in common.

5. Manage agreement and disagreement: When members agree, confirm shared views. When they disagree, acknowledge both sides and support your position with strong, clear evidence.

6. Encourage and coach: Support members when they face new/uncertain situations and when success depends on high-level performance.

7. Share information: Give members the information they need; show you're knowledgeable about team tasks and individual talents; check in regularly on progress.

8. Check regularly: Find out what members are doing and how the job is progressing.

🧭 Overview

🧠 One-sentence thesis

Businesses operate by organizing functional activities (management, operations, marketing, accounting, finance) to serve stakeholders and achieve profit, while navigating external macro-environmental forces that shape opportunities and threats.

📌 Key points (3–5)

• What a business is: an activity that provides goods or services to consumers for the purpose of making profit (revenue minus costs).
• Key participants and stakeholders: owners invest money, employees perform work, customers buy products, and stakeholders (vendors, banks, landlords, etc.) all have legitimate interests that sometimes conflict.
• Functional areas: businesses organize work into management, operations, marketing, accounting, and finance—each with distinct roles that must coordinate.
• External forces (PESTEL): political, economic, sociocultural, technological, environmental, and legal factors influence business decisions but are largely outside the company's control.
• Common confusion: revenue vs. profit—revenue is total funds received; profit is what remains after expenses are paid.

🏢 What is a business and who participates

🏢 Defining a business

A business is any activity that provides goods or services to consumers for the purpose of making a profit.

• Goods vs. services: Apple produces goods (Mac, iPhone, iPad); banks, hotels, airlines provide services; many companies do both (e.g., car dealerships sell cars and repair them).
• For-profit vs. nonprofit: most organizations aim to make profit, but nonprofits (United Way, Red Cross, universities) provide social/educational services and still apply business principles to meet goals efficiently.

👥 Main participants

Participant	Role
Owners	Invest money, polish the business idea, bring together resources
Employees	Work for the company to help it reach goals
Customers	Purchase goods/services; satisfying their needs generates profit

🤝 Stakeholders and their interests

Stakeholders: those with a legitimate interest in the success or failure of the business and the policies it adopts.

• Stakeholders include customers, vendors, employees, landlords, bankers, and others.
• Their interests sometimes conflict: lenders prefer high profit margins to ensure loan repayment, while customers want the lowest prices.
• Example: If a restaurant fails, employees need new jobs, vendors need new customers, banks may write off loans.
• Don't confuse: stakeholders are broader than just owners and employees—they include anyone affected by the business.

🔧 Functional areas of business

🔧 Management

Management involves planning for, organizing, leading, and controlling a company's resources so it can achieve its goals.

• Plan: set goals and develop strategies.
• Organize: arrange activities and resources, staff the organization with qualified people.
• Lead: guide employees to accomplish organizational goals.
• Control: design assessments of plans/decisions and take corrective action when needed.
• Managers are responsible for the work performance of other people.

🔧 Operations

The operations manager designs and oversees the transformation of resources (labor, materials, money, information) into goods or services.

• Tangible products: Apple converts resources into Macs, iPhones, Apple Watch.
• Intangible products: hospitals convert resources into health care.
• Operations managers also ensure products are of high quality.

🔧 Marketing

Marketing consists of everything a company does to identify customers' needs and design products to meet those needs.

• Conduct market research to understand needs.
• Develop product benefits, features, price, and quality.
• Decide on delivery methods and promotion strategies to attract and keep customers.
• Manage customer relationships and communicate the organization's ability to satisfy needs.

🔧 Accounting

Accountants measure, summarize, and communicate financial and managerial information and advise managers on financial matters.

• Financial accountants: prepare financial statements for users inside and outside the organization to assess financial strength.
• Managerial accountants: prepare internal-only reports (e.g., cost of materials in production) for decision-making.
• Provide accurate, relevant, timely information that managers need.

🔧 Finance

Finance involves planning for, obtaining, and managing a company's funds.

• Key questions: How much money does the company need? How and where will it get the money? How and when will it pay back? What investments should be made in plant and equipment? How much for R&D?
• Especially important when a company is first formed, since new owners usually need to borrow money to start.

🌍 External forces and the macro-environment

🌍 What is the macro-environment

• Businesses don't operate in a vacuum; they are influenced by external factors collectively called the "macro-environment."
• These are forces largely outside the company's control.
• Example: Fast-food companies are affected by the economy (people's spending power), government (FDA food standards), consumer trends (demand for healthier menus), and environmental concerns (elimination of Styrofoam containers).

🌍 The PESTEL model

PESTEL is an acronym representing six aspects of the macro-environment: Political, Economic, Sociocultural, Technological, Environmental, and Legal.

Letter	Force	Examples
P	Political	Taxation, tariffs, trade agreements, labor regulations, environmental regulations
E	Economic	Whether the economy is growing; economic indicators measuring economic health
S	Sociocultural	Societal attitudes, demographics (age, income, gender, race), fashion trends
T	Technological	Internet, e-commerce, social media, remote device control
E	Environmental	Natural resources, pollution levels, recycling, supply of oil
L	Legal	Laws enacted by government, court decisions with broad implications

🌍 How to use PESTEL analysis

• There is considerable overlap between categories; it's more important to thoroughly assess the external environment than to categorize forces "correctly."
• A single force is not inherently positive or negative—it presents opportunities to some businesses and threats to others.
• Example: Societal attitudes favoring green energy are an opportunity for wind/solar companies but a threat to fossil-fuel-dependent businesses.
• Example: COVID-19 (a natural/environmental force) hurt tourism businesses but boosted demand for personal protective equipment (PPE) makers.

🌍 Real-world application: Electric vehicles

• As people become more environmentally conscious, they choose new technologies like all-electric cars.
• Both established companies (Nissan Leaf) and new companies (Tesla) have entered the market.
• The market is expected to grow at 21.1% annually between 2019 and 2030.
• This illustrates how environmental and technological forces create opportunities for some and challenges for others.

💰 Key business terms

💰 Revenue vs. profit

Revenue represents the funds an enterprise receives in exchange for its goods or services.

Profit is what's left (hopefully) after all the bills are paid.

• Don't confuse: Revenue is total income; profit is revenue minus expenses.
• Example: When Steve Jobs and Steve Wozniak launched Apple I, they created the company in Jobs' garage in the hope of making a profit.

💰 Entrepreneur

Entrepreneurs: those who take the risks and reap the rewards associated with starting a new business enterprise.

• Jobs and Wozniak were successful entrepreneurs who invested $1,300 and set up business in Jobs' garage.
• Apple grew from a garage start-up to a company generating over $365 billion in sales in 2021.

🧭 Overview

🧠 One-sentence thesis

Businesses operate within a complex macro-environment shaped by political, economic, sociocultural, technological, environmental, and legal forces that create both opportunities and threats depending on the company's capabilities and positioning.

📌 Key points (3–5)

• Business fundamentals: A business provides goods or services to make a profit (revenue minus costs), involving owners, employees, customers, and stakeholders with sometimes conflicting interests.
• Functional areas: Businesses organize work into management, operations, marketing, accounting, and finance—each with distinct roles that must work together.
• External forces: Companies are influenced by macro-environment factors (economy, government, consumer trends, technology, environment, legal) over which they have little control.
• PESTEL analysis: A systematic tool for examining Political, Economic, Sociocultural, Technological, Environmental, and Legal forces; the same force can be an opportunity for one business and a threat for another.
• Common confusion: Don't confuse revenue (total funds received) with profit (what remains after expenses); also, external forces aren't inherently good or bad—they present different implications for different businesses.

🏢 What is a business and who participates

💼 Core definition and key distinction

A business is any activity that provides goods or services to consumers for the purpose of making a profit.

• Revenue vs. profit: Revenue = funds received in exchange for goods/services; Profit = what's left after all bills are paid.
• Don't confuse: receiving money (revenue) with keeping money (profit).
• Example: Apple generates over $365 billion in sales (revenue), but profit is the portion remaining after paying for materials, employees, facilities, etc.

👥 Three main participants

Participant	Primary role	Why they matter
Owners	Invest money, polish business idea, bring together resources	Provide capital and strategic direction
Employees	Work for the company to help reach goals	Execute the business operations
Customers	Purchase goods/services	Generate revenue; satisfying their needs is the ultimate goal

🎯 Stakeholders and their interests

Stakeholders: those with a legitimate interest in the success or failure of the business and the policies it adopts.

• Include customers, vendors, employees, landlords, bankers, and others.
• Their interests sometimes conflict: lenders prefer high profit margins (ensures loan repayment), while customers want lowest possible prices.
• Pleasing stakeholders is a balancing act—no single decision satisfies everyone equally.
• Example: If a restaurant fails, employees need new jobs, vendors need new customers, banks may write off loans.

🔧 Functional areas of business

📋 Management

• Managers are responsible for other people's work performance.
• Four key activities:
  • Plan: set goals and develop strategies
  • Organize: arrange activities and resources to meet goals
  • Lead: guide employees to accomplish organizational goals
  • Control: design assessments of success and take corrective action when needed

🏭 Operations

• Converts resources (labor, materials, money, information) into goods or services.
• Tangible products: Apple produces Macs, iPhones, Apple Watch.
• Intangible products: Hospitals produce health care.
• Operations manager designs and oversees this transformation and ensures high quality.

📢 Marketing

• Everything a company does to identify customer needs and design products to meet them.
• Activities include:
  • Market research (identify needs)
  • Develop benefits, features, price, quality
  • Decide delivery methods and promotion
  • Manage customer relationships

📊 Accounting

• Measures, summarizes, and communicates financial information.
• Two fields:
  • Financial accounting: prepares statements for users inside and outside the organization to assess financial strength
  • Managerial accounting: prepares internal-only information (e.g., cost reports for production)

💰 Finance

• Plans for, obtains, and manages company funds.
• Key questions: How much money is needed? Where will it come from? How and when will it be repaid? What investments should be made?
• Particularly important for new businesses that need to borrow money to start.

🌍 The macro-environment and PESTEL analysis

🌐 External forces overview

• Businesses don't operate in a vacuum—they're influenced by the "macro-environment."
• Macro-environment = the big picture world external to a company over which the business exerts very little if any control.
• These forces collectively shape the context in which all businesses operate.

🔤 The PESTEL model

PESTEL: an acronym representing six aspects of the macro-environment that businesses must consider in planning.

Letter	Force	What it covers	Example
P	Political	Government influence: taxation, tariffs, trade agreements, labor/environmental regulations	Food standards monitored by FDA
E	Economic	Economic growth, health of economy, economic indicators	Strong economy = more money to eat out
S	Sociocultural	Societal attitudes, demographics (age, income, gender, race), fashion trends	Pressure for healthier fast-food menus
T	Technological	Internet, e-commerce, social media, remote device control	All-electric cars replacing fossil fuel vehicles
E	Environmental	Natural resources, pollution levels, recycling	Fast-food chains eliminating Styrofoam containers
L	Legal	Laws enacted by government, court decisions with broad implications	Various regulations affecting business operations

⚖️ Key insights about PESTEL

• Overlap is normal: Categories can overlap; it's more important to thoroughly assess the environment than to categorize perfectly.
• Forces aren't inherently good or bad: The same force presents opportunities for some businesses and threats for others.
  • Example: Societal shift toward green energy = opportunity for wind/solar companies, threat for fossil fuel-only companies.
• Pandemics fit the model: COVID-19 can be considered under Environmental/Natural forces; it hurt tourism but boosted PPE manufacturers.
• Don't confuse: A force being "external" doesn't mean it's unimportant—external forces often determine business success or failure.

🍔 Real-world application: Fast-food industry

The excerpt uses fast food to illustrate how all PESTEL forces impact one industry:

• Economy: Strong economy → people have more money to eat out
• Government: FDA monitors food standards
• Consumer trends: Pressure for healthier menus
• Environment: Companies eliminated Styrofoam containers in response to environmental concerns
• All these forces shape how Taco Bell, McDonald's, Cook-Out, and others compete

📈 The Apple story: Entrepreneurship in context

🚀 From garage to global giant

• 1976: Steve Jobs and Steve Wozniak created Apple I with $1,300 investment in Jobs' garage.
• Three decades later: over $365 billion in sales (2021).

Entrepreneurs: those who take the risks and reap the rewards associated with starting a new business enterprise.

🎢 Jobs' journey and lessons

• Jobs was ousted at age 30 by John Sculley (whom Jobs had hired).
• Started NextStep after leaving Apple.
• Invited back in 1993 when both companies struggled.
• Key trait: Never gave up on the company that turned its back on him.
• Leadership qualities: visionary, motivator, driven for perfection, learned/adjusted/improvised.
• Tim Cook took over in 2011; despite doubts, Apple released successful products (Apple Watch, AirPods) and approached $3 trillion valuation by 2022.

📉 Navigating economic turmoil

• 2008 financial crisis: Credit markets froze, consumer confidence dropped, unemployment rose, stock market fell 44%, even Apple cut iPhone production.
• 2020 COVID-19: Stock price plummeted 30% (from $325 to $224), then rebounded to $362 by June 2020.
• Lesson: Even successful companies must navigate external economic forces beyond their control.

🧭 Overview

🧠 One-sentence thesis

Businesses operate within a complex web of stakeholder interests and external forces that shape their decisions and require balancing competing priorities while considering their broader social impact.

📌 Key points (3–5)

• Stakeholders have legitimate interests: customers, vendors, employees, landlords, bankers, and others all have a stake in how a business operates and its success or failure.
• Interests often conflict: different stakeholders may want different things (e.g., lenders want high profit margins while customers want low prices), creating a balancing act for companies.
• External forces shape business: the macro-environment includes economic, governmental, consumer, technological, environmental, and legal factors that businesses cannot fully control.
• Common confusion: external forces are not inherently positive or negative—the same force can be an opportunity for some businesses and a threat to others.
• Corporate citizenship matters: businesses face increasing scrutiny and pressure to act responsibly, including environmental concerns and ethical behavior.

🤝 Stakeholders and Their Competing Interests

👥 Who are stakeholders?

Stakeholders: those with a legitimate interest in the success or failure of the business and the policies it adopts.

• Not just owners and employees—includes customers, vendors, landlords, bankers, and others.
• Each group has a keen interest in how the business operates, usually for obvious reasons.
• If a business fails, the ripple effects touch all stakeholders: employees need new jobs, vendors need new customers, banks may write off loans.

⚖️ The balancing act

Stakeholders do not always see things the same way—their interests sometimes conflict:

Stakeholder	Typical Interest	Potential Conflict
Lenders/Banks	High profit margins to ensure loan repayment	vs. Customers wanting lowest possible prices
Employees	Job security and good wages	vs. Owners wanting to cut costs
Vendors	Stable, ongoing orders	vs. Company wanting to switch suppliers for better deals

• Pleasing stakeholders can be a real balancing act for any company.
• Management must navigate these competing interests when making decisions.
• Don't confuse: stakeholder interests with shareholder interests alone—stakeholders are a broader group beyond just owners.

🌍 The Macro-Environment and External Forces

🔍 What is the macro-environment?

Macro-environment: essentially the big picture world external to a company over which the business exerts very little if any control.

• Businesses don't operate in a vacuum—they're influenced by numerous external factors.
• These forces collectively shape the environment in which businesses must operate.
• Companies must adapt to these forces rather than control them.

📊 The PESTEL model

PESTEL: an acronym representing six aspects of the macro-environment that a business needs to consider in its planning.

Letter	Force	What It Includes
P	Political	Taxation, tariffs, trade agreements, labor regulations, environmental regulations
E	Economic	Whether the economy is growing, economic indicators, overall economic health
S	Sociocultural	Societal attitudes, demographics (age, income, gender, race), fashion trends
T	Technological	Internet, e-commerce, social media, remote device control, information access
E	Environmental	Natural resources, pollution levels, recycling, supply of resources like oil
L	Legal	Laws enacted by government, court decisions with broad implications

🔄 How to use PESTEL analysis

Important considerations when conducting PESTEL analysis:

• There can be considerable overlap between categories—don't worry about getting forces under the "right" category.
• Focus on thoroughly assessing the external environment rather than perfect categorization.
• Individual forces are not inherently positive or negative—they present opportunities or threats depending on the business.

Example: Societal attitudes moving in favor of green energy:

• Opportunity for companies with capabilities in wind, solar, and other renewables.
• Threat for companies whose business models depend exclusively on fossil fuels.

🦠 Broader interpretation of forces

The model can accommodate major events that don't fit neatly into traditional categories:

• COVID-19 pandemic could fit under "Environmental" (natural forces) with a broader interpretation.
• The same force can have opposite effects on different industries:
  • Negative impact: tourism businesses suffered revenue losses and employee layoffs.
  • Positive impact: makers of personal protective equipment (PPE) struggled to meet increased demand.

🏢 Corporate Citizenship and Social Pressure

📢 Increasing scrutiny

• Corporations are being held responsible for the behavior of their executives.
• More people share the opinion that companies should be good corporate citizens.
• Businesses face increasing scrutiny and negative public sentiment, especially after the financial crisis.

🌱 Environmental responsibility

Several examples show businesses responding to public pressure:

• Fast-food chains eliminated Styrofoam containers in response to environmental concerns.
• Consumer preferences influence business decisions (e.g., pressure for healthier fast-food menus).
• Companies must balance profit motives with social responsibility.

💡 Why corporate citizenship matters

• Public pressure influences business decisions beyond pure profit considerations.
• Companies that ignore social responsibility face reputational risks.
• Being a good corporate citizen can be both an ethical imperative and a business strategy.

Don't confuse: responding to stakeholder pressure with purely voluntary action—businesses often face real consequences for ignoring social concerns, making "voluntary" action somewhat compelled by market forces.

🧭 Overview

🧠 One-sentence thesis

Businesses operate by combining owners, employees, and customers through functional areas like management, operations, marketing, accounting, and finance, while external macro-environmental forces shape their strategies and success.

📌 Key points (3–5)

• What defines a business: any activity providing goods or services to consumers for profit; revenue is total funds received, while profit is what remains after expenses.
• Key participants and stakeholders: owners invest and set direction, employees execute work, customers drive demand, and stakeholders (vendors, banks, landlords) all have legitimate interests that sometimes conflict.
• Functional areas: businesses organize work into management, operations, marketing, accounting, and finance—each with distinct responsibilities that must work together.
• External forces (PESTEL): political, economic, sociocultural, technological, environmental, and legal factors influence business decisions but are largely outside company control.
• Common confusion: revenue vs. profit—revenue is all money coming in; profit is what's left after paying bills.

🏢 What Makes a Business

💼 Core definition and purpose

A business is any activity that provides goods or services to consumers for the purpose of making a profit.

