Introduction to Business

🧭 Overview

🧠 One-sentence thesis

Businesses and not-for-profit organizations create our standard of living by combining factors of production to provide goods and services, accepting risk in pursuit of profit or other goals.

📌 Key points (3–5)

• What businesses do: organizations that strive for profit by providing goods and services desired by customers, creating the basis of our standard of living.
• Risk and reward relationship: greater risks generally mean greater potential for profit (or loss); conservative stances can lead to losing ground to nimble competitors.
• Not-for-profits vs for-profits: not-for-profit organizations pursue goals other than profit (e.g., feeding the poor, preserving the environment) but still compete for resources, employees, and donations.
• Common confusion: standard of living vs quality of life—standard of living measures output people can buy with their money, while quality of life refers to general human happiness based on life expectancy, education, health, sanitation, and leisure time.
• Five factors of production: natural resources, labor, capital, entrepreneurship, and knowledge are the building blocks all organizations need to create goods and services.

💼 What businesses contribute to society

💼 Creating standard of living through goods and services

Business: an organization that strives for a profit by providing goods and services desired by its customers.

Goods: tangible items manufactured by businesses, such as laptops.

Services: intangible offerings of businesses that can't be held, touched, or stored (e.g., physicians, lawyers, hairstylists, car washes, airlines).

• Businesses serve both consumers (medical care, autos, countless goods and services) and other organizations (hospitals, retailers, governments) by providing machinery, goods for resale, computers, and thousands of other items.
• They create the goods and services that are the basis of our standard of living.

Standard of living: measured by the output of goods and services people can buy with the money they have.

• The United States has one of the highest standards of living in the world.
• Don't confuse: higher average wages ≠ higher standard of living. Although countries like Switzerland and Germany have higher average wages than the U.S., their standards of living aren't higher because prices are so much higher—the same amount of money buys less.
• Example: an Extra Value Meal at McDonald's costs less than $5 in the U.S., but a similar meal might cost as much as $10 in another country.

🌟 Building quality of life

Quality of life: the general level of human happiness based on such things as life expectancy, educational standards, health, sanitation, and leisure time.

• Building a high quality of life is a combined effort of businesses, government, and not-for-profit organizations.
• In 2017, Vienna, Austria, ranked highest in quality of life, followed by Zurich, Switzerland; Auckland, New Zealand; and Munich, Germany.
• Seven of the top 10 locations are in western Europe, two are in Australia/New Zealand, and one is in Canada; not one of the world's top cities is in the United States.
• At the other end of the scale, Baghdad, Iraq, scored lowest on the annual survey.

⚖️ Risk, revenue, and profit

⚖️ Understanding business risk

Risk: the potential to lose time and money or otherwise not be able to accomplish an organization's goals.

• Creating a quality of life is not without risks.
• Example: Without enough blood donors, the American Red Cross faces the risk of not meeting the demand for blood by victims of disaster.
• Example: Businesses such as Microsoft face the risk of falling short of their revenue and profit goals.

💰 Revenue, costs, and profit

Revenue: the money a company receives by providing services or selling goods to customers.

Costs: expenses for rent, salaries, supplies, transportation, and many other items that a company incurs from creating and selling goods and services.

Profit: the money left over after a company pays all costs.

• Example: Some of the costs incurred by Microsoft in developing its software include expenses for salaries, facilities, and advertising.
• A company whose costs are greater than revenues shows a loss.
• When a company such as Microsoft uses its resources intelligently, it can often increase sales, hold costs down, and earn a profit.
• Not all companies earn profits, but that is the risk of being in business.

📈 The risk-profit relationship

• In U.S. business today, there is generally a direct relationship between risks and profit: the greater the risks, the greater the potential for profit (or loss).
• Companies that take too conservative a stance may lose out to more nimble competitors who react quickly to the changing business environment.
• Example: Sony, once a leader with its Walkman music player and Trinitron televisions, steadily lost ground—and profits—over the past two decades by not embracing new technologies such as the digital music format and flat-panel TV screens. Sony misjudged what the market wanted and stayed with proprietary technologies rather than create cross-platform options for consumers. Apple, at the time an upstart in personal music devices, quickly grabbed the lion's share of the digital music market with its iPods and iTunes music streaming service.
• By 2016, Sony restructured its business portfolio and has experienced substantial success with its PlayStation 4 gaming console and original gaming content.

🤝 Not-for-profit organizations

🤝 What makes them different

Not-for-profit organization: an organization that exists to achieve some goal other than the usual business goal of profit.

• Examples: Charities such as Habitat for Humanity, the United Way, the American Cancer Society, and the World Wildlife Fund; most hospitals, zoos, arts organizations, civic groups, and religious organizations.
• Over the last 20 years, the number of nonprofit organizations—and the employees and volunteers who work for them—has increased considerably.
• Government is our largest and most pervasive not-for-profit group.
• More than 1.5 million nongovernmental not-for-profit entities operate in the United States today and contribute more than $900 billion annually to the U.S. economy.

🎯 Goals and competition

• Like their for-profit counterparts, these groups set goals and require resources to meet those goals. However, their goals are not focused on profits.
• Example goals: feeding the poor, preserving the environment, increasing attendance at the ballet, or preventing drunk driving.
• Not-for-profit organizations do not compete directly with one another in the same manner as, for example, Ford and Honda, but they do compete for talented employees, people's limited volunteer time, and donations.

🔄 Blurring boundaries

• The boundaries that formerly separated not-for-profit and for-profit organizations have blurred, leading to a greater exchange of ideas between the sectors.
• For-profit businesses are now addressing social issues.
• Successful not-for-profits apply business principles to operate more effectively.
• Not-for-profit managers are concerned with the same concepts as their colleagues in for-profit companies: developing strategy, budgeting carefully, measuring performance, encouraging innovation, improving productivity, demonstrating accountability, and fostering an ethical workplace environment.
• Example: In addition to pursuing a museum's artistic goals, top executives manage the administrative and business side of the organization: human resources, finance, and legal concerns. Ticket revenues cover a fraction of the museum's operating costs, so the director spends a great deal of time seeking major donations and memberships. Today's museum boards of directors include both art patrons and business executives who want to see sound fiscal decision-making in a not-for-profit setting. Therefore, a museum director must walk a fine line between the institution's artistic mission and financial policies.

🏗️ Factors of production

🏗️ The building blocks overview

Factors of production: inputs in the form of resources required to provide goods and services, regardless of whether organizations operate in the for-profit or not-for-profit sector.

• Four traditional factors of production are common to all productive activity: natural resources, labor (human resources), capital, and entrepreneurship.
• Many experts now include knowledge as a fifth factor, acknowledging its key role in business success.
• By using the factors of production efficiently, a company can produce more goods and services with the same resources.

🌲 Natural resources

• Commodities that are useful inputs in their natural state are known as natural resources.
• They include farmland, forests, mineral and oil deposits, and water.
• Sometimes natural resources are simply called land, although the term means more than just land.
• Example: International Paper Company uses wood pulp to make paper, and Pacific Gas & Electric Company may use water, oil, or coal to produce electricity.
• Today urban sprawl, pollution, and limited resources have raised questions about resource use. Conservationists, environmentalists, and government bodies are proposing laws to require land-use planning and resource conservation.

👷 Labor (human resources)

• Labor, or human resources, refers to the economic contributions of people working with their minds and muscles.
• This input includes the talents of everyone—from a restaurant cook to a nuclear physicist—who performs the many tasks of manufacturing and selling goods and services.

🏭 Capital

Capital: the tools, machinery, equipment, and buildings used to produce goods and services and get them to the consumer.

• Sometimes the term capital is also used to mean the money that buys machinery, factories, and other production and distribution facilities.
• However, because money itself produces nothing, it is not one of the basic inputs. Instead, it is a means of acquiring the inputs. Therefore, in this context, capital does not include money.

🚀 Entrepreneurship

Entrepreneurs: the people who combine the inputs of natural resources, labor, and capital to produce goods or services with the intention of making a profit or accomplishing a not-for-profit goal.

• These people make the decisions that set the course for their businesses; they create products and production processes or develop services.
• Because they are not guaranteed a profit in return for their time and effort, they must be risk-takers.
• Of course, if their companies succeed, the rewards may be great.
• Today, many individuals want to start their own businesses. They are attracted by the opportunity to be their own boss and reap the financial rewards of a successful firm.
• Many start their first business from their dorm rooms, such as Mark Zuckerberg of Facebook, or while living at home, so their cost is almost zero.
• Examples: Microsoft cofounder Bill Gates, who was named the richest person in the world in 2017, as well as Google founders Sergey Brin and Larry Page. Many thousands of individuals have started companies that, while remaining small, make a major contribution to the U.S. economy.

🧠 Knowledge (the fifth factor)

Knowledge: the combined talents and skills of the workforce and has become a primary driver of economic growth.

Knowledge workers: employees whose jobs require knowledge and cognitive skills.

• A number of outstanding managers and noted academics are beginning to emphasize a fifth factor of production—knowledge.
• Today's competitive environment places a premium on knowledge and learning over physical resources.
• Recent statistics suggest that the number of U.S. knowledge workers has doubled over the last 30 years, with an estimated 2 million knowledge job openings annually.
• Despite the fact that many "routine" jobs have been replaced by automation over the last decade or outsourced to other countries, technology has actually created more jobs that require knowledge and cognitive skills.

🎯 Real-world example: StickerGiant

🎯 Entrepreneurial risk-taking and adaptation

• John Fischer of Longmont, Colorado, started his business inspired by the drawn-out U.S. presidential election in 2000 between Bush and Gore, creating a bumper sticker that claimed, "He's Not My President," which became a top seller.
• As a result, Fischer started an online retail sticker store, which he viewed as possibly the "Amazon of Stickers."
• Designing and making stickers in his basement, Fischer's start-up would eventually become a multimillion-dollar company, recognized in 2017 by Forbes as one of its top 25 small businesses.

🔄 Embracing change

• By 2011, the business was going strong; however, the entrepreneur decided to do away with the retail store, instead focusing the business on custom orders, which became StickerGiant's main product.
• In 2012 he decided to introduce a concept called open-book management, in which he shares the company's financials with employees at a weekly meeting.
• Other topics discussed at the meeting include customer comments and feedback, employee concerns, and colleague appreciation for one another.
• Fischer believes sharing information about the company's performance (good or bad) not only allows employees to feel part of the operation, but also empowers them to embrace change or suggest ideas that could help the business expand and flourish.

🔧 Innovation and technology

• Innovation is also visible in the technology StickerGiant uses to create miles and miles of custom stickers (nearly 800 miles of stickers in 2016).
• The manufacturing process involves digital printing and laser-finishing equipment.
• Fischer says only five other companies worldwide have the laser-finishing equipment StickerGiant uses as part of its operations.
• Because of the investment in this high-tech equipment, the company can make custom stickers in large quantities overnight and ship them to customers the next day.

📊 Current success

• With $10 million in annual sales and nearly 40 employees, StickerGiant continues to be a successful endeavor for John Fischer and his employees almost two decades after Fischer created his first sticker.
• In 2016, StickerGiant put together Saul the Sticker Ball, a Guinness World Records winner that weighed in at a whopping 232 pounds, created from more than 170,000 stickers that had been lying around the office.

🧭 Overview

🧠 One-sentence thesis

Businesses operate within a dynamic external environment composed of seven key sectors—economic, political and legal, demographic, social, competitive, global, and technological—that managers must continuously study and adapt to because these forces are largely beyond their control yet directly influence whether businesses achieve their objectives.

📌 Key points (3–5)

• Internal vs. external control: Managers control internal decisions (supplies, employees, products) but must adapt to external environmental forces they cannot control.
• Seven key subenvironments: Economic, political and legal, demographic, social, competitive, global, and technological sectors each create unique challenges and opportunities.
• Managers as adapters: No single business is powerful enough to create major changes in the external environment; managers are primarily adapters rather than agents of change.
• Common confusion: While businesses generally cannot control external forces, they can sometimes influence external events through strategic actions (e.g., lobbying, working with regulatory agencies).
• Why it matters: Continuous environmental study and adaptation are necessary for businesses to compete successfully in a constantly changing landscape.

🌍 The external business environment framework

🌍 What the external environment includes

The external business environment is composed of numerous outside organizations and forces grouped into seven key subenvironments: economic, political and legal, demographic, social, competitive, global, and technological.

• Each sector creates a unique set of challenges and opportunities.
• These conditions are generally beyond management control and change constantly.
• The excerpt emphasizes that businesses "do not operate in a vacuum" but in a dynamic environment with direct influence on operations and objectives.

🔄 Internal vs. external control

Aspect	Internal environment	External environment
Control level	Great deal of control	Generally beyond control
Examples	Supplies purchased, employees hired, products sold, where to sell	Economic fluctuations, laws, demographics, technology changes
Management role	Day-to-day decisions	Continuous study and adaptation

• Business owners and managers use their skills and resources to create goods and services for customers.
• To compete successfully, they must continuously study the environment and adapt their businesses accordingly.
• Example: A manager can choose which suppliers to work with (internal), but cannot control whether a natural disaster disrupts the supply chain (external).

⚠️ Limits and exceptions

• General rule: Managers are primarily adapters to, rather than agents of, change.
• Exception: In some situations, a firm can influence external events through strategies.
• Example from excerpt: Major pharmaceutical companies successfully influenced the FDA to speed up drug approval processes; large tech companies spend millions on lobbying to help policy makers understand their industry.
• Don't confuse: "Beyond control" does not mean "zero influence"—strategic actions can sometimes shape external conditions, but businesses still cannot create major changes alone.

💰 Economic influences

💰 How economic activity affects business

• One of the most important external influences on businesses.
• Fluctuations in economic activity create business cycles that affect businesses and individuals in many ways.

📊 Key economic factors

• When economy is growing: Unemployment rates are low, income levels rise.
• Other changing areas: Inflation and interest rates change according to economic activity.
• Government role: Through policies (taxes, interest rate levels), government attempts to stimulate or curtail economic activity.
• Market forces: Supply and demand determine how prices and quantities of goods and services behave in a free market.

Example: During economic growth, a business may see increased sales because consumers have higher incomes and more confidence to spend.

⚖️ Political and legal influences

⚖️ What political climate includes

The political climate of a country includes three components: the amount of government activity, the types of laws it passes, and the general political stability of a government.

• Critical factor for managers to consider in day-to-day business operations.
• Example: A multinational company will evaluate political climate before locating a plant—Is the government stable? How restrictive are regulations for foreign businesses?

📜 Legal and regulatory factors

International considerations:

• Import tariffs, quotas, and export restrictions
• Foreign ownership rules and taxation

U.S. domestic regulations:

• Laws passed by Congress and regulatory agencies cover competition, minimum wages, environmental protection, worker safety, copyrights and patents
• Example from excerpt: The Telecommunications Act of 1996 deregulated the industry, increasing competition and creating new opportunities

🏛️ Federal agencies' role

• Federal agencies play a significant role in business operations.
• Example: A pharmaceutical company must follow FDA procedures for testing and clinical trials, register securities with the SEC, and ensure advertisements are not misleading (FTC oversight).
• State and local governments also exert control through taxes, corporate charters, business licenses, and zoning ordinances.

👥 Demographic factors

👥 What demography studies

Demography is the study of people's vital statistics, such as their age, gender, race and ethnicity, and location.

• An uncontrollable factor in the business environment.
• Extremely important to managers because demographics help companies define markets for products and determine workforce size and composition.

🎯 Generational markets

The excerpt identifies three major generations with distinct characteristics:

Generation	Birth years	Key characteristics
Millennials	1981-1997	Largest generation (75+ million); technologically savvy; hundreds of billions to spend; surpassed baby boomers in 2017
Generation X	1965-1980	Own spending patterns
Baby boomers	1946-1964	Nearing retirement; willing to spend on health, comforts, leisure, cars

• Businesses must deal with unique shopping preferences of different generations.
• Each requires marketing approaches and goods/services targeted to their needs.
• Example: As the population ages, businesses offer more products appealing to middle-aged and senior markets.

🌈 Diversity and minority populations

• Minorities represent more than 38 percent of total population.
• Immigration has brought millions of new residents over past several decades.
• By 2060, the U.S. Census Bureau projects minorities will increase to 56 percent of total population.
• Companies recognize the value of hiring a diverse workforce that reflects society.
• Minorities' buying power has increased significantly; companies develop products and marketing campaigns targeting different ethnic groups.

🧑‍🤝‍🧑 Social factors

🧑‍🤝‍🧑 What social factors include

Social factors—our attitudes, values, ethics, and lifestyles—influence what, how, where, and when people purchase products or services.

• Difficult to predict, define, and measure because they can be very subjective.
• Change as people move through different life stages.

🔄 Key social trends

• Broader interests: People of all ages have a broader range of interests, defying traditional consumer profiles.
• Time poverty: People experience a "poverty of time" and seek ways to gain more control over their time.
• Changing roles: More women in the workforce increases family incomes, heightens demand for time-saving goods and services, changes family shopping patterns, and impacts work-life balance.
• Ethical emphasis: Renewed emphasis on ethical behavior at

🧭 Overview

🧠 One-sentence thesis

A nation's economic system—whether capitalism, communism, socialism, or a mixed model—determines how resources are allocated and what is produced, directly shaping the environment in which businesses operate and succeed.

📌 Key points (3–5)

• What an economic system is: the combination of policies, laws, and choices that determine what is produced and how goods and services are allocated.
• The major systems: capitalism (private ownership, market competition), communism (government owns and controls everything), socialism (government owns critical industries), and mixed economies (blend of systems).
• Common confusion: pure systems rarely exist in reality—most countries use mixed economies that incorporate elements from multiple systems.
• Macro vs micro: macroeconomics studies the economy as a whole (aggregate data); microeconomics focuses on individual households or firms.
• Why it matters: managers must understand and adapt to the economic systems where they operate, especially when doing business internationally.

🌍 Economic Systems and Their Core Differences

🏛️ What defines an economic system

Economic system: the combination of policies, laws, and choices made by a government to establish the systems that determine what goods and services are produced and how they are allocated.

Economics: the study of how a society uses scarce resources to produce and distribute goods and services.

• Economics is fundamentally about choices—what people, firms, or nations choose from among limited resources.
• Every economy must answer: what types and amounts should be produced, how they should be produced, and for whom.
• These decisions are made by the marketplace, the government, or both.

🔑 The major differentiator among systems

The key distinction is who decides:

• How to allocate limited resources (factors of production) to satisfy unlimited societal needs
• What goods and services to produce and in what quantities
• How and by whom these goods and services are produced
• How to distribute goods and services to consumers

Don't confuse: the label of a system with its practice—many countries that call themselves one thing operate as mixed economies in reality.

💼 The Four Major Economic Systems

💰 Capitalism (private enterprise system)

Capitalism: an economic system based on competition in the marketplace and private ownership of the factors of production (resources).

Core features:

• Large number of people and businesses buy and sell products freely
• In pure capitalism, all factors of production are privately owned
• Government does not try to set prices or coordinate economic activity

Four guaranteed economic rights:

1. Right to own property (central to the system)
2. Right to make a profit (the main incentive; encourages entrepreneurship)
3. Right to make free choices (decide to be an entrepreneur or work for someone else)
4. Right to compete

How competition works:

• Companies try to produce at the lowest cost and sell at the highest price
• When profits are high, more businesses enter the market
• Resulting competition tends to lower prices
• Companies must find new ways to operate efficiently to keep making a profit and stay in business
• Competition leads to better and more diverse products, keeps prices stable, and increases producer efficiency

Example: The United States leans toward pure capitalism, though it uses government policies to promote stability and growth.

🏭 Communism

Communism: an economic system in which the government owns virtually all resources and controls all markets.

Core features:

• Economic decision-making is centralized
• Government decides what will be produced, where, how much, where raw materials come from, who gets output, and what prices will be
• Offers little or no choice to citizens

Why it has declined:

• Tight controls over careers, work locations, and purchases led to lower productivity
• Workers had no rewards for excellence, so no reason to work harder or produce quality goods
• Errors in planning and resource allocation led to shortages of basic items
• These factors contributed to the 1991 collapse of the Soviet Union

Current examples: North Korea and Cuba are the best remaining examples.

Don't confuse: early 20th-century promises with actual results—countries that chose communism believed it would raise living standards, but practice showed otherwise.

🏗️ Socialism

Socialism: an economic system in which the basic industries are owned by the government or by the private sector under strong government control.

Core features:

• State controls critical, large-scale industries (transportation, communications, utilities)
• Smaller businesses and less critical sectors (e.g., retail) may be privately owned
• State determines business goals, prices and selection of goods, and workers' rights to varying degrees

Trade-offs:

• Socialist countries typically provide higher levels of services (health care, unemployment benefits)
• As a result, taxes and unemployment may also be higher
• Example: In 2017, France's top individual tax rate was 45%, compared to 39.6% in the United States

Current examples: United Kingdom, Denmark, India, and Israel have socialist systems, but they vary from country to country.

🔀 Mixed economic systems

Mixed economies: economies that use more than one economic system.

Core features:

• Real-world economies fall somewhere between pure capitalism and pure communism
• Government may own basic industries while private enterprise handles most other activity
• Government is extensively involved through taxing, spending, and welfare activities

Examples of mixed elements:

• United States: leans toward capitalism but uses government policies for stability; transfers money to the poor, unemployed, elderly, or disabled; regulates large corporations to protect smaller firms
• Canada: government owns communications, transportation, utilities, and some natural resources; provides health care; but most other activity is private enterprise
• Sweden, UK, France: similar blends of public and private ownership

Why mixed systems exist: countries try to achieve social goals (income redistribution, retirement pensions) that may not be attempted in purely capitalist systems.

📊 Comparison of Economic Systems

System	Ownership	Market Control	Worker Incentives	Management	Forecast
Capitalism	Businesses privately owned; minimal government ownership	Complete freedom of trade; little government control	Strong incentive to work and innovate (profits retained by owners)	Managed by owners or professional managers with little government interference	Continued steady growth
Communism	Government owns all or most enterprises	Complete government control of markets	No incentive to work hard or produce quality	Centralized management by government bureaucracy; little flexibility	No growth and perhaps disappearance
Socialism	Basic industries government-owned; very high taxation redistributes income	Some markets controlled, some free; significant central-government planning	Private-sector same as capitalism; public-sector limited incentives	Government enterprises run by bureaucrats (rarely profitable); private sector similar to capitalism	Stable with probable slight growth
Mixed Economy	Private ownership of land and businesses but government control of some enterprises; large private sector	Some markets (nuclear energy, post office) controlled or highly regulated	Private-sector same as capitalism; public-sector limited	Private-sector similar to capitalism; public sector similar to socialism	Continued growth

🔬 Macroeconomics vs Microeconomics

📈 Macroeconomics

Macroeconomics: the study of the economy as a whole.

• Looks at aggregate data for large groups of people, companies, or products considered as a whole
• Example factors: national level of personal income, unemployment rate, interest rates, fuel costs, national level of sales

🔍 Microeconomics

Microeconomics: focuses on individual parts of the economy, such as households or firms.

• Example factors: consumer demand for specific products, existing supply, competing models, labor and material costs and availability, current prices and sales incentives

🔄 How they work together

Both offer valuable outlooks on the economy and are often used together for business decisions.

Example: Ford deciding whether to introduce a new vehicle line would consider:

• Macroeconomic factors: national income, unemployment rate, interest rates, fuel costs, national new-vehicle sales
• Microeconomic factors: consumer demand vs existing supply, competing models, labor/material costs and availability, current prices and sales incentives

🔄 The Circular Flow of Economics

🔁 How economic sectors interact

Circular flow: the movement of inputs and outputs among households, businesses, and governments.

The main exchanges:

1. Households → Businesses (inputs):

   • Households provide natural resources, labor, capital, entrepreneurship, knowledge
   • Businesses convert these into outputs (goods and services)

2. Businesses → Households (income):

   • Households receive income from rent, wages, interest, and ownership profits
   • Businesses receive revenue from consumer purchases

3. Government ↔ Households and Businesses:

   • Governments supply publicly provided goods and services (highways, schools, police, courts, health services, unemployment insurance, social security)
   • Government purchases from businesses contribute to business revenues
   • Government receives taxes from households and businesses

⚠️ How changes ripple through the system

Changes in one flow affect the others:

• If government raises taxes: households have less to spend → businesses reduce production → economic activity declines → unemployment may rise
• If government cuts taxes: can stimulate economic activity (reverse effect)

Don't confuse: the circular flow is continuous and interconnected—you cannot change one part without affecting the others.

🎯 Macroeconomic Goals

🏆 The three main goals

The United States and most other countries have three main macroeconomic goals:

1. Economic growth
2. Full employment
3. Price stability

A nation's economic well-being depends on carefully defining these goals and choosing the best economic policies for achieving them.

📊 Measuring economic growth

Economic growth: an increase in a nation's output of goods and services.

Gross Domestic Product (GDP): the total market value of all final goods and services produced within a nation's borders each year.

• The most basic measure of economic growth
• The more a nation produces, the higher its standard of living
• Perhaps the most important way to judge a nation's economic health
• The Bureau of Labor Statistics publishes quarterly GDP figures for comparing trends

🧭 Overview

🧠 One-sentence thesis

A nation's economic health depends on achieving three main macroeconomic goals—economic growth, full employment, and price stability—which the government pursues through monetary and fiscal policy tools.

📌 Key points (3–5)

• Three main goals: economic growth (rising GDP), full employment (jobs for ~94–96% of those who want to work), and price stability (controlling inflation).
• Business cycles: upward and downward changes in economic activity; a recession is two consecutive quarters of declining GDP, followed by recovery.
• Types of unemployment: frictional (short-term job transitions), structural (skills mismatch), cyclical (recession-driven), and seasonal (industry-specific timing).
• Common confusion: inflation vs. purchasing power—prices can rise while purchasing power increases if incomes rise faster than inflation; typically, however, inflation outpaces income growth.
• Policy tools: monetary policy (controlling money supply and interest rates via the Federal Reserve) and fiscal policy (government spending and taxation).

📈 Economic Growth and Business Cycles

📈 What economic growth measures

Economic growth: an increase in a nation's output of goods and services.

Gross Domestic Product (GDP): the total market value of all final goods and services produced within a nation's borders each year.

• GDP is the most basic measure of economic growth; when GDP rises, the economy is growing.
• The rate of growth in real GDP (adjusted for inflation) matters: the U.S. has been growing at 3–4% annually; China at 6–7%.
• Higher output → higher standard of living.

🔄 Business cycles

Business cycles: upward and downward changes in the level of economic activity.

• Economic activity constantly changes; cycles vary in length, height, and impact.
• Expansion: rising output, income, employment, and prices → peak.
• Contraction: output, income, and employment decline.
• Recession: a decline in GDP lasting two consecutive quarters (each three months), followed by recovery.
  • Example: the most recent U.S. recession ran from December 2007 to June 2009.

🏭 How businesses adapt

• During growth: firms struggle to hire good employees and find scarce supplies/raw materials.
• During recession: firms have more capacity than demand requires; operating below capacity is inefficient and raises costs per unit.
  • Example: Mars Corp. can produce 1 million Milky Way bars/day but sells only 500,000 during a recession → underutilizes expensive machines and plant investment.

💼 Full Employment and Unemployment

💼 What full employment means

Full employment: having jobs for all who want to and can work.

• Full employment ≠ 100% employment; it means about 94–96% of available workers have jobs.
• Some people choose not to work (school, raising children) or are temporarily between jobs.
• U.S. unemployment peaked at 10% in October 2009; as of the excerpt, it hovers around 4%.

📊 Measuring unemployment

Unemployment rate: the percentage of the total labor force that is not working but is actively looking for work.

• Published monthly by the U.S. Department of Labor.
• Excludes "discouraged workers" (those not seeking jobs because they think no one will hire them).

🔍 Four types of unemployment

Type	Cause	Characteristics
Frictional	Short-term, not business-cycle related	People waiting to start a better job, reentering the market, or entering for the first time (e.g., new graduates); always present, little economic impact
Structural	Mismatch between available jobs and worker skills in an industry/region	Involuntary; caused by changes like declining birthrates (fewer teachers needed) or lack of required skills; requires retraining programs
Cyclical	Downturn in the business cycle reduces labor demand	Widespread in long recessions; even skilled workers can't find jobs; government can partly counteract with economic stimulus; historically affected less-skilled and manufacturing workers, now affects all levels including management
Seasonal	Specific times of year in certain industries	E.g., holiday retail workers, California lettuce pickers, ski-country restaurants in summer

• Don't confuse: cyclical unemployment used to mainly hit less-skilled/manufacturing workers who were rehired when growth returned; since the 1990s, downsizing for global competitiveness has affected all worker categories, including middle management.
  • Example: Ford increased North America workforce by 25% after the 2007–2009 recession, then announced ~10% global workforce cuts in 2017 as sales plateaued.

💰 Price Stability and Inflation

💰 What inflation is

Inflation: the situation in which the average of all prices of goods and services is rising.

Purchasing power: the value of what money can buy.

• Purchasing power depends on inflation and income.
• If incomes rise at the same rate as inflation → no change in purchasing power.
• If prices rise faster than income → purchasing power falls.
• If incomes rise faster than inflation → purchasing power increases (even with rising prices).
• Example: a basket of groceries rises from $30 to $40, but salary stays the same → you can buy only 75% as many groceries ($30 ÷ $40); purchasing power declines by 25% ($10 ÷ $40).

📉 How inflation affects decisions

• People: tend to spend more before purchasing power declines further; speed up planned purchases (cars, major appliances).
• Businesses: expecting inflation often increase supplies.
• U.S. inflation (early 2000s–April 2017): very low, 0.1–3.8%; 2016 was 1.3%.
• For comparison: 1980s U.S. had 12–13% inflation; early 2017 Venezuela had 741% monthly inflation, South Sudan 273%.

🔥 Two types of inflation

Type	Cause	Mechanism
Demand-pull	Demand for goods/services > supply	Would-be buyers have more money than needed to buy available goods; demand exceeds supply and pulls prices up ("too much money chasing too few goods"); higher prices → greater supply → eventual balance
Cost-push	Increases in production costs (materials, wages)	Rising costs push up prices of final goods/services; wage increases are a major cause, creating a "wage-price spiral"

• Example of wage-price spiral: United Auto Workers negotiates 3% annual wage increases + higher overtime → carmakers raise prices to cover labor costs → autoworkers have more money → increased demand pulls up other prices → workers in other industries demand higher wages to keep up → cycle pushes prices even higher.

📏 How inflation is measured

📏 Consumer Price Index (CPI)

Consumer Price Index (CPI): an index of the prices of a "market basket" of goods and services purchased by typical urban consumers.

• Published monthly by the Department of Labor.
• Major components (weighted by importance): food/beverages, clothing, transportation, housing, medical care, recreation, education; special indexes for food and energy.
• Collects ~80,000 retail price quotes + 5,000 housing rent figures.
• Base period (1982–1984) set at 100; current prices expressed as percentage of base period.
• Example: CPI was 244.5 in April 2017 → prices more than doubled since 1982–1984.

📏 Producer Price Index (PPI)

Producer Price Index (PPI): measures the prices paid by producers and wholesalers for various commodities (raw materials, partially finished goods, finished products).

• Uses 1982 as base year.
• Family of indexes for many product categories: crude goods (raw materials), intermediate goods (become part of finished goods), finished goods.
• Examples: processed foods, lumber, containers, fuels/lubricants, metals, construction, chemicals.
• Example: PPI for finished goods was 197.7 in April 2017 (up 3.9 points); for chemicals 106.5 (up 3.8 points since April 2016).
• Why it matters: PPI may foreshadow subsequent price changes for businesses and consumers (measures prices paid by producers for inputs).

⚠️ Negative effects of inflation

• People on fixed incomes: penalized because real purchasing power declines.
  • Example: a couple receives $2,000/month retirement income in 2018; if inflation is 10% in 2019, they can buy only ~91% (100 ÷ 110) of what they could in 2018.
• Savers: inflation hurts them because the real value (purchasing power) of savings deteriorates as prices rise.

🏛️ Government Policy Tools

🏛️ Monetary policy

Monetary policy: a government's programs for controlling the amount of money circulating in the economy and interest rates.

Federal Reserve System (the Fed): the central banking system of the United States; prints money and controls how much is in circulation.

• Changes in money supply affect both the level of economic activity and the rate of inflation.
• The Fed regulates certain bank activities to control money supply.
• When the Fed increases/decreases money in circulation → affects interest rates (cost of borrowing, reward for lending).
• The Fed can change the interest rate on money it lends to banks to signal the banking system and financial markets that monetary policy has changed.
• These changes have a ripple effect: banks may pass along changes to their customers.

🏛️ Fiscal policy

• The excerpt mentions fiscal policy as the second main tool (alongside monetary policy) but does not provide details.

⚖️ Trade-offs in achieving goals

• Countries must often choose among conflicting alternatives to reach macroeconomic goals.
• Sometimes political needs override economic needs.
  • Example: controlling inflation may require a politically difficult period of high unemployment and low growth.
  • Example: in an election year, politicians may resist raising taxes to curb inflation.
• The government must try to guide the economy to a sound balance of growth, employment, and price stability.

🧭 Overview

🧠 One-sentence thesis

Governments use monetary policy and fiscal policy as their two main tools to guide the economy toward a sound balance of growth, employment, and price stability, though these tools involve trade-offs and can create unintended consequences like crowding out private spending or increasing the national debt.

📌 Key points (3–5)

• Two main policy tools: monetary policy (controlling money supply and interest rates) and fiscal policy (taxation and spending programs).
• Policy trade-offs: achieving macroeconomic goals often requires choosing among conflicting alternatives, such as accepting high unemployment to control inflation.
• Monetary policy mechanisms: the Federal Reserve adjusts money supply and interest rates, which ripple through banks to consumers and businesses, affecting spending and investment decisions.
• Fiscal policy effects: government spending and taxation influence business revenues and consumer income, but increased government spending can crowd out private-sector activity.
• Common confusion: contractionary vs. expansionary policy—contractionary restricts money supply to slow growth and lower inflation; expansionary increases money supply to stimulate growth but may raise inflation.

💰 Monetary Policy

💰 What monetary policy controls

Monetary policy: a government's programs for controlling the amount of money circulating in the economy and interest rates.

• Changes in the money supply affect both the level of economic activity and the rate of inflation.
• The Federal Reserve System (the Fed), the central banking system of the United States, prints money and controls how much will be in circulation.
• The Fed also regulates certain bank activities to control the money supply.

🏦 How the Fed influences the economy

• The Fed can change the interest rate on money it lends to banks to signal that it has changed its monetary policy.
• These changes have a ripple effect:
  • Banks may pass along rate changes to consumers and businesses that receive loans.
  • If the cost of borrowing increases, the economy slows because interest rates affect consumer and business decisions to spend or invest.
• The housing industry, business, and investments react most to changes in interest rates.

Example: After the 2007–2009 recession, the Fed dropped the federal funds rate (the interest rate charged on overnight loans between banks) to 0 percent in December 2008 and kept it at zero until December 2015. When the Fed raised the rate to 0.25 percent in December 2015 and later to 0.75–1 percent in March 2017, regional Federal Reserve Banks increased the discount rate they charge commercial banks, commercial banks raised rates for customers, and credit card companies increased APRs on consumer balances.

🔄 Contractionary vs. expansionary policy

Policy Type	What the Fed Does	Economic Effect	Trade-off
Contractionary	Restricts/tightens money supply by selling government securities or raising interest rates	Slower economic growth, higher unemployment	Reduces spending and ultimately lowers inflation
Expansionary	Increases/loosens money supply	Interest rates decline, business and consumer spending go up, unemployment drops	More spending pushes prices up, increasing inflation

Don't confuse: Both policies are tools to achieve goals, not goals themselves. Contractionary policy accepts short-term pain (unemployment) to control inflation; expansionary policy stimulates growth but risks higher inflation.

🏛️ Fiscal Policy

🏛️ What fiscal policy includes

Fiscal policy: the government's program of taxation and spending.

• By cutting taxes or increasing spending, the government can stimulate the economy.
• Tax policies affect business decisions; high corporate taxes can make it harder for U.S. firms to compete with companies in countries with lower taxes, leading firms to locate facilities overseas.

📊 How fiscal policy stimulates the economy

• Through spending: The more government buys from businesses, the greater the business revenues and output.
• Through tax cuts: If consumers or businesses pay less in taxes, they have more income to spend on goods and services.

🚫 Crowding out phenomenon

Crowding out: when government takes more money from business and consumers (the private sector), government spending crowds out private spending.

Three examples from the excerpt:

1. The government spends more on public libraries → individuals buy fewer books at bookstores.
2. The government spends more on public education → individuals spend less on private education.
3. The government spends more on public transportation → individuals spend less on private transportation.

Why it matters: Government spending competes with private-sector activity for the same consumer dollars.

💳 Budget Deficits and National Debt

💳 Federal budget deficit

Federal budget deficit: when the government spends more for programs (social services, education, defense) than it collects in taxes.

• To balance the budget, the government can cut spending, increase taxes, or do some combination of the two.
• When it cannot balance the budget, the government must make up shortfalls by borrowing (just like any business or household).
• The excerpt notes that in 1998 there was a federal budget surplus (revenue exceeding spending) of about $71 billion, but by 2005 the deficit was more than $318 billion, and in fiscal year 2009 it reached an all-time high of more than $1.413 trillion.

📈 National debt

National debt: the accumulated total of past budget deficits.

• The excerpt states the national debt amounts to about $19.8 trillion, or about $61,072 for every person in the United States.
• Total interest on the debt is more than $2.5 trillion a year.
• To cover the deficit, the U.S. government borrows money from people and businesses in the form of Treasury bills, Treasury notes, and Treasury bonds (federal IOUs that pay interest to their owners).

⚠️ Problems with a large national debt

Two main concerns from the excerpt:

1. Not everyone holds the debt (fairness issue):

   • If only the rich were bondholders, they alone would receive interest payments and could end up receiving more in interest than they paid in taxes.
   • Poorer people who hold no bonds would pay taxes that transfer to the rich as interest, making the debt an unfair burden.
   • The government addresses this by instructing commercial banks to reduce their total debt by divesting some bond holdings and by creating savings bonds in small denominations so more people can buy and hold government debt.

2. It crowds out private investment:

   • If the government raises the interest rate on bonds to sell them, it forces private businesses (whose corporate bonds compete with government bonds for investor dollars) to raise rates on their bonds to stay competitive.
   • Selling government debt to finance government spending makes it more costly for private industry to finance its own investment.
   • Government debt may end up crowding out private investment and slowing economic growth in the private sector.

Don't confuse: Crowding out from government spending (competing for consumer dollars) vs. crowding out from government borrowing (competing for investor dollars and raising interest rates for private firms).

🎯 Policy Trade-offs and Political Realities

🎯 Conflicting alternatives

• To reach macroeconomic goals, countries must often choose among conflicting alternatives.
• Sometimes political needs override economic needs.

Examples from the excerpt:

• Bringing inflation under control may call for a politically difficult period of high unemployment and low growth.
• In an election year, politicians may resist raising taxes to curb inflation.

🎯 The balancing act

• Despite these challenges, the government must try to guide the economy to a sound balance of growth, employment, and price stability.
• The two main tools—monetary policy and fiscal policy—are the means to achieve this balance, but each involves trade-offs and potential negative consequences.

🧭 Overview

🧠 One-sentence thesis

Market equilibrium is reached automatically when the quantity demanded equals the quantity supplied at a certain price, and shifts in demand or supply factors move that equilibrium point.

📌 Key points (3–5)

• Equilibrium mechanism: the market automatically adjusts through price and quantity changes until demand equals supply.
• Surplus vs shortage: surplus (too much supply) pushes prices down; shortage (too little supply) pushes prices up—both move toward equilibrium.
• Demand shifters: incomes, tastes/fashion, prices of related products, future price expectations, and number of buyers all shift the demand curve left or right.
• Supply shifters: technology, resource prices, prices of alternative products, number of producers, and taxes all shift the supply curve.
• Common confusion: a change in price causes movement along the curve (quantity adjustment), but changes in other factors shift the entire curve to a new position.

⚖️ Equilibrium: where demand meets supply

⚖️ What equilibrium means

Equilibrium: the point where quantity demanded equals quantity supplied; at this price and quantity, the market is balanced.

• When you plot demand and supply curves on the same graph, they cross at one point (labeled E in the excerpt).
• At that point, the number of units consumers want to buy exactly matches the number suppliers want to sell.
• Example: for snowboard jackets, equilibrium is at $80 and 700 jackets—no surplus, no shortage.

🔄 How the market self-corrects

If price is too high (above equilibrium):

• Suppliers produce more than consumers will buy → surplus.
• To sell the extra inventory, sellers lower prices.
• Prices fall until equilibrium is restored.

If price is too low (below equilibrium):

• Quantity demanded exceeds available supply → shortage.
• Competition among buyers pushes prices up.
• Prices rise until equilibrium is reached.

Example from the excerpt: at $160, a surplus forces prices down; at $60, a shortage forces prices up—both converge back to $80.

🧭 Stability and shifts

• Once equilibrium is reached, the market tends to stay there unless demand or supply shifts.
• A shift means the entire curve moves left or right, creating a new equilibrium price and quantity.

📈 What shifts the demand curve

💰 Buyers' incomes

• Income increases → people buy more at every price → demand curve shifts right (D₂).
• Income decreases → people buy less → demand curve shifts left (D₁).
• Example: if snowboarders' incomes rise, they may buy a second jacket; if incomes fall, they wear an old one instead.

👗 Tastes and fashion

• If a product becomes more popular, demand increases (shifts right).
• If it goes out of fashion, demand decreases (shifts left).
• Example: if snowboarding suddenly goes out of style, jacket demand drops quickly.

🔗 Prices of related products

• If the price of a complementary product rises, demand for the main product falls.
• Example: if snowboards jump to $1,000, fewer people snowboard → jacket demand falls.
• (The excerpt does not discuss substitutes in detail for demand, but mentions related products.)

🔮 Expectations about future prices

• If buyers expect prices to rise in the future, they buy now → demand increases today.
• If they expect prices to fall, they postpone purchases → demand decreases today.

👥 Number of buyers

• More buyers in the market → demand increases.
• Fewer buyers → demand decreases.
• Example: snowboarding is a young person's sport; as the teenage population grows, jacket demand should increase.

📊 Summary table: demand shifters

Factor	Shifts demand RIGHT (increases) if	Shifts demand LEFT (decreases) if
Buyers' incomes	Increase	Decrease
Tastes/preferences	Increase	Decrease
Prices of related products	(Complement price falls or substitute price rises)	(Complement price rises)
Future price expectations	Will rise	Will fall
Number of buyers	Increases	Decreases

🏭 What shifts the supply curve

🔧 Technology

• New technology typically lowers production costs → higher profit per unit → suppliers offer more at every price → supply shifts right.
• Example: North Face bought laser-guided cutting and computer-aided pattern equipment → each jacket became cheaper to produce → incentive to supply more jackets at every price.

💵 Resource prices (labor, materials)

• If input costs (fabric, labor) rise → profit per unit falls → supply decreases (shifts left).
• If input costs fall → profit rises → supply increases (shifts right).

🎿 Prices of other products the firm can produce

• If a firm can make multiple products with the same resources, a price change in one affects supply of the other.
• Example: if ski jackets become more profitable than snowboard jackets, North Face will produce fewer snowboard jackets at every price (supply shifts left for snowboard jackets).

🏢 Number of producers

• More suppliers enter the market → total supply increases (shifts right).
• Suppliers exit → supply decreases (shifts left).

💸 Taxes

• Higher taxes on production → profits fall → supply decreases (shifts left).
• Lower taxes → supply increases (shifts right).

📊 Summary table: supply shifters

Factor	Shifts supply RIGHT (increases) if	Shifts supply LEFT (decreases) if
Technology	Lowers cost	Increases cost
Resource prices	Fall	Rise
Prices of other producible goods	Profit of alternative falls	Profit of alternative rises
Number of suppliers	Increases	Decreases
Taxes	Decrease	Increase

🌀 Real-world example: Hurricane Katrina and energy prices

🌀 Supply shock from natural disaster

• Background: Most U.S. offshore drilling and ~30% of refining capacity are in the Gulf Coast.
• Event: Hurricane Katrina in 2005 disrupted production → supply fell sharply.
• Demand: remained at the same levels (people still needed energy).
• Result: prices rose almost immediately as the supply curve shifted left while demand stayed constant.

⚠️ Vulnerability and concentration risk

• The storm highlighted that ~25% of U.S. oil and gas infrastructure is in hurricane-prone states.
• Energy experts questioned the wisdom of such high concentration—vulnerable to natural disasters, terrorist attacks, and foreign price increases.
• Refiners were already near capacity before Katrina, so the disruption had an outsized impact.

📉 Ripple effects across the economy

• Oil prices doubled from 2003 levels (to $50–60/barrel at the time).
• Agriculture: Midwest grain exporters use Gulf ports; fewer usable docks → barges couldn't unload → supply of transportation and grain fell → costs rose.
• Shipping: ~80% of shipping costs are fuel-related → higher gas prices → higher transportation costs throughout the economy.

🔄 Long-term price fluctuations

• More than a decade later, U.S. gas prices fluctuated dramatically:
  • Peaked at $3.71/gallon in 2014.
  • Dropped to $1.69 in early 2015.
  • Moderated to $2.36 in mid-2017.
• JP Morgan Chase research: consumers spend ~80% of savings from lower gas prices, which helps the overall economy.

🧠 Don't confuse

• A movement along the supply curve (quantity supplied changes because price changed) vs. a shift of the supply curve (the entire relationship changes because of technology, resource costs, taxes, etc.).
• The Katrina example is a supply shift (left), not just a price change—production capacity was physically destroyed.

🧭 Overview

🧠 One-sentence thesis

Companies must adapt to workforce demographic shifts, global energy pressures, and intensifying competition by embracing diversity, managing relationships strategically, and forming alliances to remain competitive in the global marketplace.

📌 Key points (3–5)

• Workforce transformation: The U.S. labor force now spans five generations, with older workers delaying retirement and millennials becoming the dominant multicultural generation, requiring companies to manage generational differences and foster diversity.
• Global energy challenges: Rising energy demand from emerging economies like China and India creates supply pressures and geopolitical risks, pushing countries to seek diverse energy sources including new technologies like fracking.
• Competitive strategies: Companies stay competitive through relationship management (building long-term partnerships with customers and suppliers) and strategic alliances (cooperative agreements between firms with complementary strengths).
• Common confusion: Diversity programs vs. diversity strategy—effective diversity is not random seminars but an ongoing, integrated approach to decision-making and organizational culture.
• Why it matters: These converging dynamics create major challenges that will intensify by 2020 and beyond, requiring companies to fundamentally rethink how they do business and retain employees.

👥 The Multigenerational Workforce Challenge

👴 Older workers redefining retirement

• Baby boomers (now over 40% of the workforce) are retiring closer to age 65 but many plan to work into their 70s.
• Retirement is no longer "all-or-nothing"—many Americans expect to work full- or part-time after "retirement."
• Financial motivations: Longer life expectancies mean workers worry about outliving retirement savings, especially after losses during the 2007–2009 recession.
• Non-financial motivations: For some, the satisfaction of working and feeling productive matters more than money alone.
• Example: An organization might find workers in their 60s and 70s seeking phased retirement programs rather than complete exit from the workforce.

🌈 Five generations working together

The workforce now includes:

• Generation Z (recent college graduates)
• Millennials and Generation X (people in their 30s and 40s)
• Baby boomers
• Traditionalists (people in their 70s)

Generational dynamics:

• Not unusual to find a 50-, 60-, or 70-year-old working for a manager under 30.
• People in their 50s and 60s offer "what's worked in the past" (experience).
• People in their 20s and 30s tend to be experimental, open to options, and unafraid to take risks.
• Key insight: The most effective managers recognize these generational differences and use them to the company's advantage.

🎯 Retention and knowledge transfer strategies

Companies should:

• Develop programs like flexible hours and telecommuting to retain older workers and benefit from their practical knowledge and problem-solving skills.
• Continually track where employees are in their career life cycles.
• Know when employees are approaching retirement age or thinking about retirement.
• Determine how to replace them and their knowledge and job experiences.

Don't confuse: Simply offering benefits vs. strategic knowledge management—the excerpt emphasizes tracking and planning for knowledge transfer, not just retention perks.

🌍 Diversity and Inclusion as Corporate Strategy

📊 The changing face of the workforce

According to U.S. Census Bureau data:

• Millennials are the largest generation in U.S. history.
• More than 44% of millennials classify themselves as something other than "white."
• Women continue making progress in management promotions, but obstacles remain on the path to CEO.
• Fewer than 5% of Fortune 500 companies have female CEOs.

Strategic imperative: The most successful organizations will recognize the importance of diversity and inclusion as part of their ongoing corporate strategies, not as one-time initiatives.

🏢 EY's approach to diversity (case example)

EY (formerly Ernst & Young) landed in the top spot of DiversityInc's 2017 list of top companies for diversity through:

PTR decision-making strategy (Preference, Tradition, and Requirement):

• Preference: Challenges managers to examine preferences toward job candidates similar to themselves.
• Tradition: Asks whether hiring decisions are influenced by traditional characteristics of a certain role.
• Requirement: Urges managers to make selections based on job requirements rather than personal preferences.
• Purpose: Gives people a way to question the status quo without accusing colleagues of being biased.

Professional network groups:

• Groups for LGBT employees, blacks, Latinos, pan-Asians, women, veterans, and employees with disabilities.
• Provide opportunities to network across divisions, create informal mentoring relationships, and strengthen leadership skills.

Global perspective:

• As a company working with clients in many countries, EY acknowledges different perspectives and cultures as part of daily business.
• Commitment to respecting different viewpoints and individual differences (background, education, gender, ethnicity, religious background, sexual orientation, ability, technical skills).
• Research shows diverse teams are more likely to improve market share, have success in new markets, demonstrate stronger collaboration, and show better retention.

Don't confuse: Random diversity seminars vs. integrated diversity strategy—the excerpt emphasizes that "it is no longer acceptable for companies to simply hold a random seminar or two"; instead, a "simple, ongoing approach is the most effective way."

⚡ Global Energy Demands and Supply Pressures

📈 Rising demand from emerging economies

• As standards of living improve worldwide, demand for energy continues to rise.
• Emerging economies such as China and India need energy to grow.
• In recent years, China and India were responsible for more than half of the growth in oil products consumption worldwide.
• Their demands place pressure on world supplies and affect prices, as the laws of supply and demand predict.

🏛️ State-supported competition

• State-supported energy companies in China, India, Russia, Saudi Arabia, and other countries place additional competitive pressure on privately owned oil companies (BP, Chevron, ExxonMobil, Shell).
• This represents a shift in the competitive landscape of the global energy market.

🔗 Supply dependence and geopolitical risk

Current dependencies:

Region/Country	Energy Source	Supplier	Percentage/Details
United States	Oil	Canada and Saudi Arabia	Large percentage
Europe	Natural gas	Russia (OAO Gazprom)	39%

Geopolitical implications:

• Dependence on one source gives foreign governments power to use energy as a political tool.
• Example: Tensions between Russia and Ukraine in November 2015 caused Russia to stop sending natural gas to Ukraine, which also disrupted gas in Europe because Russia uses Ukraine's pipelines to transport deliveries to European countries.
• In 2017, Russia announced plans to build its own pipeline alongside Ukraine's gas line in the Baltic Sea, allowing Russia to bypass Ukraine's pipelines and deliver gas directly to European countries.

🔧 Seeking alternative sources

Countries and companies worldwide are seeking additional sources of supply to prevent being held captive to one supplier.

U.S. fracking technology:

• Relatively new technology of extracting oil from shale rock formations (known as fracking).
• Now accounts for more than half of the country's oil output.
• Can help reduce U.S. dependence on foreign oil and create new jobs.

🤝 Competitive Strategies for the Global Marketplace

🔗 Relationship management

Relationship management: Building, maintaining, and enhancing interactions with customers and other parties to develop long-term satisfaction through mutually beneficial partnerships.

Two key components:

1. Supply chain management: Builds strong bonds with suppliers.
2. Relationship marketing: Focuses on customers.

Why long-term customers matter:

• The longer a customer stays with a company, the more that customer is worth.
• Long-term customers:
  • Buy more
  • Take less of a company's time
  • Are less sensitive to price
  • Bring in new customers
  • Require no acquisition or start-up costs
• In some industries, reducing customer defections by as little as five points (e.g., from 15% to 10% per year) can double profits.

🤝 Strategic alliances

Strategic alliances (also called strategic partnerships): Cooperative agreements between business firms.

Trend: The trend toward forming these agreements is accelerating rapidly, particularly among high-tech firms, which have realized that strategic partnerships are more than important—they are critical.

Forms of strategic alliances:

1. Supplier partnerships: Some companies enter strategic alliances with suppliers, who take over much of their actual production and manufacturing.

   • Example: Nike, the largest producer of athletic footwear in the world, does not manufacture a single shoe.

2. Complementary strengths partnerships: Companies with complementary strengths team up.

   • Example: Harry's Shave Club (an online men's grooming subscription service) teamed up with retail giant Target to improve sales and boost brand presence among Target shoppers.
   • Harry's products are now available in Target's brick-and-mortar stores and on Target's website.
   • This exclusive deal makes Target the only mass retailer to carry Harry's grooming products.
   • Context: The men's shaving industry accounts for more than $2.6 billion in annual sales.

Don't confuse: Traditional supplier relationships vs. strategic alliances—in strategic alliances, partners take over significant functions (like all manufacturing for Nike) rather than simply providing inputs.

🧭 Overview

🧠 One-sentence thesis

Businesses must continuously identify and respond to evolving trends across demographic, energy, and competitive sectors to maintain their competitive position in the global economy.

📌 Key points (3–5)

• Aging workforce challenge: Baby boomers approaching retirement create knowledge retention and workforce planning issues for companies.
• Multi-generational workplace: Organizations now manage five generations of workers simultaneously, requiring new management approaches.
• Energy demand pressures: Global energy consumption, especially from China and India, challenges supply and drives alternative technology development.
• Strategic responses: Companies use relationship management and strategic alliances to compete effectively in the changing global environment.
• Common confusion: Don't confuse traditional retirement patterns with current reality—many older workers continue working past traditional retirement age, reshaping workforce demographics.

👥 Demographic Shifts in the Workforce

👴 Baby Boomer Retirement Wave

• Large numbers of baby boomers are approaching traditional retirement age, creating a significant workforce transition.
• Companies face two critical challenges:
  • Planning for the exodus of experienced employees
  • Finding ways to retain the vast amounts of knowledge these workers represent

The demographic shift requires organizations to develop knowledge transfer systems before experienced workers leave.

🔄 Five-Generation Workforce

• Many older workers are choosing to continue working after traditional retirement age.
• This creates a workplace with five generations working simultaneously.
• Organizations must adapt management practices to accommodate different generational preferences and work styles.

Example: An organization might have employees ranging from recent college graduates to workers in their 70s, each with different communication preferences, technology comfort levels, and career expectations.

Don't confuse: Traditional retirement patterns (everyone leaving at 65) with current reality (many workers extending their careers well beyond traditional retirement age).

⚡ Global Energy Challenges

🌍 Worldwide Demand Pressures

• Global demand for energy is increasing significantly.
• China and India are major drivers of increased energy consumption.
• This demand challenges oil companies to respond in two ways:
  • Increase supplies through traditional means
  • Find alternative technologies to produce more oil

🔧 Technology and Supply Responses

• Companies are exploring alternative technologies such as fracking to increase oil production.
• The excerpt mentions fracking as one technological approach to meeting increased demand.

🌪️ Supply Vulnerability

• U.S. vulnerability to energy supply disruptions became evident during Hurricane Katrina.
• The hurricane put Gulf Coast refineries and offshore drilling rigs out of commission.
• This demonstrated how natural disasters can significantly impact energy infrastructure and supply chains.

Example: When Hurricane Katrina struck, it simultaneously affected multiple points in the energy supply chain—both production (offshore rigs) and processing (refineries)—showing the interconnected nature of energy systems.

🤝 Competitive Strategies for the Global Economy

🔗 Relationship Management

• Companies are using relationship management as a competitive tool.
• This approach focuses on building and maintaining interactions with customers and other parties.

Relationship management: the practice of building, maintaining, and enhancing interactions with customers and other parties to develop long-term satisfaction through mutually beneficial partnerships.

🤝 Strategic Alliances

• Organizations form strategic alliances to compete effectively in the global economy.

Strategic alliance: a cooperative agreement between business firms; sometimes called a strategic partnership.

• These partnerships allow companies to combine strengths and resources.
• Alliances help businesses navigate the complexities of global competition.

Strategy	Purpose	Benefit
Relationship management	Build long-term partnerships	Mutual satisfaction and sustained competitive advantage
Strategic alliances	Cooperative agreements between firms	Combined resources and capabilities for global competition

Why these matter: In an increasingly complex and global business environment, no single company can excel at everything; partnerships and relationship-building become essential competitive tools rather than optional strategies.

🧭 Overview

🧠 One-sentence thesis

Organizations and individuals shape ethical behavior through personal moral standards, philosophical frameworks, and recognition of unethical activities, which together determine what is considered right or wrong in business decisions.

📌 Key points (3–5)

• What ethics is: a set of moral standards for judging whether something is right or wrong; the first step is learning to recognize an ethical issue.
• How to recognize unethical activities: all unethical business activities fall into 11 categories, from taking things that don't belong to you to condoning unethical actions.
• What influences ethical choices: personal philosophies (justice, utilitarianism, deontology, individual rights) and the ethical environment created by employers.
• Common confusion: utilitarianism vs. deontology—utilitarianism focuses on consequences and the greatest good for the majority, while deontology focuses on meeting obligations and duties regardless of outcomes.
• Why it matters: poor business ethics can create negative company images, result in expensive liability claims, bankruptcy, and even jail time for offenders.

🔍 What is business ethics

🔍 Core definition

Ethics: a set of moral standards for judging whether something is right or wrong.

Ethical issue: a situation where someone must choose between a set of actions that may be ethical or unethical.

• Ethics is not just about following laws; it's about making moral judgments in everyday business decisions.
• Managers and business owners demonstrate through their actions what is and is not acceptable behavior.
• These actions shape the moral standard of the organization.

🤔 Recognizing ethical dilemmas

The excerpt provides three scenarios to illustrate ethical complexity:

Scenario	Ethical question
CEO raises drug price by 5000% for newborns and HIV patients	Is this ethical even if it's a "great business decision"?
Stranded, hungry people take food and water without paying after Hurricane Katrina	Is this unethical behavior given the circumstances?
Manufacturer must pay bribes to stay in business and keep 100+ employees employed	Should he pay bribes to prevent bankruptcy and job losses?

• These examples show that ethical issues are not always black and white.
• Context matters, but so do moral standards.
• The challenge is determining which actions cross ethical boundaries.

📋 The 11 categories of unethical business activities

📋 Overview of categories

Researchers from Brigham Young University identified that all unethical business activities fall into one of 11 categories. Recognizing these categories helps identify unethical situations.

🚫 Property and truth violations

1. Taking things that don't belong to you

• Unauthorized use of someone else's property or taking property under false pretenses.
• Example: using the office postage meter for personal letters or exaggerating travel expenses.
• Even the smallest offense falls into this category.

2. Saying things you know are not true

• Falsely assigning blame or inaccurately reporting conversations is lying.
• Example: discrediting coworkers when trying for a promotion.
• Common justification: "This is the way the game is played around here"—but it's still an ethical violation.