• The excerpt emphasizes the distinction between goods (tangible products like iPhones, cars) and services (intangible offerings like banking, healthcare, legal advice).
• Many companies provide both: a car dealership sells cars (goods) and offers repairs (services).
• Revenue vs. Profit clarity:
  • Revenue = funds received in exchange for goods/services
  • Profit = what remains after all bills are paid
• Example: When Apple launched, Steve Jobs and Steve Wozniak created the company "in the hope of making a profit"—not just to generate revenue.

🎯 Not-for-profit organizations

• Organizations like United Way, Habitat for Humanity, Red Cross, and many colleges are not set up to make profits.
• However, they function similarly to businesses: they establish goals and work to meet them effectively and efficiently.
• Most business principles in the text apply to nonprofits as well.

👥 Participants and Stakeholders

👤 Three main participants

Participant	Role	Why they matter
Owners	Invest money, polish business idea, bring together resources	Primary risk-takers who start and fund the business
Employees	Work for the company to help reach goals	Execute the day-to-day operations
Customers	Purchase goods/services	Ultimate goal is satisfying their needs to generate profit

🤝 Stakeholders and conflicting interests

Stakeholders: those with a legitimate interest in the success or failure of the business and the policies it adopts.

• Stakeholders include customers, vendors, employees, landlords, bankers, and others.
• All have keen interest in how the business operates—if it fails, employees need new jobs, vendors need new customers, banks may write off loans.
• Key challenge: Stakeholder interests sometimes conflict.
  • Example from excerpt: Lenders appreciate high profit margins (ensures loan repayment), while customers prefer lowest possible prices.
  • "Pleasing stakeholders can be a real balancing act for any company."

Don't confuse: Participants vs. stakeholders—participants (owners, employees, customers) are the core actors; stakeholders is a broader category including anyone with legitimate interest, even if not directly involved in daily operations.

🔧 Functional Areas of Business

📋 Management

Management involves planning for, organizing, leading, and controlling a company's resources so that it can achieve its goals.

• Managers are responsible for the work performance of other people.
• Four key activities:
  • Plan: set goals and develop strategies
  • Organize: arrange activities and resources, staff with qualified people
  • Lead: guide employees to accomplish organizational goals
  • Control: design assessments of plans/decisions, take corrective action when needed

🏭 Operations

• Operations managers design and oversee the transformation of resources (labor, materials, money, information) into goods or services.
• Tangible products: Apple converts resources into Macs, iPhones, Apple Watch
• Intangible products: Hospitals convert resources into healthcare
• Also responsible for ensuring products are of high quality.

📣 Marketing

Marketing consists of everything that a company does to identify customers' needs (market research) and design products to meet those needs.

• Marketers develop benefits, features, price, and quality of products.
• Decide on best delivery methods and promotional means to attract and keep customers.
• Manage customer relationships and communicate the organization's ability to satisfy needs.

📊 Accounting

• Accountants measure, summarize, and communicate financial and managerial information.
• Provide accurate, relevant, and timely financial information that managers need.
• Two fields:
  • Financial accountants: prepare statements to help users inside and outside assess financial strength
  • Managerial accountants: prepare internal-use information (e.g., cost reports for production materials)

💰 Finance

Finance involves planning for, obtaining, and managing a company's funds.

• Financial managers address questions like:
  • How much money does the company need?
  • How and where will it get necessary money?
  • How and when will it pay money back?
  • What investments should be made in plant and equipment?
  • How much should be spent on research and development?
• Particularly important when a company is first formed, since new owners usually need to borrow money to get started.

🌍 External Forces and the Macro-Environment

🌐 The macro-environment concept

• Businesses don't operate in a vacuum—they're influenced by external factors.
• The excerpt calls this the "macro-environment": the big picture world external to a company over which the business exerts very little if any control.
• Example from fast-food industry (Taco Bell, McDonald's, Cook-Out):
  • Strong economy = people have more money to eat out
  • Government agency (FDA) monitors food standards
  • Consumer trends pressure companies to make menus healthier
  • Environmental concerns led to eliminating Styrofoam containers

🔍 The PESTEL model

PESTEL is an acronym, with each letter representing an aspect of the macro-environment that a business needs to consider in its planning.

Letter	Force	What it covers
P	Political	Government influence: taxation, tariffs, trade agreements, labor regulations, environmental regulations
E	Economic	Whether economy is growing; economic indicators measuring economic health
S	Sociocultural	Societal attitudes, demographics (age, income, gender, race), fashion trends
T	Technological	Internet, e-commerce, social media, remote device control, instantaneous information access
E	Environmental	Natural resources, pollution levels, recycling
L	Legal	Laws enacted by government, court decisions with broad implications

⚖️ Important PESTEL considerations

• Overlap is normal: considerable overlap exists between categories; more important to thoroughly assess the environment than to categorize perfectly.
• Forces are neutral: an individual force is not inherently positive or negative—it presents either an opportunity or a threat to different businesses.
  • Example: Societal attitudes favoring green energy = opportunity for wind/solar companies, threat to fossil fuel companies.
• Broad interpretation: The excerpt discusses where COVID-19 fits—while "Natural" or environmental forces usually mean resources and pollution, a broader view logically includes pandemics.
  • COVID-19 was unfavorable to tourism (revenue losses, layoffs) but boosted demand for PPE makers.

🚗 Real-world application example

The excerpt describes the all-electric vehicle market:

• Sociocultural/Environmental: People became more conscious of the environment
• Technological: New technologies like all-electric cars emerged to replace fossil fuel vehicles
• Both established companies (Nissan Leaf) and new companies (Tesla) entered the market
• Market expected to grow at 21.1% compound annual growth rate between 2019 and 2030

Don't confuse: The PESTEL categories with each other—while there's overlap, the model's value is in ensuring thorough analysis of all external forces, not in perfect categorization.

🧭 Overview

🧠 One-sentence thesis

Businesses operate through distinct functional areas—management, operations, marketing, accounting, and finance—while being influenced by external macro-environmental forces that present both opportunities and threats.

📌 Key points (3–5)

• What a business is: an activity that provides goods or services to consumers for the purpose of making a profit (revenue minus expenses).
• Key participants: owners invest money, employees work toward goals, customers create demand, and stakeholders have legitimate interests in business success.
• Functional areas: businesses divide activities into management, operations, marketing, accounting, and finance—each with distinct roles.
• External forces: the macro-environment (economy, government, technology, society, environment, legal factors) influences business but is largely outside company control.
• Common confusion: revenue vs. profit—revenue is total funds received; profit is what remains after paying all bills.

💼 Business fundamentals

💼 Defining a business

A business is any activity that provides goods or services to consumers for the purpose of making a profit.

• Goods vs. services: Apple produces goods (Mac, iPhone); banks provide services; many companies do both (car dealerships sell cars and provide repairs).
• For-profit vs. nonprofit: most organizations discussed are for-profit, but nonprofits (United Way, Habitat for Humanity, Red Cross) function similarly—they set goals and work to meet them efficiently.
• Example: Apple Computer started in a garage with the hope of making a profit.

💰 Revenue vs. profit distinction

Term	Definition	Key point
Revenue	Funds received in exchange for goods/services	Total money coming in
Profit	What's left after all bills are paid	Revenue minus expenses

• Don't confuse: a company can have high revenue but low or no profit if expenses are too high.

👥 Participants and stakeholders

👥 Three main participants

• Owners: invest money, polish the business idea, bring together resources (money and people), hire employees.
• Employees: work for the company to help it reach its goals.
• Customers: the ultimate goal is to satisfy their needs to generate profit for owners.

🎯 Stakeholders and their interests

Stakeholders: those with a legitimate interest in the success or failure of the business and the policies it adopts.

• Include customers, vendors, employees, landlords, bankers, and others.
• All have keen interest in how the business operates—if it fails, employees need new jobs, vendors need new customers, banks may write off loans.
• Balancing act: stakeholder interests sometimes conflict (lenders want high profit margins to ensure loan repayment; customers want lowest prices).
• Example: In a restaurant, whether national chain or local, all stakeholders care about business success for their own reasons.

🏢 Functional areas of business

📋 Management

Management involves planning for, organizing, leading, and controlling a company's resources so that it can achieve its goals.

• Plan: set goals and develop strategies for achieving them.
• Organize: arrange activities and resources to ensure company goals are met; staff the organization with qualified employees.
• Lead: guide employees to accomplish organizational goals.
• Control: design controls for assessing success of plans and decisions; take corrective action when needed.
• Managers are responsible for the work performance of other people.

⚙️ Operations

• Role: convert resources (labor, materials, money, information) into goods or services.
• Tangible products: Apple converts resources into Macs, iPhones, Apple Watch.
• Intangible products: hospitals convert resources into health care.
• Operations manager: designs and oversees the transformation process; ensures products are of high quality.

📢 Marketing

Marketing consists of everything that a company does to identify customers' needs (market research) and design products to meet those needs.

• Develop benefits and features of products, including price and quality.
• Decide on best method of delivering products and best means of promoting them.
• Attract and keep customers; manage relationships with customers.
• Make customers aware of the organization's desire and ability to satisfy their needs.

📊 Accounting

• Purpose: provide accurate, relevant, and timely financial information that managers need.
• Accountants measure, summarize, and communicate financial and managerial information; advise other managers on financial matters.

Type	Role	Audience
Financial accountants	Prepare financial statements to assess financial strength	Inside and outside the organization
Managerial accountants	Prepare reports (e.g., cost of materials in production)	Internal use only

💵 Finance

Finance involves planning for, obtaining, and managing a company's funds.

• Financial managers address questions like:
  • How much money does the company need?
  • How and where will it get the necessary money?
  • How and when will it pay the money back?
  • What investments should be made in plant and equipment?
  • How much should be spent on research and development?
• Particularly important when a company is first formed—new business owners usually need to borrow money to get started.

🌍 External macro-environment

🌍 Forces outside business control

The macro-environment: essentially the big picture world external to a company over which the business exerts very little if any control.

• Businesses don't operate in a vacuum—they're influenced by external factors.
• Include: economy, government, consumer trends, technological developments, public pressure to act as good corporate citizens.
• Example: Fast-food industry (Taco Bell, McDonald's, Cook-Out) is affected by all these factors:
  • Strong economy → people have more money to eat out.
  • Government agency (FDA) monitors food standards.
  • Consumer trends push for healthier menus.
  • Environmental concerns led to eliminating Styrofoam containers.

🔍 PESTEL analysis model

PESTEL: an acronym representing aspects of the macro-environment that a business needs to consider in its planning.

Letter	Force	Examples
P	Political	Taxation, tariffs, trade agreements, labor regulations, environmental regulations
E	Economic	Whether economy is growing; economic indicators measuring economic health
S	Sociocultural	Societal attitudes, demographics (age, income, gender, race), fashion trends
T	Technological	Internet, e-commerce, social media, remote device control
E	Environmental	Natural resources, pollution levels, recycling; also includes natural events like pandemics
L	Legal	Laws enacted by government, court decisions with broad implications

⚖️ Using PESTEL effectively

• Overlap is normal: considerable overlap from category to category; more important to thoroughly assess external environment than to categorize perfectly.
• Not inherently positive or negative: an individual force presents either an opportunity or a threat to different businesses.
• Example: Societal attitudes favoring green energy are an opportunity for wind/solar companies but a threat to companies depending exclusively on fossil fuels.
• Example: All-electric car technology—as people become more environmentally conscious, companies like Nissan (Leaf) and Tesla have entered the market; expected to grow at 21.1% annually between 2019 and 2030.

🦠 Pandemic as macro-environmental force

• COVID-19 fits under the environmental force (broader view of natural environment).
• Hugely unfavorable to some industries (tourism suffered revenue losses and layoffs), yet a boost to others (PPE makers challenged to meet increased demand).
• Consistent with other forces: same event can be opportunity for some, threat for others.

🧭 Overview

🧠 One-sentence thesis

Businesses operate through the collaboration of owners, employees, and customers while performing core functional activities and responding to external macro-environmental forces they cannot fully control.

📌 Key points (3–5)

• Three main participants: owners invest money and start the business; employees work to achieve goals; customers generate profit by having their needs satisfied.
• Stakeholders have competing interests: customers, vendors, employees, landlords, and bankers all care about business success but may want different outcomes (e.g., lenders prefer high margins; customers prefer low prices).
• Five functional areas: management, operations, marketing, accounting, and finance—each handles a distinct set of business activities.
• External forces shape business: the macro-environment (economy, government, consumer trends, technology, environment, legal factors) influences business decisions but lies largely outside company control.
• Common confusion—PESTEL categories overlap: forces can fit multiple categories; what matters is thorough assessment, not perfect categorization.

👥 Business participants and stakeholders

👥 The three core participants

• Owners: invest money, polish the business idea, and bring together resources (money and people) to turn the idea into a business.
• Employees: hired by owners to work for the company and help it reach its goals.
• Customers: the ultimate target—the goal of any business is to satisfy customer needs in order to generate profit for owners.

🎯 Stakeholders and their interests

Stakeholders: those with a legitimate interest in the success or failure of the business and the policies it adopts.

• Include customers, vendors, employees, landlords, bankers, and others.
• All have a keen interest in how the business operates; if the business fails, employees need new jobs, vendors need new customers, and banks may write off loans.
• Conflicting interests: stakeholders do not always see things the same way.
  • Example: lenders appreciate high profit margins (ensures loan repayment), while customers prefer the lowest possible prices.
• Pleasing stakeholders is a balancing act for any company.

🏢 Functional areas of business

🧑‍💼 Management

Management: involves planning for, organizing, leading, and controlling a company's resources so it can achieve its goals.

• Managers are responsible for the work performance of other people.
• Plan: set goals and develop strategies for achieving them.
• Organize: arrange activities and resources to ensure company goals are met; staff the organization with qualified employees.
• Lead: guide employees to accomplish organizational goals.
• Control: design controls for assessing the success of plans and decisions; take corrective action when needed.

⚙️ Operations

• All companies must convert resources (labor, materials, money, information) into goods or services.
• Tangible products: e.g., Apple converts resources into Macs, iPhones, Apple Watch.
• Intangible products: e.g., hospitals convert resources into health care.
• Operations manager: designs and oversees the transformation of resources into goods or services; also responsible for ensuring products are of high quality.

📢 Marketing

Marketing: everything a company does to identify customers' needs (market research) and design products to meet those needs.

• Develop the benefits and features of products, including price and quality.
• Decide on the best method of delivering products and the best means of promoting them to attract and keep customers.
• Manage relationships with customers and make them aware of the organization's desire and ability to satisfy their needs.

📊 Accounting

• Managers need accurate, relevant, and timely financial information, which accountants provide.
• Accountants: measure, summarize, and communicate financial and managerial information; advise other managers on financial matters.
• Two fields:
  • Financial accountants: prepare financial statements to help users (inside and outside the organization) assess the financial strength of the company.
  • Managerial accountants: prepare information (e.g., reports on the cost of materials used in production) for internal use only.

💰 Finance

Finance: involves planning for, obtaining, and managing a company's funds.

• Financial managers address questions such as:
  • How much money does the company need?
  • How and where will it get the necessary money?
  • How and when will it pay the money back?
  • What investments should be made in plant and equipment?
  • How much should be spent on research and development?
• Good financial management is particularly important when a company is first formed, because new business owners usually need to borrow money to get started.

🌍 External forces and the macro-environment

🌍 The macro-environment concept

• Businesses don't operate in a vacuum; they're influenced by external factors.
• These include the economy, government, consumer trends, technological developments, public pressure to act as good corporate citizens, and other factors.
• Collectively, these forces constitute the "macro-environment"—the big picture world external to a company over which the business exerts very little if any control.

🍔 Fast-food industry example

• A strong economy means people have more money to eat out.
• Food standards are monitored by a government agency (the Food and Drug Administration).
• Preferences for certain types of foods are influenced by consumer trends (e.g., pressure to make menus healthier).
• Several fast-food chains have responded to environmental concerns by eliminating Styrofoam containers.

🚗 Electric vehicle example

• As people have become more conscious of the environment, they have begun to choose new technologies, like all-electric cars to replace those that burn fossil fuels.
• Both established companies (Nissan with its Nissan Leaf) and brand new companies (Tesla) have entered the market.
• The market is expected to grow at a compound annual growth rate of 21.1 percent between 2019 and 2030.

🔍 The PESTEL analysis model

🔍 What PESTEL means

PESTEL model: a tool for analyzing the external environment in which an industry or company operates; each letter represents an aspect of the macro-environment.

Letter	Force	Description
P	Political	Governments influence business through taxation, tariffs, trade agreements, labor regulations, environmental regulations
E	Economic	Whether the economy is growing or not is a major concern; numerous economic indicators measure the health of the economy
S	Sociocultural	Societal attitudes, trends in national demographics, fashion trends; demographics = any attribute describing people (age, income, gender, race, etc.)
T	Technological	Internet, e-commerce, social media, remote device control—technological forces have greatly impacted business in recent decades
E	Environmental	Natural resources, pollution levels, recycling (distinct from societal attitudes, which are sociocultural)
L	Legal	Laws enacted by politicians; court decisions with broad implications beyond the case being decided

⚠️ Important considerations

• Overlap is common: considerable overlap exists from category to category; it's more important to thoroughly assess the external environment than to get forces under the "right" category.
• Forces are not inherently positive or negative: an individual force presents either an opportunity or a threat to different businesses.
  • Example: societal attitudes moving in favor of green energy are an opportunity for wind/solar companies, while presenting a threat to companies whose business models depend exclusively on fossil fuels.

🦠 COVID-19 and PESTEL

• In other models, there is a "Natural" force that equates to the environmental force in PESTEL.
• A broader view of this force would logically include something like a pandemic.
• COVID-19 has been hugely unfavorable to some industries (tourism suffered large revenue losses and employee layoffs) yet a boost to others (makers of personal protective equipment challenged just to meet increased demand).
• Don't confuse: the same external force can be an opportunity for some businesses and a threat for others.

🧭 Overview

🧠 One-sentence thesis

Management involves planning, organizing, leading, and controlling a company's resources across functional areas—management, operations, marketing, accounting, and finance—while external macro-environmental forces shape business decisions and opportunities.

📌 Key points (3–5)

• What managers do: plan goals, organize activities and resources, lead employees, and design controls to assess success and take corrective action.
• Five functional areas: management, operations, marketing, accounting, and finance—each handles a distinct aspect of converting resources into value.
• External forces matter: businesses operate within a macro-environment (economy, government, consumer trends, technology, environment, legal factors) that they cannot fully control.
• PESTEL as a tool: this model helps analyze Political, Economic, Sociocultural, Technological, Environmental, and Legal forces; forces can be opportunities or threats depending on the business.
• Common confusion: external forces aren't inherently good or bad—the same force (e.g., green energy trends) can be an opportunity for some companies and a threat to others.