3. Giving or allowing false impressions

• Permitting someone to believe something that isn't true.
• Example: a salesperson lets a customer believe cardboard boxes will hold tomatoes for long-distance shipping when they know the boxes aren't strong enough.
• Example: a car dealer fails to disclose that a car has been in an accident.

💰 Influence and information violations

4. Buying influence or engaging in a conflict of interest

Conflict of interest: occurs when the official responsibilities of an employee or government official are influenced by the potential for personal gain.

• Example: a company awards a construction contract to a firm owned by the father of the state attorney general while the state attorney general's office is investigating that company.
• The potential to shape the investigation outcome creates the conflict.

5. Hiding or divulging information

• Hiding: failing to disclose information that could be harmful to purchasers.
  • Example: not disclosing medical study results showing a new drug has significant side effects.
• Divulging: taking your firm's product development or trade secrets to a new place of employment.
• Both constitute ethical violations but in opposite directions.

6. Taking unfair advantage

• Many consumer protection laws were passed because businesses took unfair advantage of people who were not educated or unable to discern complex contract nuances.
• Examples of resulting regulations: credit disclosure requirements, truth-in-lending provisions, new regulations on auto leasing.
• These laws exist because businesses misled consumers who couldn't follow the jargon of long, complex agreements.

👥 Personal and organizational violations

7. Committing improper personal behavior

• Personal conduct outside the job can influence performance and company reputation.
• Example: a company driver must abstain from substance abuse because of safety issues.
• Example: employees at company holiday parties might harm others through alcohol-related accidents.
• Don't confuse: this is about personal behavior that affects the company, not purely private matters with no connection to work.

8. Abusing power and mistreating individuals

• Example: a manager sexually harasses an employee or subjects employees to humiliating corrections in the presence of customers.
• Some cases are protected by laws; many situations are simply interpersonal abuse that constitutes an ethical violation.

9. Permitting organizational abuse

• Many U.S. firms with operations overseas (Apple, Nike, Levi Strauss) have faced these issues.
• Forms: child labor, demeaning wages, excessive work hours.
• Although a business cannot change another country's culture, it can perpetuate—or stop—abuse through its operations there.

⚖️ Rules and complicity violations

10. Violating rules

• Organizations use rules and processes to maintain internal controls or respect managerial authority.
• Although these rules may seem burdensome to employees trying to serve customers, a violation may be considered an unethical act.

11. Condoning unethical actions

• Example: witnessing a fellow employee embezzling company funds by forging her signature on a check but not reporting it.
• A winking tolerance of others' unethical behavior is itself unethical.
• This category emphasizes that inaction in the face of wrongdoing is also an ethical violation.

🧠 Philosophical frameworks for ethical decisions

⚖️ Justice—the question of fairness

Justice: what is fair according to prevailing standards of society.

• We all expect life to be reasonably fair: fair exams, fair grading, fair wages based on the type of work.
• Today, justice means an equitable distribution of the burdens and rewards that society has to offer.
• The distributive process varies from society to society.

Democratic society view:

• Belief in the "equal pay for equal work" doctrine.
• Individuals are rewarded based on the value the free market places on their services.
• Because the market places different values on different occupations, rewards (wages) are not necessarily equal, but many regard them as just.
• Example: a politician arguing that a supermarket clerk should receive the same pay as a physician would not receive many votes from the American people.

Communist theory view:

• Justice would be served by distributing burdens and rewards according to individuals' abilities and needs, respectively.
• This represents the other extreme from the democratic market-based approach.

🌐 Utilitarianism—seeking the best for the majority

Utilitarianism: focuses on the consequences of an action taken by a person or organization.

• Core notion: people should act so as to generate the greatest good for the greatest number.
• When an action affects the majority adversely, it is morally wrong.

Problems with utilitarianism:

1. Measurement difficulty: It is nearly impossible to accurately determine how a decision will affect a large number of people.

2. Winners and losers: Utilitarianism always involves both.

   • Example: if sales are slowing and a manager decides to fire five people rather than putting everyone on a 30-hour workweek, the 20 people who keep their full-time jobs are winners, but the other five are losers.

3. Unacceptable costs: Some "costs," although small relative to the potential good, are so negative that some segments of society find them unacceptable.

   • Example: the backs of animals are deliberately broken so scientists can conduct spinal cord research that could someday lead to a cure for spinal cord injuries. To many people, the "costs" are simply too horrible for this research to continue.

📜 Deontology—following obligations and duties

Deontology: the philosophy that says people should meet their obligations and duties when analyzing an ethical dilemma.

• A person will follow his or her obligations to another individual or society because upholding one's duty is what is considered ethically correct.
• Example: people who follow this philosophy will always keep their promises to a friend and will follow the law.
• Produces very consistent decisions because they are based on the individual's set duties.

Important limitation:

• This theory is not necessarily concerned with the welfare of others.
• Example: an Orkin Pest Control technician has decided it's his ethical duty to always be on time to meetings with homeowners. Today he is running late. Should he speed (breaking his duty to society to uphold the law) or arrive late (breaking his duty to be on time)?
• This scenario of conflicting obligations does not lead to a clear ethically correct resolution, nor does it protect the welfare of others from the technician's decision.

Don't confuse: Deontology vs. utilitarianism:

• Deontology focuses on duties and obligations regardless of outcomes.
• Utilitarianism focuses on consequences and the greatest good for the greatest number.

🛡️ Individual rights

Human rights: certain rights—to life, to freedom, to the pursuit of happiness—are bestowed at birth and cannot be arbitrarily taken away.

Legal rights: rights guaranteed by the government and its laws.

Human rights:

• Exist under certain conditions regardless of any external circumstances.
• Serve as guides when making individual ethical decisions.
• Denying the rights of an individual or group is considered unethical and illegal in most, though not all, parts of the world.

Legal rights:

• Defined by the U.S. Constitution and its amendments, as well as state and federal statutes.
• Can be disregarded only in extreme circumstances, such as during wartime.
• Include: freedom of religion, speech, and assembly; protection from improper arrest and searches and seizures; proper access to counsel, confrontation of witnesses, and cross-examination in criminal prosecutions.
• Also include the right to privacy in many matters.
• Must be applied without regard to race, color, creed, gender, or ability.

🏢 How organizations influence ethical conduct

🏢 The organizational impact

After recognizing that a situation is unethical, the next question is what do you do. The action a person takes is partially based upon his or her ethical philosophy. The environment in which we live and work also plays a role in our behavior.

• People choose between right and wrong based on their personal code of ethics.
• They are also influenced by the ethical environment created by their employers.

📰 Real-world consequences of poor ethics

The excerpt provides actual headlines illustrating the impact of poor business ethics:

Case	Consequence
Bernard Madoff	Sentenced to 150 years in prison for swindling clients out of more than $65 billion
Jeff Smisek (United Airlines CEO)	Left the company after federal investigation into whether United tried to influence Port Authority officials
Renaud Laplanche (Lending Club founder)	Lost his job because of faulty practices and conflicts of interest
John Stumpf (Wells Fargo CEO)	Fired after employees opened more than 2 million fake accounts to meet aggressive sales targets

Key takeaway:

• Poor business ethics can create a very negative image for a company.
• Can be expensive for the firm and/or the executives involved.
• Can result in bankruptcy and jail time for the offenders.

🎯 How organizations can encourage ethical behavior

Organizations can reduce the potential for liability claims by:

• Educating their employees about ethical standards.
• Leading through example.
• Implementing various informal and formal programs.

Leading by example:

• Employees often follow the examples set by their managers.
• Leaders and managers establish patterns of behavior that determine what's acceptable and what's not within the organization.

🧭 Overview

🧠 One-sentence thesis

Organizations can shape employee ethical behavior through leadership example, formal training programs, and written codes of ethics that define expected responsibilities and conduct.

📌 Key points (3–5)

• Leadership sets the tone: Managers' actions establish patterns that determine what behavior is acceptable within the organization.
• Training builds awareness: Formal ethics programs teach employees to recognize questionable activities and practice appropriate responses through scenario-based learning.
• Codes provide guidance: Written codes of ethics communicate the firm's expectations for employee behavior toward colleagues, customers, and suppliers.
• Common confusion: A code of ethics alone doesn't guarantee ethical behavior—it must be actively emphasized and followed by senior management to influence conduct.
• Decision-making tests: Two self-tests (the feelings test and the newspaper/social media test) help employees evaluate whether a decision is truly ethical.

👔 Leadership influence on ethics

👔 Leading by example

Leaders and managers establish patterns of behavior that determine what's acceptable and what's not within the organization.

• Employees often follow the examples set by their managers, not just written policies.
• The actions of top executives shape the ethical values of the entire organization.
• Example: Ben Cohen at Ben & Jerry's followed a policy that no one could earn more than seven times the lowest-paid worker's salary. When company sales reached $140 million and the lowest-paid worker earned $19,000, Cohen's salary was $133,000—far below what a typical executive of a similar-sized company would earn (potentially 10 times more). This action helped shape Ben & Jerry's ethical values around equality.

🔍 Why leadership matters more than rules

• The excerpt emphasizes that leaders create the ethical environment, not just the formal systems.
• If senior management abides by the code of ethics and regularly emphasizes it, the code will likely have a positive influence on behavior.
• Without leadership commitment, codes may be "little more than public relations gimmicks."

📚 Formal ethics training programs

📚 What effective training includes

Organizations provide formal training to develop awareness of questionable business activities and practice appropriate responses.

Structure of effective programs (examples: Levi Strauss, American Express, Campbell Soup):

1. Begin with techniques for solving ethical dilemmas
2. Present employees with a series of situations
3. Ask employees to develop the "best" ethical solution

🎯 Training prevalence and methods

• According to the Ethics Resource Center survey, more than 80 percent of U.S. companies provide some sort of ethics training.
• Methods include online activities, videos, and games.
• Training goes beyond theory—it uses realistic scenarios to practice decision-making.

📝 Example training scenario

The excerpt provides a detailed training dilemma:

Situation: Bill Gannon, a middle manager at a lighting fixture manufacturer, must evaluate Robert Talbot's subpar performance. Bill's boss Dana Johnson refuses to accept negative comments on Robert's evaluations. A previous manager who gave Robert a bad evaluation is no longer with the company. A major client recently complained that Robert filled an order improperly and was rude when the client complained.

Discussion questions used in training:

• What ethical issues does the situation raise?
• What courses of action could Bill take? What are the ethics of each?
• Should Bill confront Dana? Dana's boss?
• What would you do? What are the ethical implications?

This type of scenario helps employees think through real conflicts they might face.

📜 Formal codes of ethics

📜 What a code of ethics is

A code of ethics provides employees with the knowledge of what their firm expects in terms of their responsibilities and behavior toward fellow employees, customers, and suppliers.

Characteristics:

• Some offer lengthy, detailed guidelines; others are summary statements of goals, policies, and priorities.
• Companies display them in various ways: framed on office walls, in employee handbooks, posted on corporate websites.

✅ Do codes actually work?

The excerpt presents two views:

• Some believe: Codes do make employees behave more ethically.
• Others think: They are little more than public relations gimmicks.

The determining factor: If senior management abides by the code and regularly emphasizes it to employees, it will likely have a positive influence on behavior.

Don't confuse: Simply having a code vs. actively using and modeling the code—only the latter changes behavior.

🏆 Recognition of ethical companies

The "100 Best Corporate Citizens" ranked by Corporate Responsibility magazine are selected based on seven categories:

• Employee relations
• Human rights
• Corporate governance (including code of ethics)
• Philanthropy and community support
• Financial performance
• Environment
• Climate change

Top 10 corporate citizens in 2017: Hasbro, Intel, Microsoft, Altria Group, Campbell Soup Company, Cisco Systems, Accenture, Hormel Foods, Lockheed Martin, Ecolab.

📖 Campbell Soup Company case study

The excerpt provides Campbell's as an example of strong corporate citizenship:

Transformation under CEO Denise Morrison (2011–2018):

• Shifted from processed soup to organics and fresh food
• Acquired fresh food companies: Bolthouse Farms (fresh carrots), Garden Fresh Gourmet (salsa and hummus), Plum Organics (organic baby food)
• Central vision: "real food that matters for life's moments"
• Morrison's belief: "We can make a profit and make a difference"

Community initiatives:

• Launched healthy communities initiative in Camden, New Jersey (company headquarters)
• Funded community gardens, food pantries, nutrition education, cooking classes
• Expanded program to Detroit and Norwalk, Connecticut

Business results:

• 20 percent stock price increase over two years
• Strong commitment to sustainability attracted new customers, especially millennials
• Named one of the Best Corporate Citizens in 2017

🧪 Decision-making tests for individuals

🧪 Three preliminary questions

Before applying the final tests, ask:

1. Legal test: "Are there any legal restrictions or violations that will result from the action?"
   • If yes → take a different course of action
2. Company code test: "Does it violate my company's code of ethics?"
   • If yes → find a different path
3. Personal philosophy test: "Does this meet the guidelines of my own ethical philosophy?"
   • If yes → proceed to the two final tests

💭 The feelings test

"How does it make me feel?"

• Enables you to examine your comfort level with a particular decision.
• Many people experience discomfort after reaching a decision—may manifest as loss of sleep or appetite.
• These feelings of conscience can serve as a future guide in resolving ethical dilemmas.
• Example: If you feel uneasy or lose sleep over a decision, that discomfort signals a potential ethical problem.

📰 The newspaper or social media test

The question: How would an objective reporter describe your decision in a front-page newspaper story, an online media site, or a social media platform such as Twitter or Facebook?

Alternative phrasing for employees:

• "How will the headline read if I make this decision?"
• "What will be the reaction of my social media followers?"

Purpose: This test is helpful in spotting and resolving potential conflicts of interest.

Don't confuse: What you can legally do vs. what you'd be comfortable seeing publicly reported—the newspaper test catches decisions that might be legal but ethically questionable.

⚠️ Why organizational ethics matter

⚠️ Consequences of poor ethics

The excerpt opens with real headlines showing the costs of unethical behavior:

Case	Consequence
Bernard Madoff (investment advisor)	150 years in prison for swindling clients out of more than $65 billion
Jeff Smisek (United Airlines CEO)	Left company after federal investigation into whether United tried to influence Port Authority officials
Renaud Laplanche (Lending Club founder)	Lost job because of faulty practices and conflicts of interest
John Stumpf (Wells Fargo CEO)	Fired after employees opened more than 2 million fake accounts to meet aggressive sales targets

Overall impact: Poor business ethics can create very negative image, be expensive for the firm and/or executives, and result in bankruptcy and jail time.

🛡️ How organizations reduce liability

Organizations can reduce the potential for liability claims by:

• Educating employees about ethical standards
• Leading through example
• Implementing various informal and formal programs

🧭 Overview

🧠 One-sentence thesis

Corporate social responsibility extends beyond legal compliance and profit-making to encompass voluntary ethical obligations toward all stakeholders—employees, customers, communities, and society at large.

📌 Key points (3–5)

• What CSR is: voluntary concern for society's welfare that goes beyond legal requirements and includes economic, legal, ethical, and philanthropic responsibilities.
• The foundation principle: economic responsibility (profit) is the base of the pyramid, but companies must simultaneously fulfill legal, ethical, and philanthropic duties.
• Common confusion: legal vs. responsible behavior—actions can be legal yet irresponsible, or both legal and responsible; CSR requires more than just obeying the law.
• Who matters: stakeholders include employees, customers, the general public, and investors—each group has distinct claims on the business.
• Real commitment: Fortune 500 companies spend over $15 billion annually on CSR activities, demonstrating that social responsibility is a significant business priority.

🏛️ The CSR framework

🏛️ Definition and scope

Corporate social responsibility (CSR): the concern of businesses for the welfare of society as a whole, consisting of obligations beyond those required by law or union contract.

• Two critical aspects:
  • Voluntary nature: CSR is not about legally mandated actions (e.g., required pollution cleanup doesn't count as CSR).
  • Broad obligations: responsibilities extend beyond investors to workers, suppliers, consumers, communities, and society at large.
• The excerpt emphasizes that CSR involves what a company does to society first, then what it can do for society.

📊 The four-level pyramid

The excerpt presents CSR as a pyramid with four components:

Level	Type of Responsibility	What It Means
Foundation	Economic	Pursue profits
Second	Legal	Obey the law
Third	Ethical	Do what is right, just, and fair
Top	Philanthropic	Be a good corporate citizen

• Key insight: Economic responsibility is the foundation—without profit, the other three responsibilities become impossible.
• Simultaneous pursuit: A business must pursue profits while obeying the law, acting ethically, and being a good citizen.
• Don't confuse: These four components are distinct but together constitute the whole of CSR.

💰 Scale of commitment

• Fortune 500 companies spend more than $15 billion annually on CSR activities.
• Example: Starbucks donated more than one million meals through its FoodShare program and alliance with Feeding America, giving 100 percent of leftover food from seven thousand U.S. company-owned stores.
• Example: Salesforce pays employees for up to 56 hours of volunteer work per year and gives a $1,000 grant to employees who volunteer for seven days in one year.
• Example: Deloitte pays employees for up to 48 hours of volunteer work annually; in one recent year, more than 27,000 Deloitte professionals contributed over 353,000 volunteer hours.

⚖️ Dimensions of social responsibility

⚖️ Legality and responsibility as two axes

The excerpt presents two basic dimensions of social responsibility:

• Legality: whether actions comply with federal, state, and local laws.
• Responsibility: whether actions serve society's welfare.

These create different categories of business behavior:

🚫 Illegal and irresponsible behavior

• Hard to conceive of companies continually acting this way today, but it still occurs.
• Consequences:
  • Financial ruin for organizations.
  • Extreme financial hardships for former employees.
  • General struggles for communities where they operate.
• Top executives may walk away with millions initially but can ultimately face large fines and prison time.

⚠️ Irresponsible but legal behavior

• Companies sometimes act irresponsibly even when their actions are legal.
• Example: A Minnesota-based company making MyPillow was fined $1 million by California for making unsubstantiated claims that the pillow could alleviate medical conditions such as snoring, fibromyalgia, and migraines.
  • The company's CEO countered that claims were made by customers via testimonials posted on the website (later removed).
  • Consequences included the fine, several class-action lawsuits, and revocation of Better Business Bureau accreditation.
• Don't confuse: Legal compliance alone does not equal social responsibility.

✅ Legal and responsible behavior

• The vast majority of business activities fall into this category.
• Most companies act legally and try to be socially responsible.
• Consumer preference: Research shows consumers, especially those under 30, are likely to buy brands with excellent ethical track records and community involvement.
• Example: Outdoor retailer REI gave back nearly 70 percent of its profits to the outdoor community, investing a record $9.3 million in nonprofit partners in 2016.

🤝 Stakeholder responsibilities

🤝 Who are stakeholders?

Stakeholders: the individuals or groups to whom a business has a responsibility.

The excerpt identifies four main stakeholder groups:

• Employees
• Customers
• The general public
• Investors

👥 Responsibility to employees

• Fundamental responsibility: Provide a job to employees.
  • Keeping people employed and letting them enjoy the fruits of their labor is described as "the finest thing business can do for society."
• Beyond employment: Employers must provide a clean, safe working environment that is free from all hazards.
• Don't confuse: The first responsibility is simply providing employment; additional responsibilities build on this foundation.

🌱 Case study: Benefit Corporations

🌱 The Badger Company example

The excerpt includes a detailed case of W.S. Badger Company, which demonstrates CSR principles in action:

Origin story:

• Founder Bill Whyte (a carpenter) created a balm from olive oil and beeswax to heal his dry, cracked hands.
• Originally called Bear Paw, renamed Badger Balm after discovering a competing product.
• Started production at home, selling to hardware stores, lumber yards, and health food stores.

Current operations:

• Uses only organic plant extracts, exotic oils, beeswax, and minerals.
• Natural ingredients sourced globally (e.g., organic olive oil from Spain, rose oil from Bulgaria, bergamot oil from Italy).
• Family-run: founder Bill Whyte ("head badger"), wife Kathy (COO), daughter Rebecca (head of sustainability), daughter Emily (head of sales and marketing).

🏅 B Corp certification

Certified Benefit Corporation (B Corp): certification requiring companies to meet rigorous standards for transparency, accountability, and social and environmental performance.

Why Badger became a B Corp:

• To reinforce commitment to being socially responsible and demonstrating transparency.
• Helped organize how the company operates.

Specific practices at Badger:

• Pay equity: Highest-paid full-time employee's pay is capped at five times the lowest paid (now $15/hour, more than double New Hampshire's minimum wage).
• Profit sharing: Portion of company profits flows to employees; all employees participate in a bonus plan.
• Family-friendly: New parents encouraged to bring babies to work, fostering new teamwork styles and increasing employee morale.
• Charitable giving: Donates 10 percent of pre-tax profits annually to nonprofits focusing on children's health and welfare.
• Employee matching: Matches employee contributions to charitable causes (up to $100 per employee).
• Birthday donations: Donates an additional $50 to a nonprofit chosen by each employee on their birthday.

Results:

• Staff of more than 100 employees.
• Employees enjoy a living wage, great benefits, and a socially responsible work environment.

🎯 Competitive advantages of CSR

• Employee attraction and retention: Badger's approach to social responsibility helps attract and retain employees through meaningful benefits and ethical work environment.
• Consumer appeal: Companies with excellent ethical track records and community involvement attract customers, especially those under 30.
• Certification value: B Corp certification provides transparency and accountability that can differentiate a company in the marketplace.

🧭 Overview

🧠 One-sentence thesis

Businesses meet their social responsibilities by fulfilling obligations to four key stakeholder groups—employees, customers, society, and investors—through practices ranging from safe workplaces and honest dealings to environmental protection and strategic philanthropy.

📌 Key points (3–5)

• Who stakeholders are: employees, customers, the general public, and investors—the groups to whom a business has responsibility.
• Responsibility to employees: providing jobs, safe working environments free from discrimination, job security, and empowerment to make decisions.
• Responsibility to customers and society: delivering on promises, honest interactions, environmental protection, and corporate philanthropy (cash, equipment, volunteer support).
• Responsibility to investors: making a profit while meeting ethical standards; social investing limits investments to companies that align with ethical beliefs.
• Common confusion: social responsibility is not one-way—the social contract between employer and employee requires commitment from both sides for the organization to prosper.

👥 Responsibilities to Employees

👥 The fundamental obligation

An organization's first responsibility is to provide a job to employees.

• Keeping people employed and allowing them to enjoy the fruits of their labor is the finest thing business can do for society.
• Beyond employment, employers must provide a clean, safe working environment free from all forms of discrimination.
• Example: A company that hires workers and ensures workplace safety fulfills its basic duty to employees.

💪 Job security and empowerment

• Companies should strive to provide job security whenever possible.
• Enlightened firms empower employees to make decisions on their own and suggest solutions to company problems.
• Why it matters: Empowerment contributes to an employee's self-worth, which increases productivity and reduces absenteeism.
• Example: Biotech company Genentech offers employee compensation for taking alternative transportation to work—$12/day for walking or biking, $8 for carpooling, $16 for vanpooling, plus free commuter bus service via 27 routes.

🏆 Recognition of best practices

• Each year, Fortune collaborates with Great Place to Work® to survey the best places to work in the United States.
• 2017 top companies included Google, Wegmans Food Markets, Edward Jones, Genentech, Salesforce, Acuity, and Quicken Loans.

🛒 Responsibilities to Customers and Society

🛒 Meeting customer expectations

• To be successful, a company must satisfy its customers.
• A firm must deliver what it promises and be honest and forthright in everyday interactions with customers, suppliers, and others.
• Recent research suggests many consumers, particularly millennials, prefer to do business with companies and brands that:
  • Communicate socially responsible messages
  • Utilize sustainable manufacturing processes
  • Practice ethical business standards

🌍 Responsibility to society at large

• A business provides a community with jobs, goods, and services.
• It pays taxes that support schools, hospitals, and better roads.
• Example: Outdoor specialty retailer REI gave back nearly 70% of its profits to the outdoor community, investing a record $9.3 million in nonprofit partners in 2016.

✅ Certified Benefit Corporations (B Corps)

Certified Benefit Corporations (B Corps): companies verified by B Lab (a global nonprofit) that meet the highest standards of social and environmental performance, public transparency, and legal accountability.

• B Corps strive to use the power of business to solve social and environmental problems.
• How certification works:
  • Companies complete an impact assessment rated on a possible score of 200 points.
  • To become certified, companies need to reach a score of at least 80.
  • Must be recertified every two years.
• More than 2,000 companies worldwide are certified B Corps, including Method, W.S. Badger Company, Fishpeople Seafood, LEAP Organics, New Belgium Brewing Company, Ben & Jerry's, Cabot Creamery Co-op, Comet Skateboards, Etsy, Patagonia, Plum Organics, and Warby Parker.

🌱 Environmental Protection

🌱 The urgency of environmental responsibility

• Business is responsible for protecting and improving the world's fragile environment.
• Current state of the environment:
  • Every second, an area the size of a football field of forest is destroyed.
  • Plant and animal species are becoming extinct at the rate of 17 per hour.
  • A continent-size hole is opening up in the earth's protective ozone shield.
  • Each year we throw out 80% more refuse than in 1960; more than half of the nation's landfills are filled to capacity.

♻️ Corporate environmental initiatives

• To slow the erosion of the world's natural resources, many companies have become more environmentally responsible.
• Example: Toyota uses renewable energy sources (solar, wind, geothermal, and water power) for electricity to run its facilities. When its new $1 billion North American headquarters opened in Plano, Texas, in May 2017, Toyota said the 2.1 million square-foot campus would eventually be powered by 100% clean energy, helping the company move closer to its goal of eliminating carbon emissions in all operations.

🐟 Case study: Fishpeople Seafood

Background: Duncan Berry, a former sea captain and organic cotton entrepreneur, discovered that:

• The majority of seafood consumed in the U.S. was being imported.
• More than 90% of U.S. seafood was being exported.
• The ocean was being overfished, causing great harm.
• One key group was missing from the discussion: consumers.

Fishpeople's approach (founded 2012):

• Mission: changing the way people think about seafood through transparency about where it comes from, how it is processed, and how it is handled.
• Products: shelf-stable, ready-to-eat restaurant-quality seafood (soups, meal kits, fresh and frozen filets) with farm-to-table ingredients.
• Every package has a code consumers can enter at the company's website to learn everything about the seafood's origin, down to the fisherman who caught it.
• The company operates a processing plant in Toledo, Oregon, where workers are paid a livable wage and receive health insurance—benefits typically unheard of in the fishing industry.
• Products are available in more than 5,000 stores nationwide, including Walmart, Whole Foods, Costco, and Kroger.

💰 Corporate Philanthropy

💰 What corporate philanthropy includes

Corporate philanthropy: cash contributions, donations of equipment and products, and support for the volunteer efforts of company employees.

• U.S. corporate philanthropy exceeds more than $19 billion annually.
• Example: American Express is a major supporter of the American Red Cross, which relies almost entirely on charitable gifts to carry out programs including disaster relief, armed-forces emergency relief, blood and tissue services, and health and safety services.

🚨 Disaster relief examples

• When Hurricane Katrina hit the Gulf Coast:
  • Bayer sent 45,000 diabetes blood glucose monitors to the relief effort.
  • Within weeks, Abbott, Alcoa, Dell, Disney, Intel, UPS, Walgreens, Walmart, and others contributed more than $550 million for disaster relief.

🎯 Strategic giving

Strategic giving: philanthropy and corporate social responsibility efforts tied closely to a company's mission or goals and targeting donations to the communities where a company does business.

• Historically, corporate philanthropy involved companies seeking out charitable groups and giving them money or donating products/services.
• Today, the focus has shifted to strategic giving.
• Top businesses recognized for giving back to their communities include Salesforce, NuStar Energy, Veterans United, and Intuit.

💼 Responsibilities to Investors

💼 Beyond profit: social investing

• Although a company's economic responsibility to make a profit might seem to be its main obligation to shareholders, some investors increasingly emphasize other aspects of social responsibility.

Social investing: limiting investments to securities (e.g., stocks and bonds) that coincide with beliefs about ethical and social responsibility.

• Example: A social investment fund might eliminate from consideration the securities of all companies that make tobacco products or liquor, manufacture weapons, or have a history of being environmentally irresponsible.
• Don't confuse: Not all social investment strategies are alike. Some ethical mutual funds will not invest in government securities because they help fund the military; others freely buy government securities, noting that federal funds also support the arts and pay for AIDS research.
• Assets invested using socially responsible strategies total more than $7 trillion.

⚖️ Accountability and ethical behavior

• Perhaps partly as a result of the global recession of 2007–2009, companies have tried to meet responsibilities to investors as well as other stakeholders.
• Recent research suggests CEOs are being held to higher standards by boards of directors, investors, governments, media, and even employees when it comes to corporate accountability and ethical behavior.
• A recent global study by PwC reveals a large increase in the number of CEOs being forced out due to some sort of ethical lapse in their organizations.

Strategies to prevent ethical lapses:

• Establish a culture of integrity to prevent anyone from breaking the rules.
• Make sure company goals and metrics do not create undue pressure on employees to cut corners.
• Implement effective processes and controls to minimize the opportunity for unethical behavior.

🔄 The Social Contract Between Employer and Employee

🔄 A two-way relationship

• Many people have viewed social responsibility as a one-way street that focuses on the obligations of business to society, employees, and others.
• Now, companies recognize that the social contract between employer and employee is an important aspect of the workplace.
• Key insight: Both groups have to be committed to working together in order for the organization to prosper.