🎯 What managers do

🎯 The four management functions

Management involves planning for, organizing, leading, and controlling a company's resources so that it can achieve its goals.

Managers are responsible for the work performance of other people. Their role breaks down into four core activities:

• Plan: set goals and develop strategies for achieving them.
• Organize: arrange activities and resources to ensure company goals are met; staff the organization with qualified employees.
• Lead: guide and motivate employees to accomplish organizational goals.
• Control: design systems to assess the success of plans and decisions; take corrective action when needed.

Example: A manager plans a sales target, organizes the sales team and resources, leads the team through coaching, and controls by reviewing sales reports and adjusting tactics.

🏭 The five functional areas

🏭 Operations

The person who designs and oversees the transformation of resources into goods or services is called an operations manager.

• Operations converts resources (labor, materials, money, information) into goods or services.
• Tangible products: companies like Apple convert resources into physical products (Macs, iPhones, Apple Watch).
• Intangible products: hospitals convert resources into services like health care.
• Operations managers are also responsible for ensuring products are of high quality.

📢 Marketing

Marketing consists of everything that a company does to identify customers' needs (i.e., market research) and design products to meet those needs.

• Marketers develop product benefits, features, price, and quality.
• They decide on the best delivery methods and promotional means to attract and keep customers.
• They manage customer relationships and communicate the organization's ability to satisfy needs.

💰 Accounting

Accountants measure, summarize, and communicate financial and managerial information; they advise other managers on financial matters.

Type	Purpose	Users
Financial accountants	Prepare financial statements to assess the financial strength of the company	Both inside and outside the organization
Managerial accountants	Prepare information (e.g., cost reports on materials used in production)	Internal use only

• Managers need accurate, relevant, and timely financial information, which accountants provide.

💵 Finance

Finance involves planning for, obtaining, and managing a company's funds.

Financial managers address questions such as:

• How much money does the company need?
• How and where will it get the necessary money?
• How and when will it pay the money back?
• What investments should be made in plant and equipment?
• How much should be spent on research and development?

Good financial management is particularly important when a company is first formed, because new business owners usually need to borrow money to get started.

🌍 External forces and the macro-environment

🌍 What is the macro-environment

Collectively, these forces constitute what is known as the "macro-environment"—essentially the big picture world external to a company over which the business exerts very little if any control.

• Businesses don't operate in a vacuum; they're influenced by external factors.
• These include: the economy, government, consumer trends, technological developments, public pressure to act as good corporate citizens, and other factors.
• Example: The fast-food industry is affected by all these factors—a strong economy means people have more money to eat out; food standards are monitored by government agencies; consumer trends push for healthier menus; environmental concerns have led chains to eliminate Styrofoam containers.

🔋 Technology example

• As people have become more conscious of the environment, they have begun to choose new technologies like all-electric cars to replace those that burn fossil fuels.
• Both established companies (Nissan with its Nissan Leaf) and brand new companies (Tesla) have entered the market for all-electric vehicles.
• The market is expected to grow at a compound annual growth rate of 21.1 percent between 2019 and 2030.

🔍 The PESTEL analysis model

🔍 What PESTEL means

PESTEL is an acronym, with each of the letters representing an aspect of the macro-environment that a business needs to consider in its planning.

PESTEL is a useful tool for analyzing the external environment in which an industry or company operates.

🅿️ Political environment

• Governments influence the environment in which businesses operate in many ways.
• Examples: taxation, tariffs, trade agreements, labor regulations, and environmental regulations.

💹 Economic environment

• Whether the economy is growing or not is a major concern to business.
• Numerous economic indicators have been created for the specific purpose of measuring the health of the economy.

👥 Sociocultural environment

• Captures societal attitudes, trends in national demographics, and even fashion trends.
• Demographics: any attribute that can be used to describe people, such as age, income level, gender, race, and so on.
• As a society's attitudes or its demographics change, the market for goods and services can shift right along with it.

💻 Technological factors

• In the last several decades, perhaps no force has impacted business more than the emergence of the internet.
• Nearly instantaneous access to information, e-commerce, social media, and even the ability to control physical devices from remote locations have all come about due to technological forces.

🌱 Environmental forces

• Refers to natural resources, pollution levels, recycling, etc.
• Don't confuse: attitudes towards the natural environment would be sociocultural; the actual level of pollution, supply of oil, etc. would be grouped under environmental forces.

⚖️ Legal factors

• These forces often coincide with political factors, because it is politicians (i.e., government) that enacts laws.
• However, other legal factors can impact businesses as well, such as decisions made by courts that may have broad implications beyond the case being decided.

🧩 Using PESTEL effectively

🧩 Important reminders

• Overlap is normal: there can be considerable overlap from category to category; it's more important to thoroughly assess the external environment than to get all forces under the "right" category.
• Forces aren't inherently good or bad: an individual force is not inherently positive or negative but rather presents either an opportunity or a threat to different businesses.
  • Example: societal attitudes moving in favor of green energy are an opportunity for those with capabilities in wind, solar, and other renewables, while presenting a threat to companies whose business models depend exclusively on fossil fuels.

🦠 COVID-19 example

• COVID-19 had a major impact on all sorts of businesses and on every economy in the world.
• A broader view of environmental/natural forces would logically include something like a pandemic.
• Consistent with other types of forces, COVID-19 has been hugely unfavorable to some industries (tourism suffered large revenue losses and employee layoffs) yet a boost to business for others (makers of personal protective equipment have been challenged just to meet the increase in demand).

🧭 Overview

🧠 One-sentence thesis

Businesses operate within a complex macro-environment of external forces—economic, political, technological, sociocultural, environmental, and legal—that they cannot control but must analyze and respond to strategically.

📌 Key points (3–5)

• Macro-environment definition: the big-picture external world over which a business has little or no control, including economy, government, consumer trends, technology, and environmental pressures.
• PESTEL model: a framework for analyzing six categories of external forces (Political, Economic, Sociocultural, Technological, Environmental, Legal) that influence business planning.
• Forces are context-dependent: the same external force can be an opportunity for some businesses and a threat to others (e.g., green energy trends favor renewables but challenge fossil fuel companies).
• Common confusion: PESTEL categories overlap; what matters is thorough assessment, not perfect categorization—and some forces (like pandemics) can fit multiple categories.
• Real-world impact: external forces shape entire industries (e.g., fast-food chains adapting to health trends and environmental concerns; electric vehicle market growth driven by environmental consciousness).

🌍 Understanding the macro-environment

🌍 What the macro-environment includes

Macro-environment: the big picture world external to a company over which the business exerts very little if any control.

• Businesses do not operate in a vacuum; they are influenced by numerous external factors.
• These forces collectively shape the context in which companies compete and make decisions.
• The excerpt emphasizes that businesses have minimal control over these forces but must respond to them.

🔗 How external forces connect to business

The excerpt illustrates this with the fast-food industry:

• Economy: strong economy means people have more money to eat out
• Government: Food and Drug Administration monitors food standards
• Consumer trends: pressure for healthier menus
• Environmental concerns: elimination of Styrofoam containers to be good corporate citizens

Example: Electric vehicle market growth (21.1% compound annual growth rate 2019-2030) driven by environmental consciousness—both established companies (Nissan Leaf) and new entrants (Tesla) respond to this external shift.

🔍 The PESTEL analysis framework

🔍 What PESTEL stands for

PESTEL: an acronym representing six aspects of the macro-environment that businesses must consider in planning.

Each letter represents a category of external forces:

Letter	Category	What it covers
P	Political	Government influence: taxation, tariffs, trade agreements, labor regulations, environmental regulations
E	Economic	Economic growth, health of the economy, economic indicators
S	Sociocultural	Societal attitudes, demographics (age, income, gender, race), fashion trends
T	Technological	Internet, e-commerce, social media, remote device control, information access
E	Environmental	Natural resources, pollution levels, recycling, supply of resources like oil
L	Legal	Laws enacted by government, court decisions with broad implications

📊 Political environment

• Governments influence business operations in many ways.
• Key areas: taxation, tariffs, trade agreements, labor regulations, environmental regulations.
• Political forces often overlap with legal factors since politicians enact laws.

💰 Economic environment

• Whether the economy is growing or not is a major business concern.
• Numerous economic indicators measure the health of the economy.
• Economic conditions directly affect consumer spending power and business performance.

👥 Sociocultural environment

• Captures societal attitudes, trends in national demographics, and fashion trends.

Demographics: any attribute that can be used to describe people, such as age, income level, gender, race, and so on.

• As society's attitudes or demographics change, the market for goods and services shifts accordingly.
• Don't confuse: societal attitudes toward the environment (sociocultural) vs. actual pollution levels (environmental).

💻 Technological factors

• Perhaps no force has impacted business more in recent decades than the internet.
• Key developments: nearly instantaneous information access, e-commerce, social media, remote device control.
• Technology continuously reshapes how businesses operate and compete.

🌱 Environmental forces

• Refers to natural resources, pollution levels, recycling, etc.
• Different from sociocultural attitudes about the environment (which fall under "S").
• A broader view can include natural events like pandemics.

⚖️ Legal factors

• Often coincide with political factors since government enacts laws.
• Also includes court decisions that may have broad implications beyond individual cases.
• Legal environment shapes the rules within which businesses must operate.

🎯 Applying PESTEL effectively

🎯 Key principles for using the model

Overlap is normal and acceptable:

• Considerable overlap exists between categories.
• More important to thoroughly assess the external environment than to categorize forces "correctly."
• The goal is comprehensive analysis, not perfect classification.

Forces are neither inherently good nor bad:

• An individual force presents either an opportunity or a threat depending on the business.
• Example: Societal attitudes favoring green energy create opportunities for wind/solar companies but threaten fossil fuel-dependent businesses.

🦠 Special case: Pandemics and unusual events

Where does COVID-19 fit in PESTEL?

• Could be classified under Environmental (natural environment in a broader sense).
• Some models use "Natural" as a force category.
• Demonstrates how the same force affects industries differently:
  • Threat: Tourism industry suffered revenue losses, layoffs, furloughs
  • Opportunity: Personal protective equipment (PPE) makers struggled to meet increased demand

Don't confuse: The natural environment typically means resources and pollution, but a broader interpretation logically includes pandemics and other natural events.

💼 Financial management considerations

💼 Core financial questions

Businesses must address fundamental financial questions:

• How much money does the company need?
• How and where will it get the necessary money?
• How and when will it pay the money back?
• What investments should be made in plant and equipment?
• How much should be spent on research and development?

🚀 Importance for new businesses

• Good financial management is particularly important when a company is first formed.
• New business owners usually need to borrow money to get started.
• Financial planning is critical for survival and growth in the early stages.

🧭 Overview

🧠 One-sentence thesis

The PESTEL model provides a systematic framework for businesses to analyze six categories of macro-environmental forces—political, economic, sociocultural, technological, environmental, and legal—that present both opportunities and threats depending on the company's capabilities and business model.

📌 Key points (3–5)

• What PESTEL covers: six macro-environmental categories (political, economic, sociocultural, technological, environmental, legal) that influence business operations and planning.
• Category overlap is normal: forces can fit multiple categories; thorough assessment matters more than perfect categorization.
• Forces are context-dependent: the same external force is not inherently positive or negative—it creates opportunities for some businesses while threatening others.
• Common confusion: don't treat categories as rigid silos; some forces (like government actions) naturally span multiple letters (political and legal).
• Practical application: businesses use PESTEL to assess their external environment and identify strategic opportunities or threats.

🔤 The Six PESTEL Categories

🏛️ Political (P)

Political environment: how governments influence the business operating environment.

• What it includes: taxation, tariffs, trade agreements, labor regulations, environmental regulations.
• Governments shape the rules and costs of doing business through policy decisions.
• Example: A new trade agreement might open markets for some companies while increasing competition for others.

💰 Economic (E)

Economic environment: the overall health and direction of the economy.

• Key concern: whether the economy is growing or contracting.
• Economic indicators are specifically created to measure economic health.
• Business performance is heavily tied to macroeconomic conditions.

👥 Sociocultural (S)

Sociocultural environment: societal attitudes, demographic trends, and fashion trends.

• Demographics: attributes used to describe people (age, income, gender, race, etc.).
• As society's attitudes or demographics shift, markets for goods and services shift accordingly.
• Example: Changing societal attitudes toward green energy create opportunities for renewable energy companies while threatening fossil fuel-dependent businesses.

💻 Technological (T)

Technological factors: forces driven by technological innovation and advancement.

• Major impact: the internet has been one of the most significant forces in recent decades.
• Includes: near-instantaneous information access, e-commerce, social media, remote device control.
• Technology continuously reshapes how businesses operate and compete.

🌍 Environmental (E)

Environmental forces: natural resources, pollution levels, recycling, and related factors.

• Don't confuse: societal attitudes toward the environment belong under sociocultural (S); actual pollution levels, oil supply, etc. belong here.
• A broader interpretation can include natural events like pandemics.
• The excerpt notes that "Natural" forces in other models typically align with this category.

⚖️ Legal (L)

Legal factors: laws and court decisions that impact business operations.

• Overlap with political: politicians enact laws, so legal and political forces often coincide.
• Also includes: court decisions with broad implications beyond individual cases.
• Legal frameworks create constraints and requirements for business activity.

🔄 How to Use PESTEL Effectively

🔄 Overlap is expected and acceptable

• Considerable overlap exists between categories.
• What matters most: thorough assessment of the external environment.
• What matters less: placing every force in the "right" category.
• The model is a thinking tool, not a rigid classification system.

⚖️ Forces create opportunities AND threats

• No force is inherently positive or negative in isolation.
• The same force affects different businesses differently based on their capabilities and business models.
• Example from excerpt: Green energy trends are opportunities for wind/solar companies but threats to fossil fuel companies.

🦠 Real-world application: COVID-19 pandemic

The excerpt uses COVID-19 to illustrate PESTEL principles:

Industry Type	Impact	Explanation
Tourism	Threat	Large revenue losses, layoffs, furloughs
PPE manufacturers	Opportunity	Challenged to meet increased demand

• Categorization: Could fit under Environmental (E) as a natural force, though broader than typical pollution/resource concerns.
• Key lesson: The same macro-environmental event creates vastly different strategic implications for different businesses.

🎯 Strategic Implications

🎯 Why external analysis matters

• Businesses must consider external forces when making strategic decisions.
• The macro-environment shapes opportunities, threats, and constraints.
• PESTEL provides structure for identifying and organizing these external influences.

🎯 Connection to stakeholders

• External forces interact with stakeholder interests (mentioned in the excerpt's key takeaways).
• Businesses must balance stakeholder needs while navigating external environmental changes.
• External analysis helps businesses anticipate changes that will affect multiple stakeholder groups.

🧭 Overview

🧠 One-sentence thesis

Economics studies how resources are transformed into goods and services through the coordination of land, labor, capital, and entrepreneurship within input and output markets that connect households and businesses.

📌 Key points (3–5)

• What economics studies: the production, distribution, and consumption of goods and services using various resources.
• Resources as factors of production: land/natural resources, labor, capital, entrepreneurship, and knowledge are combined to create outputs.
• The circular flow: households provide resources to businesses (labor, land, capital) and receive income (wages, rent, interest) in return.
• PESTEL as an analytical tool: Political, Economic, Sociocultural, Technological, Environmental, and Legal forces shape the external environment businesses must navigate.
• Common confusion: PESTEL categories overlap—the same force can fit multiple categories; what matters is thorough assessment, not perfect categorization.

🏭 What economics studies and core resources

🏭 Definition of economics

Economics: the study of the production, distribution, and consumption of goods and services.

• It examines how societies use resources to create value.
• The focus is on the entire cycle: making things, getting them to people, and how people use them.

🧱 Resources (factors of production)

Resources: the inputs used to produce outputs.

The excerpt identifies five types of resources:

Resource	What it includes	Role
Land and natural resources	Raw materials, electricity, physical space	Provides the foundation and raw inputs
Labor	Physical and mental work	Transforms raw materials into outputs
Capital	Buildings, equipment, vehicles, cash	Enables the production process
Entrepreneurship	Skill, drive, creativity	Coordinates other resources and brings them together
Knowledge	Production know-how	Guides how to combine resources effectively

👕 Concrete example: making a shirt

The excerpt illustrates factors of production with a shirt factory:

• Land: the factory site, electricity, raw cotton
• Labor: workers who make the shirts
• Capital: factory buildings, equipment, operating money
• Entrepreneurship: skills to coordinate resources, make shirts, and distribute them

🔄 Input and output markets

🏠 How households and businesses interact

• Households provide resources to businesses: labor (as workers), land and buildings (as landlords), capital (as investors).
• Businesses pay households for these resources: wages for labor, rent for land/buildings, interest for capital.
• Businesses then use these resources to produce goods and services.

This creates a circular flow: resources flow from households to businesses, income flows back to households, and goods/services flow to the market.

🔍 Don't confuse inputs and outputs

• Inputs = resources/factors of production (what goes into making things)
• Outputs = goods and services (what comes out of the production process)
• Example: cotton and labor are inputs; the finished shirt is the output.

🌍 The external environment: PESTEL model

🌍 What PESTEL analyzes

PESTEL model: a tool for analyzing the external macro-environment in which an industry or company operates.

Each letter represents a different environmental force that affects business planning.

🏛️ Political (P)

• Governments influence business through taxation, tariffs, trade agreements, labor regulations, and environmental regulations.
• These are policy decisions that shape the rules businesses must follow.

💰 Economic (E)

• Whether the economy is growing or contracting is a major business concern.
• Economic indicators measure the health of the economy.
• Example from excerpt: the 2008 financial crisis was described as the "worst crisis since the '30s" and affected companies like Apple.

👥 Sociocultural (S)

• Captures societal attitudes, demographic trends, and fashion trends.

Demographics: any attribute that can be used to describe people, such as age, income level, gender, race, and so on.

• As society's attitudes or demographics change, markets for goods and services shift accordingly.
• Example: societal attitudes moving toward green energy create opportunities for renewable energy companies.

💻 Technological (T)

• In recent decades, technology (especially the internet) has massively impacted business.
• Includes instantaneous information access, e-commerce, social media, and remote device control.

🌱 Environmental (E)

• Refers to natural resources, pollution levels, recycling, etc.
• Don't confuse: societal attitudes about the environment belong under Sociocultural; the actual state of natural resources and pollution belongs here.
• A broader view includes natural events like pandemics (the excerpt discusses where COVID-19 fits).