🧩 Four aspects of the social contract

Aspect	What it means	Why it matters
Compensation	Companies must recognize that most employees do not stay with one organization for decades.	Need to change compensation structure to acknowledge short-term performance; update methods for determining compensation, including benefits and nontraditional perks (increased paid leave, telecommuting options).
Management	Employees are likely to jump to new jobs every couple years.	Managers need a more active and engaged approach to supervising employees; may need to change how they think about loyalty. Engaging employees regularly, setting realistic expectations, and identifying specific development paths may help retain key employees.
Culture	Thanks to today's tight labor market, some employees feel empowered to demand more from their employer.	Employees demand increased flexibility, transparency, and fairness. This increased importance of the employee's role helps workers stay engaged in the mission and makes them less likely to look elsewhere.
Learning and development	Rapidly changing technology shifts the learning and development component of the contract.	Immense challenges to both companies and workers. May be more difficult to identify critical employee skills for the next several years, causing employers either to increase training of current workers or to look outside for individuals who already possess needed technical skills.

🌐 Global Ethics and Social Responsibility

🌐 Expanding ethics globally

• When U.S. businesses expand into global markets, they must take their codes of ethics and policies on corporate social responsibility with them.
• As a citizen of several countries, a multinational corporation has several responsibilities:
  • Respecting local practices and customs
  • Ensuring harmony between the organization's staff and the host population
  • Providing management leadership
  • Developing a solid group of local managers

🧭 Overview

🧠 One-sentence thesis

Corporate social responsibility is evolving toward strategic giving aligned with business goals, a new employer-employee social contract emphasizing mutual responsibility, and global ethics standards that respect local customs while upholding human rights.

📌 Key points (3–5)

• Strategic giving: Corporate philanthropy is shifting from general donations to targeted giving that aligns with company mission and focuses on communities where the firm operates.
• New social contract: Employers and employees now share responsibility for job security—employees must add value while employers provide engagement and development opportunities.
• Global responsibility: Multinational corporations must balance local customs with universal ethical standards, involving local stakeholders in decisions and ensuring suppliers avoid human rights violations.
• Common confusion: Don't confuse traditional philanthropy (giving to any needy group) with strategic giving (donations tied to corporate mission and operational areas).
• Employee engagement challenges: Rapid job-hopping and changing technology require managers to adapt supervision styles and continuously identify critical skills for training.

🎯 Strategic Philanthropy

🎯 What strategic giving means

Strategic giving: the practice of tying philanthropy and corporate social responsibility efforts closely to a company's mission or goals and targeting donations to the communities where a company does business.

• This represents a shift away from simply giving to any needy group.
• The focus is on alignment: donations relate more closely to corporate mission or goals.
• Geographic targeting: companies concentrate donations in areas where the firm operates.
• Example: An organization might focus charitable efforts on education programs in cities where it has major facilities, rather than spreading donations broadly across unrelated causes.

🔄 How this differs from traditional philanthropy

• Traditional approach: Give to any charitable cause that requests support.
• Strategic approach: Select causes that connect to business purpose and operational footprint.
• Don't confuse: Strategic giving is not about reducing total giving—it's about making philanthropy more focused and aligned with business strategy.

🤝 The New Employer-Employee Social Contract

🤝 Shared responsibility for job security

• The old model placed sole responsibility on employers to maintain jobs.
• The new model requires employees to assume part of the burden and find ways to add value to the organization.
• This shift reflects changing workplace dynamics and labor market conditions.

💼 What employers must do differently

The excerpt identifies several employer responsibilities in the new contract:

• Regular engagement: Engaging employees on a regular basis rather than passive supervision.
• Realistic expectations: Setting clear, achievable goals.
• Development paths: Identifying specific development paths to help retain key employees.
• Cultural strategies: Increased flexibility, transparency, and fairness to keep workers engaged in the organization's mission.

👤 What employees must contribute

• Employees who jump to new jobs every couple years create challenges for traditional management approaches.
• Thanks to tight labor markets, some employees feel empowered to demand more from employers.
• Employees need to stay engaged in the company's mission to be less likely to look elsewhere for employment.

🔧 Technology and skills challenges

• Rapidly changing workplace technology shifts the learning and development component of the contract.
• Employers face immense challenges identifying which employee skills will be critical over the next several years.
• This forces a choice: increase training of current workers or look outside for individuals who already possess needed technical skills.

🌍 Global Ethics and Social Responsibility

🌍 Core responsibilities of multinationals

When U.S. businesses expand into global markets, they must take their codes of ethics and policies on corporate social responsibility with them. As a citizen of several countries, a multinational corporation has several responsibilities:

Responsibility	What it means
Respect local practices	Honor local customs and traditions
Ensure harmony	Maintain positive relationships between organizational staff and host population
Provide leadership	Offer management guidance
Develop local managers	Build a solid group of local managers who will be a credit to their community
Long-term commitment	Invest in lasting relationships, not short-term extraction

🗣️ Stakeholder involvement

• When a multinational firm makes an investment in a foreign country, it should commit to a long-term relationship.
• This means involving all stakeholders in the host country in decision-making.
• A responsible multinational will implement ethical guidelines within the organization in the host country.
• By fulfilling these responsibilities, the company will foster respect for both local and international laws.

⚖️ Balancing conflicting interests

• Multinational corporations often must balance conflicting interests of stakeholders when making decisions regarding social responsibilities.
• Questions involving child labor, forced labor, minimum wages, and workplace safety can be particularly difficult.
• Example: Gap, Inc. published its list of global factories to provide transparency about suppliers and efforts to improve working conditions worldwide.

🤝 Partnership approach

The excerpt describes Gap's approach as an example:

• Partnered with Verité, a nongovernmental organization focused on ensuring people work under safe, fair, and legal conditions.
• Solicits feedback from factory workers making its products.
• Goal: improve working conditions and help factories become leaders in their local communities.
• Don't confuse: Transparency (publishing factory lists) is a tool, not the end goal—the aim is actual improvement in working conditions.

🧭 Overview

🧠 One-sentence thesis

International trade is dominated by developed nations and large corporations, but its measurement through exports, imports, balance of trade, and currency exchange rates reveals both opportunities and challenges for the U.S. economy.

📌 Key points (3–5)

• Who dominates trade: Developed nations account for 70% of world trade; in the U.S., 250 companies ship 85% of manufactured exports, yet 98% of exporters are small/medium firms.
• How trade is measured: Key metrics include exports/imports, balance of trade (exports minus imports), balance of payments (broader financial summary), and exchange rates.
• U.S. trade position: The United States is both the largest exporter and largest importer, but has run trade deficits (unfavorable balance) since the 1970s and balance of payments deficits since 1950.
• Common confusion: Balance of trade vs balance of payments—trade balance covers only goods/services, while balance of payments includes investments, military spending, loans, and transfers.
• Why nations trade: Absolute advantage (producing at lowest cost or exclusively) and comparative advantage (specializing in what you produce most efficiently) drive specialization and mutual benefit.

📊 Major players and structure of U.S. trade

🏢 Who exports from the United States

• Large corporations dominate volume: About 85% of all U.S. manufactured exports are shipped by just 250 companies.
• Small firms dominate by number: 98% of all U.S. exporters are small and medium-size firms.
• Over 60,000 U.S. companies participate in international trade, with major exporters including Apple, General Motors, Ford, Procter & Gamble, and Cisco Systems.

🌍 Developed nations as trade leaders

Developed nations: those with mature communication, financial, educational, and distribution systems.

• These nations account for about 70% of the world's exports and imports.
• The United States is both the largest exporter and largest importer globally.

🌾 What the U.S. exports and imports

Exports:

• Food, animal feed, and beverages (one-third of U.S. farm acreage devoted to export crops)
• Engineering products and high-tech goods (computers, telecommunications equipment)
• Reusable spacecraft and advanced technology

Imports:

• Raw materials the U.S. lacks (manganese, cobalt, bauxite for airplane parts and military hardware)
• Industrial supplies like steel (cheaper to import due to lower foreign labor costs and more modern factories)
• Consumer goods like coffee, tea, cocoa
• Large volumes from China due to lower manufacturing costs

📏 Key measures of international trade

💱 Exports and imports

Exports: goods and services made in one country and sold to others.

Imports: goods and services that are bought from other countries.

• International trade value exceeds $16 trillion annually and growing.
• Trade improves relationships, eases tensions, bolsters economies, raises living standards, provides jobs, and improves quality of life.

⚖️ Balance of trade

Balance of trade: the difference between the value of a country's exports and the value of its imports during a specific time.

Term	Definition	Meaning
Trade surplus	Favorable balance of trade	Exports exceed imports; more money flows in
Trade deficit	Unfavorable balance of trade	Imports exceed exports; more money flows out

U.S. situation:

• The United States has had an unfavorable balance of trade throughout the 1990s, 2000s, and 2010s.
• In 2016: exports totaled $2.2 trillion, imports were $2.7 trillion, resulting in a $500 billion trade deficit.
• U.S. exports continue to grow, but not as fast as imports.
• Service exports lag behind goods exports, partly due to piracy (FBI estimates intellectual property theft costs billions annually).

💼 Balance of payments

Balance of payments: a summary of a country's international financial transactions showing the difference between the country's total payments to and its total receipts from other countries.

What it includes (broader than balance of trade):

• Imports and exports (balance of trade)
• Long-term investments in overseas plants and equipment
• Government loans to and from other countries
• Gifts and foreign aid
• Military expenditures made in other countries
• Money transfers in and out of foreign banks

Don't confuse: Balance of trade only measures goods and services; balance of payments captures all international financial flows.

U.S. historical pattern:

• From 1900 to 1970: trade surplus, but unfavorable balance of payments (mainly due to large military presence abroad)
• Since 1970: both balance of trade and balance of payments have been unfavorable
• 2016: balance of payments deficit exceeded $504 billion

🔧 How to reduce unfavorable balance of payments

A nation can:

• Foster exports
• Reduce dependence on imports
• Decrease military presence abroad
• Reduce foreign investment

💱 Currency exchange and valuation

💵 Exchange rates and their effects

Exchange rate: the price of one country's currency in terms of another country's currency.

Key terms:

• Appreciates: less of that country's currency is needed to buy another country's currency
• Depreciates: more of that currency is needed to buy another country's currency

📉 How depreciation affects trade

Example scenario: Dollar depreciates relative to Japanese yen

• Initial rate: $0.012 per yen
• A Toyota priced at 2 million yen costs: $0.012 × 2 million = $24,000
• After depreciation to $0.018 per yen: same Toyota costs $0.018 × 2 million = $36,000

Trade effects when the dollar depreciates:

• Japanese goods become more expensive for U.S. residents → U.S. imports decline
• Simultaneously, the yen appreciates relative to the dollar
• U.S. goods become cheaper for Japanese buyers → U.S. exports rise

🌊 Floating exchange rates and government intervention

Floating exchange rates: a system where prices of currencies "float" up and down based upon the demand for and supply of each currency.

• Global currency traders create supply and demand based on a currency's investment potential, trade potential, and economic strength.

Government intervention:

Devaluation: a nation lowers the value of its currency relative to other currencies.

• Purpose: makes that country's exports cheaper and should help the balance of payments
• Concern: undervalued currency gives unfair competitive advantage
• Example: Many believe China's trade surplus with the U.S. is partially due to undervalued currency; in 2017, U.S. Department of Commerce accused China of dumping steel and providing financial assistance to Chinese steel manufacturers.

🌐 Why nations trade

🏆 Absolute advantage

Absolute advantage: when a country can produce and sell a product at a lower cost than any other country or when it is the only country that can provide a product.

• Example: The United States has absolute advantage in reusable spacecraft and high-tech items
• Example: Brazil has absolute advantage in coffee (U.S. lacks proper climate)
• Both countries gain by exchanging products where each has absolute advantage

🔄 Comparative advantage

Principle of comparative advantage: each country should specialize in the products that it can produce most readily and cheaply and trade those products for goods that foreign countries can produce most readily and cheaply.

Why it matters even with absolute advantage:

• Even if the United States had absolute advantage in both coffee and air traffic control systems, it should still specialize
• Specialization ensures greater product availability and lower prices
• Acts as a stimulus to trade

Examples of comparative advantage:

• India and Vietnam: clothing (lower labor costs)
• Japan: consumer electronics (technological expertise)
• United States: computer software, airplanes, some agricultural products, heavy machinery, jet engines

🆓 Free trade vs protectionism

Free trade: the policy of permitting the people and businesses of a country to buy and sell where they please without restrictions.

Protectionism: a nation protects its home industries from outside competition by establishing artificial barriers such as tariffs and quotas.

• Free trade allows citizens to trade whatever goods and services they choose without government regulation
• Protectionism is the opposite approach, using artificial barriers

⚠️ Concerns about globalization

😟 Negative impacts of global trade

The excerpt lists several fears about world trade and globalization:

• Job losses: Millions of Americans have lost jobs due to imports or production shifting abroad; most find new jobs but often at lower pay
• Job insecurity: Millions fear losing their jobs, especially at companies under competitive pressure
• Wage pressure: Employers threaten to export jobs if workers don't accept pay cuts
• White-collar vulnerability: Service and white-collar jobs increasingly vulnerable to operations moving offshore

🌏 Outsourcing

Outsourcing: sending domestic jobs to another country.

• Many U.S. companies (Dell, IBM, AT&T) have set up call service centers in India
• Represents a shift from traditional manufacturing job losses to service sector job displacement

🏛️ Terrorism's impact on global trade

• Terrorist attacks (September 11, 2001 in the U.S.; Charlie Hebdo attacks in Paris, 2015) changed how the world conducts business
• Immediate impact: short-term shrinkage of global trade
• Long-term outlook: Globalization will continue because major markets are too vitally integrated, but growth will be slower and costlier

Increased costs:

• Higher insurance premiums
• Security costs for overseas staff and property
• Heightened border inspections slow cargo movements, forcing companies to stock more inventory
• Tighter immigration policies curtail inflows of skilled and blue-collar workers, affecting expansion and wage control

Don't confuse: The impact may lessen over time, but multinational firms will remain vigilant—terrorism hasn't stopped globalization, just made it more expensive and complex.

🧭 Overview

🧠 One-sentence thesis

Nations trade because comparative advantage allows countries to specialize in producing what they make most efficiently, leading to greater product availability, lower prices, and economic benefits that outweigh the costs when trade barriers are minimized.

📌 Key points (3–5)

• Comparative advantage drives trade: countries specialize in goods they produce most readily and cheaply, ensuring greater availability and lower prices.
• Free trade vs protectionism: free trade allows unrestricted buying and selling, while protectionism uses tariffs and quotas to shield domestic industries from foreign competition.
• Globalization creates both winners and losers: millions lose jobs to imports and outsourcing, but trade also boosts productivity, keeps prices down, spurs innovation, and spreads prosperity.
• Common confusion: tariffs protect domestic jobs vs tariffs raise prices—both effects occur, but the net impact depends on whether efficiency gains from trade outweigh job displacement costs.
• Trade barriers take many forms: natural (distance, language), tariff (taxes on imports), and nontariff (quotas, embargoes, buy-national regulations, exchange controls).

🌍 How comparative advantage works

🏭 Specialization by country

Comparative advantage: when a country can produce certain goods most readily and cheaply relative to other goods.

• Countries focus on what they do best and trade for the rest.
• This specialization ensures greater product availability and lower prices for consumers.

🗺️ Examples from the excerpt

Country/Region	Comparative advantage	Reason
India and Vietnam	Clothing	Lower labor costs
Japan	Consumer electronics	Technological expertise
United States	Software, airplanes, some agriculture, heavy machinery, jet engines	(Implied: technology and capital)

• Example: India produces clothing cheaply due to low wages; the U.S. buys Indian clothing and sells software to India—both benefit from specialization.

🆚 Free trade vs protectionism

🔓 Free trade

Free trade: the policy of permitting people and businesses to buy and sell where they please without restrictions.

• No government barriers; citizens and firms choose trading partners freely.
• Allows comparative advantage to work most efficiently.

🛡️ Protectionism

Protectionism: a nation protects home industries from outside competition by establishing artificial barriers such as tariffs and quotas.

• Opposite of free trade.
• Uses tariffs (taxes on imports) and quotas (quantity limits) to shield domestic producers.
• Don't confuse: protectionism helps some domestic workers but raises prices for all consumers.

⚖️ The globalization debate

😟 Fears and costs of global trade

The excerpt lists negatives expressed by anti-globalization activists:

• Job losses: millions of Americans have lost jobs due to imports or production shifting abroad; most find new jobs but often at lower pay.
• Job insecurity: millions more fear losing jobs, especially in competitive industries.
• Wage pressure: employers threaten to export jobs unless workers accept pay cuts.
• White-collar vulnerability: service, engineering, and R&D jobs increasingly move offshore.

📞 Outsourcing

Outsourcing: sending domestic jobs to another country.

• Example from the excerpt: Dell, IBM, AT&T set up call centers in India and the Philippines; Carrier planned to move manufacturing from Indianapolis to Monterrey, Mexico (minimum wage $3.90/day vs U.S. wages).
• Estimates: almost 2.4 million U.S. jobs outsourced in 2015.
• Don't confuse good vs bad: bad for individuals who lose jobs, but economists argue it leads to cheaper goods and may stimulate exports.

😊 Benefits of globalization

The excerpt argues globalization has been "the engine that creates jobs and wealth":

• Productivity and living standards: faster growth when countries produce goods in which they have comparative advantage.
• Lower inflation: global competition and cheap imports keep prices down.
• Innovation: open economy brings fresh ideas from abroad.
• Development: infusion of foreign capital and technology helps poor countries develop economically.
• Knowledge sharing: trading partners share information about local cultures and customs, expanding collective knowledge and global competitiveness.

🔍 How to distinguish costs vs benefits

• The excerpt presents both sides but emphasizes that trade has been a net positive ("engine that creates jobs and wealth").
• Problem noted: big G20 countries added over 1,200 restrictive measures since 2008, and some countries manipulate currency to gain price advantages—these actions undermine the benefits of free trade.

🚧 Barriers to international trade

🏔️ Natural barriers

Physical or cultural obstacles that make trade difficult:

• Distance: shipping costs can make trade uneconomical even when production costs are lower abroad.
  • Example: raising beef in warm Argentina costs less than in cold Siberia, but shipping costs from South America to Siberia may drive the price too high.
• Language: inability to communicate effectively hinders negotiation and may lead to shipping the wrong goods.

💰 Tariff barriers

Tariff: a tax imposed by a nation on imported goods.

• May be charged per unit (e.g., per barrel of oil), as a percentage of value (e.g., 5% of a $500,000 shoe shipment), or a combination.
• Makes imported goods more costly, so they compete less effectively with domestic products.

🛡️ Protective tariffs

Protective tariffs: tariffs that make imported products less attractive to buyers than domestic products.

• Examples from the excerpt:
  • U.S. has protective tariffs on poultry, textiles, sugar, some steel and clothing; Trump administration added tariffs on steel and aluminum in March 2018.
  • Japan imposes a tariff making U.S. cigarettes cost 60% more than Japanese brands; U.S. tobacco firms have under 2% of the Japanese market (they believe they could get a third without tariffs).
  • In 2017, U.S. imposed tariffs of 63.86% to 190.71% on Chinese steel products after antidumping and anti-subsidy probes.

⚖️ Arguments for tariffs

1. Protect infant industries: give struggling new domestic industries time to become globally competitive.
2. Protect U.S. jobs: unions argue tariffs prevent foreign labor from taking away U.S. jobs.
3. Military preparedness: protect industries and technology vital to defense during peacetime.

⚖️ Arguments against tariffs

1. Discourage free trade: tariffs prevent comparative advantage from working efficiently.
2. Raise prices: decrease consumers' purchasing power.
3. Ripple effects: higher steel prices (from tariffs) increase production costs for heavy users like construction and automobile industries; may provoke retaliatory tariffs from other countries and bog down negotiations on other issues (e.g., intellectual property).

🚫 Nontariff barriers

📊 Import quotas

Import quota: limits on the quantity of a certain good that can be imported.

• Goal: restrict imports to a specific amount.
• Example: U.S. protects its shrinking textile industry with quotas.

🚷 Embargoes

Embargo: a complete ban against importing or exporting a product.

• Often set up for defense purposes.
• Example: U.S. does not allow high-tech products (supercomputers, lasers) to be exported to non-allied countries; costs U.S. firms billions in lost sales but keeps enemies from using latest military technology.

🏛️ Buy-national regulations

Buy-national regulations: government rules that give special privileges to domestic manufacturers and retailers.

• Example: U.S. bans use of foreign steel in constructing highways; many state governments have buy-national rules for supplies and services.
• Subtle version: establish customs regulations different from international standards (e.g., requiring bottles to be quart size rather than liter size).

💱 Exchange controls

Exchange controls: laws requiring a company earning foreign exchange (foreign currency) from exports to sell the foreign exchange to a control agency, usually a central bank.

• Example from the excerpt: if Switzerland had exchange controls, Rolex (Swiss company) sells 300 watches to Zales (U.S. chain) for US$600,000; Rolex must sell its U.S. dollars to the Swiss central bank and receive Swiss francs. If Rolex wants to buy supplies from abroad, it must buy foreign currency from the central bank.
• Effect: government controls the amount of foreign exchange available to companies, restricting their ability to import.

🧭 Overview

🧠 One-sentence thesis

Governments use various trade barriers—from quotas and embargoes to exchange controls and antidumping laws—to protect domestic industries and control imports, while international organizations like the WTO, World Bank, and IMF work to reduce these barriers and foster global trade.

📌 Key points (3–5)

• Types of barriers: quotas limit import quantities, embargoes ban products entirely, buy-national regulations favor domestic firms, and exchange controls restrict foreign currency access.
• Antidumping laws: designed to prevent foreign firms from selling products below cost to destroy competitors or win market share unfairly.
• Common confusion: trade barriers vs. trade facilitation—governments both restrict trade (through tariffs and quotas) and promote it (through WTO agreements and international financial support).
• International efforts to reduce barriers: the Uruguay Round and WTO lower tariffs worldwide, while the World Bank and IMF provide financial support and enforce trade-opening conditions.
• Economic communities: nations formalize trade relationships through preferential tariffs, free-trade zones, and agreements like NAFTA to reduce barriers among partners.

🚧 Types of Trade Barriers

📦 Quotas

Quota: limits on the quantity of a certain good that can be imported.

• The goal is to restrict imports to a specific amount of a given product.
• Example: The United States protects its textile industry by setting quotas on textile imports.
• This is not a complete ban; it allows some imports but caps the volume.

🚫 Embargoes

Embargo: a complete ban against importing or exporting a product.

• Often set up for defense or security purposes.
• Example: The United States does not allow high-tech products like supercomputers and lasers to be exported to non-allied countries.
• This costs U.S. firms billions in lost sales but prevents enemies from accessing advanced military technology.

🏭 Buy-national regulations

Buy-national regulations: government rules that give special privileges to domestic manufacturers and retailers.

• Example: U.S. law bans the use of foreign steel in constructing U.S. highways.
• Many state governments have similar rules for supplies and services.
• A subtler version: establishing customs regulations different from international standards (e.g., requiring quart-size bottles instead of liter-size).

💱 Exchange controls

Exchange controls: laws that require a company earning foreign exchange from its exports to sell the foreign exchange to a control agency, usually a central bank.

• How it works:
  • A foreign company sells goods and earns foreign currency.
  • The company must sell that currency to the central bank and receive domestic currency.
  • To buy foreign goods, the company must buy foreign currency back from the central bank.
• Example: If a Swiss company (Rolex) sells watches to a U.S. chain for $600,000, it must sell those dollars to the Swiss central bank and receive Swiss francs.
• By controlling how much foreign exchange is sold, the government controls how much can be imported.
• Goal: limit imports, encourage exports, and create a favorable balance of trade.

⚖️ Antidumping Laws

🎯 What dumping is

Dumping: the practice of charging a lower price for a product (perhaps below cost) in foreign markets than in the firm's home market.

• Reasons a company might dump:
  • Trying to win foreign customers.
  • Seeking to get rid of surplus goods.
• Dumping is suspected when price differences cannot be explained by differences in the cost of serving the two markets.

🔪 Predatory dumping

Predatory dumping: the attempt to gain control of a foreign market by destroying competitors with impossibly low prices.

• Most industrialized countries have antidumping regulations to prevent this.
• Example: The United States imposed tariffs on Canadian softwood lumber after Canada was found guilty of pricing lumber 4.49% to 7.72% below cost. U.S. customs now levy tariffs of 17.41% to 30.88% on Canadian timber exports, depending on the business.
• Don't confuse: dumping to clear surplus vs. predatory dumping to destroy competitors—the latter is more aggressive and aimed at market control.

🌍 Fostering Global Trade

🤝 Trade negotiations and the WTO

📜 Uruguay Round

Uruguay Round: a trade agreement adopted in 1994 that dramatically lowers trade barriers worldwide.

• Signed by 148 nations.
• Reduced tariffs by one-third worldwide, expected to increase global income by $235 billion annually.
• First agreement to cover services, intellectual property rights, and trade-related investment measures (e.g., exchange controls).

🇶🇦 Doha Round

• Started in Qatar in 2001 as a follow-up to the Uruguay Round.
• Has shown little progress in advancing free trade.
• Key disputes:
  • Developing nations want the U.S., Europe, and Japan to reduce farm subsidies (which drive down global agricultural prices and hurt poor countries' exports).
  • The U.S. and Europe want to lower trade barriers in services and manufacturing.
• Criticism: protesters claim the WTO serves multinational corporations, promotes trade over the environment, and treats poor nations unfairly.

🏛️ World Trade Organization (WTO)

World Trade Organization: replaces the old General Agreement on Tariffs and Trade (GATT), created in 1948.

• GATT had extensive loopholes; the WTO requires full compliance with all Uruguay Round agreements.
• Has an effective dispute settlement procedure with strict time limits.
• Advantage of membership: member countries lower trade barriers among themselves; non-members must negotiate individually with all trading partners.
• Only a few countries (e.g., North Korea, Turkmenistan, Eritrea) are not WTO members.

🏦 World Bank and IMF

🌐 World Bank

World Bank: offers low-interest loans to developing nations.

• Original purpose: help build infrastructure (roads, power plants, schools, hospitals).
• Now also helps developing nations relieve debt burdens.
• Conditions: countries must pledge to lower trade barriers and aid private enterprise.
• Also provides advice and information (e.g., databases on nutrition, birth control, software engineering, accounting).

💰 International Monetary Fund (IMF)

International Monetary Fund: founded in 1945 to promote trade through financial cooperation and eliminate trade barriers.

• Makes short-term loans to member nations unable to meet budgetary expenses.
• Operates as a lender of last resort for troubled nations.
• In exchange for emergency loans, the IMF often requires commitments to address underlying problems (e.g., curtailing imports, devaluing currency).
• Moral hazard problem: if the IMF always bails out countries, investors may take bigger risks in emerging markets, leading to deeper future crises.

📊 U.S. experience with the WTO

Outcome	Details
Win rate	The U.S. has won slightly fewer than half of the cases it presented to the WTO
Defense rate	The U.S. has won about one-third of cases brought against it
Recent loss	The WTO ruled in favor of Mexico in a dispute over "dolphin safe" tuna criteria
Recent targets	The U.S. filed cases against Europe, India, South Korea, Canada, and Argentina on issues ranging from aviation practices to trade barriers affecting U.S. automakers
Biggest dispute	U.S. vs. EU over aircraft subsidies—U.S. claims Europe gave Airbus $15 billion; EU claims U.S. gave Boeing $23 billion in military research benefits plus $3.2 billion in tax breaks from Washington State

🌐 International Economic Communities

🤝 What they are

• Nations that frequently trade may formalize their relationship through common economic policies.
• Result: an economic community or bilateral trade agreement (between two countries).

🎁 Preferential tariffs

Preferential tariff: gives advantages to one nation (or several nations) over others.

• Example: Members of the British Commonwealth (former British territories like Canada and Australia) pay lower tariffs when trading with Great Britain than other nations do.

🆓 Free-trade zones

Free-trade zone: few duties or rules restrict trade among partners, but nations outside the zone must pay tariffs set by individual members.

🇺🇸🇨🇦🇲🇽 North American Free Trade Agreement (NAFTA)

NAFTA: created the world's largest free-trade zone, ratified by the U.S. Congress in 1993.

• Includes Canada, the United States, and Mexico.
• Combined population: 450 million; combined economy: over $20.8 trillion.
• Canada entered a free-trade agreement with the U.S. in 1988, so most new opportunities under NAFTA are in Mexico (America's third-largest trading partner).
• Before NAFTA, tariffs on Mexican exports to the U.S. averaged just 4%, so NAFTA's primary impact was opening the Mexican market to U.S. companies.
• When NAFTA took effect, tariffs on about half of traded items disappeared.
• U.S.-Mexican trade increased from $80 billion to $515 billion annually.
• Removed Mexican licensing requirements, quotas, and tariffs; allowed U.S. and Canadian financial-services companies to own subsidiaries in Mexico for the first time in 50 years.

🧭 Overview

🧠 One-sentence thesis

International trade agreements and economic communities reduce barriers between nations to expand markets, increase trade flows, and create larger integrated economies that benefit member countries through reduced tariffs and streamlined regulations.

📌 Key points (3–5)

• Free-trade zones and agreements: NAFTA, CAFTA, Mercosur, and the EU eliminate or reduce trade barriers among member nations while maintaining individual tariffs for outsiders.
• NAFTA's impact: Created the world's largest free-trade zone with 450 million people and over $20.8 trillion in economic activity, primarily opening Mexican markets to U.S. businesses.
• European Union integration: 28 member states created a borderless economy with common currency (euro), reduced trade barriers, and pooled sovereignty for joint decision-making.
• Common confusion: Free-trade zones vs. global free trade—zones reduce barriers among members but often maintain tariffs against non-members.
• Trade-offs: While agreements expand markets and lower prices, they can create disputes (like U.S.-Canada softwood lumber) and concerns about job movement to lower-wage countries.

🌎 Major Trade Agreements

🇺🇸 NAFTA (North American Free Trade Agreement)

NAFTA: Created the world's largest free-trade zone including Canada, the United States, and Mexico.