⚖️ Legal (L)

• Legal forces often coincide with political factors (since governments enact laws).
• Also includes court decisions that may have broad implications beyond individual cases.

🔀 Using PESTEL effectively

🔀 Overlap is normal

• The excerpt emphasizes that "there can be considerable overlap from category to category."
• What matters: thorough assessment of the external environment.
• What doesn't matter: getting every force into the "right" category.

⚡ Forces are neutral—context determines impact

• An individual force is not inherently positive or negative.
• The same force presents opportunities to some businesses and threats to others.
• Example: green energy attitudes are an opportunity for wind/solar companies but a threat to fossil fuel companies that don't adapt.
• Example: COVID-19 hurt tourism businesses (revenue losses, layoffs) but boosted demand for personal protective equipment (PPE) makers.

🧩 Real-world application: where does a pandemic fit?

• The excerpt notes that some models include a "Natural" force equivalent to the Environmental category.
• A pandemic like COVID-19 can logically fit under a broader view of environmental/natural forces.
• Consistent with other forces, it has been "hugely unfavorable to some industries and yet a boost to business for others."

🧭 Overview

🧠 One-sentence thesis

Economics studies how societies allocate scarce resources (land, labor, capital, entrepreneurship, and knowledge) to produce and distribute goods and services, with different economic systems—ranging from planned to free market—determining the degree of government versus individual control over these decisions.

📌 Key points (3–5)

• What economics studies: the production, distribution, and consumption of goods and services using resources (factors of production).
• Economic systems spectrum: ranges from planned systems (communism, socialism) with high government control to free market systems (capitalism) with minimal government intervention; most real-world economies are mixed.
• How to distinguish systems: the key difference is the degree of government control over resource allocation, production decisions, and distribution—more control means more social services but higher taxes and less private ownership.
• Perfect competition foundation: in competitive markets, prices are determined by the interaction of supply (from sellers) and demand (from buyers), with no single seller able to influence price.
• Common confusion: no economy is purely capitalist or purely communist; all modern economies are mixed, leaning toward one end of the spectrum but incorporating elements of both.

🏭 Resources and Production

🧩 What resources are

Resources: the inputs used to produce outputs; also called factors of production.

The excerpt identifies five types of resources:

• Land and other natural resources
• Labor (physical and mental)
• Capital (buildings, equipment, vehicles, cash)
• Entrepreneurship
• Knowledge

These are not just "things a business owns"—they are the inputs that must be combined to create goods and services.

👕 How resources combine to produce output

The excerpt uses a shirt factory example to show how all factors work together:

Factor	Role in shirt production
Land & natural resources	Factory site, electricity, raw cotton
Labor	Workers who make the shirts
Capital	Factory, equipment, money to operate
Entrepreneurship	Skills to coordinate resources and distribute to market

• Each factor is necessary but not sufficient alone.
• Entrepreneurship is the organizing force that brings the others together.

🔄 The circular flow between households and businesses

The excerpt describes a dual role system:

Households:

• Provide factors of production (labor as workers, land as landlords, capital as investors)
• Consume goods and services

Businesses:

• Buy resources from households (paying wages, rent, interest as income)
• Produce and sell goods and services (earning revenue)
• Use revenue to buy more resources, continuing the cycle

Goods and services: the outputs produced by businesses using resources obtained from households.

• This is a continuous loop: households supply inputs → businesses produce outputs → households consume outputs → businesses pay income → cycle repeats.
• Don't confuse: households are not just consumers; they are also the source of production inputs.

🌍 Economic Systems

🧭 The three fundamental questions

Economists study how societies answer three sets of questions:

1. What and when: What goods and services should be produced? In what quantity? When?
2. How and who produces: How should they be produced? Who should produce them? What resources and technology should be combined?
3. Who receives: Who should receive the products? How should they be allocated among consumers?

Economic system: the means by which a society (households, businesses, and government) makes decisions about allocating resources to produce products and about distributing those products.

• The answers depend on the country's economic system.
• The key variable is the degree of freedom individuals and business owners have versus government control.

🏛️ Planned systems (high government control)

Communism (highest control):

• Government owns all or most enterprises.
• Central planning dictates what is produced, how, and who receives it.
• In practice, pure communism is practically nonexistent today; only North Korea and Cuba operate under rigid centrally planned systems.

Socialism (moderate-high control):

• Essential services (utilities, banking, health care) may be government-owned.
• Some businesses are privately owned and operated for profit.
• Central planning allocates government-produced goods and tries to ensure equal wealth distribution.
• Workers typically have shorter hours, longer vacations, more benefits (health care, education, child care).
• Taxes are generally steep to offset high public service costs.
• Examples: Venezuela, Sweden, France lean toward socialism.

🏪 Free market system (low government control)

Free market system (also called capitalism): the economic system in which most businesses are owned and operated by individuals.

Key features:

• Competition dictates how goods and services are allocated.
• Government involvement is limited, concentrated on regulations dictating how businesses may operate.
• Private property rights: business owners can expect to own their land, buildings, machines, and keep most profits (except taxes).
• Profit incentive is the key driver.
• Examples: United States, Japan are based on capitalism.

Important caveat: A purely capitalistic economy is as rare as a purely communist one.

• Example from the excerpt: if police protection were allocated by market forces (ability to pay), few in American society would find that acceptable.
• This shows why even capitalist economies have some government-provided services.

📊 The economic spectrum

The excerpt presents a continuum:

← Communism	Socialism	Mixed	Capitalism →
Maximum government control	High control	Moderate	Minimal control
Maximum social services	High services	Moderate	Minimal services
Highest taxes	High taxes	Moderate	Lowest taxes

• As you move from left to right, government control over business diminishes.
• Social services (health care, child care, social security, unemployment benefits) also decrease.
• Taxes are correspondingly lower.

🔀 Mixed market economies (the reality)

Mixed market economy: relies on both markets and the government to allocate resources.

• In practice, most economies are mixed, leaning toward either free market or socialistic principles rather than being purely one or the other.
• Privatization: the process of converting government-owned businesses to private ownership (movement toward capitalism).
  • Example: Eastern Europe and China are adopting more capitalistic characteristics.
• Nationalization: the process of government taking control of industries (movement toward socialism).
  • Example: Venezuela has moved increasingly toward socialism, taking control of oil and media.

Don't confuse: "mixed" does not mean "halfway between"; it means incorporating elements of both systems, with a lean in one direction.

🇺🇸 The U.S. Economic System

🗽 Mixed market with free market lean

The United States features a mixed market system:

• Primarily a free market system.
• Federal government controls some basic services: postal service, air traffic control.
• Has some socialist characteristics: social security retirement benefits for retired workers.

📖 Historical foundation: Adam Smith

The free market system was espoused by Adam Smith in The Wealth of Nations (1776):

• Core idea: competition alone would ensure consumers receive the best products at the best prices.
• Mechanism: a seller charging more than others won't find buyers; a job-seeker asking more than the going wage won't be hired.
• "Invisible hand": competition makes the market work effectively without needing to regulate prices or wages.
• Laissez-faire principle: leaving things alone (minimal government intervention).

🏛️ Government intervention in practice

Almost immediately, tension developed between laissez-faire and government intervention.

Today: it's common for the U.S. government to intervene in the economic system.

• Example: Food and Drug Administration (FDA) influences food and pharmaceutical industries by preventing unsafe or mislabeled products from reaching the market.
• This protects consumers while still allowing private businesses to operate.

Don't confuse: "free market system" in the U.S. does not mean zero government involvement; it means limited, targeted intervention focused on regulation and consumer protection.

🏪 Perfect Competition and Market Mechanisms

🎯 What perfect competition is

Perfect competition: exists when there are many consumers buying a standardized product from numerous small businesses.

Key characteristics:

• No seller is big enough or influential enough to affect price.
• Sellers and buyers accept the going price.
• Example: a commercial fisher bringing fish to the local market has little control over the price and must accept the going market price.

📊 Supply and demand basics

To understand how perfect competition works, the excerpt introduces how buyers and sellers interact:

Supply and demand schedule: (definition incomplete in excerpt, but context indicates it tracks how supply from sellers and demand from buyers interact to set prices)

• In a market characterized by perfect competition, price is determined through the mechanisms of supply and demand.
• Prices are influenced both by:
  • Supply of products from sellers
  • Demand for products by buyers

The excerpt promises to illustrate this concept with a supply and demand schedule for a particular good but cuts off before providing the example.

🔍 Four types of competition

Economists have identified four types of competition:

1. Perfect competition (introduced in this section)
2. Monopolistic competition (mentioned, not yet covered)
3. Oligopoly (mentioned, not yet covered)
4. Monopoly (mentioned, not yet covered)

The excerpt states these will be covered in a following section, with perfect competition serving as the foundation for understanding how prices are set in competitive markets.

🧭 Overview

🧠 One-sentence thesis

This excerpt does not address union/management issues; instead, it explains how prices are determined under different market structures—perfect competition, monopolistic competition, oligopoly, and monopoly—through the mechanisms of supply and demand.

📌 Key points (3–5)

• What the excerpt covers: market competition types and price-setting mechanisms, not labor relations or union topics.
• Perfect competition: many sellers, standardized products, and prices set by supply and demand equilibrium.
• Supply and demand interaction: the equilibrium price occurs where the quantity buyers want equals the quantity sellers offer.
• Common confusion: the four competition types differ by number of sellers and product differentiation—perfect competition has many identical products; monopoly has one seller with no competition.
• Why market structure matters: the degree of competition determines how much control sellers have over prices.

⚠️ Content mismatch

⚠️ Title vs. excerpt content

The current title is "Union/Management Issues," but the excerpt contains no information about unions, labor relations, collective bargaining, or management-employee negotiations.

• The excerpt focuses entirely on market structures and price determination.
• Topics covered: perfect competition, supply and demand curves, equilibrium price, monopolistic competition, oligopoly, and monopoly.
• No labor or employment topics appear in the text.

Conclusion: The excerpt does not provide material to write review notes on union/management issues. The notes below cover the actual content present in the excerpt.

🏪 Perfect competition and price determination

🏪 What perfect competition means

Perfect competition: exists when there are many consumers buying a standardized product from numerous small businesses.

• No single seller is large enough to influence price.
• Sellers and buyers accept the market price.
• Example: A commercial fisher brings fish to market and must accept the going price—he has little control over it.

📈 Supply and demand basics

The excerpt explains that price is determined through supply and demand in perfectly competitive markets.

• Demand: the quantity buyers are willing to purchase at various prices.
• Supply: the quantity sellers are willing to sell at various prices.
• Prices are influenced by both buyer demand and seller supply.

📉 The demand curve

Demand: the quantity of a product that buyers are willing to purchase at various prices.

• Key pattern: buyers typically purchase less when prices rise and more when prices fall.
• Why: products are more attractive at lower prices, and income goes further.
• Example from the excerpt: at $0.80/pound, buyers purchase 1,500 pounds of apples; at $0.60, they purchase 2,000 pounds; at $0.40, they purchase 2,500 pounds.
• The demand curve slopes downward (price down → quantity demanded up).

📈 The supply curve

Supply: the quantity of a product that sellers are willing to sell at various prices.

• Key pattern: businesses are more willing to sell when prices rise and less willing when prices fall.
• Why: higher prices mean larger profits.
• Example from the excerpt: farmers sell 1,000 pounds of apples at $0.40/pound, 2,000 pounds at $0.60, and 3,000 pounds at $0.80.
• The supply curve slopes upward (price up → quantity supplied up).

⚖️ Equilibrium price

Equilibrium price: the price at which buyers are willing to purchase the amount that sellers are willing to sell.

• Found where the supply curve and demand curve intersect.
• Example from the excerpt: at $0.60/pound, demand and supply both equal 2,000 pounds—this is the equilibrium.
• Why sellers stick to equilibrium:
  • Charge more than $0.60 → won't sell many apples because competitors charge less → profits drop.
  • Charge less than $0.60 → sell more apples but profit per pound is lower → no incentive to drop price.
• Key insight: without outside influences, markets reach an equilibrium where both buyers and sellers are satisfied.

🌦️ What can shift equilibrium

The excerpt warns that the simple model doesn't capture real-world complexity.

Outside influences:

• Price ceilings (artificially low government-set prices) → producers don't supply enough → shortage.
• Price floors (artificially high government-set prices) → sellers supply more than buyers need → surplus.

Changing circumstances:

• Demand shift: if incomes rise and buyers pay more for apples → demand curve shifts → equilibrium price increases.
• Supply shift: if favorable weather increases apple crops → farmers willing to sell at lower prices → supply curve shifts → equilibrium price decreases.

🏢 Other competition types

🏢 Monopolistic competition

Monopolistic competition: many sellers, but not as many as in perfect competition, selling differentiated products (products that differ or are perceived to differ, though they serve a similar purpose).

• Products can differ by quality, style, convenience, location, or brand name.
• Example from the excerpt: toothpaste—many similar products, but consumers are loyal to favorites; a substantial price difference might persuade buyers to switch brands.
• How differentiation works:
  • Geography: buying gasoline at the nearest station regardless of brand.
  • Advertising: promoting perceived differences to convince consumers one product is better.
• Price control: companies have limited control over price—if price goes too high, customers switch to competitors.

🏭 Oligopoly

Oligopoly: few sellers, each supplying a large portion of all products sold in the marketplace.

• High startup costs → few firms enter the industry.
• Examples from the excerpt: automobile companies, airlines.
• Price control: firms have some control over prices because they supply a large market share.
• Catch: products are fairly similar, so when one company lowers prices, others must follow to stay competitive.
• Example from the excerpt: when American Airlines cuts fares, Delta and United do the same; when one automaker offers a deal, competitors follow.

🏛️ Monopoly

Monopoly: only one seller in the market.

• Lies at the opposite end of the spectrum from perfect competition.
• The market can be a city, region, or country—not necessarily the entire nation.
• Why few monopolies exist in the U.S.: the government limits them.
• Two categories:
  • Natural monopolies: public utilities (electricity, gas). Require huge investments; duplicating them would be inefficient. They inhibit competition but are legal because they're important to society.
  • Legal monopolies: (the excerpt mentions this category but does not elaborate further).

📊 Comparison of competition types

Competition type	Number of sellers	Product type	Price control	Examples from excerpt
Perfect competition	Many small businesses	Standardized (identical)	None—accept market price	Commercial fisher selling fish
Monopolistic competition	Many (fewer than perfect)	Differentiated (similar purpose, perceived differences)	Limited—too high and customers switch	Toothpaste, gasoline stations
Oligopoly	Few large firms	Fairly similar	Some—but competitors match price changes	Airlines, automobile companies
Monopoly	One seller	Unique (no substitutes)	High—but government-regulated	Public utilities (electricity, gas)

🔍 Don't confuse

• Perfect vs. monopolistic competition: both have many sellers, but perfect competition has identical products and no price control; monopolistic has differentiated products and limited price control.
• Oligopoly vs. monopoly: oligopoly has few sellers with some price control; monopoly has one seller with high price control (though often regulated).
• Market equilibrium vs. government intervention: equilibrium assumes no outside influences; real markets can have price ceilings (→ shortages) or price floors (→ surpluses).

🧭 Overview

🧠 One-sentence thesis

Market structures—ranging from perfect competition to monopoly—determine how much control sellers have over prices, with most real-world markets falling into monopolistic competition or oligopoly where firms balance product differentiation against competitive pressure.

📌 Key points (3–5)

• Market structures differ by number of sellers and price control: perfect competition (many sellers, no control), monopolistic competition (many sellers, limited control), oligopoly (few sellers, some control), and monopoly (one seller, significant control).
• Oligopolies face a pricing catch: even though they supply large portions of the market, similar products force them to match competitors' price cuts to stay competitive.
• Monopolies are rare and regulated: natural monopolies (utilities) are allowed but government-controlled; legal monopolies (patents) are temporary and meant to recover R&D costs.
• Common confusion—monopolistic competition vs oligopoly: monopolistic competition has many sellers with limited price control due to differentiation; oligopoly has few sellers with some control but must match rivals' prices.
• Economic health is tracked by three goals: growth (GDP), full employment (unemployment rate), and price stability (inflation/deflation measured by CPI).

🏪 Market structures and pricing power

🏪 Monopolistic competition

Monopolistic competition: a market with many sellers where products are promoted as different from competitors but remain similar enough that high prices drive customers to rivals.

• Sellers use advertising to convince consumers their product is unique and better.
• Limited price control: customer loyalty exists, but if price goes too high, buyers switch to competitors.
• Example: many brands of shampoo or cereal—each claims to be special, but consumers will switch if one becomes too expensive.

🏭 Oligopoly

Oligopoly: a market with few sellers, each supplying a large portion of total products sold.

• High entry costs keep the number of firms low (e.g., automobile companies, airlines).
• Some price control because firms are large and supply significant market share.
• The pricing catch: products are fairly similar, so when one company lowers prices, others must follow to remain competitive.
• Example: when American Airlines cuts fares, Delta and United typically match the decrease; when one automaker offers a deal, competitors respond with similar promotions.
• Don't confuse with monopolistic competition: oligopoly has few large sellers, not many small ones.

🏛️ Monopoly

Monopoly: a market with only one seller, lying at the opposite end of the spectrum from perfect competition.

• The market could be a city, region, or country—not necessarily nationwide.
• Two categories in the U.S.:

Type	Definition	Examples	Regulation
Natural monopoly	Enterprises requiring huge investments where duplication would be inefficient	Public utilities (electricity, gas)	Government-controlled prices; must serve all customers even if not cost-efficient
Legal monopoly	Company receives a patent for exclusive use of an invention	Polaroid's instant-film technology	Patent lasts ~20 years; allows recovery of R&D costs

• Few monopolies exist in the U.S. because the government limits them.
• Natural monopolies are legal because they're important to society but are regulated in exchange for operating without competition.
• Legal monopolies are temporary: patents grant exclusive rights for a limited time (generally 20 years) to recover heavy research and development costs.
• Example: Polaroid priced instant film high enough to recoup development costs over time without competition.

📈 Measuring economic health

🎯 Three main economic goals

All economies share three goals:

1. Growth
2. High employment
3. Price stability

These goals help determine whether an economy is performing well and guide government policy.

📊 Economic growth and GDP

Gross Domestic Product (GDP): the market value of all goods and services produced by the economy in a given year.

• What GDP includes: only goods produced domestically (not outside the country) and only final products (not intermediate components).
• Example: a silicon chip going into a computer doesn't count directly—it's included when the finished computer is counted.
• Why GDP matters: by itself, GDP doesn't tell much, but change in GDP reveals economic direction.
  • GDP goes up (after adjusting for inflation) → economy is growing.
  • GDP goes down → economy is contracting.

🔄 The business cycle

Business cycle: economic ups and downs resulting from expansion and contraction.

• Typical cycle runs 3–5 years but can last much longer; cycles are typically irregular.
• Four phases:

Phase	What happens	Characteristics
Prosperity	Economy expands	Low unemployment, rising incomes, consumers buy more, businesses increase production and offer new products
Recession	Economic slowdown	GDP decreases, unemployment rises, people have less money, business revenues decline; often defined as two consecutive quarters of GDP decline
Recovery	Economy starts growing again	Follows a recession; GDP begins to rise
Depression	Severe, prolonged downturn	Very high unemployment, severely curtailed production, lasts perhaps a decade; no uniform standard but characterized by duration

• Don't confuse recession and depression: economists agree on recession standards (two quarters of GDP decline) but not on depression; depressions are much longer and more severe.
• Another severe depression like the 1930s is unlikely because the federal government has economic tools to fight such threats.

💼 Employment and unemployment

💼 Full employment

Full employment: in principle, when everyone who wants to work has a job; in practice, about 95 percent of those wanting to work are employed.

• Why employment matters: people must spend money on goods and services to keep the economy strong.
• Reduced personal spending (food, clothing, housing, medical care, etc.) could severely reduce GDP and weaken the economy.
• Most people earn spending money by working, so job availability is crucial.

📉 The unemployment rate

Unemployment rate: the percentage of the labor force that's unemployed and actively seeking work.

• Tracked and reported by the U.S. Department of Labor.
• Important measure of economic health:
  • Goes up during recessions (companies reluctant to hire when demand is low).
  • Goes down when economy expands (high demand for products and workers).
• Multiple measurements exist:
  • U3 (most commonly used): tracks those unemployed and actively seeking work.
  • U6 (broader): includes people not actively looking but want a job and looked in last 12 months, plus those working part-time who want full-time work.
  • U6 is always higher than U3; U3 is discussed more often because it paints a more favorable picture.
• The excerpt notes that U.S. unemployment peaked in 1982, 1992, and 2010, coinciding with recessions.

💰 Price stability and inflation

💰 What is price stability

Price stability: when the average of prices for goods and services either doesn't change or changes very little.

• Why it matters:
  • For individuals: rapidly rising prices mean paying more for necessities.
  • For businesses: rising prices mean higher costs; in the short run, businesses may struggle to pass costs to consumers.

📈 Inflation

Inflation: when the overall price level goes up.

• Rapidly rising prices are troublesome for both individuals and businesses.
• The excerpt shows U.S. inflationary trends since 1960, with peak periods in 1974 and 1979–1980 when oil prices doubled.

📉 Deflation

Deflation: when the price level goes down (rarely happens).

• Can also damage the economy: when purchasers expect lower future prices, they defer purchases, slowing economic growth (GDP) and raising unemployment.
• Example: Japan experienced a long deflation period contributing to economic stagnation, from which it is only now beginning to recover.

🛒 Consumer Price Index (CPI)

Consumer Price Index (CPI): the most widely publicized measure of inflation, reported monthly by the Bureau of Labor Statistics.

• How it works: measures inflation by determining price changes of a hypothetical basket of goods bought by a typical household (food, housing, clothing, medical care, appliances, automobiles, etc.).
• Base period: 1982–1984, given an average value of 100.
• CPI values show how much prices have changed relative to the base period.

🧭 Overview

🧠 One-sentence thesis

The excerpt does not contain substantive content about pricing strategy; instead, it discusses macroeconomic indicators (unemployment, inflation, CPI), economic forecasting, and government monetary and fiscal policy.

📌 Key points (3–5)

• Content mismatch: The source excerpt covers macroeconomic topics (price stability, inflation, deflation, CPI, economic indicators, and government policy), not pricing strategy for businesses.
• Main topics present: price stability and inflation measurement (CPI), economic indicators (lagging vs. leading), and government tools (monetary and fiscal policy).
• No pricing strategy content: The excerpt does not discuss how firms set prices, pricing models, competitive pricing, or business-level pricing decisions.

📊 What the excerpt actually covers

📊 Price stability and inflation

The excerpt discusses price stability as a macroeconomic goal, not a business pricing strategy.

Price stability: occurs when the average of the prices for goods and services either doesn't change or changes very little.

• Inflation: when the overall price level goes up.
• Deflation: when the price level goes down (rare).
• Both rapid inflation and deflation can damage an economy.

Why inflation matters:

• For individuals: rising prices mean paying more for necessities.
• For businesses: rising prices mean higher costs; in the short run, firms may struggle to pass costs to consumers.

Deflation risks:

• When buyers expect lower future prices, they defer purchases.
• This slows economic growth (GDP) and raises unemployment.
• Example: Japan experienced long deflation contributing to economic stagnation.

📈 Consumer Price Index (CPI)

Consumer Price Index (CPI): measures the rate of inflation by determining price changes of a hypothetical basket of goods bought by a typical household.

• Reported monthly by the Bureau of Labor Statistics.
• Basket includes food, housing, clothing, medical care, appliances, automobiles, etc.
• Base period: 1982–1984 = 100.

How to read CPI values:

• CPI of 24 in 1950 means $1 of typical 1982–84 purchases cost $0.24 in 1950.
• CPI of 218 in 2010 means you needed $2.18 to buy the same $1 worth of goods.
• The difference registers the effect of inflation.
• Inflation rate = percentage change in the price index.

🔮 Economic indicators

🔮 Lagging vs. leading indicators

Economic indicator: a statistic that provides valuable information about the economy.

Type	Definition	Examples from excerpt
Lagging	Statistics that report the economy's status using past data	Average length of unemployment; GDP growth
Leading	Indicators that predict the economy's status 3–12 months into the future	Building permits; new unemployment insurance claims; average weekly manufacturing hours

Why leading indicators matter:

• If a leading indicator rises, the economy is more likely to expand in the coming year.
• If it falls, the economy is more likely to contract.

🏗️ Specific leading indicators mentioned

• Building permits: More permits → more materials (lumber, appliances) and construction workers employed → future economic activity.
• New unemployment insurance claims: Rising claims signal trouble ahead because unemployed consumers buy fewer goods and services.
• Average weekly manufacturing hours: Rising hours → more goods produced → future sales likely to improve.
• Total non-farm payroll employment: Tracks net new jobs created.
• Consumer confidence index: Monthly survey of 5,000 U.S. households; gathers opinions on economic health and future purchase plans; often a good indicator of future buying intent.

🏛️ Government economic management

💵 Monetary policy

Monetary policy: exercised by the Federal Reserve System ("the Fed"), which takes actions that decrease or increase the money supply and raise or lower short-term interest rates.

Two types:

Policy type	When used	Actions	Effects
Contractionary	When inflation is a problem	Decrease money supply; raise interest rates	Money is "tighter" (more expensive to borrow); banks more selective; demand for goods/services falls; prices fall
Expansionary	To counter a recession	Increase money supply; reduce interest rates	Money is "easy" (cheaper to borrow); banks more willing to lend; businesses expand production; consumers buy more; economy escapes recession

Mechanism:

• Higher rates → borrowers pay more → less borrowing → lower demand → lower prices.
• Lower rates → cheaper borrowing → more lending → more spending → economic growth.

🏦 Fiscal policy

Fiscal policy: relies on the government's powers of spending and taxation.

• Both taxation and government spending affect the total supply of money businesses and consumers have to spend.

Two approaches:

Economic condition	Policy type	Actions	Goal
Recession	Expansionary	Increase spending, reduce taxes, or both	Put more money in hands of businesses and consumers; encourage expansion and purchases
Inflation	Contractionary	Decrease spending, increase taxes, or both	Reduce spending by businesses and consumers; prices come down; inflation eases

💳 National debt (mentioned but incomplete)

The excerpt begins to discuss national debt:

• If the government takes in more money (through taxes) than it spends, [text cuts off].
• The excerpt does not provide further explanation.

⚠️ Important note

This excerpt does not address pricing strategy. It covers macroeconomic policy and indicators, not business-level pricing decisions, competitive pricing, price-setting mechanisms, or pricing models. If you are studying pricing strategy, this excerpt is not the relevant source material.

🧭 Overview

🧠 One-sentence thesis

The hospitality and tourism industry encompasses diverse sectors—including accommodation, food and beverage, recreation, events, and travel services—that collectively generate significant economic, social, and environmental impacts worldwide.

📌 Key points (3–5)

• Tourism's scale: The industry contributes 10% of global GDP and involves over 1.2 billion international tourists annually, making it one of the world's largest industries.
• Three impact categories: Tourism creates economic (revenue, jobs), social (cultural exchange, community pride), and environmental (conservation vs. resource depletion) effects—both positive and negative.
• Hospitality core sectors: Accommodation/lodging and food & beverage services form the largest segment, with hotels classified by type, size, service level, and market segment.
• Common confusion—hotel classifications: Hotels are categorized multiple ways (by type, chain scale, ownership structure, brand affiliation), and the same property can fit several categories simultaneously.
• Diverse sub-industries: The sector includes restaurants (QSR to fine dining), beverages (wineries, craft beer, distilleries), recreation (adventure tourism, gaming, theme parks), events (conventions, festivals), and travel services (cruises, OTAs, tour operators).

🌍 What tourism is and why it matters

🌍 Defining tourism

Tourism: "A social, cultural and economic phenomenon which entails the movement of people to countries or places outside their usual environment for personal or business/professional purposes."

• Tourism is fundamentally about movement of people for various purposes (business or pleasure).
• It is considered an export that is unique because consumers travel to where the product is consumed on-site.
• Multiple stakeholders are involved: tourists, businesses providing goods/services, government/political structures, and local residents.

🏗️ Industry structure

The tourism industry can be broken into broad groups:

• Accommodation and Lodging
• Food and Beverage Services (F&B)
• Recreation and Entertainment
• Convention & Event Management
• Travel Services
• Private Clubs

📊 Scale and growth

• In 2016, over 1.2 billion international tourists generated $1.5 trillion in export value.
• The UNWTO predicts international arrivals will reach nearly 1.8 billion by 2030.
• Don't confuse: Pre-pandemic growth projections with post-2020 reality—the COVID-19 pandemic severely disrupted global tourism, causing significant drops in travel and revenue.

💰 Economic impacts of tourism

💰 Positive economic effects

• Foreign exchange and income: Tourism injects money into local economies, increases GDP, and creates diverse employment opportunities.
• Secondary development: Successful tourism can stimulate related businesses (e.g., a resort may create demand for commercial laundries or pet boarding).
• Local product integration: Tourism can be developed using local products and is often compatible with other economic activities.

⚠️ Negative economic effects

• Affordability issues: Property values may rise to levels unaffordable for local residents.
• Seasonality: The feast-or-famine nature of seasonal tourism creates economic instability.
• Vulnerability: Over-reliance on tourism leaves communities exposed to unexpected economic, social, or environmental shocks.
• Example: The New Jersey shore after Hurricane Sandy (2012) had no economic fallback when tourism was devastated.

🤝 Social and environmental impacts

🤝 Positive social impacts

• Increase in amenities (parks, recreation facilities).
• Investment in arts, culture, heritage, and tradition.
• Celebration of indigenous communities and community pride.
• Potential to break down language, socio-cultural, religious, and political barriers.
• When developed conscientiously, tourism contributes to quality of life and promotes positive destination image.

🚫 Negative social impacts

According to the United Nations Environment Programme, negative effects can include:

• Change or loss of indigenous identity and values.
• Culture clashes and changes in family structure.
• Conflict within communities competing for tourism dollars.
• Ethical issues: increase in sex tourism, crime, gambling, and exploitation of child workers.

🌳 Environmental impacts—positive and negative

Positive:

• Tourism can help save delicate ecosystems and their flora and fauna.
• Preservation of parks and protected areas benefits tourists and local residents.

Negative:

• Depletion of natural resources (water, forests).
• Pollution (air, noise, sewage, waste, littering).
• Physical impacts (construction, marina development, trampling, loss of biodiversity, disease spread).
• Global reach: Increased air travel contributes to climate change beyond local areas.

🏨 Accommodation and lodging sector

🍍 The hospitality industry and its symbol

Hospitality: "The business of helping people to feel welcome and relaxed and to enjoy themselves."

Hospitality industry: The combination of accommodation and food and beverage groupings, collectively making up the largest segment of the industry.

• The pineapple is the traditional symbol of hospitality, originating with the Caribs of the Caribbean who placed pineapples at village entrances to signal welcome.
• This symbolism spread across Europe and North America.

🏨 Hotel classifications—multiple dimensions

Hotels are classified by several overlapping variables:

By type:

• All-inclusive hotels, all-suite properties, B&B/Inns, boutique, convention/conference centers, condo hotels, resorts, extended stay, full service, casino, limited service, timeshare properties.

By size and complexity:

• Size ranges from fewer than 50 rooms (small boutique) to more than 1,000 rooms (large resort).
• Complexity determined by additional revenue functions: conference space square footage, number of F&B operations, amenities (pools, fitness, spas, golf).

By location:

• Airport hotels differ from city-center properties, remote island resorts, or mountain B&Bs.
• Conference hotels may locate near entertainment destinations (Las Vegas, Disney) for pre/post-conference activities.

By service level:

• Limited or Focused Service Hotels: Budget/economy with limited services and amenities.
• Full Service Hotels: Upscale and luxury with many services and wide range of amenities.

🎯 Market segmentation

Market segment	Traveler type	Characteristics
Commercial	Individual business travel	High-volume corporate accounts in city/airport properties; stronger demand Monday–Thursday
Leisure	Leisure travelers—family, tourists	Sightseeing, recreation, visiting friends/relatives; stronger demand Friday–Saturday and holidays/summer
Meetings and groups	Corporate groups, associations, SMERF (social, military, education, religious, fraternal)	Meetings, seminars, trade shows, conventions, gatherings over 10 people; peak demand spring/fall; need conference space
Extended stay	Business and leisure	Kitchen facilities, living room spaces; bookings over 5 nights; business-related (health care, construction, corporate projects) or leisure (visiting relatives, home renovations, snowbirds)

Don't confuse: A single hotel can target multiple market segments simultaneously to drive occupancy and revenue.

📊 Chain scale and consumer ratings

Chain Scale (by STR—Smith Travel Research):

• Hotels classified into six segments by Average Daily Rate (ADR): Luxury, Upper Upscale, Upscale, Mid-Scale with F&B (Upper Mid-Scale), Mid-Scale without F&B (Mid-Scale), and Economy.
• STR provides benchmarking data (STAR report) comparing property performance to competitors using occupancy, ADR, and RevPar (revenue per available room).

Consumer Ratings:

• Forbes awards one to five "Stars."
• AAA awards one to five "Diamonds."
• Social media platforms like TripAdvisor offer property ratings.

🤝 Ownership, branding, and management structures

Branding decision:

• Selecting a brand affiliation is a significant decision for hotel owners.
• Brand affiliation determines development/conversion costs, service levels, amenities, operational costs, marketing opportunities, and competitive position.
• Major chains (Marriott, Hilton, Hyatt, IHG) have multiple brands—Marriott has 30 different brands, each representing different price points, service levels, or market segments.

Franchise agreements:

Franchise: A structure where individuals or investment companies (franchisee) build or purchase a hotel and buy/lease a brand name to become part of a chain.

• Franchisee gains access to: brand name, image, loyalty program, central reservations, electronic distribution, marketing programs, central purchasing, revenue management support, brand standards.
• Franchisee receives training, support, and advice but must adhere to inspections, audits, and reporting requirements.
• Costs: Initial fee plus continuing fees (percentage of revenue or fixed fee); total ranges 3.3–14.7% of sales, median 11.8%.

Management contracts:

• Two main options:
  1. Independent third-party management company (e.g., Aimbridge, Benchmark Hospitality, Crescent Hotels, Interstate Hotels, White Lodging).
  2. Single company providing both brand and management expertise (e.g., Marriott, Hilton, Hyatt).

🍽️ Food and beverage services

🍔 Quick-Service Restaurants (QSRs)

• Formerly known as fast-food restaurants.
• Examples: Chick-fil-A, Subway, Pizza Hut.
• Cater to both residents and visitors in convenient locations.
• Dominated by brands, chains, and franchises.
• Focus on food purchased, prepared, and consumed quickly.

🥗 Fast-Casual Restaurants

Fast-Casual: Restaurants focusing on higher quality ingredients than QSRs, providing made-to-order food without table service.

• Customers queue and order at a counter.
• Seating area is more upscale and comfortable than QSRs.
• Examples: Chipotle Mexican Grill, Panera, Jason's Deli.

🍷 Full-Service Restaurants—four major segments

Fine dining:

• Highly trained chefs preparing complex, exquisitely presented food.
• Experienced servers with strong food/beverage knowledge.
• Upscale atmosphere: table linens, fine china, crystal stemware, silver-plate cutlery, fresh flowers, candles.
• High average check ($$$ or $$$$).
• Examples: Inn at Little Washington, Ruth's Chris Steakhouse, Capitol Grille.

Casual restaurants:

• Moderately-priced to upscale food in casual atmosphere.
• Often have full bar with separate bar staff, larger beer menu, limited wine menu.
• Full of chains (Chili's, Outback, Red Robin, Cracker Barrel) and independent restaurants.

Family restaurants:

• Affordable menu items spanning variety of tastes.
• Operational flexibility to welcome large groups.
• Menu cross-utilization: few key ingredients repurposed in several ways.
• Examples: Golden Corral, Cici's Pizza, Ponderosa Steakhouse.

Ethnic restaurants:

• Reflect owner's cultural identity (Vietnamese, Cuban, Thai, etc.).
• Two evolution routes: remain authentic to country of origin OR modify for larger market acceptance.
• Examples: P.F. Chang's, Tara Thai, Pei Wei.

🍷 Beverage industry evolution

Wineries:

• Over 300 wineries in Virginia as of 2022; exist in almost every state.
• Provide special consumer experiences on beautiful farms with elaborate tasting rooms and event venues.
• Growers discuss "terroir"—the blend of culture, climate, soil, and terrain factors creating unique growing conditions.
• Climate change impact: Industry constantly evolving; new varietals grow in areas where they couldn't 50 years ago (example: British Sparkler wines).

Cideries:

• Craft Beverage Modernization and Reform Act of 2015 (CBMA) loosened alcohol control laws.
• The "Cider Act" portion enabled farmers to open cider tasting rooms and distribute product more easily.
• Cider was fastest growing beverage segment 2013–2014 (over 75% growth), stealing market share from wine and beer.
• Another CBMA version passed in 2019, further extending consumer access.