• Ratified by U.S. Congress in 1993
• Combined population: 450 million; economy: over $20.8 trillion
• Primary impact: opened Mexican market to U.S. companies

Before vs. After NAFTA:

• Before: Tariffs on Mexican exports averaged 4%; most goods entered U.S. duty-free
• After: Tariffs on about half of traded items disappeared immediately
• U.S.-Mexican trade increased from $80 billion to $515 billion annually
• Removed Mexican licensing requirements, quotas, and tariffs
• Allowed U.S. and Canadian financial-services companies to own Mexican subsidiaries for the first time in 50 years

Example: At Delphi Corp. auto parts plant in Ciudad Juárez, the company expanded significantly post-NAFTA, now employing 70,000 Mexicans who assemble U.S.-made components. Workers earn about $2.30/hour (triple Mexico's minimum wage).

Don't confuse: NAFTA's success with automatic benefits—the agreement requires rising wages and expanding middle class in Mexico to sustain purchasing power for continued trade growth.

🌎 Other Americas Agreements

🔹 Mercosur

• Includes: Peru, Brazil, Argentina, Uruguay, and Paraguay
• Eliminated most tariffs among trading partners
• Trade revenues: currently exceed $16 billion annually
• Challenge: Recent recessions have limited economic growth despite continued trade growth

🔹 CAFTA (Central America Free Trade Agreement)

• Passed in 2005
• Members: United States, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua
• U.S. already principal exporter to these nations
• Impact: Reduces tariffs on exports to CAFTA countries; 80% of goods imported to U.S. from CAFTA nations already tariff-free
• Potential benefit: Increased U.S. multinational investment in the region

🇪🇺 The European Union

🏛️ Structure and Formation

European Union (EU): Trade agreement among 28 European nations creating a borderless economy.

• 1993: Member countries ratified Maastricht Treaty
• Goal: Economic, monetary, and political union
• Created borderless economy for 28 nations

European integration: The pooling of sovereignty where member states delegate some authority to common institutions for democratic decision-making on joint interests.

Member states include: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom (pre-Brexit)

💶 Economic Benefits

Key achievements:

• Created 2.5 million new jobs since founding
• Generated over $1 trillion in new wealth
• Reduced national telephone call prices by 50% since 1998
• Significantly lowered airfare prices through competition
• Enabled 15+ million Europeans to work or retire in other EU countries

Common currency: The euro, managed by European Community Bank

⚖️ EU as Antitrust Enforcer

The EU enforces antitrust regulations more aggressively than the United States:

Powers:

• Can seal off corporate offices indefinitely to prevent evidence destruction
• Can enter homes, cars, yachts, and personal property of executives suspected of market power abuse or price-fixing

Examples:

• Google: Fined $2.7 billion for favoring its own services in search results
• Microsoft: Fighting European Court since 2002; fined for monopolizing internet access by bundling Internet Explorer with Windows; required to share code with open-source companies
• Coca-Cola: Settled six-year dispute by agreeing to strict sales tactics limits—cannot sign exclusive agreements banning competing soft drinks, cannot give volume-based rebates, must give rivals like Pepsi 20% of space in Coke coolers; violations result in fines of 10% of worldwide revenue (over $2 billion)

🚧 Challenges and Protectionism

Protectionist concerns:

• European automakers proposed holding Japanese imports at roughly 10% market share
• France maintains strict quota on Japanese cars to protect Renault and Peugeot
• Countries without domestic auto industries (Ireland, Denmark, Netherlands) oppose import restrictions

American companies' success:

• Many large U.S. companies considered more "European" than European companies
• Coke and Kellogg's: classic European brand names
• Ford and General Motors: compete for largest auto sales share
• Apple, IBM, Dell: dominate their markets
• GE, AT&T, Westinghouse: strong presence with heavy manufacturing investment

📜 Constitutional Proposal (Failed)

Proposed EU constitution would have:

• Centralized powers at Union level
• Decreased individual member country powers
• Created single foreign minister position for unified world affairs voice
• Given EU control over political asylum, immigration
• Guaranteed freedom of speech and collective labor bargaining

Why it failed:

• France and Germany (two most powerful EU countries) voted "no" in summer 2005
• Citizens feared constitution would draw jobs to Eastern European EU members (lower wages, fewer regulations)
• Concerns about free-market reforms threatening traditional social protections
• Immigration concerns (also sparked Brexit referendum)

Brexit: In 2016, United Kingdom citizens voted to leave the European Union, a process that could take several years.

🔄 Trade Agreement Patterns

📊 Comparison of Major Agreements

Agreement	Members	Key Feature	Primary Benefit
NAFTA	U.S., Canada, Mexico	Largest free-trade zone	Opened Mexican market; $515B annual U.S.-Mexico trade
EU	28 European nations	Borderless economy + common currency	2.5M jobs, $1T+ wealth, reduced prices
Mercosur	Peru, Brazil, Argentina, Uruguay, Paraguay	Eliminated most tariffs	$16B+ annual trade revenues
CAFTA	U.S. + 6 Central American nations	Reduced tariffs	80% goods already tariff-free to U.S.

🎯 Common Pattern

Free-trade zone: An area where few duties or rules restrict trade among partners, but nations outside the zone must pay tariffs set by individual members.

How they work:

1. Member nations reduce or eliminate trade barriers among themselves
2. Maintain individual tariffs against non-member countries
3. Create larger integrated markets for member businesses
4. Often include provisions beyond tariffs (e.g., investment rights, intellectual property)

Don't confuse: Free-trade zones with complete global free trade—these agreements create preferential treatment for members while maintaining barriers to outsiders, which can disadvantage non-member nations.

⚠️ Disputes and Controversies

🌲 Softwood Lumber Dispute (U.S.-Canada)

Background: One of the longest trade disputes between the two nations

U.S. claim: Canadian government unfairly subsidizes lumber production by providing access to public land, while U.S. producers harvest on private property

Result: U.S. imposed tariffs on Canadian softwood lumber imports

Paradox: Anti-free-trade groups support these tariffs even though they result in higher prices for softwood lumber

Example of how: Even within free-trade agreements, specific industry disputes can lead to protective measures that contradict the agreement's broader goals.

🔮 Future Considerations

🔄 Renegotiation

The United States recently notified Canadian and Mexican governments of intent to renegotiate aspects of NAFTA, showing that trade agreements evolve over time based on changing economic and political conditions.

🤔 Ongoing Tensions

Trade agreements must balance:

• Economic efficiency and lower prices
• Domestic job protection
• Fair competition vs. subsidies
• National sovereignty vs. integrated markets
• Short-term disruption vs. long-term growth

🧭 Overview

🧠 One-sentence thesis

International economic communities—ranging from free-trade zones to deeper unions like the EU—reduce trade barriers among member nations to promote economic integration, job creation, and prosperity, though they also raise concerns about protectionism, sovereignty, and unequal impacts across borders.

📌 Key points (3–5)

• Free-trade zones vs deeper unions: free-trade zones eliminate tariffs among partners but let each member set its own external tariffs, while unions like the EU pool sovereignty and create common institutions, currencies, and regulations.
• NAFTA's impact: created the world's largest free-trade zone (U.S., Canada, Mexico), primarily opening the Mexican market to U.S. companies and increasing U.S.-Mexican trade from $80 billion to $515 billion annually.
• EU integration benefits: eliminated trade barriers, created the euro, generated 2.5 million jobs and over $1 trillion in new wealth, and enabled 15+ million Europeans to work or retire in other member countries.
• Common confusion: "European" vs "outsider" companies—many large U.S. firms (Coke, Ford, IBM) are considered classic European brands because of their deep market presence and investment.
• Tensions within trade blocs: member countries often disagree on issues like immigration, sovereignty, labor protections, and whether to limit imports from non-members or newer, lower-wage members.

🌐 Free-trade zones and agreements

🌐 What is a free-trade zone

Free-trade zone: an arrangement where few duties or rules restrict trade among partner nations, but countries outside the zone must pay tariffs set by individual members.

• Partners eliminate most internal barriers, but each member retains control over its own external trade policy.
• This differs from deeper unions that create common external tariffs and shared institutions.

🇺🇸🇨🇦🇲🇽 NAFTA (North American Free Trade Agreement)

• Members: Canada, United States, Mexico (combined population 450 million, economy over $20.8 trillion).
• Ratified: 1993 by U.S. Congress.
• Primary impact: opened the Mexican market to U.S. companies, since Canada already had a free-trade agreement with the U.S. since 1988.
• Before NAFTA: tariffs on Mexican exports to the U.S. averaged just 4 percent; most goods already entered duty-free.
• After NAFTA: tariffs on about half of traded items disappeared immediately; U.S.-Mexican trade grew from $80 billion to $515 billion annually.
• What changed: removed Mexican licensing requirements, quotas, and tariffs; allowed U.S. and Canadian financial-services companies to own Mexican subsidiaries for the first time in 50 years.

💼 NAFTA's real-world effects

Example: Delphi Corp. auto parts plant in Ciudad Juárez (across from El Paso, Texas):

• Employs 70,000 Mexicans assembling U.S.-made components.
• Wages: ~$2.30/hour for workers with two years' experience (triple Mexico's minimum wage).
• These jobs are among the most coveted in the region.

The test: whether NAFTA delivers rising wages, better benefits, and an expanding middle class in Mexico with purchasing power to buy U.S. and Canadian goods—this scenario appears to be working.

Recent development: the U.S. has notified Canada and Mexico of its intent to renegotiate aspects of NAFTA.

🌎 Other free-trade agreements in the Americas

Agreement	Members	Key facts
Mercosur	Peru, Brazil, Argentina, Uruguay, Paraguay	Largest new trade agreement; trade revenues exceed $16 billion annually; recent recessions limited growth, but intra-Mercosur trade continues to grow
CAFTA (Central America Free Trade Agreement)	U.S., Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua	Passed 2005; U.S. already principal exporter, so not expected to cause major export increase; reduces tariffs on exports to CAFTA countries; 80% of goods from CAFTA nations already enter U.S. tariff-free; may benefit if U.S. multinationals deepen investment

🇪🇺 The European Union: deeper integration

🇪🇺 What the EU is

European Union (EU): a borderless economy for 28 European nations (as of the excerpt) that pools sovereignty by delegating some decision-making to common institutions; also called European integration.

• Origin: member countries of the European Community ratified the Maastricht Treaty in 1993, proposing economic, monetary, and political union.
• 28 member states listed in the excerpt (including the United Kingdom before Brexit).
• Candidate countries: Albania, Former Yugoslav Republic of Macedonia, Montenegro, Serbia, Turkey.

🎯 Principal objectives and achievements

Objective: promote economic progress of all member countries.

How:

• Eliminated trade barriers, differences in tax laws, and differences in product standards.
• Established a common currency (the euro) and created the European Community Bank.

Results:

• Created 2.5 million new jobs since founding.
• Generated more than $1 trillion in new wealth.
• Reduced national telephone call prices by 50% since 1998.
• Significantly lowered airfare prices due to competition.
• Enabled more than 15 million Europeans to work or retire in another EU country.

⚖️ EU as antitrust enforcer

The EU is described as a "very tough" antitrust enforcer—some say tougher than the United States.

Powers:

• Can seal off corporate offices for unspecified periods to prevent evidence destruction.
• Can enter homes, cars, yachts, and other personal property of executives suspected of abusing market power or price-fixing.

Examples:

• Google: fined $2.7 billion for favoring its own services in search results.
• Microsoft: fighting the European Court since 2002; fined for monopolizing internet access by bundling Internet Explorer with Windows; required to share code with "open source" companies.
• Coca-Cola: settled a six-year dispute by agreeing to strict limits—can't sign exclusive agreements banning competing soft drinks, can't give volume-based rebates, must give rivals like Pepsi 20% of space in Coke coolers; violations result in fines of 10% of worldwide revenue (over $2 billion).

🚧 Protectionism and internal tensions

Protectionist concerns:

• European automakers proposed holding Japanese imports at roughly their current 10% market share.
• Different countries have different interests: Ireland, Denmark, and the Netherlands don't make cars and have unrestricted markets (unhappy about limiting Toyota/Honda imports); France has strict quotas to protect Renault and Peugeot.

Don't confuse: "European" vs "American" companies by headquarters location alone—many large U.S. companies are considered more "European" than many European firms:

• Coke and Kellogg's: classic European brand names.
• Ford and General Motors: compete for largest auto sales share.
• Apple, IBM, Dell: dominate their markets.
• GE, AT&T, Westinghouse: strong across Europe with heavy investment in manufacturing.

📜 Constitutional challenges and Brexit

Proposed EU constitution (not ratified):

• Would centralize powers at the Union level and decrease individual member powers.
• Create a single foreign minister for world affairs.
• Give EU control over political asylum, immigration, freedom of speech, and collective labor bargaining.
• Required ratification by each member country.

Why it failed:

• France and Germany (the two most powerful EU countries) voted "no" in summer 2005.
• Citizens feared the constitution would draw jobs from Western Europe to lower-wage, less-regulated Eastern European EU members.
• Voters worried it would impose free-market reforms (American or British style) over traditional social protections.

Brexit:

• In 2016, United Kingdom citizens voted to leave the EU.
• Concerns over immigration sparked the referendum.
• The process could take several years.

🔍 Common confusions and key distinctions

🔍 Free-trade zone vs deeper union

Feature	Free-trade zone (e.g., NAFTA, CAFTA)	Deeper union (e.g., EU)
Internal tariffs	Eliminated or reduced among partners	Eliminated
External tariffs	Each member sets its own	Common external tariff
Sovereignty	Retained by individual nations	Pooled; delegated to common institutions
Currency	Each nation keeps its own	May adopt common currency (euro)
Regulations	Harmonized only for trade	Harmonized across many areas (product standards, tax laws, labor, immigration)

🔍 Short-term vs long-term benefits

• Short-term: tariff elimination, immediate market access.
• Long-term test (NAFTA example): whether the agreement delivers rising wages, better benefits, and an expanding middle class with purchasing power to sustain cross-border demand.
• Don't assume trade agreements automatically benefit all partners equally—outcomes depend on wage levels, regulations, and investment flows.

🔍 "European" identity of companies

• A company's "European" status is not determined solely by its headquarters location.
• Deep market presence, local investment, and brand recognition matter more.
• Example: U.S. firms like Coke, Ford, and IBM are considered classic European brands because of their long-standing dominance and manufacturing investment in Europe.

🧭 Overview

🧠 One-sentence thesis

Companies enter the global marketplace through multiple strategies—ranging from low-risk exporting to high-investment direct ownership—each offering different levels of control, cost, and potential reward.

📌 Key points (3–5)

• Why companies go global: to earn additional profits, exploit unique advantages, access exclusive market information, or escape saturated domestic markets and excess capacity.
• Entry strategies vary by risk and control: exporting (lowest risk), licensing/franchising (moderate risk), contract manufacturing (testing the water), joint ventures (shared risk), and direct foreign investment (highest risk and reward).
• Common confusion: licensing vs. franchising—franchising is a form of licensing that has grown rapidly, especially for fast-food and business services, but both involve letting another firm use proprietary knowledge for fees.
• Countertrade is significant: roughly 30 percent of international trade involves countertrade (payment in goods/services rather than cash), used by major U.S. firms.
• Political and cultural factors matter: nationalism, local regulations, and cultural misunderstandings can threaten or limit foreign operations.

🚪 Why and how companies enter global markets

💰 Motivations for going global

Companies decide to "go global" for several urgent reasons:

• Additional profits: the most urgent driver.
• Unique advantages: a firm with a unique product or technological advantage not available to international competitors should achieve major business successes abroad.
• Exclusive market information: management may have special knowledge about foreign customers, marketplaces, or market situations (though competitors will eventually catch up).
• Domestic market saturation, excess capacity, and cost savings: these can also motivate expansion into international markets.

🛤️ Entry methods overview

The excerpt describes several ways to enter global trade, ordered roughly from least to most complex and risky:

1. Exporting
2. Licensing and franchising
3. Contract manufacturing
4. Joint ventures
5. Direct foreign investment
6. Countertrade (a payment method, not strictly an entry mode)

📦 Low-risk entry strategies

📤 Exporting

Exporting: selling domestically produced products to buyers in another country.

• Usually the least complicated and least risky alternative when a company decides to enter the global market.
• A company can sell directly to foreign importers or buyers.
• Not limited to huge corporations; small companies typically enter the global marketplace by exporting.
• China is the world's largest exporter, followed by the United States.

Support for small exporters:

• U.S. Small Business Administration (SBA) offers the Export Working Capital Program to help small and medium-size firms obtain money to complete export sales.
• SBA provides counseling and legal assistance.
• Over 700 Export Assistance Centers (EACs) are placed strategically around the country, often co-located with the SBA.
• SBA can guarantee loans of $50,000 to $100,000 to help an exporter grow.
• Online help available at http://www.ustr.gov and http://www.export.gov with tools, international marketing research, and answers for first-time exporters.

Example: American Building Restoration Products of Franklin, Wisconsin, now sells chemical products to building restoration companies in Mexico, Israel, Japan, and Korea; exports account for more than 5 percent of total sales.

📜 Licensing

Licensing: the legal process whereby a firm (the licensor) agrees to let another firm (the licensee) use a manufacturing process, trademark, patent, trade secret, or other proprietary knowledge. The licensee pays the licensor a royalty or fee.

• An effective way to move into the global arena with relatively little risk.
• International licensing is a multibillion-dollar-a-year industry.
• Largest categories: entertainment and character licensing (e.g., DVD movies, Batman), followed by trademarks.

Examples from the excerpt:

• Labatt Brewing Company has a license to produce Miller High Life in Canada.
• Spalding Company receives more than $2 million annually from license agreements on sporting goods.
• Fruit of the Loom lends its name to 45 consumer items in Japan alone, for at least 1 percent of the licensee's gross sales.
• Caterpillar licenses its brand for shoes and clothing, popular in Europe.

Control and risks:

• The licensor must ensure sufficient control over the licensee's activities (quality, pricing, distribution, etc.).
• Licensing may create a new competitor in the long run if the licensee voids the agreement; international law is often ineffective in stopping such actions.
• Two common control methods: shipping one or more critical components from the United States, and locally registering patents and trademarks in the licensor's own name.

🍔 Franchising

Franchising: a form of licensing that has grown rapidly in recent years.

• Many U.S. franchisors operate thousands of outlets in foreign countries.
• More than half of international franchises are for fast-food restaurants and business services.

Don't confuse: Franchising is a type of licensing, not a separate category; it shares the same basic structure (fees/royalties for using a brand and system) but has grown especially fast.

Challenges and adaptations:

• Having a big-name franchise doesn't always guarantee success or mean the job will be easy.
• Example: McDonald's decided to sell its Chinese stores to outside investors for $1.8 billion but retained 20 percent equity.
• Example: Home Depot closed its 12 stores in China after failing to research the market—most urban dwellers live in recently built apartments, and DIY is viewed with disdain (seen as a sign of poverty).
• Example: When Subway opened in China, locals were confused; the franchisee had to print signs explaining how to order. Customers didn't believe tuna salad was fish (no head or tail visible), didn't like touching food, and held sandwiches vertically, peeling the wrap and eating like a banana. Most of all, Chinese customers didn't want sandwiches.
• Western food chains adapt: McDonald's offered a spicy chicken burger (Chinese consume more chicken than beef); KFC replaced coleslaw with seasonal dishes like shredded carrots or bamboo shoots.

🏭 Contract manufacturing

Contract manufacturing: a foreign firm manufactures private-label goods under a domestic firm's brand.

• Marketing may be handled by either the domestic company or the foreign manufacturer.
• Advantage: lets a company test the water in a foreign country without investing in overseas plants and equipment.
• The foreign firm produces a certain volume of products to specification and puts the domestic firm's brand name on the goods, broadening the domestic firm's global marketing base.
• After establishing a solid base, the domestic firm may switch to a joint venture or direct investment.

Example: Levi Strauss entered an agreement with the French fashion house Cacharel to produce a new Levi's line, Something New, for distribution in Germany.

🤝 Moderate-to-high-risk entry strategies

🤝 Joint ventures

Joint venture: the domestic firm buys part of a foreign company or joins with a foreign company to create a new entity.

• Somewhat similar to licensing agreements.
• A quick and relatively inexpensive way to enter the global market.
• Can also be very risky: many joint ventures fail; others fall victim to takeover (one partner buys out the other).

Why joint ventures are used:

• Sometimes countries require local partners to establish a business (e.g., China had this requirement in a number of industries until recently), so a joint venture was the only way to enter the market.
• Help reduce risks by sharing costs and technology.
• Often bring together different strengths from each member.

Example: General Motors–Suzuki joint venture (CAMI Automotive) in Canada:

• Formed to manufacture low-end cars for the U.S. market.
• Plant run by Suzuki management; produces Chevrolet Equinox, Pontiac Torrent, and Suzuki SUV.
• Suzuki gained: access to GM's dealer network and expanded market for parts/components.
• GM gained: avoided cost of developing low-end cars; obtained models to revitalize lower end of product line and average fuel economy rating.
• After the successful joint venture, GM gained full control in 2011.
• The CAMI factory may be one of the most productive plants in North America; GM learned how Japanese automakers use work teams, run flexible assembly lines, and manage quality control.

🏢 Direct foreign investment

Direct foreign investment: active ownership of a foreign company or of overseas manufacturing or marketing facilities.

• Direct investors have either a controlling interest or a large minority interest in the firm.
• Stand to receive the greatest potential reward but also face the greatest potential risk.
• A firm may make a direct foreign investment by acquiring an interest in an existing company or by building new facilities.

Why firms choose direct investment:

• Trouble transferring some resources (especially personnel/managers) to a foreign operation or obtaining that resource locally.
• If the local labor market is tight, the firm may buy an entire foreign firm and retain all employees instead of paying higher salaries than competitors.
• Sometimes firms cannot find suitable local partners.
• Avoids communication problems and conflicts of interest that can arise with joint ventures.

Examples:

• IBM in the past insisted on total ownership of foreign investments because it did not want to share control with local partners.
• General Motors in China: built a $4,400 (RMB 29,800) minivan (Wuling Sunshine) that gets 43 miles per gallon in city driving. Has a quarter the horsepower of U.S. minivans, weak acceleration, top speed of 81 mph, and seats only a third the thickness of Western models, but looks plush compared to similar Chinese cars. The minivans made GM the largest automotive seller in China and made China a large profit center for GM.
• Walmart: now has over 6,000 stores outside the United States; in 2016, international sales were over $116 billion. About one-third of all new Walmart stores are opened in global markets.

Not all direct investments succeed:

• Walmart in Germany: bought the 21-store Wertkauf hypermarket chain and 74 unprofitable Interspar stores. Problems integrating and upgrading resulted in at least $200 million in losses. German law required stores to close at 8 p.m. on weekdays and 4 p.m. on Saturdays, and they could not open on Sundays. Costs were astronomical. Walmart left the German retail market.
• Walmart's turnaround: pushed operational authority down to country managers to respond better to local cultures. Enforces core principles (everyday low prices) but country managers handle their own buying, logistics, building design, and other operational decisions.

Adapting to market changes:

• Global firms change strategies as local market conditions evolve.
• Example: major oil companies like Shell Oil and ExxonMobil had to react to dramatic changes in oil prices due to technological advances (more efficient automobiles, fracking, horizontal drilling).

📉 Case: Managing the drop in oil prices (2014–2015)

In 2014, crude oil was $90 a barrel, but increased production (shale oil boom) and OPEC's reluctance to reduce output led to a price drop to $45–$60 in Q1 2015.

Impact:

• Terrific news for consumers, but challenges for managers at oil-industry companies.
• Chevron, Royal Dutch Shell, and ExxonMobil saw dramatic reductions in earnings and lower stock prices.

Strategies managers employed:

Company	Action
Chevron	Trim planned capital expenditures by $5 billion in 2016; eliminate 1,500 jobs
ExxonMobil	Less specific; planned belt-tightening strategies; forecast several years of low oil prices
Royal Dutch Shell	Eliminate 6,500 jobs; predicted long-range low prices for oil

Other strategies mentioned:

• Mergers: for companies that can't become fully efficient themselves, merge with others that can improve overall efficiencies and operations.
• Increase spending (contrarian): Encana, a North American oil producer, planned to increase overall spending due to low debt-to-equity ratio and growth exceeding industry average. Growth is important; reactive short-term strategies can hurt long-term growth.
• Performance-improvement programs: address problems and inefficiencies within the company; allow focus on innovation.
• Review and alter supply chain: focus on costs and efficiency; expand supplier base to increase competition and reduce costs; embrace lean manufacturing mindset.
• Adopt new technology: e.g., microseismic sensors to monitor fracking operations miles under the earth can boost production. New technology usually requires higher-skilled workers while reducing lower-skilled workers.

Conclusion from the excerpt: The drop in oil prices produced survival-of-the-fittest competition; companies that employ multiple strategies to improve efficiency are the ones that will survive and prosper.

💱 Countertrade

💱 What countertrade is

Countertrade: part or all of the payment for goods or services is in the form of other goods or services.

• A form of barter (swapping goods for goods), an age-old practice traced back to cave dwellers.
• International trade does not always involve cash; countertrade is a fast-growing way to conduct international business.

📊 Scale and examples

• U.S. Commerce Department says roughly 30 percent of all international trade involves countertrade.
• Each year, about 300,000 U.S. firms engage in some form of countertrade.
• U.S. companies including General Electric, Pepsi, General Motors, and Boeing barter billions of goods and services every year.

Example: Recently, the Malaysian government bought 20 diesel-powered locomotives from China and paid for them with palm oil.

🌍 Threats and opportunities in the global marketplace

🏛️ Political considerations

To be successful in a foreign market, companies must fully understand the foreign environment in which they plan to operate. Politics, cultural differences, and the economic environment can represent both opportunities and pitfalls.

Threats already discussed:

• Tariffs, exchange controls, and other governmental actions threaten foreign producers.
• The political structure of a country may also jeopardize a foreign producer's success in international trade.

🚩 Nationalism

Nationalism: the sense of national consciousness that boosts the culture and interests of one country over those of all other countries.

• Intense nationalism can lead to difficulties.
• Strongly nationalistic countries, such as Iran and New Guinea, often discourage investment by foreign companies.
• In other, less radical forms of nationalism, the government may take actions to hinder (excerpt cuts off here).

Don't confuse: Nationalism is not the same as normal regulatory differences; it is an ideological stance that prioritizes the home country's culture and interests, actively discouraging or hindering foreign firms.

🧭 Overview

🧠 One-sentence thesis

Success in foreign markets depends on understanding and navigating political structures, cultural differences, and economic environments, which multinational corporations can leverage through their unique advantages of scale, flexibility, and global resource access.

📌 Key points (3–5)

• Political threats: nationalism, expropriation, and confiscation can jeopardize foreign operations; governments may enact laws to protect domestic interests.
• Cultural factors: shared values, language, customs, and traditions determine what is socially acceptable and influence business practices and negotiations.
• Economic environment: level of development and infrastructure quality determine purchasing power, demand, and business opportunities.
• Common confusion: don't assume business practices are universal—personal relationships may matter more than financial considerations in some countries; timing and social customs vary widely.
• Multinational advantages: large corporations can overcome trade barriers, sidestep regulations, shift production flexibly, access global technology, and reduce costs.

🏛️ Political considerations

🚨 Nationalism as a barrier

Nationalism: the sense of national consciousness that boosts the culture and interests of one country over those of all other countries.

• Strongly nationalistic countries (e.g., Iran, New Guinea) often discourage foreign investment.
• Less radical forms still hinder operations through protective laws.
• Example: France requires pop music stations to play at least 40% of songs in French, limiting American music sales and airtime.
• Example: Dutch politicians opposed a U.S.-based PPG bid to acquire Netherlands-based AzkoNobel, with the government warning it would defend against hostile takeover; AzkoNobel used the hashtag #DutchPride.

⚠️ Expropriation and confiscation

• Expropriation: government takes ownership of foreign company assets and compensates former owners.
• Confiscation: government takes ownership with no compensation (worse outcome).
• These actions occurred during rebellions in several African nations during the 1990s and 2000s.
• Don't confuse: expropriation involves some payment; confiscation means total loss with zero compensation.

🌍 Cultural differences

🗣️ Language and naming

• Product names and promotional messages must be carefully selected and translated to avoid wrong meanings.
• Examples of mistakes:
  • Mitsubishi Pajero had to be renamed in Spanish-speaking countries because the term refers to a sexual activity.
  • Toyota MR2 dropped the "2" in France because the combination sounds like a French swear word.
  • Coca-Cola's literal translation in Chinese characters means "bite the wax tadpole."
  • American Airlines' "Fly in Leather" campaign translated literally to "Fly Naked" in Spanish for the Mexican market.

🤝 Customs and business practices

• Each country has its own traditions that determine business practices and influence negotiations.
• Personal relationships may be more important than financial considerations in many countries.
• Examples:
  • Western Europe: attempting business during the first two weeks in August is virtually impossible—businesses close and everyone vacations simultaneously.
  • Mexico: skipping social engagements may lead to lost sales.
  • Japan: negotiations often include long evenings of dining, drinking, and entertaining; business negotiations begin only after a close personal relationship is formed.

📋 Cultural dos and don'ts

DO	DON'T
Present business card with both hands in Asian countries, right-side-up and print-side-showing; accept cards with gratitude and examine carefully	Quickly put received cards into your pocket
Use "soft-sell" and subtle approach in Japan	Use America's traditional hard-selling style in Japan
Understand the role of religion (e.g., Ramadan in Muslim countries slows everything down, especially business)	Glad-hand, back-slap, or use first names on first business meeting in Asia (you'll be considered a lightweight)
Have a local person interpret advertising culturally and linguistically	Fill a wine glass to the top when dining with French businessperson (considered completely uncouth)
Be patient in Asia; let clients get to know you first before talking business	Begin first business meeting in Asia talking business immediately

🧩 What culture includes

Culture: the common set of values shared by citizens that determine what is socially acceptable; underlies the family, educational system, religion, and social class system.