Local Craft Beer:

• Growth driven by home brewing clubs (1970s–1980s), internet sharing/promotion (1990s), and easing of distribution laws.
• Total U.S. breweries (Regional Craft, Microbreweries, Taprooms, Brewpubs, large commercial) grew from 4,847 in 2015 to 8,884 in 2020.
• Categories vary by production size and percent of beverage vs. onsite food sales.

Three craft beer growth strategies:

1. Local strategy: Leverage local resources, develop local traditions, self-distribute; example: Big Lick Brewing (Roanoke, VA).
2. Grow and sell: Regional growth attracts national brewer who purchases the smaller competitor; example: Anheuser Busch/InBev acquiring Devils Backbone.
3. Independent national growth: Rare; requires exceptional beer and multiple distributor relationships; example: Sierra Nevada.

Distilleries and Mixology:

• As of August 2021, 2,290 craft spirit producers in U.S., about one-third focused on whisky.
• Strong branding programs share history, geography, chemistry, and culture (example: Makers Mark Ambassador program).
• Tequila growth: North America's fastest growing alcoholic beverage category in 2020 ($5.7 billion annual sales), driven by celebrity endorsements and changing demographics (Hispanic/Latino population grew 23% between 2010–2020 census).

COVID-19 impact:

• Craft Beverage Modernization Act 2019 revision passed.
• Many states permitted "cocktails to go" as temporary pandemic relief; some made changes permanent.

🏢 Institutional Food Service

Institutional food service: Large-scale operations often connected to governmental or corporate organizations, run under predetermined contracts.

Includes:

• Hospitals
• Educational institutions
• Prisons and detention facilities
• Corporate staff cafeterias
• National Park restaurants and concessions
• Cruise ships
• Airports and transportation terminals

Examples of companies: Compass, Sodexho, Aramark.

🏨 Accommodation Food Service

• Hotel restaurants, bars, room service, self-serve dining (breakfast rooms).
• Hotel restaurants usually open to public and reliant on public patronage plus hotel guests.
• Collaborations between hotel and restaurant chains (example: Shula's Steakhouse and Marriott Hotels).

💵 Restaurant profitability and cost control

Pre-tax profit margins:

• QSRs: 6.6%
• Full-service restaurants: 6.1%
• Significant variances exist at individual locations, even within same brand.

Major operating expenses (as % of revenue):

Expense	Full-service	QSR
Cost of food and beverage sales	33%	33%
Salaries and wages (including benefits)	33%	28%
Fixed costs (rent, taxes, property insurance)	6%	3%

Primary costs requiring particular attention: labor, food, and beverage costs.

Additional costs: reusable operating supplies (cutlery, glassware, china, linen in full-service restaurants).

🎢 Recreation and entertainment

🏔️ Recreation definitions

Outdoor recreation: "Outdoor activities that take place in a natural setting, as opposed to a highly cultivated or managed landscape such as a playing field or golf course."

• Typically applied to outdoor activities near one's community.

Adventure tourism (UNWTO): "A trip that includes at least two of the following three elements: physical activity, natural environment, and cultural immersion."

• Applied when activities are further away and people must travel some distance.

Categorization factors:

• Manner of engagement (risk exposure, experience requirement, group/solo activity).
• Distance travelled to access the activity.
• Type of environment (proximity to nature, level of challenge).

Market size: Global adventure travel market expecting elevation of $2.02 billion (USD) by 2030, with 10.7% compound annual growth rate from 2020–30.

🎰 Gaming

• Number of U.S. casinos growing since 2010.
• Found in major cities, riverboats, and Native American lands.
• U.S. casino revenue relatively flat; global gaming revenues increasing (largely due to Asian market growth).
• Most casinos involve other hospitality facets: lodging, F&B, golf, entertainment, spas.

🎡 Theme Parks

• Long history dating back to 1500s Europe.
• Disneyland (opened 1955, California) set the standard for theme parks.
• Parks outside California and Florida are often highly seasonal, facing significant staffing and training challenges each year.

🎪 Convention and event management

📋 Definitions and planning roles

Convention: A large meeting of people with similar interests who meet for at least a few days to discuss their field.

Event: A gathering at a given place and time, usually of some importance, often celebrating or commemorating a special occasion.

Meeting planner roles:

• Independent contractors hired to facilitate planning.
• Full-time employees coordinating company meetings.
• Hotel, conference center, and event venue staff.

Professional designations: CMP (Certified Meeting Planner), CSEP (Certified Special Events Professional), CMM (Certificate in Meeting Management).

Planning tasks include:

• Conceptualizing/theming
• Site inspection & selection
• Logistics and planning
• Human resource management
• Security
• Marketing and public relations
• Budgeting and financial management
• Sponsorship procurement
• Management and evaluation

🎭 Event categories

Mega-events:

Large-scale, highly prestigious events such as the Olympic Games, FIFA World Cup, or global economic summits.

• Gain tremendous media coverage.
• Major economic impacts (positive and negative) on host location.
• High tourism volume (1 million visitors) brings revenue but may be outweighed by substantial capital and social costs.
• Often awarded through bidding process.

Special events:

One-time or infrequent specific ritual, presentation, performance, or celebration marking a special occasion.

• Examples: presidential inauguration, Queen of England's 90th birthday.
• Significant media coverage and economic impact for host city.

Hallmark events:

Unique events identified with the location where held.

• Examples: Carnival in Rio de Janeiro, Oktoberfest in Munich.
• Contribute significant economic benefits and create competitive advantage for host city.

Festivals:

Themed public celebrations conveying meaning to participants and spectators through activities.

• Often celebrations of community or culture featuring music, dance, or dramatic performances.
• Examples: Lollapalooza, Cannes Film Festival, Junkanoo in the Bahamas.

Local community events:

• Generated by and for locals; may attract tourists but main audience is local community.
• May experience measurable economic impacts (hotel stays, dining out).
• Examples: Steppin' Out Street Fair in Blacksburg, fundraisers, community picnics.

🏢 Meetings and conventions types

Conventions:

• Very large attendance.
• Held on regular schedule but in different locations.
• Often require bidding process.
• Example: Political conventions.

Association Meetings or Conferences:

• Held regionally and nationally for hundreds of associations or themed events.
• Examples: National Restaurant Association Annual Convention, ComicCon, National Auto Show.

Corporate Meetings:

• Vary significantly in size and purpose.
• Include regional/national sales meetings, shareholder meetings, training sessions, celebrations.
• Location varies by meeting nature: airport property, corporate meeting facility, upscale resort.

Trade Shows and Trade Fairs:

• Can be stand-alone or adjoin a convention/conference.

Seminars, Workshops, and Retreats:

• Smaller-scale events.

Non-traditional venues:

• Meeting planners increasingly creative; delegates more demanding.
• Architectural spaces: airplane hangars, warehouses, rooftops.
• Experiential venues: aquariums, museums, galleries.

✈️ Travel services

🚢 Cruises

• According to CLIA (Cruise Lines International Association), 23 million passengers expected on cruises worldwide in 2015 (62 member lines).
• Industry employs over 900,000 people.
• Over 55% of world's cruise passengers from North America.

Leading destinations (by ship deployments):

• Caribbean (36%)
• Mediterranean (20%)
• Northern Europe (11%)
• Australia/New Zealand (6%)
• Alaska (6%)
• Asia (5%)
• South America (3%)

🗺️ Travel services sector

Travel services industry: "Establishments primarily engaged in travel arrangement and reservation services."

Includes:

• Tourist and travel agencies
• Travel tour operators and wholesale operators
• Convention and visitors' bureaus
• Airline, bus, railroad, and steamship ticket offices
• Sports and theatrical ticket offices
• Airline, hotel, and restaurant reservation offices

Impacted by: Fuel costs, safety issues, load factors, government regulation.

🏢 Travel agencies

Travel agency: A business operating as intermediary between the travel industry (supplier) and the traveler (purchaser).

• Market prepackaged travel tours and holidays to potential travelers.
• Function as broker between traveler and hotels, car rentals, tour companies.
• Can be small/privately owned or part of larger entity.

💻 Online Travel Agencies (OTAs)

Online travel agents (OTAs): Companies that aggregate accommodations and transportation options, allowing users to choose trip components based on price or other incentives.

• Examples: Booking.com, Expedia.com, Hotwire.com, Kayak.com.
• Gaining popularity with travelling public.
• Revenue rose in 2021 over 2020 (after sharp 2020 drop due to COVID-19), but not yet at pre-pandemic levels.
• 2021 revenue leaders: Booking (nearly $11 billion USD), Expedia (roughly $8.6 billion USD).

🚌 Tour operators

Tour operator: Packages all or most components of an offered trip and sells them to the traveler.

• Packages can be sold through retail outlets or travel agencies.
• Work closely with hotels, transportation providers, and attractions to purchase large volumes and package at better rates than individual travelers could obtain.

🏙️ Destination Marketing Organizations (DMOs)

Destination marketing organizations (DMOs): Include national tourism boards, state/provincial tourism offices, and community convention and visitor bureaus.

• Promote "the long-term development and marketing of a destination, focusing on convention sales, tourism marketing and service."

⛳ Country clubs

Country clubs: Part of hospitality industry with service strategy focusing on serving members who develop relationships with staff (vs. transactional service in lodging, restaurants, airlines).

Focus:

• Maximize member satisfaction, retention, and growth while maintaining attractive fee structure.
• Less focus on profit than other hospitality sectors.

Typical offerings:

• Restaurant and bar operations
• Catered events
• Amenities: golf, tennis, pool, fitness facilities
• Family and youth events (important for membership maintenance and growth)

Required skills: Strong customer service, culinary, event management, and general management skills.

🧭 Overview

🧠 One-sentence thesis

Accounting and financial management provide the essential language and tools for measuring business performance, making informed decisions, and maximizing firm value through careful analysis of financial statements and strategic resource allocation.

📌 Key points (3–5)

• Two main accounting fields: Management accounting serves internal decision-makers, while financial accounting reports to external stakeholders following standardized rules (GAAP).
• Core financial statements: The income statement shows profitability over time; the balance sheet shows financial position at a point in time based on the equation Assets = Liabilities + Owner's Equity.
• Ratio analysis unlocks insights: Financial ratios (profitability, liquidity, debt, efficiency) reveal trends and enable comparisons across time periods and between companies.
• Common confusion: Don't confuse the income statement (performance over a period) with the balance sheet (snapshot at one moment); they serve different purposes.
• Financial management goal: Maximize firm value by balancing risk and return in planning, investment, and financing decisions—not just short-term profit maximization.

📊 Two Fields of Accounting

📊 Management accounting (internal focus)

Management accounting provides information and analysis to decision makers inside the organization to help them run it.

• Serves managers across all functional areas (HR, operations, marketing)
• Flexible reporting formats tailored to specific manager needs
• Focuses on relevant, accurate, timely information for internal decisions
• Not bound by external reporting rules
• Example: A manager might request a custom report analyzing costs by product line to decide which products to emphasize.

📊 Financial accounting (external focus)

Financial accounting furnishes information to individuals and groups both inside and outside the organization to help them assess its financial performance.

• Primary focus on external stakeholders (investors, creditors, regulators)
• Must follow Generally Accepted Accounting Principles (GAAP) in the US
• Produces standardized financial statements: income statement, balance sheet, statement of owner's equity, statement of cash flows
• Enables comparison between companies because everyone follows the same rules
• International companies may follow International Financial Reporting Standards (IFRS) instead

Don't confuse: Management accounting reports are private and flexible; financial accounting statements are public (for traded companies) and standardized.

👥 Users of Financial Information

👥 Owners and managers

• Financial statements act as "report cards" showing whether the company made a profit
• Provide basis for corrective action (though management accounting offers more detail)
• Help assess overall business health

💰 Investors and creditors

• Need accurate information to make smart investment and loan decisions
• Study financial statements to assess company performance
• Warren Buffett (net worth $96 billion as of 2022) credits learning accounting as the best investor preparation
• Investors provide equity financing (ownership stake); creditors provide debt financing (loans)

🏛️ Government agencies

• Securities and Exchange Commission (SEC): Requires publicly-traded companies to file annual financial reports
• Internal Revenue Service (IRS) and other tax agencies: Need financial data for tax purposes
• Regulatory agencies ensure companies report truthfully

🔧 Other stakeholders

• Suppliers: Want to know if customers can pay their bills
• Employees and unions: Interested because compensation depends on employer performance
• Each group uses financial information to assess their relationship with the company

📋 The Balance Sheet

📋 The accounting equation

Assets = Liabilities + Owner's Equity

• Assets: Things owned by the business (cash, inventory, equipment)
• Liabilities: Amounts owed to others (loans, unpaid bills)
• Owner's equity: The owner's investment plus retained profits

This equation must always balance—assets must equal the sum of liabilities and owner's equity.

📋 What the balance sheet shows

A balance sheet reports assets (resources), liabilities (debts), and owner's equity (investment) at a specific point in time.

• Represents a snapshot of financial position on a particular date
• Shows where the company's resources came from (borrowing or owner investment)
• Example: Stress-Buster's opening balance sheet showed $600 in cash (asset) funded by $400 borrowed (liability) plus $200 owner investment (equity)

📋 Credit types

• Unsecured credit: Loans based on trust/promise to repay (like borrowing from relatives)
• Secured credit: Loans backed by collateral that the lender can take if borrower doesn't pay (like a car loan)
• Collateral: Property or assets pledged to secure a loan

💵 The Income Statement

💵 What it measures

The income statement shows revenues (sales) and expenses (costs of doing business) over a period of time, revealing whether the company made a profit or loss.

• Covers a time period (month, quarter, year), not a single point in time
• Shows how much income was earned during that period
• Fiscal year: 12-month accounting period, often ending December 31 but can vary by industry

💵 Key components

Line Item	Definition	Stress-Buster Example
Sales/Revenue	Money received from selling products	100 units × $10 = $1,000
Cost of Goods Sold	Direct cost of products sold	100 units × $6 = $600
Gross Profit	Sales minus cost of goods sold	$1,000 - $600 = $400
Operating Expenses	Costs of running business (salaries, rent, advertising)	$240 + $20 + $40 = $300
Net Income	Gross profit minus operating expenses (the "bottom line")	$400 - $300 = $100

💵 Variable vs fixed costs

• Variable costs: Change with quantity produced (e.g., materials for each unit)
• Fixed costs: Stay the same regardless of quantity (e.g., rent, advertising)
• Understanding this distinction is crucial for breakeven analysis

Don't confuse: The income statement shows performance over time; the balance sheet shows position at one moment.

🎯 Breakeven Analysis

🎯 The breakeven concept

Breakeven analysis determines the sales level at which total revenue exactly equals total expenses—where the company has neither profit nor loss.

• At breakeven, gross profit equals all fixed costs
• Helps determine minimum sales needed to avoid losing money
• Can be modified to calculate sales needed for a target profit level

🎯 Breakeven calculation steps

1. Determine total fixed costs: Add up all costs that don't change with sales volume
2. Identify variable cost per unit: Cost that varies with each unit sold
3. Calculate contribution margin per unit: Selling price minus variable cost per unit
4. Calculate breakeven in units: Fixed costs ÷ contribution margin per unit

🎯 Stress-Buster example

• Fixed costs: $300 (salaries $240 + advertising $40 + rent $20)
• Variable cost per unit: $6 (chest $1 + toys $5)
• Selling price: $10
• Contribution margin: $10 - $6 = $4
• Breakeven: $300 ÷ $4 = 75 units

At 75 units sold, revenue ($750) minus total costs ($450 variable + $300 fixed) equals zero profit.

📈 Ratio Analysis Fundamentals

📈 What ratios reveal

Ratio analysis is a technique for evaluating financial performance by calculating relationships between numbers on financial statements.

• One ratio alone reveals little; value comes from trends over time and comparisons with other companies
• Ratios must be compared across periods or against industry benchmarks
• Different ratio categories assess different aspects of performance

📈 Four main ratio categories

Category	What It Measures	Key Question
Profitability	Profit relative to investment or sales	How much profit per dollar invested or sold?
Liquidity	Ability to pay short-term bills	Can the company meet immediate obligations?
Debt	Amount of borrowing used	How much risk from leverage?
Efficiency	How well assets are managed	Are resources being used effectively?

📈 Liquidity concept

• Liquidity: How quickly an asset can be converted to cash
• Stock is more liquid than a building
• Cash itself is perfectly liquid
• Companies need sufficient liquidity to pay bills on time

💹 Key Financial Ratios

💹 Profitability ratios

Return on sales (also called profit margin):

• Formula: Net income ÷ Sales revenue
• Apple 2021 example: $94.7 billion ÷ $365.8 billion = 25.9%
• Meaning: For every $5 in sales, Apple kept more than $1 as profit

Earnings per share (EPS):

• Formula: Net income ÷ Number of shares outstanding
• Apple grew from $3.31 (2020) to $5.67 (2021)—71% increase
• Critical metric watched by financial markets and analysts

💹 Liquidity ratios

Current ratio:

• Formula: Current assets ÷ Current liabilities
• Apple 2021: $121.4 billion ÷ $106.3 billion = 1.14
• Ratio above 1.0 means company can pay its bills
• Apple also had $31.3 billion in long-term marketable securities (additional cushion not in the ratio)

💹 Debt ratios

Debt-to-equity ratio:

• Formula: Total liabilities ÷ Owner's equity
• Apple 2021: $267.9 billion ÷ $69.1 billion = 3.87
• Means Apple borrowed more than owners invested
• Context matters: Apple's liquid assets mean this high ratio isn't alarming

Don't confuse: A high debt ratio isn't automatically bad if the company has strong cash position and ability to repay.

💼 Financial Management Role

💼 What financial managers do

Financial management is the art and science of managing a firm's money so it can meet its goals—not just the finance department's job but a concern for all managers.

• Track cash flows (money moving in and out)
• Make three types of decisions: planning, investment (spending), financing (raising money)
• Work with all departments since every business decision has financial consequences
• Focus on cash flows, not just accounting profits

💼 Three key activities

1. Financial planning: Project revenues, expenses, and financing needs over time
2. Investment decisions: Invest funds in projects and securities with high returns relative to risks
3. Financing decisions: Obtain funding and balance debt (borrowed funds) versus equity (ownership funds)

💼 The primary goal

The main goal of the financial manager is to maximize the value of the firm to its owners.

• For public companies: measured by stock price
• For private companies: measured by sale price
• Must balance short-term and long-term consequences
• Cannot focus only on maximizing immediate profits

Example: A company that eliminated research and development would boost short-term profits but lose long-term competitiveness—destroying firm value.

⚖️ Risk and Return

⚖️ The risk-return tradeoff

A basic principle in finance: the higher the risk, the greater the return required.