• The network of social organizations generates overlapping roles and status positions.
• These values and roles have tremendous effect on people's preferences and thus on marketers' options.
• Example: In China, Walmart holds live fishing contests on premises; in South Korea, the company hosts food competitions with variations on kimchee (a popular Korean dish).

💰 Economic environment

📊 Development levels and purchasing power

• Economic development varies considerably:
  • Everyday survival is a struggle in countries like Sudan and Eritrea.
  • Highly developed countries include Switzerland and Japan.
• Complex, sophisticated industries are found in developed countries; more basic industries in less-developed nations.
• Average family incomes are higher in more developed countries.
• Larger incomes mean greater purchasing power and demand for:
  • Consumer goods and services
  • Machinery and workers required to produce consumer goods
• Business opportunities are usually better in countries with economic infrastructure in place.

🏗️ Infrastructure

Infrastructure: the basic institutions and public facilities upon which an economy's development depends.

Infrastructure includes:

• Money and banking system: provides major investment loans to businesses
• Educational system: produces skills and basic research that run production lines
• Transportation and communications: interstate highways, railroads, airports, canals, telephones, internet sites, postal systems, TV stations—link geography into one market
• Energy system: powers factories
• Market system: brings goods and services into homes and businesses

🌐 Global wealth snapshot

The excerpt provides a table showing gross national income per capita:

• Top examples: Luxembourg ($103,199), Switzerland ($79,243), Norway ($70,392), United States ($57,436)
• Bottom five: South Sudan ($233), Malawi ($295), Burundi ($325), Central African Republic ($364), Madagascar ($391)

Gross National Income: the value of final goods and services produced by a country (GDP) together with income received from other countries (interest, dividends) minus similar payments made to other countries.

Final goods: goods ultimately consumed rather than used in production of another good (e.g., a car sold to a consumer is final; tires sold to the car manufacturer are intermediate).

🏢 Multinational corporations

🌐 What multinationals are

Multinational corporations: corporations that move resources, goods, services, and skills across national boundaries without regard to the country in which their headquarters are located.

• Some are so rich and have so many employees they resemble small countries.
• Example: sales of both Exxon and Walmart are larger than the GDP of all but a few nations.
• Heavily engaged in international trade; successful ones take political and cultural differences into account.
• Many global brands sell much more outside the U.S. than at home: Coca-Cola, Marlboro, Pepsi, Kellogg, Pampers, Nescafe, Gillette.

📈 Growth in emerging markets

• In slow-growing developed economies (Europe, Japan), a weaker dollar helps: cheaper products to sell, and profits translate into more dollars back home.
• Emerging markets in Asia, Latin America, and Eastern Europe are growing steadily.
• Example: General Electric expects 60% of revenue growth to come from emerging markets over the next decade.
• Example: Brown-Forman (spirits company) gets a fifth of Jack Daniels sales growth from developing markets like Mexico and Poland.
• Example: IBM had rapid sales growth in Russia, India, and Brazil.

✅ Advantages of multinationals

🚧 Overcoming trade problems

• Multinationals can often overcome trade barriers.
• Example: Taiwan and South Korea have long had an embargo against Japanese cars for political reasons and to help domestic automakers, yet Honda USA (Japanese-owned, U.S.-based) sends Accords to Taiwan and Korea.
• Example: When Germany's BASF faced challenges from the environmentally conscious Green movement over biotechnology research, it moved cancer and immune-system research to Cambridge, Massachusetts.

📜 Sidestepping regulatory problems

• Multinationals can avoid licensing and regulatory hassles.
• Example: U.S. drugmaker SmithKline and Britain's Beecham merged partly to avoid hassles in their largest markets; the merged company can claim insider status in both Europe and the U.S. ("When we go to Brussels, we're a member state [of the EU]. When we go to Washington, we're an American company.")

🔄 Shifting production flexibly

• Multinationals can shift production from one plant to another as market conditions change.
• Example: When European demand for a certain solvent declined, Dow Chemical instructed its German plant to switch to manufacturing a chemical that had been imported from Louisiana and Texas; computer models help Dow run plants more efficiently and keep costs down.

🔬 Tapping global technology

• Multinationals can access new technology from around the world.
• Example: Xerox introduced about 80 office copiers designed and built by Fuji Xerox (joint venture with a Japanese company).
• Example: Procter & Gamble's super-concentrated detergent first formulated in Japan (in response to a rival) is now sold as Ariel in Europe and Cheer/Tide in the U.S.
• Example: Otis Elevator's Elevonic 411 (programmed to send more cars to high-demand floors) was developed by six research centers in five countries:
  • Connecticut (U.S.): systems integration
  • Japan: special motor drives for smooth rides
  • France: door systems
  • Germany: electronics
  • Spain: small-geared components
  • Result: saved over $10 million in design costs and cut development time from four years to two.

💵 Saving labor costs

• Multinationals can often save significantly in labor costs, even in highly unionized countries (the excerpt mentions this but provides no further detail).

🏆 Top multinational corporations

The excerpt provides a table of the world's 11 largest multinational corporations by revenue:

Rank	Company	Revenues ($M)	Home Country
1	Walmart	$482,130	United States
2	State Grid	$329,601	China
3	China National Petroleum	$299,271	China
4	Sinopec Group	$294,344	China
5	Royal Dutch Shell	$272,156	Netherlands
6	Exxon Mobil	$246,204	United States
7	Volkswagen	$236,600	Germany
8	Toyota Motor	$236,592	Japan
9	Apple	$233,715	United States
10	BP	$225,982	United Kingdom
11	Berkshire Hathaway	$210,821	United States

🔄 Shifting brand landscape

📉 Erosion of U.S. brand dominance

• America is the cradle of the consumer goods brand (nurtured Apple, Google, Coca-Cola, Microsoft, and countless others).
• Many American brands conquered other societies, but their domination in the global marketplace is eroding.
• Companies in Europe and Asia (Samsung, Toyota, Mercedes Benz, SAP) are producing top-quality goods and selling them as such rather than competing on price.
• "There are longer-term trends toward greater competition. The United States was the only global brand country [but] that's no longer the case."
• Consumers prefer brands they take to be of higher quality regardless of country of origin.
• Of the top five most valuable brands (Interbrand list), four still originate in the U.S.: Apple, Google, Coca-Cola, Microsoft; Toyota (Japan) is number five.
• American companies have lost the most ground in the middle tier of recognizable brand names.

🌏 Competition from Asia-Pacific

• The Asia-Pacific region harbors the fastest-growing emerging markets today and is a major source of pressure on U.S. brands.
• Appliances: Two Chinese companies, Haier and Kelon, are becoming top competitors for Whirlpool and Maytag; Haier bought GE's appliance division in 2016.
• Sporting goods: Li Ning (well known in China) is building its international profile; the Spanish Olympic basketball team wore Li Ning apparel (while the Chinese team wore Nike).
• South Korean brands: Samsung, LG, and Hyundai have emerged globally in smartphones, household appliances, and automobiles.

🇪🇺 European brand strength

• Animosity that many Europeans feel toward the U.S. translates into preference for European or even Asian brands at the expense of U.S. brands.
• European brands are becoming stronger and more consistent.
• European brands are gaining momentum in white goods and consumer goods.

🧭 Overview

🧠 One-sentence thesis

Multinational corporations leverage global resources, technology, and labor to reduce costs and accelerate innovation while driving trends in market expansion, resource acquisition, and the rise of emerging economies like China and India.

📌 Key points (3–5)

• What multinationals do: tap technology and resources worldwide, save on labor costs, and access new markets beyond domestic borders.
• How they innovate globally: collaborate across research centers in multiple countries to share development costs and speed up product creation.
• Key global trends: market expansion (seeking bigger markets), resource acquisition (finding cheaper labor or scarce materials), and the emergence of China and India as economic powerhouses.
• Common confusion: China vs. India's impact—China dominates mass manufacturing and exports through foreign investment, while India excels in services, software, and innovation through skilled labor.
• Why it matters: multinationals shape global competition, influence brand dynamics, and drive economic development across nations.

🌍 How multinationals leverage global advantages

🔬 Accessing technology worldwide

• Multinationals can tap into innovation from any country, not just their home base.
• Example: Xerox introduced 80 office copiers designed and built by Fuji Xerox, its Japanese joint venture.
• Example: Procter & Gamble formulated super-concentrated detergent in Japan in response to a competitor, then sold it in Europe (Ariel brand) and the U.S. (Cheer and Tide).
• This approach allows companies to respond to local competition and then scale successful innovations globally.

🛠️ Collaborative international development

• Multinationals coordinate research centers across multiple countries to divide specialized tasks.
• Example: Otis Elevator developed the Elevonic 411 using six research centers in five countries:
  • Connecticut: systems integration
  • Japan: motor drives for smooth rides
  • France: door systems
  • Germany: electronics
  • Spain: small-geared components
• Benefits: saved over $10 million in design costs and cut development time from four years to two.
• Don't confuse: this is not outsourcing entire projects—it's strategic division of specialized expertise.

💰 Labor cost savings

• Multinationals can reduce labor expenses even in unionized countries by relocating work or negotiating productivity improvements.
• Example: Xerox moved copier-rebuilding work to Mexico for lower wages; the Rochester, New York union initially objected but eventually agreed to change work styles and improve productivity to keep jobs at home.
• This shows multinationals can use the threat of relocation to drive domestic efficiency gains.

📈 Three major trends driving global competition

🌐 Market expansion

Market expansion: the need for businesses to seek markets beyond national borders because domestic markets are too small.

• Why it happens: large-scale manufacturing requires big markets; small domestic markets (like Denmark, Netherlands, Switzerland) cannot generate enough demand.
• Example: Nestlé went global early because Switzerland is so small—it was shipping milk to 16 countries by 1875.
• Today, hundreds of thousands of businesses recognize the potential rewards in international markets.

🔧 Resource acquisition

Resource acquisition: going to the global marketplace to obtain cheap or skilled labor, scarce raw materials, technology, or capital.

• Companies seek resources wherever they are most efficiently available:
  • Cheap labor: Nike has manufacturing facilities in many Asian countries.
  • Skilled talent: Honda opened a design studio in southern California for "California flair" in vehicle design.
  • Capital: Large banks like Bank of New York and Citigroup have offices in Geneva, Switzerland (Europe's private banking center).
• Don't confuse resource acquisition with market expansion—one is about inputs (what you need to produce), the other is about outputs (where you sell).

🚀 The emergence of China and India

Country	Primary strength	How growth happened	Impact on global business
China	Mass manufacturing, exports	Foreign investment attracted by low labor costs	Forces manufacturers worldwide to reduce costs or outsource; dominates production of goods from garlic to jeans to plastic molds
India	Services, software, innovation	Technical and managerial skills	Alters competition for service contracts; plays key role in global innovation (e.g., Google Bangalore lab, 3-D simulations for GM and Boeing)

• China's trajectory: boom driven by big manufacturers expanding production bases; now building multibillion-dollar electronics and heavy industrial plants.
• India's trajectory: engineers and scientists devise software platforms, multimedia features, and use simulations to tweak designs for global clients.
• Future projections: within five years, India should become the world's fourth-biggest economy (overtaking Germany); by mid-century, China could overtake the U.S. as number one; together they could account for half of global output.
• Key shift: technical and managerial skills in both countries are becoming more important than cheap assembly labor alone.

🏢 Brand competition and multinational dynamics

🏷️ The rise of non-U.S. brands

• Chinese brands are building international profiles:
  • Haier bought GE's appliance division in 2016 and competes with Whirlpool and Maytag.
  • Li Ning (sporting goods) dressed the Spanish basketball team at the Olympics while the Chinese team wore Nike.
• South Korean brands (Samsung, LG, Hyundai) have emerged in smartphones, appliances, and automobiles.
• European brands are gaining momentum in white goods and consumer goods (e.g., Gaggenau, Bosch, Dyson, Absolut, Virgin, Mini Cooper, Red Bull, Ikea).
• Challenge for U.S. brands: European animosity toward the U.S. translates into preference for European or Asian brands; European brands are becoming stronger and more consistent.

⚖️ Balancing global operations

• Multinationals must navigate tensions between cost savings and domestic employment.
• They must also adapt to local competition and preferences in each market.
• Success requires recognizing when to centralize (e.g., systems integration) and when to localize (e.g., design studios in California).

🌱 Ethical dimensions: UN Sustainability Development Goals

🎯 Corporate engagement with global goals

• In 2015, UN member nations adopted 17 Sustainability Development Goals to end poverty, ensure sustainability, and promote prosperity—to be met over 15 years.
• Corporations like Albertson's, Unilever, Kimberly Clark, and Siemens are taking action on these goals.
• Shift from traditional CSR: deeper, longer engagement rather than peripheral, short-term programs that get dropped when demand falls.

🐟 Example: Albertson's and ocean sustainability

• Albertson's used UN Goal 14 (conserve oceans and marine resources) in concert with World Oceans Day.
• Rationale: "The wellbeing of people and the sustainability of our oceans are interdependent."
• As one of the largest U.S. seafood retailers, committed to protecting oceans for food security, livelihoods, and the global economy.
• First retailer to sell tuna with the fair trade seal.

🏭 Example: Siemens and sustainable development

• Siemens defines sustainable development as the means to achieve profitable, long-term growth.
• Aligns company values (responsible, excellent, innovative) with the UN's 2030 Agenda.
• Recognizes that a robust CSR program enhances reputation, which can indirectly boost the bottom line.

🤔 Critical questions raised

• Why would companies pledge to meet these goals when competitors could ignore them for short-term profits?
• Would consumers choose Albertson's over competitors that didn't agree to the UN program?
• Would a company pay 10% more for a Siemens component because of their sustainability commitment?
• These questions highlight the tension between ethical commitments and competitive pressures.

🧭 Overview

🧠 One-sentence thesis

Global business activity will continue to escalate as firms seek larger customer bases and additional resources beyond their borders, with China and India emerging as major economic powerhouses.

📌 Key points (3–5)

• Why global expansion continues: firms need larger customer bases and additional resources that require looking beyond domestic borders.
• Emerging markets: China and India are becoming global economic powerhouses.
• Growth trajectory: global business activity will continue to escalate due to multiple driving factors.
• Strategic motivation: companies are driven by both opportunity (more customers) and necessity (resource needs).

🌍 Drivers of Global Business Growth

🎯 Customer base expansion

• Firms that desire a larger customer base will continue to seek opportunities outside their country's borders.
• This is not just about selling more; it's about accessing markets that domestic operations alone cannot reach.
• Example: An organization that has saturated its home market looks internationally to find new buyers for its products or services.

🔧 Resource acquisition

• Companies need additional resources that may not be available or cost-effective domestically.
• This drives firms to look beyond their home country's borders.
• The excerpt links resource needs directly to international expansion decisions.

🚀 Emerging Economic Powers

🇨🇳🇮🇳 China and India's rise

• Both China and India are specifically identified as emerging global economic powerhouses.
• These two countries represent major shifts in the global economic landscape.
• Their emergence creates both opportunities (new markets) and competitive pressures for firms worldwide.

📈 Continued escalation

• The excerpt emphasizes that global business activity will "continue to escalate," indicating an ongoing trend rather than a temporary phenomenon.
• Multiple factors contribute to this sustained growth pattern.
• The momentum is driven by both push factors (need for resources) and pull factors (opportunity for growth).

🧭 Overview

🧠 One-sentence thesis

The sole proprietorship is the most popular form of business ownership because it is the easiest to set up and allows one person to maintain complete control, though it accounts for only a small fraction of total business revenues.

📌 Key points (3–5)

• What a sole proprietorship is: a business established, owned, operated, and often financed by one person.
• Popularity vs. revenue: sole proprietorships represent 72% of all businesses but generate only 4% of total business revenues and 15% of profits.
• Why entrepreneurs choose it: easiest to set up, no partners required, direct control, and flexibility to dissolve or sell.
• Common confusion: most businesses are sole proprietorships by number, but corporations dominate in revenue (81%) and profits (58%)—don't confuse popularity with economic scale.
• When it makes sense: appropriate for individuals who want to work alone, prefer full control, have low liability exposure, and want easy exit options.

📊 Business ownership landscape

📊 Distribution by form

The excerpt provides data comparing three major forms of business organization:

Form	Percentage of businesses	Percentage of sales	Percentage of profits
Sole Proprietorships	72%	4%	15%
Partnerships	10%	15%	27%
Corporations	18%	81%	58%

🔍 What the numbers reveal

• Sole proprietorships are the most common by count but remain small in economic impact.
• Corporations are fewer in number but generate the vast majority of revenues and profits.
• Most start-up businesses select one of these three major ownership forms.
• The excerpt notes that "most sole proprietorships and partnerships remain small," explaining the revenue gap.

🏢 What is a sole proprietorship

🏢 Definition and core features

Sole proprietorship: a business that is established, owned, operated, and often financed by one person.

• The defining characteristic is single-person ownership and control.
• The owner handles all aspects: establishment, operations, and typically financing.
• No partners are involved, and no corporate structure is required.

🎯 Why entrepreneurs choose this form

The excerpt highlights several reasons through the example of an entrepreneur who founded a pearl business:

• Ease of setup: described as "the easiest to set up" among business forms.
• No partners wanted: the entrepreneur "did not want partners," maintaining sole control.
• Low liability concerns: when liability exposure is low, the protection of incorporating is unnecessary.
• Flexibility: sole proprietors have direct control and can easily dissolve the business or sell it at any time.

Example: An entrepreneur starts an online jewelry business as a sole proprietorship because it requires minimal paperwork, allows complete decision-making authority, and can be closed quickly if the venture doesn't succeed.

👤 Real-world application

👤 The pearl business case

The excerpt describes an entrepreneur who:

• Started a pearl business after discovering a pricing opportunity in an Asian market.
• Chose sole proprietorship specifically because it was easiest to establish.
• Grew the business to $20 million in annual sales while maintaining the sole proprietorship structure.
• Operated through multiple websites and eventually added a showroom.

🔄 When to reconsider the form

The excerpt notes an important principle:

• "As a company expands from small to midsize or larger, the form of business structure selected in the beginning may no longer be appropriate."
• The excerpt mentions that business owners need to consider factors like financing needs, employee attraction, taxation, and liability as the business grows.
• The example of a lawyer who worked in different business forms (sole proprietorship, corporation, limited liability partnership) illustrates how needs change over time.

Don't confuse: A sole proprietorship can be successful and generate significant revenue (as shown in the pearl business example), but the structure itself may become limiting as the business scales or as the owner's needs for liability protection, financing, or shared management change.

⚖️ Advantages and trade-offs

✅ Key advantages

Based on the excerpt, sole proprietorships offer:

• Simplicity: easiest form to set up among business organizations.
• Complete control: owner is not "responsible for or to anyone else."
• Flexibility: can "easily dissolve the business" if plans change.
• Direct rewards: "if it does succeed, I know that success is due to my hard work."

🤔 Considerations for choosing

The excerpt suggests entrepreneurs should ask themselves:

• Do you prefer to "go it alone" or share burdens with partners?
• Will you need financing, and how easy will it be to obtain?
• Will you attract employees?
• How will the business be taxed, and who will be liable for debts?
• If sharing ownership, how much control would others want, and what would that cost?

These questions help determine whether a sole proprietorship or another form (partnership, corporation, limited liability company) better suits the business needs.

🧭 Overview

🧠 One-sentence thesis

Partnerships allow business owners to share burdens and challenges with others, distributing both the workload and the risks that come with running a business.

📌 Key points (3–5)

• What partnerships offer: a way to share burdens and challenges rather than going it alone as a sole proprietor.
• Key trade-off: partnerships involve sharing control and decision-making with others, unlike sole proprietorships where one person has direct control.
• Operating considerations: partners need to think about how much operating control others would want and what costs would be associated with sharing ownership.
• Common confusion: don't confuse partnerships with sole proprietorships—sole proprietors prefer direct control and flexibility to act alone, while partnerships distribute responsibility among multiple owners.
• Flexibility over time: as business needs change, the form of organization (sole proprietorship, partnership, corporation, LLC) may need to change too.

🤝 Why choose a partnership

🤝 Sharing burdens and challenges

• The excerpt frames partnerships as an alternative to going it alone.
• Instead of one person bearing all responsibility, partners distribute the workload.
• The question posed is: "do you want others to share your burdens and challenges in a partnership?"
• Example: An entrepreneur who feels overwhelmed by all aspects of running a business might bring in a partner to handle specific areas like finance or operations.

⚖️ Trade-offs in shared ownership

• Sharing ownership means giving up some control.
• Key questions to consider:
  • How much operating control would partners want?
  • What costs would be associated with sharing ownership?
• Don't confuse: partnerships require negotiation and compromise, unlike sole proprietorships where the owner makes all decisions independently.

🔄 Partnerships vs. other business forms

🔄 Comparing organizational structures

The excerpt presents partnerships as one option among several:

Form	Key characteristic	Control
Sole proprietorship	Go it alone	Direct control by one person
Partnership	Share burdens and challenges	Shared among partners
Corporation	Limited liability protection	More structured governance
LLC	Flexibility	Hybrid features

📊 Partnership prevalence

• Partnerships account for 10 percent of all businesses (compared to 72% sole proprietorships and 18% corporations).
• Despite being fewer in number, partnerships generate approximately 15 percent of total business revenues and 27 percent of total profits.
• This suggests partnerships tend to be larger operations than sole proprietorships on average.

🔧 Practical considerations

🔧 Questions before forming a partnership

Before choosing a partnership structure, the excerpt suggests asking:

• Will you need financing? How easy will it be to obtain?
• Will you attract employees?
• How will the business be taxed?
• Who will be liable for the company's debts?
• How much operating control would partners want?
• What costs would be associated with shared ownership?

🔄 Changing forms over time

As a company expands from small to midsize or larger, the form of business structure selected in the beginning may no longer be appropriate.

• Business needs evolve as companies grow.
• The excerpt illustrates this with Jessica MacLean's career: she worked as a sole proprietor, then for a corporation, and later joined a limited liability partnership (LLP) as her needs changed.
• Example: A business might start as a partnership for shared resources, then incorporate later to gain limited liability protection as it grows and faces more risk exposure.
• Don't confuse: the initial choice of business form is not permanent—owners can and should reassess as circumstances change.

🧭 Overview

🧠 One-sentence thesis

The corporate structure provides limited liability protection and other advantages that make it suitable for certain businesses, though it represents a smaller percentage of total businesses while generating the majority of revenues and profits.

📌 Key points (3–5)

• What the data shows: Corporations account for only 18% of all businesses but generate approximately 81% of total business revenues and 58% of total profits.
• Core advantage: The corporate structure provides limited liability protection to owners, shielding them from personal responsibility for company debts.
• Major types exist: There are different types of corporations, each with distinct characteristics (though specific types are not detailed in this excerpt).
• Common confusion: Don't confuse number of businesses with economic impact—sole proprietorships are most numerous (72%) but corporations dominate in revenue generation.
• Why form matters: As a company expands from small to midsize or larger, the initial business structure may no longer be appropriate and may need to change.

📊 Business organization landscape

📊 Distribution across forms

Form	Percentage of Businesses	Sales	Profits
Sole Proprietorships	72%	4%	15%
Partnerships	10%	15%	27%
Corporations	18%	81%	58%

🔍 What the numbers reveal

• Sole proprietorships are the most popular form by count, but corporations generate disproportionately large revenues and profits.
• This means: most businesses start small and simple, but larger economic activity concentrates in the corporate form.
• Example: An organization might begin as a sole proprietorship but later incorporate as it grows and needs more capital or liability protection.

🛡️ Core corporate advantages

🛡️ Limited liability protection

The corporate structure provides limited liability protection.

• This is the defining feature mentioned in the title and excerpt.
• "Limited liability" means owners are not personally liable for the company's debts—their personal assets are protected.
• Why it matters: This protection reduces personal financial risk for owners, making it easier to attract investors and take business risks.
• Don't confuse: Limited liability is a legal shield for owners; it does not mean the corporation itself has no liability.

💼 Suitability for growth

• The excerpt emphasizes that the form of business structure "selected in the beginning may no longer be appropriate" as needs change.
• Corporations are better suited for companies that expand from small to midsize or larger.
• Why: They can raise capital more easily, have formal structures for multiple owners, and provide liability protection that becomes more important as business risks grow.

🤔 Decision factors for choosing corporate form

🤔 Questions to consider before organizing

The excerpt lists key questions entrepreneurs should ask:

• Will you need financing? How easy will it be to obtain?
• Will you attract employees?
• How will the business be taxed?
• Who will be liable for the company's debts?
• If sharing ownership, how much operating control would others want?
• What costs would be associated with shared ownership?

🔄 When to change forms

• The excerpt notes that "most start-up businesses select one of these major ownership forms" but may need to change later.
• As a company expands, the initial structure may become inappropriate.
• Example: Jessica MacLean (from the introduction) changed from sole proprietorship to working for a corporation, then joined a limited liability partnership as her needs evolved.
• This flexibility to change forms is an important consideration when starting a business.

🏢 Corporate types and characteristics

🏢 Major types exist

• The excerpt mentions "the major types of corporations" as one of the learning outcomes.
• However, specific types and their characteristics are not detailed in this excerpt.
• The excerpt promises to cover "how the corporate structure provides advantages and disadvantages to a company" but does not elaborate in the provided text.

⚖️ Advantages and disadvantages framework

The excerpt indicates corporations have both:

• Advantages: Limited liability protection, ability to generate large revenues, suitability for growth
• Disadvantages: Not specified in this excerpt, but the learning outcomes indicate they exist and will be covered

Don't confuse: The excerpt provides data and context but does not fully explain all corporate advantages and disadvantages—this appears to be introductory material for a longer section.

🧭 Overview

🧠 One-sentence thesis

Choosing the right form of business organization—sole proprietorship, partnership, corporation, or limited liability company—depends on factors like control preferences, financing needs, liability concerns, and growth plans, with each structure offering distinct trade-offs in simplicity, taxation, and responsibility.

📌 Key points (3–5)

• Ownership forms differ in popularity vs. revenue: sole proprietorships make up 72% of all businesses but generate only 4% of sales, while corporations represent 18% of businesses yet produce 81% of revenues.
• Key decision factors: entrepreneurs must consider control preferences, financing needs, liability protection, tax treatment, employee attraction, and operating flexibility.
• Form may change with growth: as a company expands from small to midsize or larger, the initial business structure may no longer be appropriate.
• Common confusion: popularity (number of businesses) vs. economic impact (revenue and profits)—sole proprietorships dominate in count but not in financial scale.
• Sole proprietorship basics: the simplest form, owned and operated by one person, easiest to set up, but owner bears all responsibility.

📊 Comparing business organization forms

📊 Distribution by type

The excerpt provides a comparison across three dimensions:

Form	Percentage of businesses	Percentage of sales	Percentage of profits
Sole Proprietorships	72%	4%	15%
Partnerships	10%	15%	27%
Corporations	18%	81%	58%

🔍 What this tells us

• Sole proprietorships are numerous but small: they account for nearly three-quarters of all businesses but contribute only a tiny fraction of total sales.
• Corporations dominate economically: despite being less than one-fifth of all businesses, they generate the vast majority of revenue and more than half of all profits.
• Partnerships fall in between: moderate presence in all three categories.
• Don't confuse: "most common" does not mean "most economically significant"—sole proprietorships are the most popular choice but not the largest revenue generators.

🤔 Key questions before choosing a form

🤔 Control and ownership

• Going it alone vs. sharing: would you prefer to operate independently as a sole proprietorship, or share burdens and challenges in a partnership?
• Operating control: if you share ownership, how much control would others want, and what costs would be associated with that?

💰 Financial and legal considerations

• Financing: will you need external financing, and how easy will it be to obtain?
• Liability: who will be liable for the company's debts? Limited liability protection (corporation or LLC) may make more sense for some businesses.
• Taxation: how will the business be taxed?
• Employees: will you need to attract employees?

🔄 Flexibility and growth

• Flexibility: some forms (like sole proprietorships) offer easy dissolution or sale.
• Growth trajectory: the excerpt emphasizes that as companies expand, the initial form may no longer be appropriate and may need to change.

👤 Sole proprietorships in detail

👤 What is a sole proprietorship

Sole proprietorship: a business that is established, owned, operated, and often financed by one person.

• The simplest and most popular form of business organization.
• One individual has complete control and responsibility.
• Easiest to set up compared to other forms.

✅ Advantages of sole proprietorships

• Ease of setup: minimal formalities and requirements.
• Direct control: the owner makes all decisions without needing to consult partners or a board.
• Flexibility: easy to dissolve the business or close at any time; easy to sell if desired.
• Success attribution: if the business succeeds, the owner knows it is due to their own hard work.
• No shared responsibility: not responsible for or to anyone else.

Example: The excerpt describes a lawyer who chose sole proprietorship because she wanted direct control, the ability to dissolve easily if plans changed, and the satisfaction of knowing success would be her own achievement.

⚠️ When sole proprietorship makes sense

• Low liability exposure: when the business does not carry significant risk of debts or legal claims.
• No need for partners: when the owner prefers to work independently.
• Simple operations: when the business model is straightforward and does not require complex financing or multiple owners.

Example: A pearl business founder chose sole proprietorship because it was easiest to set up, he did not want partners, and low liability exposure made incorporating unnecessary.

🔄 Changing forms over time

• The excerpt illustrates that business owners may switch forms as their needs change.
• Example: A lawyer worked first for a government office, then moved to a corporation, then became a sole proprietor, and later joined a limited liability partnership—each change reflected different personal and professional needs.
• Don't confuse: the best form at startup may not remain the best form as the business grows or as the owner's priorities shift.

🏢 Other forms mentioned

🏢 Partnerships

• Involve sharing burdens and challenges with others.
• Account for 10% of businesses, 15% of sales, and 27% of profits.
• The excerpt mentions limited liability partnership (LLP) as one variant.