• Return: Opportunity for profit from an investment
• Risk: Potential for loss or chance that investment won't achieve expected return
• Financial managers constantly balance these factors
• Widely accepted concept guides investment and financing decisions

⚖️ Factors considered

• Changing market demand patterns
• Interest rate fluctuations
• General economic conditions
• Market conditions
• Social issues (environmental effects, employment policies)

⚖️ Long-term perspective example

Corning (160+ year-old company):

• Invests heavily in R&D with long development cycles
• Developed Gorilla Glass for mobile devices (now 20%+ of phone market)
• Fiber-optic cable business thriving again
• Takes short-term risks for long-term competitive advantage
• Recent quarter showed 16% revenue increase from this strategy

Don't confuse: Maximizing short-term profits versus maximizing long-term firm value—they often require different decisions.

💳 Debt vs Equity Financing

💳 Two forms of financing

Debt financing:

• Borrowing money (bank loans, bonds)
• Bonds pay interest over set period, then principal is repaid
• Principal: The amount originally borrowed
• Lenders expect repayment regardless of business performance

Equity financing:

• Selling ownership stake in the company
• Owners share in profits but also losses
• Many owners reluctant to dilute ownership
• No obligation to repay like debt

💳 Practical reality

• Lenders limit how much they'll loan based on ability to repay
• Most businesses use a combination of debt and equity
• Balance depends on company situation, industry, and growth stage
• Financial managers must find optimal mix for their firm

🧭 Overview

🧠 One-sentence thesis

Starting early with disciplined financial planning—including building good credit, controlling debt, and leveraging compound interest—is essential to achieving long-term financial goals like home ownership and comfortable retirement.

📌 Key points (3–5)

• Credit rating matters: Your FICO score (300–850) determines your ability to borrow and the interest rates you'll pay; it's built by paying bills on time and borrowing responsibly.
• Debt control is critical: High monthly bills relative to income and splurging habits jeopardize your financial future; moving to cash-only and cutting discretionary spending can help.
• Time value of money: A dollar saved today is worth more than one saved tomorrow because it starts earning interest sooner and compounds over time.
• Education pays off: College graduates earn significantly more over their lifetime than high school graduates, making student loans a worthwhile investment despite the debt.
• Common confusion: Secured vs. unsecured credit—secured loans (car, mortgage) require collateral; unsecured loans (student loans, credit cards) don't, so they carry higher interest rates.

💳 Building and protecting your credit

💳 What is a credit rating and why it matters

Credit rating: your ability to borrow in the future, measured by a FICO score ranging from 300–850, with most people falling in the 600–700 range.

• Whenever you use credit, lenders (retailers, credit card companies, banks) report your debt and payment habits to three national credit bureaus: Equifax, Experian, and TransUnion.
• The bureaus compile your FICO score based on five criteria:
  • Payment history (most important): paying bills on time
  • Total amount owed
  • Length of credit history
  • Amount of new credit
  • Types of credit used
• Lenders use your score to decide whether to lend to you and at what interest rate.
• A low FICO score can prevent you from renting an apartment or landing a job.

🏗️ How students can build good credit

The excerpt emphasizes starting early to establish a positive credit history:

• Get your own credit card if you meet qualifications; look for low interest rates and no annual fee.
• Pay bills on time and don't borrow too heavily.
• Building credit early creates a foundation for future borrowing (home, car, etc.).

Example: If you consistently pay your credit card balance in full each month, you build a strong payment history—the most important factor in your FICO score.

Don't confuse: Having a credit card with using it irresponsibly; the card is a tool to build credit, not an invitation to overspend.

🔒 Secured vs. unsecured credit

🔒 Secured loans

Secured credit: loans that require the borrower to pledge collateral (security) to the lender to ensure repayment.

• How it works: If you fail to repay, the lender can repossess the collateral (e.g., car) or foreclose on it (e.g., house) and resell it to recover the loan amount.
• Examples: car loans, mortgage loans.
• The collateral reduces the lender's risk, so secured loans typically have lower interest rates.

🔓 Unsecured loans

Unsecured credit: loans made without collateral, based on the borrower's creditworthiness.

• Examples: student loans, credit cards.
• The lender takes more risk, so unsecured loans often require higher interest rates.

Don't confuse: Secured and unsecured loans—secured means you pledge an asset; unsecured means the lender relies on your credit score and promise to repay.

💸 Getting out of debt and controlling spending

💸 Two steps to turn things around

According to experts, if you're in over your head:

1. Cut up your credit cards and live on a cash-only basis.
2. Bring down your monthly bills by cutting discretionary spending.

• Many people lack the financial discipline to handle credit cards well; if that's you, switch to cash or debit card only.
• Be honest with yourself: if you can't handle credit, don't use it.

📊 Tracking and reducing expenses

The excerpt suggests a one-week "exercise" to reveal spending patterns:

• Keep a written record of everything you spend and total it at week's end.
• Keep all ATM receipts and count up the fees.
• Take $100 out of the bank and don't spend a penny more.
• Avoid gourmet coffee shops.

Example: Spending $4 daily on coffee = nearly $1,400/year. Using an ATM at another bank twice a week at $5/fee = $500/year in fees. Eating out can cost $175/week = over $9,000/year.

Why it matters: Small daily expenses add up quickly; tracking them reveals opportunities to save thousands annually.

🎯 Splurging vs. high bills

The excerpt describes a self-help quiz that identifies two problems:

Problem	Quiz result	What it means
Splurging	Answered B or C to questions 1–3	You spend impulsively on non-essentials
Bills too high	Answered B or C to questions 4–6	Your monthly obligations exceed what your income can comfortably support

Don't confuse: Splurging (discretionary, avoidable spending) with necessary bills (rent, loan payments); both drain your finances, but splurging is easier to cut.

📈 Financial planning and the life cycle

📈 What is financial planning

Personal finance: the application of financial principles to the monetary decisions you make for your individual or family benefit.

Financial planning: the ongoing process of managing your personal finances in order to meet goals you've set for yourself or your family.

• Financial planning requires answering questions like:
  • What's my annual income?
  • How much debt do I have, and what are my monthly payments?
  • What's the value of my assets?
  • How can I best budget my annual income?
  • How much wealth can I expect to accumulate during my working lifetime?
  • How much money will I need when I retire?

🔄 The financial life cycle

The excerpt divides a typical individual's financial life into three stages:

Stage	Age range	Life events	Financial focus
Stage 1	Early 20s–mid 40s	Beginning career, starting family, buying home	Building wealth
Stage 2	Mid 40s–retirement (~65)	Peak earning years, children's education, estate planning	Preserving and increasing wealth
Stage 3	Retirement onward	Living on savings	Living on (and continuing to grow) saved wealth

• Financial needs peak around age 55 (10 years before typical retirement).
• Complications can arise at any stage (e.g., changes in marital or employment status, economic downturns).

Don't confuse: The stages are not rigid; your personal timeline may vary, but the general pattern of building → preserving → living on wealth applies to most people.

🎓 The value of education and starting early

🎓 College as an investment

The excerpt presents data showing that education level strongly correlates with income:

Education level	Average income	Increase over previous level
Less than high school	$32,188	—
High school diploma	$40,612	26%
Some college, no degree	$45,604	12%
Associate degree	$48,776	7%
Bachelor's degree	$67,860	39%
Master's degree	$80,340	18%
Doctoral degree	$98,020	22%
Professional degree	$98,436	0.4%

• Over the financial life cycle, families headed by college graduates earn about $1.6 million more than families headed by high school graduates.
• For every $1 spent on college education, you can expect to earn about $35 during your financial life cycle.
• At that rate of return, you should be able to pay off student loans (assuming reasonable financial planning).

Example: A bachelor's degree holder earns $67,860 on average, 67% more than a high school graduate's $40,612.

Don't confuse: Exceptions (e.g., Bill Gates, Paul Allen) with the rule; for the average person, educational credentials are essential for employability and career advancement.

⏰ Starting early: compound interest

Compound interest: the effect of earning interest on your interest.

• How it works: You invest $10,000 at 5% annual interest. After year 1, you have $10,500. Reinvest the entire $10,500 at 5%, and after year 2 you have $11,025. And so on.
• If you invest $10,000 at age 18 and leave it until age 65 (47 years) at 5% interest, it grows to $104,345.
• If you add $10,000 per year from age 22 to 65, you accumulate slightly more than $1.6 million.

Example: Starting at age 23, if you save $2,000/year for 12 years at 10% interest, you'll have nearly $1 million by age 67. If you wait until age 36 to start, you'll have less than half that amount—even though you'd have to save for 32 years instead of 12.

Why it matters: A dollar saved today starts earning interest sooner and compounds over time, ultimately earning far more than a dollar saved later.

⏳ Time value of money

Time value of money: the principle that a dollar received in the present is worth more than a dollar received in the future.

• Why: Most people prefer to consume now rather than later. If you borrow money, you pay interest because the lender sacrifices the opportunity to buy something now.
• Additional factors: Inflation erodes the value of money over time; lending to individuals carries risk (unlike lending to the US government).
• A dollar received today also starts earning interest sooner than one received tomorrow.

Example: To save $1 million by age 67, you need to save only $33/month if you start at age 20 (at 12% interest). If you wait until age 30, you need $109/month. If you wait until age 40, you need $366/month.

Don't confuse: Time value of money (a dollar today is worth more than a dollar tomorrow) with compound interest (earning interest on interest); they're related but distinct concepts.

💼 Saving and investing basics

💼 Where to save or invest

• Savings accounts: Branch banks offer them, but interest rates can be unattractive.
• Individual stocks or bonds: Risky and usually require more funds than most students have.
• Mutual funds: A professionally managed investment program in which shareholders buy into a group of diversified holdings (stocks, bonds, etc.).
  • Companies like Vanguard and Fidelity offer indexed funds that track indices like the S&P 500.
  • Minimum investment levels can be within reach of students.
  • Accept electronic transfers for convenience.

🥚 Diversification

Diversification: not putting all your eggs in one basket.

• Spread your investments across different types of assets to reduce risk.
• The excerpt leaves detailed discussion of investment vehicles to more advanced courses.

Don't confuse: Saving (setting money aside, often in low-risk accounts) with investing (putting money into assets like stocks or mutual funds that carry more risk but potentially higher returns).

🧭 Overview

🧠 One-sentence thesis

Information technology has transformed business by enabling companies to collect, process, and share data across networks, supporting better decision-making, operational efficiency, and competitive advantage in a knowledge-based economy.

📌 Key points (3–5)

• IT as a business enabler: Information technology provides the tools and systems that allow companies to manage operations, make strategic decisions, and connect employees, suppliers, and customers globally.
• Networks and connectivity: Computer networks (LANs, WANs, intranets, VPNs, wireless) link systems and people, enabling real-time collaboration, data sharing, and remote work.
• Management information systems: Companies use transaction processing systems, decision support systems, and data warehouses to turn raw data into actionable information for all levels of management.
• Security and privacy challenges: Protecting data from unauthorized access, viruses, theft, and breaches is critical; companies must implement formal security policies, encryption, firewalls, and employee training.
• Common confusion—data vs. information: Data are raw, unorganized facts; information is data that has been processed and organized to support decision-making.

💼 The Role of IT in Modern Business

💼 What IT encompasses

Information technology (IT): the equipment and techniques used to manage and process information.

• IT is not just hardware and software; it includes the entire infrastructure for collecting, storing, processing, and distributing information.
• Businesses depend on IT for daily operations (e.g., order processing, inventory management) and strategic decisions (e.g., market forecasting, competitive analysis).
• Example: A financial advisor like John Daly uses cloud-based software-as-a-service (SaaS) tools from TD Ameritrade to manage client portfolios without maintaining his own IT infrastructure.

🧠 Knowledge workers and the CIO

Knowledge workers: employees who develop or use knowledge to perform planning, acquiring, analyzing, organizing, and other functions.

• Most modern jobs involve creating, using, or sharing information rather than physical production.
• The chief information officer (CIO) manages all information resources and must combine technical expertise with business acumen.
• Example: Google's CIO Ben Fried manages technology to deliver billions of searches daily while focusing on business efficiency and growth.
• Don't confuse: IT management is not just about buying the latest technology; it requires aligning technology investments with business strategy.

🌐 Global connectivity and collaboration

• The internet and web have become indispensable for internal communication and customer interaction.
• Electronic trading hubs (e-marketplaces) facilitate B2B commerce in industries like automotive, finance, and aerospace.
• Example: Alibaba's eWTP hub in Malaysia provides small businesses access to global markets, demonstrating how technology levels the playing field.
• Thomas Friedman's observation: "We are now connecting all of the knowledge centers on the planet together into a single global network."

🖥️ Computer Systems and Business Equipment

🖥️ Types of computers in business

The excerpt provides a table (Figure 19.1) showing different computer types:

Computer Type	Key Characteristics	Business Use
Tablets	Self-contained, run apps, cloud-connected	Increasingly dominant for many business processes
Desktop PCs	Self-contained, network-capable	Handle text, audio, video, complex graphics
Laptops	Portable, similar power to desktops	Enable mobile computing
Minicomputers	Multiple processors, support 4-200 users	Mid-range business applications
Mainframes	Refrigerator-sized, support hundreds/thousands of users	Large-scale data processing, high security
Servers	Greatest storage and processing speed	Can be upgraded/repaired while operating
Supercomputers	Most powerful, 280+ trillion calculations/second	Scientific research, national security, big data analysis

📊 Business software applications

Figure 19.2 lists common software types:

• Word processing: document creation with editing tools
• Spreadsheet: financial analysis with automatic recalculation
• Database management: electronic filing and sorting of records
• Graphics/presentation: visual materials for reports and meetings
• Desktop publishing: in-house production of brochures and catalogs
• Communications: data transmission across networks
• Integrated suites: combined programs designed to work together
• Groupware: collaborative tools for distributed teams
• Financial software: accounting and financial reporting

⚡ Supercomputers and specialized computing

• Supercomputers handle tasks that would take years on a PC, completing them in hours.
• Applications include national security analysis, scientific research, drug development, weather modeling, and big data analysis for business insights.
• The goal is petaflops: quadrillions of calculations per second.
• Multiple countries (US, China, France, Japan) have made petascale computing a national priority.

🌐 Computer Networks and Connectivity

🌐 What networks do

Computer network: a group of two or more computer systems linked together by communications channels to share data and information.

• Networks include clients (applications running on PCs or workstations) and servers (machines that manage resources, store files, or process queries).
• Benefits:
  • Efficient resource sharing
  • Communication and collaboration across distance and time
  • File-sharing gives all employees access to the same information
  • Eliminates duplication of effort through shared databases
  • Enables "screen-sharing" for remote collaboration
• Networks make enterprise software possible—large integrated programs that manage all internal operations (finance, HR, engineering, sales, procurement).

🏢 LANs and WANs

Local area network (LAN): connects people at one site to exchange data and share hardware/software.

• LANs are cost-effective for linking computers without mainframe terminals.
• Common uses: office automation, accounting, information management.
• Can be wired or wireless.

Wide area network (WAN): connects computers at different sites via telecommunications (phone lines, satellites, microwaves).

• The internet is essentially a worldwide WAN.
• WANs enable 24/7 project work using teams in different time zones.
• A modem connects computers to phone lines for near-instant data transmission.

📡 Wireless networks (WLANs and WWANs)

• Wireless WAN (WWAN): what you use with your cellular phone; coverage spans multiple countries.
• Wireless LAN (WLAN) or Wi-Fi: transmits data at one site with a radius of 500 feet indoors, 1,000 feet outdoors.
• Wireless devices communicate with a wired access point.
• Common in hotels, airports, restaurants, hospitals, retail, universities, warehouses.
• Example: Veterans Administration Hospital in West Haven, CT, added Wi-Fi in patient rooms to support clinical information systems, pharmacy management, and voice-over-internet phones.

🔐 Intranets and VPNs

Intranet: a private corporate network using internet technology to connect employees; operates behind a firewall to prevent unauthorized access.

• Essentially a mini-internet for company employees only.
• Uses standard web browsers, making it easy to use and less expensive than other network types.
• Applications: HR administration (benefits, time sheets, job postings), logistics, knowledge management.
• Example: Employees can update their own personnel records and retirement contributions online, reducing HR department size by 30%.

Virtual private network (VPN): connects two or more private networks over a public network (like the internet) with strong security measures.

• More cost-effective than leasing private lines and purchasing networking equipment.
• Allows authorized users to connect from home or while traveling.
• Uses existing internet infrastructure; no long-distance charges.
• Downside: availability and performance depend on factors outside the organization's control.
• Security benefit: encrypts all data, protecting against hackers intercepting browsing activity or credit card numbers.
• Example VPN providers: NordVPN, launched in 2012, became a leading global VPN service.

🔌 Enterprise portals

Enterprise portal: an internal website that provides proprietary corporate information to a defined user group.

• Three forms: business-to-employee (B2E), business-to-business (B2B), business-to-consumer (B2C).
• Unlike standard intranets, portals allow users to customize their home page to gather just the information they need.
• Benefits:
  • Consistent, simple user interface across the company
  • Integration of disparate systems and data
  • Single source for accurate, timely information
  • Shorter time to perform tasks
  • Cost savings by eliminating information intermediaries
  • Improved communications

📱 Bluetooth and mobile technologies

• Bluetooth: short-range wireless technology that connects devices (keyboards, mice, headsets, phones, music players).
• Business applications: hands-free phone use while driving, connecting portable music players to car audio systems.
• Companies like Amazon, Apple, Audi, BMW, Google, Honda, Toyota, and Volkswagen offer Bluetooth solutions.
• Ultramobile PCs: devices like the Apple iPad Pro combine the power of a desktop with portability; run full operating systems and business applications.

☁️ Application Service Providers (ASPs) and Managed Service Providers (MSPs)

Application service provider (ASP): a company that buys and maintains software on its servers and distributes it through high-speed networks to subscribers for a set period and price.

• Also called on-demand software, hosted applications, or software-as-a-service (SaaS).
• Users subscribe monthly and access applications like using telephone voice mail.
• Three major categories:
  1. Enterprise applications (CRM, ERP, e-commerce, data warehousing)
  2. Collaborative applications (e-mail, groupware, document management)
  3. Personal applications (games, entertainment, home-office software)
• Benefits: no need to purchase, install, support, or upgrade expensive software; savings in licensing fees, infrastructure, time, and staff.
• Major providers: Amazon Web Services, IBM, Microsoft, Salesforce.com.
• Market growth: revenues from cloud services were about $180 billion in 2017, growing three times faster than traditional hardware/software.

Managed service provider (MSP): next generation of ASPs, offering greater customization and expanded capabilities including business processes and complete network server management.

• Global market reached $149.1 billion in 2016, estimated to reach $256.5 billion in 2021 (11.5% annual growth).