🏢 Corporations

• Provide limited liability protection: owners are not personally liable for the company's debts.
• Account for 18% of businesses but 81% of sales and 58% of profits.
• The excerpt notes that corporations may be more complex but offer advantages for larger operations.

🏢 Limited liability companies (LLCs)

• Offer flexibility as a key advantage.
• Combine features of partnerships and corporations.
• The excerpt does not provide detailed advantages/disadvantages but positions LLCs as an alternative worth considering.

📈 Growth and organizational change

📈 Why form may need to change

• Expansion: as a company grows from small to midsize or larger, the initial structure may no longer be appropriate.
• Changing needs: financing requirements, liability concerns, and employee management may evolve.
• Strategic shifts: the excerpt's example shows a professional moving through different organizational forms as career goals and work-life balance priorities changed.

📈 Factors driving change

• Need for additional capital or financing.
• Desire to limit personal liability as business risks increase.
• Complexity of operations requiring more formal governance.
• Tax considerations as revenue and profits grow.

Don't confuse: choosing a form is not a one-time decision—successful businesses often revisit and change their organizational structure as circumstances evolve.

🧭 Overview

🧠 One-sentence thesis

Franchising enables rapid business expansion with limited capital by allowing franchisees to operate proven business concepts under a franchisor's brand, making it one of the fastest-growing segments of the economy.

📌 Key points (3–5)

• What franchising is: a business arrangement where a franchisor provides a proven product/service concept and the franchisee sells it in a specific geographic area.
• Why it grows: franchising offers expansion without major franchisor investment while giving franchisees a recognized brand and proven operating methods.
• Key trade-offs: franchisees gain training, brand recognition, and support but lose operating freedom and pay ongoing fees/royalties.
• Common confusion: franchise rankings vary by criteria—some emphasize owner satisfaction, others focus on costs, brand strength, or financial stability.
• Scale and diversity: franchising provided 8.9 million U.S. jobs with $890 billion economic output; opportunities range from fast food to tech services to senior care.

🏢 Core franchise structure

🏢 The franchise relationship

Franchising: a form of business organization involving a franchisor (the company supplying the product or service concept) and a franchisee (the individual or company selling the goods or services in a certain geographic area).

• The franchisee buys a complete package: proven product/service, operating methods, and management training.
• A franchise agreement is the contract allowing use of the franchisor's business name, trademark, and logo while outlining operating rules and financial terms.

📋 What the franchisee receives

• Use of a proven company name and symbols
• Help finding a site and building plans
• Guidance, training, and management assistance
• Managerial and accounting systems
• Employee training programs
• Wholesale prices for supplies
• Financial assistance and referrals to lenders

💰 What the franchisee provides

• Financing for their own unit
• Adherence to franchisor's operating rules (inventory levels, equipment standards, sales/service levels)
• Participation in franchisor promotions
• Ongoing relationship maintenance
• Fees and/or royalties (usually tied to percentage of sales)

⚖️ Advantages and disadvantages

✅ Key advantages

Advantage	How it works	Who benefits
Expansion ability	Franchisees finance their own units	Franchisor grows without major investment
Brand recognition	Consumers trust known names (Pizza Hut, Hertz, Holiday Inn)	Franchisee's risk reduced, success opportunity increased
Training & support	Structured training programs plus ongoing assistance	Franchisee gets crash course and peer support group
Financial help	National brand linkage aids loan applications	Franchisee gains access to lenders, advice, and sometimes direct credit

• Example: A franchisee opening a recognized brand like McDonald's benefits from existing customer trust rather than building reputation from scratch.
• The franchisor receives ongoing revenues through royalty payments despite giving up some profit share.

❌ Key disadvantages

Disadvantage	Impact	Affected party
Loss of control	Less control over franchisees than company employees	Franchisor
High costs	Expensive facilities, equipment, fees, royalties, advertising charges	Franchisee
Restricted freedom	Must conform to operating rules, facility design, inventory/supply standards	Franchisee

• Don't confuse: The franchisee owns their business but doesn't have full autonomy—they must follow the franchisor's policies or risk losing the franchise.
• Some franchisors restrict territory or require purchasing only from approved suppliers, potentially limiting growth.

📈 Growth patterns and trends

📈 Industry evolution

• Major franchise brands like McDonald's and KFC started in the 1950s.
• 1960s–1970s: expansion into clothing, convenience stores, business services.
• Current growth comes from both established franchises (Subway, Pizza Hut, OrangeTheory Fitness) and new entrants.

🎯 Top franchise categories (2017 data)

The excerpt shows three different ranking systems with varying criteria:

• Entrepreneur: uses costs/fees, brand strength, support, financial strength
• Franchise Business Review: focuses on owner satisfaction
• Franchise Gator: uses formula including financial stability and engagement

Top-ranked franchises include 7-Eleven, McDonald's, Dunkin' Donuts, and various service businesses with initial investments ranging from $36,000 to over $2 million.

🔄 Demographic drivers

• Technology and personal computing: eBay drop-off stores, tech consultants like Geeks on Call
• Specialty coffee market growth
• Children's enrichment and tutoring programs
• Senior care services
• Weight control and fitness franchises

Example: Mosquito Joe (mosquito control treatment services) ranked as the top new franchise in 2017 on multiple lists, showing how niche services can become successful franchise opportunities.

🌍 International expansion

🌍 Global franchise challenges

• Franchising is part of the global marketplace economy
• Popular international categories: restaurants, hotels, business services, educational products, car rentals, nonfood retail

🚧 Obstacles franchisors face abroad

• Tracking markets and currency changes
• Understanding local culture and language differences
• Navigating the political environment
• Aligning business operations with geographically distant franchisees

🥪 Case insight: Subway in China

The excerpt details challenges faced when opening Subway franchises in Beijing:

• Construction delays and cost overruns
• Cultural barriers: customers didn't know how to order, didn't like touching food
• Menu preferences: Chinese consumers initially didn't want sandwiches
• Required joint ventures with local partners
• Eventually grew to nearly 600 stores as tastes adapted (e.g., tuna salad became top seller)

Lesson: International franchising requires patience, cultural adaptation, and long-term commitment—consumer preferences may take time to shift.

🎯 Evaluating franchise opportunities

🎯 Self-assessment questions

Before becoming a franchisee, ask:

• Are you excited about a specific franchise concept?
• Are you willing to work hard and put in long hours?
• Do you have necessary financial resources?
• Do you have prior business experience?
• Do your expectations and personal goals match the franchisor's?

✨ Desired franchisee qualities

• Passion about the franchise concept
• Desire to be your own boss
• Willingness to make substantial time commitment
• Assertiveness, optimism, patience, integrity
• Prior business experience (especially in the franchise's field)

📚 Due diligence steps

Step	Purpose
Take personality test	Assess strengths, weaknesses, and fit
Research thoroughly	Study franchise company, services, location, and industry field
Seek professional help	Consult tax advisors and contract specialists
Focus on financials	Count your money, limit liability, look beyond initial costs
Review disclosure document	Use Uniform Franchise Offering Circular (UFOC) required by FTC
Interview franchisees	Talk to current and past franchisees
Check industry publications	Read Entrepreneur, Inc., Startups, Success for trends

• The Uniform Franchise Offering Circular (UFOC) provides franchisor history, operating style, management, litigation, financial obligations, and restrictions.
• Don't skip: Interviewing current and past franchisees is essential—they provide real-world insight beyond official documents.

🛠️ Preparation tips

• Interview advisers to find the right fit
• Select an attorney with franchise experience
• Establish banking relationships early
• Connect with commercial real estate brokers for retail franchises
• Take computer classes if not computer literate (most franchise systems use computers)

🧭 Overview

🧠 One-sentence thesis

Mergers and acquisitions enable companies to achieve strategic goals such as cost savings, market expansion, and competitive advantage, but success depends on paying reasonable prices, understanding the target, and managing integration challenges.

📌 Key points (3–5)

• What mergers and acquisitions are: a merger combines two or more firms into one new company; an acquisition is when one company purchases another (target company).
• Three main merger types: horizontal (same stage, same industry), vertical (different stage, same industry), and conglomerate (unrelated businesses).
• Why companies merge: strategic motives include cost savings, market share growth, technology acquisition, and faster market entry; financial motives include restructuring to unlock hidden value.
• Common confusion: bigger deals are not always better—many mega-mergers fail because buyers overpay, underestimate integration costs, or misjudge cultural fit.
• What predicts merger success: low purchase premiums, smaller targets in familiar businesses, cash payments, and evidence of both business and financial logic.

🔀 Types of Mergers

🔀 Horizontal merger

Horizontal merger: companies at the same stage in the same industry merge to reduce costs, expand product offerings, or reduce competition.

• Both companies operate at the same level of the production or sales process.
• Goal: achieve economies of scale, broaden what the combined company can offer, or eliminate a competitor.
• Example: UPS acquired trucking company Overnite for $1.25 billion to expand its heavy freight–delivery business—both are in shipping/logistics at the same stage.

🔗 Vertical merger

Vertical merger: a company buys a firm in its same industry, often involved in an earlier or later stage of the production or sales process.

• The acquirer moves up or down the supply chain (e.g., buying a supplier, distributor, or customer).
• Goal: gain more control over the production or sales process.
• Example: Google acquired Urchin Software Corp. (web analytics) to strengthen the software tools it provides to advertisers—Google moved into an earlier stage (analytics) to support its core advertising business.

🌐 Conglomerate merger

Conglomerate merger: brings together companies in unrelated businesses to reduce risk.

• The firms operate in different industries with no direct production or sales relationship.
• Goal: diversify to stabilize sales across different seasonal patterns or business cycles.
• Example: Philip Morris (now Altria Group) started in tobacco, then acquired Miller Brewing, General Foods, Kraft, and Nabisco—unrelated businesses that respond differently to economic cycles.

💰 Leveraged buyout (LBO)

Leveraged buyout (LBO): a specialized, financially motivated type of merger—a corporate takeover financed by large amounts of borrowed money (as much as 90 percent of the purchase price).

• Can be initiated by outside investors or the company's own management.
• Rationale: belief that the company is worth more than its current stock value; buyers take it private, improve cash flow, or sell off units to pay debt.
• Example: Apollo Global Management LLC agreed to buy ADT Corp. in the largest LBO of 2016.
• Don't confuse with strategic mergers: LBOs are primarily financial plays, not about operational synergies; many fail to generate enough cash to cover debt.

🎯 Why Companies Merge

🎯 Strategic motives

• Cost savings and efficiency: eliminate overlapping operations, improve purchasing power.
• Market power: increase market share or reduce competition.
  • Example: Oracle paid $5.85 billion for Siebel Systems, its largest competitor in sales automation.
• Growth and expansion: broaden product lines, acquire technology or management skills, enter new markets quickly.
  • Example: Yahoo invested $1 billion for a 40 percent stake in Alibaba.com to strengthen ties to China's e-commerce market.
• Faster, less risky entry: purchasing a company can be quicker and cheaper than developing products or markets in-house.
  • Example: Amazon's $13.7 billion purchase of Whole Foods gave it instant entry into retail grocery, plus new consumer data and physical stores to sell Amazon tech products.

💼 Financial restructuring motives

• Unlock hidden value: acquirers believe the target is undervalued and can be made more valuable through restructuring.
• Actions taken: cut costs, sell off units, lay off employees, refinance debt.
• Example: Brookfield Business Partners plans to acquire bankrupt Westinghouse Electric for $4.6 billion; Brookfield has a history of turning around distressed businesses.
• Don't confuse with strategic mergers: financially motivated mergers focus on restructuring, not on achieving economies of scale.

⚠️ Merger Challenges and Success Factors

⚠️ Why many mergers fail

The excerpt warns that "bigger does not always mean better":

• Overpaying: buyers often pay a premium that wipes out the entire potential economic gain.
• Illusory synergies: managers envision grand synergies that prove unworkable or don't materialize.
• Misunderstanding the target: buyers don't fully understand what they are getting.
• Integration nightmares: companies underestimate the costs and difficulty of consolidating operations, especially when cultures differ.
• Losing key assets: failure to keep key employees, maintain sales force effectiveness, or retain customers.

✅ What predicts merger success

The excerpt lists four evidence-based criteria:

Factor	What to look for	Why it matters
Purchase price	Low premium (e.g., 10% over market, not 50%)	Buyer doesn't need heroic synergies to justify the deal
Target size and familiarity	Target significantly smaller than buyer, in a business the buyer understands	"Transformational" deals (entering new arenas) carry bigger risk
Payment method	Cash, not overinflated stock	Signals financial discipline and realistic valuation
Business logic	Evidence the deal makes both business and financial sense	Not purely the brainchild of an empire-building CEO

• Key insight: "The most important quality a company can bring to a merger may be humility."
• Mergers are tough—culturally, commercially, and logistically—so realistic expectations and careful planning are essential.

📈 Merger Activity Trends

📈 Historical patterns

• Late 1990s boom: merger activity soared with the technology boom; total annual transactions averaged $1.6 trillion, fueled by unrealistically high stock prices.
• 2000–2001 bust: activity dropped when the tech bubble burst and after the September 11, 2001 attacks; corporate wrongdoing further depressed stocks and merger transactions.
• 2016 resurgence: global M&A reached $3.84 trillion, driven by a solid economy, low interest rates, good credit, rising stock prices, and cash stockpiles.

📈 Current outlook

• Merger activity tracks stock market movements and economic conditions.
• First quarter 2017: mixed results—deal volume fell 17.9% versus 2016, but total deal value was $678.5 billion (fewer deals, but higher average value).
• Pending mega-deals: AT&T and Time Warner have an $85.4 billion merger pending; AT&T's CEO cited the opportunity to build an automated advertising platform for premium video and TV.
• The excerpt notes that the fundamental business case for merging must be strong; companies will continue seeking acquisition candidates, but with more scrutiny.

🧭 Overview

🧠 One-sentence thesis

Demographic shifts—especially the aging baby boomer generation and the entrepreneurial millennial generation—are driving franchise growth in fitness, eldercare, and food services, while global merger activity and foreign investment continue to reshape business ownership structures.

📌 Key points (3–5)

• Baby boomers drive franchise growth: The aging boomer generation (78 million turning 65 through 2030) fuels demand for fitness, weight-loss, and eldercare franchises.
• Millennials reshape entrepreneurship: The largest living U.S. generation seeks flexible, customizable business ownership, making franchising attractive to young entrepreneurs who want autonomy but lack startup know-how.
• Boomers redefine retirement: Many boomers (51% plan to work during retirement; 82% won't retire by 65) are starting small businesses rather than fully retiring.
• Merger and foreign investment boom: North American deals reached $2 trillion in 2016; worldwide transactions exceeded 48,000, with foreign direct investment in the U.S. hitting $373.4 billion.
• Common confusion: Don't assume all franchise growth is driven by one demographic—boomers and millennials target different sectors (eldercare vs. food/lifestyle) for different reasons (staying active vs. flexible ownership).

👴 Baby boomer demographic trends

👴 The graying of America

• "Graying of America" refers to the baby boomer generation (born post-WWII) heading toward retirement age.
• In 2006, the first of 78 million boomers turned 60; every day 10,000 boomers turn 65, a trend expected to continue until 2030.
• Boomers have transformed every life stage they've touched, and their demographic weight creates business opportunities wherever they go.

💪 Fitness and weight-loss franchises

• Boomers' interest in staying fit and healthy drives growth in fitness and weight-loss franchises.
• In just one year, the fitness category in Entrepreneur's Franchise 500 grew to over 50 franchisors.
• According to IHRSA, 52.9 million Americans belong to a health club—up from 39.4 million 10 years ago.
• Example: A boomer-focused fitness franchise benefits from this large, health-conscious consumer base.

🏠 Eldercare franchise boom

• The aging population creates demand for eldercare services, particularly home-based care.
• Home Instead Senior Care: Founded in 1994, recognized as one of the world's fastest-growing franchise companies in eldercare, with over 1,000 independently owned franchises in 12 countries.
• Services include meal preparation, companionship, light housekeeping, medication reminders, incidental transportation, and errands.
• Cost comparison:
  • Nursing home: $72,000–$92,000/year
  • Home care: $45,000–$60,000/year
• These services allow the elderly to remain in their own homes longer, enhancing quality of life.

🎨 Adult day services

• Adult day services are one of the fastest-growing franchises and "still one of the best-kept secrets around" according to Entrepreneur magazine.
• Based on the concept of day care for children, SarahCare offers a franchising opportunity that meets two criteria: a booming demographic market with growth potential and excellent eldercare.
• Cost: Around $17,900/year—highly affordable compared to nursing homes or full-time home care.
• The franchise allows entrepreneurs to enter an expanding industry while restoring dignity and vibrancy to older adults' lives.

🧑‍💼 Millennial entrepreneurship trends

🧑‍💼 Millennial demographics and preferences

• Millennials: Individuals born between 1980 and 2000, the largest living generation in the United States (Pew Research).
• Millennials spend more money in restaurants per capita than any previous generation.
• They seek brands offering customized food choices, quality ingredients, freshness, authenticity, transparency, and environmental/social responsibility.

🚀 Millennial interest in entrepreneurship

• According to the U.S. Chamber of Commerce Foundation, two out of three millennials are interested in entrepreneurship.
• Forbes reports:
  • 72% want to be their own boss
  • 74% want flexible work schedules
  • 88% want "work–life integration"
• Growth potential and a flexible, fulfilling lifestyle attract millennials to franchise ownership.

🎓 Franchising solves startup challenges

• A CT Corporation survey found that among college graduates wanting to start a business:
  • 67% lacked the know-how
  • 45% didn't think they could come up with a name
  • 30% were not knowledgeable about marketing
• Franchising provides a solution by offering a proven business model, brand recognition, and operational support.
• Example: Sal Rehman, a millennial from the Chicago area, grew up working in his family's diner. At age 27 in 2015, he opened his first Wing Zone franchise in Glendale Heights, Illinois, and now owns five Wing Zones.

🔄 Boomers and retirement trends

🔄 Working longer and second careers

• Many boomers are working longer at their jobs and embracing post-retirement second careers, often starting their own small businesses.
• Example: Bob Drucker, age 64, founded and runs RxUSA, an online pharmacy in Port Washington, New York. He says, "I love my work, and I cannot imagine sitting home and doing nothing."

📊 Retirement survey findings

• The annual retirement survey by Transamerica Center for Retirement Studies found:
  • 51% of boomers plan to work in some capacity during their retirement years
  • 82% indicated they will not retire at or before age 65
• As boomers remain healthy and energetic, they stay active and engaged, postponing or avoiding full retirement.

🏢 Choosing business structures

• Retirees starting businesses choose different forms of organization depending on their needs and goals:
  • Some start small consulting businesses using sole proprietorship
  • Couples or friends might choose partnerships in retail or franchise ventures
• Don't confuse: The choice of business structure depends on individual circumstances, not just age or industry.

🌍 Mergers and foreign investment trends

🌍 North American merger boom

• After shunning big deals for more than three years, corporate America launched a new merger wave.
• In 2016, North American companies announced deals totaling almost $2.0 trillion.
• Many were large deals; the largest in 2016 was AT&T's merger with Time Warner for over $85 billion.

🌐 Worldwide merger activity

• Foreign merger activity reached a new high:
  • 2015: 44,000 transactions totaling $4.5 trillion
  • 2016: Over 48,000 transactions, one of the most active periods to date
• Non-U.S. companies accounted for about two-thirds of transactions.
• European companies' cross-border transactions led the way, with deals totaling more than one trillion dollars.
• The increase results from improving economic growth and better stock prices.

🔍 New characteristics of current merger boom

• This merger boom feels different from earlier merger mania:
  • New players are entering the arena
  • The number of U.S. and foreign companies making cross-border acquisitions has increased
• Whether these mergers will benefit the global economy remains to be seen.
• Positive effects: Transactions leading to cost savings, streamlined operations, and more funding for research and capital investment in new facilities.
• Risk: Many deals may fail to live up to acquirers' expectations.

💵 Foreign investment in the U.S.

• Annual foreign direct investment in U.S. companies reached $373.4 billion in 2016.
• The jump results from:
  • A worldwide boom in mergers and acquisitions
  • The need to finance America's growing trade deficit
  • The continued attraction of the U.S. economy to investors worldwide

🌏 U.S. investment abroad

• American investment in foreign economies is skyrocketing as U.S. businesses seek opportunities in developing countries.
• According to Congressional Research Service Reports, outflows from the U.S. into foreign countries now exceed $6.4 trillion a year.
• Attractions: Cheap labor, resources, and intellectual capital of developing economies such as China and India.
• U.S. companies of all sizes outsource functions like payroll, information technology (IT), web/email hosting, customer relationship management (CRM), and human resources (HR) to keep costs under control and enhance profitability.

📋 Summary table: Demographic trends and business impacts

Demographic group	Key characteristics	Business opportunities	Example
Baby boomers	78 million; turning 65 through 2030; health-conscious	Fitness, weight-loss, eldercare franchises	Home Instead Senior Care, SarahCare
Millennials	Largest living generation; entrepreneurial; value flexibility	Food/restaurant franchises; customizable, socially responsible brands	Wing Zone (Sal Rehman)
Retiring boomers	51% plan to work during retirement; 82% won't retire by 65	Small business startups, consulting, partnerships	RxUSA (Bob Drucker)

🧭 Overview

🧠 One-sentence thesis

Entrepreneurship remains a strong foundation of the U.S. business system because today's global economy rewards innovative, flexible companies that can respond quickly to changes, and entrepreneurs—distinct from small-business owners—are visionaries who take risks to create new businesses or transform existing ones.

📌 Key points (3–5)

• Why entrepreneurship thrives: The global economy rewards innovation and flexibility, which entrepreneurs provide through vision, drive, creativity, and willingness to take risks.
• Who becomes entrepreneurs: The desire to be one's own boss cuts across all age, gender, and ethnic lines; minority groups and women are starting businesses at rates higher than the national average.
• Common confusion—entrepreneur vs. small-business owner: Entrepreneurs are innovators who take risks to create or greatly change businesses and spot trends; small-business owners are managers who start or buy a business and consciously stay small.
• Types of entrepreneurs: Classic entrepreneurs (risk-takers with innovative ideas), micropreneurs (start small and plan to stay small for lifestyle), multipreneurs, and intrapreneurs.
• Small business dominance: Most U.S. businesses are small—99.6% have 0–99 employees, and they pay more than 41% of America's payroll.

🚀 Why entrepreneurship continues to thrive

🌍 The global economy rewards innovation

• Today's global economy favors companies that are innovative and flexible.
• These companies can respond quickly to changes in the business environment.
• Entrepreneurs are the ones who start such companies—they bring vision, drive, and creativity.
• Example: The Aguerre brothers (Fernando and Santiago) started with a surfboard repair service as teenagers, then opened Argentina's first surf shop, and eventually created Reef sandals, which became the world's hottest beach footwear and sold for over $100 million.

💡 Entrepreneurial spirit is widespread

• Two-thirds of college students intend to be entrepreneurs at some point in their careers.
• The desire to be one's own boss cuts across all age, gender, and ethnic lines.
• Minority groups and women are becoming business owners at a much higher rate than the national average.

📊 Minority and women entrepreneurship growth

Group	Growth/Statistics
Hispanic-owned businesses	Almost tripled between 1997 (1.2 million) and 2012 (3.3 million)
African American-owned businesses	Percentage with 1–50 employees increased by 50% between 1996 and 2015
Minority-owned firms with employees	Almost a million total: 53% Asian American, 11% African American, nearly a third Hispanic
Women-owned companies	19% of all companies with employees

🔍 Entrepreneur vs. small-business owner

🎯 Key distinction

Entrepreneur: A person with vision, drive, and creativity who is willing to take the risk of starting and managing a business to make a profit; typically innovators who create new businesses or greatly change existing ones.

Small-business owner: A manager or person with technical expertise who started a business or bought an existing business and made a conscious decision to stay small.

• Don't confuse: The term "entrepreneur" is often used broadly to include most small-business owners, but there is a real difference.
• Entrepreneurs and small-business owners share some characteristics and reasons for starting businesses, but their approaches differ.

🆚 How they differ in practice

Aspect	Entrepreneur	Small-Business Owner
Risk approach	Takes risks to create or greatly change businesses	Manages or applies technical expertise; stays small by choice
Innovation	Innovators who pursue new products/services	May not focus on innovation
Vision	Visionaries who spot trends	Accepts the status quo more readily
Time horizon	Generally takes a longer-term view	More focused on current operations
Example	Jeff Bezos (Amazon.com)—developed web-based book retailing that revolutionized the industry	Local independent bookstore proprietor

• Example contrast: Both Jeff Bezos and a local bookstore owner sell books, but Bezos is an entrepreneur because he developed a new model that revolutionized bookselling and then retailing in general.

🏢 The dominance of small business in the U.S.

📈 Most U.S. businesses are small

• 80% (approximately 23.8 million) of nearly 29.7 million businesses have no employees (run by individuals or small groups of partners).
• 89% (approximately 5.2 million) of the nearly 5.8 million businesses with employees have fewer than 20 employees.
• 99.6% (approximately 5.7 million) of all businesses have 0–99 employees; 98% have 0–20 workers.
• Only about 19,000 businesses in the United States have more than 500 employees.

💼 Small businesses' economic impact

• Companies with fewer than 50 employees pay more than 20% of America's payroll.
• Companies with fewer than 500 employees pay more than 41% of America's payroll.
• 32.5 million people (1 employee in 4) work for businesses with fewer than 50 employees.
• These businesses also pay tens of millions of owners, not included in employment statistics.

🎨 Types of entrepreneurs

🌟 Classic entrepreneurs

Classic entrepreneurs: Risk-takers who start their own companies based on innovative ideas.

• They develop new products, services, or business models.
• Example: The Aguerre brothers created Reef sandals from an innovative idea (comfortable beach sandals) and built it into a dominant brand.

🏡 Micropreneurs

Micropreneurs: Entrepreneurs who start small and plan to stay small.

• They often start businesses just for personal satisfaction and the lifestyle.
• They are a subset of classic entrepreneurs but with different growth intentions.
• Example: Miho Inagi, a young office assistant in Japan, quit her job to pursue her dream of opening a bagel shop in Tokyo after falling in love with New York bagels—despite bagels being virtually unknown in Japan and her parents trying to talk her out of it.
• Don't confuse with small-business owners who stay small by default; micropreneurs intentionally choose to stay small for lifestyle reasons.

🔄 Other types mentioned

• The excerpt mentions multipreneurs and intrapreneurs as additional categories but does not provide definitions or details.

✅ Questions before starting

🤔 Self-assessment for would-be entrepreneurs

The excerpt provides 12 questions entrepreneurs should ask themselves before starting:

Product/Service viability:

• What is new and novel about your idea? Are you solving a problem or unmet need?
• Are there similar products/services? If so, what makes yours better?
• How might this product evolve over time? Can it expand into a product line or be updated in future versions?

Market understanding:

• Who is your target market? How many people would use your product or service?
• Have you talked with potential customers to get their feedback? Would they buy it?
• Where would someone buy this product/service?

Financial considerations:

• What about production costs? How much do you think the market will pay?
• What are the costs to sell and market it?

Strategic factors:

• How defensible is the concept? Is there good intellectual property?
• Is this innovation strategic to my business?
• Is the innovation easy to communicate?
• What are the challenges involved in developing this product/service?

🎯 Purpose of these questions

• These questions help would-be entrepreneurs assess whether their idea is viable before investing money, energy, and time.
• They cover product differentiation, market demand, financial feasibility, and strategic positioning.

🧭 Overview

🧠 One-sentence thesis

Successful entrepreneurs share a distinct set of personality traits—including ambition, independence, vision, and passion—combined with managerial and technical skills that enable them to build and sustain their companies.

📌 Key points (3–5)

• Core personality traits: Entrepreneurs are ambitious, independent, self-confident, creative, energetic, passionate, and committed risk-takers with vision.
• Beyond personality: Technical knowledge and managerial ability are essential to organize a company, develop strategies, obtain financing, and supervise operations.
• Work commitment: Entrepreneurs work longer hours, take fewer vacations, and cannot leave problems at the office—they are the company.
• Common confusion: Having entrepreneurial traits alone is insufficient; business skills (interpersonal, communication, technical) must be learned or delegated.
• Learning and delegation: Entrepreneurs often focus on their strengths and hire others to handle areas where they lack expertise.

🎯 The Entrepreneurial Personality

🏆 Ambitious and competitive

• Entrepreneurs have a high need for achievement.
• They are driven by the challenge of building a business and watching it grow.
• Example: CEOs of Inc. 500 companies cite "the challenge of building a business" as the most common reason for starting their companies.

🦅 Independent and self-confident

• Independent: Entrepreneurs are individualists and self-starters who prefer to lead rather than follow.
• Self-confident: They understand the challenges of starting and operating a business and are decisive and confident in their ability to solve problems.
• They want to control their own destiny rather than work for someone else.

🎲 Risk-takers (but calculated)

• Entrepreneurs are not averse to risk, but they favor moderate-degree risk where they can better control outcomes.
• They avoid highly risky ventures where luck plays a large role.
• Don't confuse: Risk-taking doesn't mean recklessness; successful entrepreneurs manage and control risk.

🔮 Visionary and creative

• Visionary: Their ability to spot trends and act on them sets entrepreneurs apart from small-business owners and managers.
• Creative: To compete with larger firms, entrepreneurs need creative product designs, bold marketing strategies, and innovative solutions to managerial problems.
• Example: Jeff Bezos recognized that Internet technology could compete with traditional book retailers and built Amazon with a vision to become "Earth's most customer-centric company."

⚡ Energetic, passionate, and committed

• Energetic: Starting and operating a business takes long hours; some entrepreneurs start companies while still employed full-time elsewhere.
• Passionate: Entrepreneurs love their work.
  • Example: Miho Inagi opened a bagel shop in Tokyo despite the odds against success, driven by her passion for bagels.
• Committed: Entrepreneurs are willing to make personal sacrifices to achieve their goals because they are so committed to their companies.