📊 Management Information Systems

📊 What MIS includes

Management information system (MIS): users, hardware, and software that support decision-making; collects and stores key data and produces information managers need for analysis, control, and decision-making.

• MIS is not just software; it's the entire system of people, processes, and technology.
• Used to automate production, order and monitor inventory, process customer orders, handle billing and payments, process bank transactions.
• Most consumer transactions involve information systems (supermarket checkout, online hotel booking, music downloads).

🔄 Transaction Processing Systems (TPS)

Transaction processing system (TPS): receives raw data from internal and external sources and prepares data for storage in a database.

• All the company's key data are stored in a single huge database—the company's central information resource.
• Database management system (DBMS): software that tracks data and allows users to query the database.
• Two update methods:
  • Batch processing: data collected over time and processed together (efficient for periodic tasks like payroll)
  • Online (real-time) processing: processes data as it becomes available (keeps data current; used for airline reservations, inventory in 24/7 factories)
• Trade-off: online processing is more expensive but provides current information.

📈 Management Support Systems (MSS)

Management support system (MSS): uses the internal master database to perform high-level analyses that help managers make better decisions.

• Goes beyond routine transaction processing to provide strategic insights.

📈 Data warehouses and data marts

Data warehouse: combines many databases across the whole company into one central database that supports management decision-making.

• Allows managers to easily access and share data across the enterprise for a broad overview.
• Includes software to extract data from operational databases, maintain the warehouse, and provide data to users.
• Analyzes data much faster than transaction-processing systems.

Data mart: a special subset of a data warehouse that deals with a single area of data, organized for quick analysis.

• Example uses: customer relationship management, fraud detection, product-line analysis, corporate asset management.
• About 60% of companies with $1 billion+ in revenues use data warehouses.
• Case study: Union Pacific railroad consolidated multiple separate systems into a unified data warehouse, enabling accurate forecasts, optimal traffic routes, identification of profitable market segments, and millions in savings through better asset utilization and crew management. The system paid for itself in three years.

📋 Information-reporting systems

Information-reporting system: uses summary data from the TPS to produce regularly scheduled and special reports.

• Level of detail depends on the user.
• Exception reports: show cases that fail to meet standards (e.g., customers with overdue accounts).
• Special reports: generated only when requested (e.g., sales by region and customer type).

🤔 Decision Support Systems (DSS)

Decision support system (DSS): helps managers make decisions using interactive computer models that describe real-world processes.

• A tool for answering "what if" questions about the effects of changes.
• Simple example: a spreadsheet showing overtime required if the number of workers changes.
• Advanced example: marketing executives at a furniture company run DSS models using sales data and demographic assumptions to forecast furniture types that will appeal to fastest-growing population groups.
• Applications: predictive analytics for inventory management, using big data to target customer segments for new products.
• Emerging use: clinical decision-support systems in healthcare to help physicians with diagnosing and treating illnesses.

👔 Executive Information Systems (EIS)

Executive information system (EIS): customized for an individual executive, providing specific information for strategic decisions.

• Example: a CEO's EIS may include spreadsheets comparing the company to competitors and graphs showing economic and industry trends.

🧠 Expert Systems

Expert system: gives managers advice similar to what they would get from a human consultant, using artificial intelligence to reason and learn.

• Enables computers to solve problems using what-if reasoning, much like humans do.
• Expensive and difficult to create, but finding more applications.
• Lower-end systems can run on mobile devices; top systems help airlines deploy aircraft and crews.
• Applications: oil exploration, employee work-shift scheduling, illness diagnosis.
• Some replace human experts; others assist them.
• Cost justification: hiring enough people for ongoing analytical tasks would be prohibitively expensive.

🛠️ Technology Management and Planning

🛠️ The challenge of IT management

• Companies have produced more data in the last 30 years than in the previous 5,000 years combined.
• Companies make sizable IT investments but often don't reap desired benefits.
• Common complaints from executives:
  • Spending too much without adequate performance and payoff
  • IT investments don't relate to business strategy
  • Buying latest technology for technology's sake
  • Poor communication between IT specialists and users

🎯 Optimizing IT operations

• IT managers must oversee on-site systems, networks, mobile devices, and systems across multiple locations.
• Face time constraints and budget restrictions.
• Growing companies may have decentralized IT with many separate systems and duplication of efforts.
• Goal: develop an integrated, company-wide technology plan that balances business judgment, technology expertise, and investment.
• IT planning requires coordinated effort among top executives, IT managers, and business-unit managers.
• Plans must account for strategic objectives and how technology helps reach those goals.
• Current trend: doing more with less—leveraging existing technology, maximizing efficiency, optimizing utilization.

📚 Knowledge Management (KM)

Information management: collecting, processing, and condensing information.

Knowledge management (KM): researching, gathering, organizing, and sharing an organization's collective knowledge to improve productivity, foster innovation, and gain competitive advantage.

• Represents a shift from managing information to unlocking the value of intellectual (not just physical) assets.
• Some companies create a chief knowledge officer position to head KM efforts.
• Don't confuse: KM is not technology-based but a business practice that uses technology. Technology facilitates KM but is not the solution itself.
• "Leading with technology" approaches are a sure path to failure; KM must be perceived as a business problem solver.
• Requires interdisciplinary approach coordinating all aspects of organizational knowledge.
• Requires major change in behavior and technology to leverage information systems and human capital.
• First step: create an information culture through organizational structure and rewards that promote flexible, collaborative work and communication.

📚 KM in practice: Bristol-Myers Squibb

• VP of KM Melinda Bickerstaff began by looking for specific information-related problems to solve.
• Example: scientists spent 18% of time searching multiple databases for patents; integrating databases enabled faster searches.
• More complex project: compiled best practices of drug-development teams with best FDA approval rates so other groups could benefit.
• Used interviews and lessons-learned sessions instead of forms; developed information into interesting articles rather than dry reports.

📋 Technology planning process

Figure 19.10 poses key questions for IT project planning:

1. What are the company's overall objectives?
2. What problems does the company want to solve?
3. How can technology help meet goals and solve problems?
4. What are IT priorities, short- and long-term?
5. What type of infrastructure (centralized or decentralized) best serves needs?
6. Which technologies meet requirements?
7. Are additional hardware/software required? Will they integrate with existing systems?
8. Does design include people and process changes, not just technological ones?
9. Do you have in-house capabilities or need outside specialists?

Steps:

1. General needs assessment
2. Ranking of projects
3. Specific choices of hardware and software
4. Evaluate potential benefits in terms of efficiency and effectiveness
5. Critical: evaluate and restructure business processes before installing new IT—installing a new system on top of inefficient processes is a waste of time and money.

🔒 Protecting Computers and Information

🔒 Why security matters

• Security breaches are increasing at an alarming rate.
• Companies must protect against human error, power outages, equipment failure, hacking, and terrorist attacks.
• Natural disasters require specialized fault-tolerant computer systems.
• Confidential data can be tapped or destroyed by anyone with computer knowledge.
• Mobile devices (laptops, tablets, cell phones) and wireless networks require new security provisions.
• Companies have increased spending on security technology, but many lack basic security policies until after a crisis.

💰 The cost of cybercrime

• Juniper Networks estimates cybercrime will cost businesses more than $2 trillion in 2019, compared to $450 million in 2001.
• Most costly threats: worms, viruses, Trojan horses, computer theft, financial fraud, unauthorized network access.
• Almost all U.S. businesses report at least one security issue; nearly 20% have multiple incidents.
• Cybercriminals are becoming more sophisticated, working in gangs for large financial rewards.
• Fewer than 5% of cybercriminals are caught.
• Example: 2017 Equifax breach stole personal data of 145+ million people, including Social Security numbers—one of the worst breaches of all time.

🚨 Major security threats

🚨 Unauthorized access and security breaches

• Can come from internal or external sources.
• Create havoc with systems and damage customer relationships.
• Internal threats: employees copying confidential information for competitors or using company systems for personal business.
• Networking links make it easier for outsiders to gain access.
• Keylogging software: secretly installed via downloads, e-mail attachments, or shared files; copies and transmits keystrokes (passwords, PINs, personal information) from banking and credit card sites.

🦠 Viruses, worms, and Trojan horses

Computer virus: a program that copies itself into other software and can spread to other systems; can destroy hard drive contents or damage files.

Worm: spreads automatically from computer to computer without requiring e-mail; enters through valid access points.

Trojan horse: a program that appears harmless and from a legitimate source but tricks the user into installing it; damages the computer when run; does not infect other files or self-replicate; may provide a "trapdoor" for undocumented access.

• Viruses can hide for weeks, months, or years before causing damage.
• Spread by sharing disks or downloading infected files.
• Virus protection software: automatically monitors computers to detect and remove viruses; requires regular updates.
• Virus authors are increasingly subject to criminal charges.

💣 Deliberate damage

• Example: unhappy employee deletes information on orders and inventory, disrupting production and accounts payable.
• Hard to prevent; companies should back up critical information.

📧 Spam

Spam: unsolicited and unwanted e-mail.

• Not just a nuisance—poses security threats.
• Viruses spread through e-mail attachments accompanying spam.
• Now clogs blogs, instant messages, and cell phone text messages.
• Threats: lost productivity, expenses from dealing with spam, legitimate messages caught by spam filters.

🏴‍☠️ Software and media piracy

• Copying copyrighted software, games, and movies without paying.
• Takes revenue away from developers.
• Includes making counterfeit CDs to sell and personal copying to share with friends.

🛡️ Prevention strategies

🛡️ Formal security policies

• First step: create written information security policies to set standards and provide basis for enforcement.
• Recent survey: over two-thirds of IT executives worldwide expect a cyberattack in the near future.
• Without security strategies, companies spend too much time in reactive mode responding to crises instead of focusing on prevention.
• Security plans need top management support, then procedures to implement policies.
• Review policies often because IT is dynamic with ongoing changes.
• Some policies handled automatically by technical measures; others are administrative policies relying on humans (e.g., "change passwords every 90 days," "update virus signatures weekly").

🛡️ Basic protective measures

• Regular backups: automatically back up data daily and store copies off-site; employees should back up their own work.
• Complete database of IT assets: maintain current inventory of all hardware, software, and user details to manage licenses, updates, and diagnose problems.
• Remote access technology: IT staff can automatically monitor and fix problems, update applications and services.

🛡️ Human factors in security

• Common way outsiders get in: posing as an employee, getting full name and username from e-mail, calling help desk for "forgotten" password.
• Other methods: viewing passwords on notes attached to desks or monitors, using machines employees leave logged on, accessing unsecured laptops with sensitive information in public places.
• Portable device risks: handheld computers, flash drives, mobile phones store sensitive data (passwords, bank details, calendars); can spread viruses when users download infected documents.
• Example risks: calendar entry "meeting re: layoffs" or "meeting about merger with ABC Company," lost flash drive with marketing plans.
• Manufacturers adding password protection and encryption to flash drives; companies using monitoring software to prevent unauthorized access.

🛡️ Comprehensive security measures

• Develop comprehensive plan and policies including portable and fixed equipment
• Protect equipment with stringent physical security measures
• Encryption: encode confidential information so only the recipient can decipher it
• Stop unwanted access with authorization systems (passwords, fingerprint or voice identification)
• Firewalls: hardware or software designed to prevent unauthorized access to or from a private network
• Intrusion-detection systems: monitor network activity, signal possible unauthorized access, document suspicious events
• Conduct periodic IT audits to catalog all attached storage devices and computers
• Use technology that monitors ports for unauthorized devices; turn off unapproved ports
• Train employees to troubleshoot problems in advance
• Hold frequent staff-training sessions on correct security procedures (logging out at lunch, changing passwords often)
• Ensure employees choose sensible passwords: at least 6-8 characters, containing numbers, letters, punctuation; avoid dictionary words and personal information
• Establish database of useful information and FAQs for employees to solve problems themselves
• Develop healthy communications atmosphere

🔐 Privacy concerns

🔐 The privacy threat

• Huge electronic file cabinets full of personal information threaten personal privacy.
• Computer networks make it easy to pool data from separate systems into data warehouses.
• Companies sell information collected from warranty cards, credit-card records, website registrations, online purchases, grocery discount club cards.
• Telemarketers combine data from different sources to create detailed consumer profiles.

🔐 Data mining and surveillance

Data mining: a process that looks for hidden patterns in a group of data.

• Increases potential for tracking and predicting people's daily activities.
• Post-9/11, government began looking for ways to improve domestic-intelligence collection and analyze terrorist threats.
• Concerns: sophisticated database applications and electronic eavesdropping could lead to excessive government surveillance encroaching on personal privacy.
• High stakes: errors in business data mining may result in inappropriate advertising; governmental mistakes in tracking suspected terrorists could cause untold damage to unjustly targeted persons.

🔐 Consumer rights and company responsibilities

• Consumers increasingly fighting to regain control of personal data and how it's used.
• Privacy advocates working to block sales of information collected by governments and corporations (e.g., driver's license information, supermarket discount card data).
• Challenge: find balance between collecting needed information and protecting individual consumer rights.
• Most registration/warranty forms have a box to prevent selling names.
• Many companies state in privacy policies they will not abuse collected information.
• Regulators taking action against companies that fail to respect consumer privacy.

🔮 Trends in Information Technology

🔮 The challenge of tracking trends

• IT is a continually evolving field.
• Fast pace and broad reach make it challenging to isolate trends.
• Trends can appear and fade in as little as six months.
• Key reshaping trends: digital forensics, distributed workforce, grid and cloud computing.

🕵️ Digital Forensics

Digital forensics: a science that safeguards electronic evidence used in investigations by creating a duplicate of a hard drive that can be searched by keyword, file type, or access date.

• Used in investigations of Enron, Merck's Vioxx, and the BTK serial killer.
• Evolving into areas like cloud computing and blockchain technology.
• Estimated 3.9 million of original 21 million bitcoins are "lost" on hard drives in landfills and flash drives in old desks.
• Not limited to law enforcement: companies like Walmart, Target, and American Express have in-house digital forensics teams.
• Over 75 Fortune 500 members use technology allowing remote hard drive searches over corporate networks.
• Example: Broadcom used computer forensics to track down former employees attempting to steal trade secrets, gathering incriminating e-mails (including deleted documents) to use the Federal Computer Fraud and Abuse Act to stop them from starting a rival firm.

🕵️ The downside of digital forensics

• If sophisticated forensics software falls into wrong hands, hackers could access corporate networks and individual computers easily without detection.
• In an age of corporate wrongdoing, sexual predators, and computer porn, hard drives tell investigators everything about behavior and interests.
• Personal privacy—once an unassailable right—is no longer as sacred.
• Huge increase in identity theft demonstrates we are all potential targets.

🏠 The Distributed Workforce

• Companies sending employees home to work instead of maintaining expensive offices in multiple locations.
• Employees have no permanent office space and work from home or on the road.
• Benefits: cost savings on personnel and related costs, happier and more productive employees.
• Examples:
  • Aetna shuttered 2.7 million square feet of office space, saving $78 million
  • American Express saved $10-15 million per year
• About 12% of all U.S. workers are distributed workers; in urban areas could be 15%; could reach 40% over next decade.
• Drivers: long commutes, high gas costs, better connecting tools and technologies.
• Employees use internet for video-conferenced meetings and global team collaboration.
• Downside: working from home can mean being available 24/7, though most workers consider trade-off worth it.
• Close to 4 million U.S. workers work from home at least half the time.
• Companies of all sizes recruiting remote workers, including Amazon, Dell, Salesforce.

🏠 Company experiences with distributed workforce

• Intel: successful virtual-work program popular with working parents; "Technology allows working remotely to be completely invisible."
• Boeing: thousands participate in virtual-work program; critical factor in attracting and retaining younger workers.
• Sun Microsystems: almost half of employees "location-independent," reducing real estate costs by $300 million; higher productivity, ability to hire best talent; "Our people working these remote schedules are the happiest employees we have, and they have the lowest attrition rates."

☁️ Grid and Cloud Computing

Grid computing / cloud computing / utility computing / peer-to-peer computing: a way to divide large computational jobs into many smaller tasks and distribute them to a virtual supercomputer consisting of many small computers linked into a common network.

• Provides smaller companies a way to perform difficult, large-scale computational tasks occasionally without owning supercomputer equipment.
• Combines multiple desktop machines to achieve computing power exceeding supercomputer speeds.
• Hardware and software infrastructure clusters and integrates computers and applications from multiple sources, harnessing unused power in existing PCs and networks.
• Central server acts as team leader and traffic monitor, dividing tasks into subtasks, assigning work to computers with surplus processing power, combining results.

☁️ How it works (Figure 19.12)

• Any company—large or small—can access software and computer capacity on an as-needed basis.
• Big advantage: companies can update inventory in real time across entire organization.
• Example: appliance retailer with outlets throughout Midwest; if one model is in Des Moines store, salesperson in Chicago can sell it, finalize sale, create shipping instructions, and update inventory automatically.

☁️ Providers and differences from outsourcing

• Major providers: Amazon, Google, IBM, Salesforce.com, Oracle, Hewlett-Packard Enterprise.
• Two key differences from outsourcing or ASPs:
  1. Pricing is per-use (not fixed-price contracts)
  2. Goes beyond hosted software to include computer and networking equipment and services
• Very cost-effective for complex projects (weather research, financial and biomedical modeling).
• Low cost because computing infrastructure already exists—taps into otherwise unused computer capacity.

☁️ Growth and applications

• Increased interest contributing to high growth.
• Companies can access cloud on as-needed basis instead of investing in own supercomputer equipment.
• Outsourcing computing needs provides additional flexibility and cost advantages.
• Companies can also set up internal grids.

🔑 Key Takeaways

• Database management system (DBMS): software that allows quick and easy entry, storage, organization, selection, and retrieval of data in a database; data are then turned into information to run the business and perform analysis.
• Database: an electronic filing system that collects and organizes data and information.
• Enterprise resource planning (ERP) systems: unite all of a firm's major departments into a single software program (e.g., production can call up sales information to know how many units to produce).
• Client: the application that runs on a personal computer or workstation.
• Server: manages network resources or performs special tasks such as storing files, managing printers, or processing database queries.
• Application service provider (ASP): a service company that buys and maintains software on its servers and distributes it through high-speed networks to subscribers for a set period and price.
• Managed service providers (MSPs): next generation of ASPs, offering customization and expanded capabilities such as business processes and complete management of network servers.
• Management information systems (MIS): the methods and equipment that provide information about all aspects of a firm's operations.
• Management support systems (MSS): information systems that use the internal master database to perform high-level analyses that help managers make better decisions.
• Decision support system (DSS): a management support system that helps managers make decisions using interactive computer models that describe real-world processes.