🌟 Real-world examples of entrepreneurial traits

The excerpt provides several illustrations:

• Sarah Levy (23): Left her restaurant pastry chef job due to low pay and high stress; launched Sarah's Pastries and Candies from her parents' home.
• Conor McDonough: Cornell graduate who started his own web design firm (OffThePathMedia.com) after becoming disillusioned with the rigid structure of his job, seeking more room for personal expression.
• Ana Sanchez: Graphic artist who freelances because "it forces me to do my best work because I know my next job depends on my performance."

🛠️ Managerial Ability and Technical Knowledge

🧰 Why personality traits alone are not enough

A person with all the characteristics of an entrepreneur might still lack the necessary business skills to run a successful company.

• Entrepreneurs need technical knowledge to carry out their ideas.
• They also need managerial ability to:
  • Organize a company
  • Develop operating strategies
  • Obtain financing
  • Supervise day-to-day activities

🗣️ Interpersonal and communication skills

• Good interpersonal and communication skills are important in dealing with:
  • Employees
  • Customers
  • Business associates (bankers, accountants, attorneys)
• Entrepreneurs believe they can learn these much-needed skills.

📚 Learning through experience

Example: Jim Steiner and Quality Imaging Products

• Initial investment: $400 total
  • $200 on a consultant to teach him the business
  • $200 on materials to rebuild his first printer cartridges
• Daily routine for 18 months:
  • 8:00 a.m.–noon: sales calls
  • Noon–5:00 p.m.: deliveries to customers
  • After quick dinner: worked in garage filling copier cartridges until midnight
  • Sometimes collapsed into bed covered with carbon soot
• This intensive learning period taught him the technical and operational skills needed.

🤝 The importance of delegation

• Entrepreneurs usually learn that they can't do it all themselves.
• They often choose to focus on what they do best and hire others to do the rest.
• Example: Jim Crane, who built Eagle Global Logistics from a start-up into a $250 million company, told his team: "I have never run a $250 million company before so you guys are going to have to start running this business."
• Don't confuse: Working on the business (strategy, vision) vs. working in the business (day-to-day tasks)—successful entrepreneurs learn to delegate the latter.

💼 The Reality of Entrepreneurial Life

⏰ Time and lifestyle demands

• Entrepreneurs tend to work longer hours than traditional employees.
• They take fewer vacations.
• They cannot leave problems at the office at the end of the day.
• They are the company—the business is inseparable from their personal life.

🎯 Motivation and satisfaction

Common reasons for becoming an entrepreneur (from Inc. 500 CEOs):

1. The challenge of building a business
2. Desire to control their own destiny
3. Financial independence
4. Frustration of working for someone else
5. Personal satisfaction with their work
6. Creating the lifestyle they want

✅ Would they do it again?

• The answer is a resounding yes.
• Most entrepreneurs say they would do it again, despite the challenges and sacrifices.

🧭 Overview

🧠 One-sentence thesis

Small businesses play a critical role in the U.S. economy by representing about half of economic output, employing about half the private sector workforce, and providing opportunities for individuals from all walks of life to succeed.

📌 Key points (3–5)

• Economic impact: Small businesses represent approximately half of U.S. economic output and employ about half the private sector workforce.
• Definition complexity: Small businesses are defined in many ways (by number of employees, revenue, length of operation, etc.), with estimates ranging from 5 million to over 22 million businesses depending on the criteria used.
• Recent growth trends: Start-up activity has risen sharply since 2013, with business survival rates reaching a three-decade high of 48.7% by 2016—nearly half of new businesses now make it to their fifth year.
• Common confusion: Different organizations use different size standards and criteria, making it difficult to get consistent statistics; collaborative efforts are now underway to combine data sources for a clearer picture.
• Measurement shift: The Kauffman Index focuses on entrepreneurial outputs (actual results like new companies and growth rates) rather than just inputs, providing a more accurate picture of entrepreneurial activity.

📊 Defining and measuring small business

📏 What counts as a small business

Small businesses are defined in many ways, with statistics varying based on criteria such as new/start-up businesses, number of employees, total revenue, length of time in business, nonemployees, businesses with employees, and geographic location.

• The Small Business Administration (SBA) uses size standards based on types of economic activity or industry, generally matched to the North American Industry Classification System (NAICS).
• Estimates of the total number of small businesses range from 5 million to over 22 million depending on the definition used.
• Don't confuse: A business might be "small" by one measure (e.g., fewer than 50 employees) but not by another (e.g., revenue over $1 million).

📐 Size distribution of established businesses

Established small businesses are defined as companies that have been in business at least five years and employ at least one, but less than 50, employees.

Number of Employees	Percentage of Businesses
1–4 employees	53.07%
5–9 employees	23.23%
10–19 employees	14.36%
20–49 employees	9.33%

• More than half of small businesses have between one and four employees.
• Small businesses can be found in almost every industry: services, retail, construction, wholesale, manufacturing, finance and insurance, agriculture and mining, transportation, and warehousing.

📈 Recent trends and growth indicators

🚀 Start-up activity resurgence

• Start-up activity rose sharply from an all-time low of minus 0.87% in 2013 to positive 0.48% in 2016.
• Between 1996 and 2011, business ownership rates dropped for both men and women, but ownership has increased every year since 2014.
• The Kauffman Index of Startup Activity rose again slightly in 2016 following sharp increases two years in a row.

💪 Opportunity-driven entrepreneurship

• In 2016, 86.3% of new entrepreneurs started businesses to pursue opportunity rather than from necessity.
• This represents more than 12 percentage points higher than in 2009 at the height of the Great Recession.
• Example: An entrepreneur who sees a market gap and starts a business to fill it (opportunity) versus someone who starts a business because they lost their job (necessity).

🏆 Improved survival rates

• For the first time, Main Street entrepreneurship activity was higher in 2016 than before the onset of the Great Recession.
• Business survival rates reached a three-decade high of 48.7%—nearly half of new businesses are making it to their fifth year of operation.
• 47% of U.S. businesses have been in business for 11 or more years.
• Why this matters: Higher survival rates indicate a healthier entrepreneurial ecosystem and better support for new businesses.

💰 Revenue distribution

• In 2016, about 25% of all employing firms had revenues over $1 million.
• However, 2% had revenues under $10,000.
• This wide range shows the diversity of small business scale and success levels.

🔬 The Kauffman Foundation's measurement approach

🏛️ About the Kauffman Foundation

• The Ewing Marion Kauffman Foundation is among the largest private foundations in the country, with an asset base of approximately $2 billion.
• Focuses on projects that encourage entrepreneurship and support education through grants and research activities.
• Distributed over $17 million in grants in 2013.

📊 Kauffman Index series structure

The foundation supports new business creation through two research programs:

1. Kauffman Index of Entrepreneurship series: Measures and interprets indicators of U.S. entrepreneurial activity at national, state, and metropolitan levels.
2. Annual Survey of Entrepreneurs (ASE): A public–private partnership between the foundation, U.S. Census Bureau, and Minority Business Development Agency providing annual data on employer businesses and their owners by gender, ethnicity, race, and veteran status.

🎯 Three specialized indexes

🌱 Kauffman Index of Startup Activity

• An early indicator of new entrepreneurship in the United States.
• Focuses on new business creation activity and people engaging in business start-up activity.
• Three components: rate of new entrepreneurs, opportunity share of new entrepreneurs, and start-up density.

🏪 Kauffman Index of Main Street Entrepreneurship

• Measures established small-business activity—businesses more than five years old with less than 50 employees from 1997 to 2016.
• Established in 2015.
• Three components: rate of business owners in the economy, five-year survival rate of businesses, and established small-business density.

📈 Kauffman Growth Entrepreneurship Index

• A composite measure of entrepreneurial business growth in the United States.
• Captures growth entrepreneurship in all industries and measures business growth from both revenue and job perspectives.
• Established in 2016.
• Three components: rate of start-up growth, share of scale-ups, and high-growth company density.

🔍 What makes Kauffman unique

• The indexes don't focus on only inputs (as most small-business reporting has been done in the past).
• Reports primarily on entrepreneurial outputs—the actual results of entrepreneurial activity, such as new companies, business density, and growth rates.
• Includes comprehensive, interactive data visualizations enabling users to analyze data nationally, at the state level, and for the 40 largest metropolitan areas.
• Data sources include Current Population Survey (CPS) with sample sizes of more than 900,000 observations and Business Dynamics Statistics (BDS) covering approximately 5 million businesses.

🚀 Getting started with your own business

✅ First steps checklist

Before starting your own small business, consider:

• Identify your reasons
• Self-analysis
• Personal skills and experience
• Finding a niche
• Conduct market research
• Plan your start-up: write a business plan
• Finances: how to fund your business

💡 Where ideas come from

• About 80% of Inc. 500 executives got the idea for their company while working in the same or a related industry.
• Why this matters: Starting a firm in a field where you have experience improves your chances of success.
• Other sources: personal experiences as a consumer, hobbies and personal interests, suggestions from customers/family/friends, industry conferences, and college courses or other education.

📚 Staying informed

• Read entrepreneurship and small-business magazines and visit their websites.
• These resources provide articles on everything from idea generation to selling a business.
• They profile young entrepreneurs and their successful business ventures.
• Example: Learning about how other entrepreneurs solved problems similar to yours can provide practical insights.

🎯 Three main paths to business ownership

About 75% of business start-ups involve brand-new organizations, with the remaining 25% representing purchased companies or franchises:

1. Start from scratch (brand-new organization)
2. Buy an existing business
3. Buy a franchise

🧭 Overview

🧠 One-sentence thesis

Starting a small business requires careful self-assessment, thorough planning through a comprehensive business plan, and securing appropriate financing, while understanding that success demands ongoing adaptation and carries significant risks.

📌 Key points (3–5)

• Getting started: Self-assessment and idea generation are the first critical steps; most entrepreneurs (80%) get ideas from working in the same or related industry.
• Business plan is essential: A comprehensive written business plan forces objective analysis, helps secure financing, and serves as an ongoing operating guide—not just a one-time document.
• Financing options: Start-ups typically use personal funds, family/friends (94% of owners), angel investors for seed capital, or venture capitalists for later-stage growth funding.
• Common confusion: Business plans vs. ongoing management—many entrepreneurs mistakenly treat the plan as only for raising money, when it should be a dynamic document reviewed regularly.
• High failure risk: Nearly 50% of small businesses fail within five years due to economic factors, inadequate capital, poor management, or lack of experience.

🚀 Getting started with your business

🔍 Self-assessment and preparation

Before launching, entrepreneurs must complete a thorough self-assessment checklist:

• Identify your reasons for starting a business
• Analyze your personal skills and experience
• Determine if you have the traits needed to succeed
• Decide what type of business suits you best

The excerpt emphasizes that this initial step determines "whether you have the personal traits you need to succeed and, if so, what type of business would be best for you."

💡 Finding business ideas

Where ideas come from:

• Industry experience (80% of Inc. 500 executives): Working in the same or related field improves success chances
• Personal experiences: As a consumer, through hobbies and interests
• External input: Customer suggestions, family and friends, industry conferences
• Education: College courses or other learning

How to identify opportunities:

• Look for problems that need solving
• Find products that don't work well and could be improved
• Ask questions about how things are done
• See opportunity in adversity

Example: Someone notices a gap in the market through their own frustration as a consumer, then develops a solution based on that unmet need.

📊 Choosing your business structure

Key decision: Select from sole proprietorship, partnership, corporation, or limited liability company.

Factors to consider:

Factor	Why it matters
Type of business	Different structures suit different operations
Number of employees	Affects management complexity
Capital requirements	Determines financing needs and options
Tax considerations	Different structures have different tax implications
Level of risk	Liability protection varies by structure

📝 Developing your business plan

🎯 Why a business plan matters

A comprehensive business plan is "one of the most important steps in starting a business."

Key benefits:

• Attracts appropriate loan financing
• Minimizes risks involved
• Critical determinant of success or failure
• Allows "what if" analyses without financial risk
• Forces objective, critical evaluation of the concept
• Helps identify and solve problems before they occur

Common mistake to avoid: Don't think the business plan is only for raising money. The excerpt warns: "Entrepreneurs who think their business plan is only for raising money make a big mistake."

📋 Essential components of a business plan

Core sections required:

Section	Purpose
Executive summary	Overview that creates excitement; written last but appears first
Vision and mission statement	Describes intended strategy and business philosophy
Company overview	Explains type, background, and legal form of organization
Product/service plan	Describes offerings and unique features that create competitive advantage
Marketing plan	Identifies customers, competition, and marketing strategy
Management plan	Profiles key players and their qualifications
Operating plan	Explains manufacturing/operating systems and facilities
Financial plan	Specifies financial needs, funding sources, and projections (3-5 years)
Appendix	Supporting documents like team biographies and research

🔄 Keeping the plan dynamic

Business plans should be "dynamic documents, reviewed and updated on a regular basis—monthly, quarterly, or annually."

Why regular review matters:

• Helps identify strengths and weaknesses in strategies
• Allows adjustment of sales and profit projections
• Evaluates expansion opportunities
• Responds to market trends and business results
• Aligns operations with original mission and current conditions

Resource: The Small Business Administration offers sample plans and guidance at https://www.sba.gov under the "Business Guide" tab.

💰 Financing your business

📊 Understanding financing types

Debt: Borrowed funds that must be repaid with interest over a stated time period.

Equity: Funds raised through the sale of stock (ownership) in the business; equity providers get a share of profits.

Typical financing structure:

• Lenders usually limit debt to 25-33% of total needs
• Equity financing often amounts to 65-75% of start-up funding
• Three-quarters of Inc. 500 companies funded on $100,000 or less

👥 Primary funding sources

Personal and close networks (94% of owners):

• Personal assets and accounts
• Family contributions
• Friends' investments
• This is the most common source for start-ups

Bootstrapping: Funding the operation with your own resources—the most self-reliant approach.

👼 Angel investors

Angel investors: Individual investors or groups of experienced investors who provide financing for start-up businesses by investing their own money, often referred to as "seed capital."

Characteristics:

• Invest early in a company's development
• Provide more flexibility than institutional investors
• Want to see ideas they understand and have confidence in
• Because it's their own money, they are careful

How to attract angel investors:

• Show them something from an industry they know
• Know your business details cold (sales, profit margins, expenses)
• Describe your business in under one minute
• Present something they're passionate about
• Demonstrate competent management they trust and respect
• Show how they can add value beyond money
• Emphasize likely exit strategies for investors
• Avoid deals requiring huge sums or repeated infusions

🚀 Venture capital

Venture capital: Financing obtained from venture capitalists, investment firms that specialize in financing small, high-growth companies.

Key differences from angels:

• Typically invest at a later stage than angel investors
• Receive ownership interest and voice in management
• Specialize in high-growth companies
• More institutional and structured than angel investing

🏢 Buying an existing business

🔍 Critical questions to answer

Before purchasing, thoroughly investigate:

About the sale:

• Why is the owner selling? (Retirement, new challenge, or problems?)
• Is the business operating at a profit? If not, can it be corrected?
• Is the valuation fair and properly justified?

About transition:

• Will the owner assist through the ownership change?
• Will customers stay loyal to the business or follow the owner?
• What are the owner's post-sale plans?

🛡️ Protecting your investment

Noncompete clause: Generally means that the owner of the company being sold may not be allowed to compete in the same industry of the acquired business for a specific amount of time.

Why this matters: Customers could leave if the current owner opens a similar business, so this protection is critical.

Required steps:

• Prepare a thorough business plan analyzing all aspects
• Get answers to all questions before committing
• Negotiate price and purchase terms carefully
• Obtain appropriate financing
• Consider using a consultant or business broker for complex transactions

⚠️ Understanding business risks

📉 Failure statistics and causes

Nearly 50% of small businesses fail within five years, according to the Kauffman Foundation.

Important distinction: Not all closures are failures—some financially successful businesses close for nonfinancial reasons.

🔴 Common causes of business closure

Economic factors:

• Business downturns
• High interest rates

Financial causes:

• Inadequate capital
• Low cash balances
• High expenses

Lack of experience:

• Inadequate business knowledge
• Insufficient management experience
• Missing technical expertise

Personal reasons:

• Owner decides to sell
• Owner moves to other opportunities

Interrelated problems: The excerpt notes these causes "can be interrelated"—for example, low sales and high expenses often directly relate to poor management.

⚡ Challenges even successful businesses face

Growth problems: Growing too quickly can strain finances when additional capital is needed for:

• Hiring additional staff
• Purchasing more raw materials
• Acquiring more equipment

Competitive threats: Example: An entrepreneur launches a terrific new product, but a larger firm with more resources introduces a similar item with better marketing, financing, and distribution.

Personal stress:

• The business can consume your whole life
• Long hours and constant decision-making
• Owners may feel in over their heads
• Unable to cope with operational pressures

🛑 Knowing when to quit

Warning signs from the excerpt:

Example: Ian White maxed out 11 credit cards, ran up over $100,000 in debt, and ultimately declared personal bankruptcy—he had to find a job to pay bills.

Example: Maria Martz saw her tax return showing losses "in black and white—for the second year in a row," which convinced her to close her gift-basket business.

The challenge: Even after deciding to quit, sticking to that decision can be difficult. The excerpt quotes Martz: "I got calls from people asking how come I wasn't in business anymore. It was tempting to say I'd make their basket but I had to tell myself it is finished now."

Key insight: "Never give up" may be a motivational phrase, but it's not always good advice for a small-business owner. Inadequate early planning is often at the core of later problems, making thorough feasibility analysis critical from the start.

🧭 Overview

🧠 One-sentence thesis

Managing a small business requires the owner to continuously adapt their role, solve problems quickly, leverage outside resources, and balance growth challenges with the flexibility advantages that small size provides.

📌 Key points (3–5)

• Owner's evolving role: As the business grows, the owner shifts from day-to-day operations to managing employees and long-term planning.
• Growth challenges vs. staying small: Rapid growth can strain finances and operations, but small size offers flexibility, quick response times, and personalized service.
• Using outside help: Consultants, outsourcing, and SBA resources can ease management burdens and provide specialized expertise.
• Common confusion: Growth is not always positive—expanding too quickly can be as problematic as sluggish sales; knowing when to pivot or even quit is crucial.
• Employee management: Attracting and retaining good employees is harder for small firms but essential for growth, requiring creative compensation and culture-building.

🎯 Core management challenges

🎯 Constant problem-solving and adaptation

• Small-business owners must be ready to solve problems as they arise and move quickly when market conditions change.
• The owner must constantly evaluate company performance and policies in light of changing market and economic conditions.
• A sound business plan is key to keeping the owner in touch with all areas of the business.
• The owner must nurture a continual flow of ideas to keep the business growing.

⚖️ The growth paradox

Two opposite problems can threaten a small business:

Challenge	What happens	Example from excerpt
Growing too quickly	Strains finances; requires additional capital for staff, materials, equipment	Successful businesses must respond quickly and develop plans to manage growth
Sluggish sales	Business becomes unsustainable	Maria Martz saw losses "in black and white—for the second year in a row" and closed her gift-basket business

• Successful business owners must respond quickly and develop plans to manage growth.
• Don't confuse: More sales always being good—growth without adequate capital or planning creates serious operational problems.

🚪 Knowing when to quit

• "Never give up" is not always good advice for a small-business owner.
• Some owners keep going "no matter what the cost," leading to severe consequences.
• Example: Ian White maxed out 11 credit cards, ran up over $100,000 in debt, declared personal bankruptcy, and had to find a job to pay bills.
• Example: Maria Martz closed her gift-basket business after seeing two years of losses, though customer calls made it "tempting" to continue.
• Making the decision to quit can be tough to stick to, even when it's the right choice.

🔄 The owner's changing role

🔄 From doer to manager

• Initially, the owner handles most tasks directly.
• As the company grows, others make many day-to-day decisions while the owner focuses on:
  • Managing employees
  • Planning for the firm's long-term success
• The types of employees needed may change as the firm grows—larger firms may need more managerial talent and technical expertise.

📚 The MailChimp pivot story

The excerpt includes a detailed case study showing how business focus can evolve:

• Initial phase: Rocket Science Group started as a web design firm targeting tech companies.
• First pivot: When the tech bubble burst, they focused on airline and travel companies.
• Second pivot: After 9/11, they shifted to the real estate market.
• Key insight: The founders discovered they didn't enjoy sales or working with large companies; they "could relate to" small businesses, who "always asked for email marketing."
• Final pivot: They recalled an email feature from a previous project and tested it with small businesses, eventually focusing entirely on email marketing for small businesses.
• The "big idea": The Freemium model—"Let's just make the whole thing free"—allowing customers to send emails free to 1,999 people, charging for larger lists and premium features.
• Result: Went from a few hundred thousand users to 1 million in one year, then added another million the next year; recognized as "2017 Business of the Year" by Inc. magazine.
• Lesson: "When you see an opportunity, don't be afraid to pivot and change course, especially if it means focusing on a market you're passionate about."

🤝 Leveraging outside resources

🤝 Outside consultants

Nearly all small businesses benefit from hiring specialists:

Type	Role	Benefit
Certified Public Accountant (CPA)	Financial record keeping, decision-making, tax planning	"A valuable asset" who helps the business grow
Attorney	Legal advice, contracts, documents	Knowledge of small-business law
Marketing/benefits/insurance consultants	Specialized advice	Used on an as-needed basis
Outside directors	Business experience and advice	Strategic guidance

• These resources free the small-business owner to concentrate on medium- and long-range planning and day-to-day operations.

📤 Outsourcing

Outsourcing: contracting out business functions to outside specialists.

Common departments that use outsourcing:

• Information technology
• Marketing
• Customer service
• Order fulfillment
• Payroll
• Human resources

Why outsource?

• Saves money—the purchasing firm buys just the services it needs.
• No investment in expensive technology.
• In many cases, the outside company is another small business.

Important note: Management should review outsourced functions as the business grows; at some point it may be more cost-effective to bring them in-house.

👥 Hiring and retaining employees

👥 The true cost of hiring

Identify all costs before hiring to ensure your business can afford it:

• Recruiting
• Help-wanted ads
• Extra space
• Taxes (add 10–15% to salary)
• Employee benefits (add even more)
• Training and management time

The catch-22: To grow you need to hire more people, but making the shift from solo worker to boss can be stressful.

🎁 Attracting and keeping good employees

Attracting good employees is more difficult for small firms, which may not match:

• Higher salaries of larger firms
• Better benefits
• Advancement potential

Small companies need to be creative:

• Company culture that nurtures a comfortable environment
• Flexible hours
• Employee benefit programs
• Opportunities to help make decisions
• Share in profits and ownership

🏡 Little Log Co. example

Duane Ruh built a $1.2 million business (log birdhouses and bird feeders) in a town with just 650 residents by treating employees right:

• Flexible schedules with plenty of personal time
• During slow periods, cut back hours rather than lay anyone off
• Turned down a buyout offer that would have closed the facility
• Encourages employees to pursue side or summer jobs if needed, assuring them their jobs are safe
• Why it matters: In a small town with few job options, employee loyalty and retention are critical.

🤲 Letting go of control

Example: Richard Humphrey of DrinkWorks (now Whirley DrinkWorks):

• Four years after starting, he was logging 100-hour weeks.
• "I was concerned that if I wasn't there every minute, the company would fall apart."
• Got sick, lost weight, engagement fell apart.
• When forced by a family emergency to leave the company in employees' hands, he was amazed: "They stepped up to the plate and it worked out."
• Result: "After that the whole company balanced out."

🌍 Going global with exporting

🌍 Why small businesses export

The global marketplace represents a huge opportunity for U.S. businesses, both large and small.

Drivers of the decision to export:

• Desire for increased sales and higher profits
• U.S. goods become less expensive for overseas buyers when the dollar declines against foreign currencies
• Domestic recession
• Foreign competition within the United States
• New markets opening up in foreign countries

🛠️ How to get started

Like any major business decision, exporting requires careful planning.

Specialists to hire:

• International-trade consultants
• Distributors
• Export Trading Companies (ETCs): Buy goods at a discount from small businesses and resell them abroad
• Export Management Companies (EMCs): Act on a company's behalf for fees of 5–15% of gross sales and multiyear contracts; handle all aspects including finding customers, billing, shipping, and compliance with foreign regulations

Online and government resources:

• Small Business Administration's Office of International Trade
• Department of Commerce services for small businesses
• Trade Information Center: 1-800-USA-TRADE
• Export Center: http://www.export.gov

⚖️ Advantages and disadvantages of staying small

⚖️ Special advantages of being small

• Greater flexibility: Uncomplicated company structure allows quick reaction to changing market forces
• Faster innovation: Product ideas can be developed and brought to market more quickly, using fewer financial resources and personnel
• Operating efficiency: Keeps costs down
• Specialized markets: Can serve niches that may not be cost-effective for large companies
• Personal service: Higher level of attention brings customers back (e.g., gourmet restaurants, health clubs, spas, fashion boutiques, travel agencies)

🏀 Tap It! Inc. example

Steve Niewulis (former minor league baseball player):

• Big idea: A sweat-busting rosin bag attached to a wristband so players can dry the bat handle between pitches
• Product: Just Tap It! wristbands, retailing for $12.95
• In less than two years, sold thousands of units
• Used by baseball players, basketball players, tennis players, golfers, and rock climbers
• Secret to success: "Find a small distribution network that allows small companies, with just one product line, to succeed."

⚠️ Disadvantages of being small

• Founders may have limited managerial skills
• Difficulties obtaining adequate financing
• Complying with federal regulations is more expensive—firms with fewer than 20 employees spend about twice as much per employee on compliance than larger firms
• Major personal commitment required:
  • Long hours
  • Owners must do much of the work themselves
  • Stress of being personally responsible for success
  • Can take a toll on health and personal life

Don't confuse: Small size always being a disadvantage—the excerpt shows both significant benefits and real challenges.

🏛️ Small Business Administration (SBA) support

🏛️ SBA mission and services

Small Business Administration (SBA): An agency whose mission is to speak on behalf of small business and help people start and manage small businesses through its national network of local offices.

How the SBA helps:

• Advises in finance and management
• Helps win federal contracts
• Toll-free number: 1-800-U-ASK-SBA (1-800-827-5722)
• Website: http://www.sba.gov

💰 Financial assistance programs

The SBA offers financial assistance to qualified small businesses that cannot obtain financing on reasonable terms through normal lending channels.

Form of assistance:

• Guarantees on loans made by private lenders
• (The SBA no longer provides direct loans)
• Can be used for most business purposes: purchasing real estate, equipment, materials

Scale of impact (fiscal year ending September 30, 2017):

• Backed more than $25 billion in loans to almost 68,000 small businesses
• About $9 billion to minority-owned firms
• $7.5 billion to businesses owned by women
• More than $1.7 billion in home and business disaster loans

Other programs:

• New Markets Venture Capital Program (promotes economic development in low-income areas)
• Export financing
• Assistance to firms suffering economic harm after disasters

🏦 Small Business Investment Companies (SBICs)

Small Business Investment Companies (SBICs): More than 300 SBA-licensed, privately owned and managed investment companies that provide about $6 billion each year in long-term financing for small businesses.

• These companies hope to earn a substantial return on their investments as the small businesses grow.
• The SBA's website suggests seeking angel investors and using SBA-guaranteed loans as funding options.

📚 Management assistance programs

Business Development Library:

• Publications on most business topics
• "Starting Out" series: brochures on how to start a wide variety of businesses (from ice-cream stores to fish farms)

Counseling and training:

• Business development officers at the Office of Business Development
• Local Small Business Development Centers
• Counsel thousands of small-business owners each year

Free management consulting through volunteers:

• Service Corps of Retired Executives (SCORE): Executives use their own business backgrounds to help small-business owners; expanded outreach through email counseling at http://www.score.org
• Active Corps of Executives (ACE): Similar volunteer consulting

Online resources:

• Free online resources and courses in the SBA's Learning Center (on the SBA website under "Learning Center" tab)

🌈 Assistance for women and minorities

The SBA is committed to helping women and minorities increase their business participation:

• Minority small-business program
• Microloans
• Spanish-language informational materials
• Increased regional office decision authority
• High-tech tools for grants, loan transactions, and eligibility reviews

Special programs:

• Support services for socially and economically disadvantaged persons (women, Native Americans, Hispanics) through the Minority Business Development Agency
• Special effort to help veterans go into business for themselves

📈 Trends in entrepreneurship

📈 Start-ups drive the economy

According to economists reviewing Department of Labor surveys and SBA statistics:

• "Small business drives the American economy," says Dr. Chad Moutray, former chief economist for the SBA's Office of Advocacy
• "Main Street provides the jobs and spurs our economic growth. American entrepreneurs are creative and productive."

2016 statistics:

• U.S. small businesses employed 57.9 million people
• Represented nearly 48% of the workforce
• Net new jobs added to the economy: 1.4 million

👩‍💼 Women-owned businesses

The highest rate of growth is coming from women-owned firms:

2016 figures:

• Estimated 11.6 million women-owned businesses
• Employing nearly 9 million people
• Generating more than $1.7 trillion in revenue

Growth rates (2007–2017):

• Women-owned firms increased by 114%
• All businesses increased by 44%
• Meaning: Growth rates for women-owned businesses are 2.5 times faster than the national average

Employment growth (past 20 years):

• Women-owned businesses: increased 27%
• Overall business employment: increased 13% since 2007

Conclusion: These trends show that more workers are striking out on their own and earning money doing it; encouraging small-business activity leads to continued strong overall economic growth.

👴 Baby Boomer entrepreneurs

The mantra "60 is the new 40" describes today's Baby Boomers, who indulge in much less knitting and golf in their retirement years.

Key statistics:

• According to a Kauffman Foundation study, Baby Boomers are twice as likely as Millennials to start a new business
• Close to 25% of all new entrepreneurs fall between ages 55 and 64
• The AARP predicts silver-haired entrepreneurs will continue to rise in coming years

Impact:

• This has created a ripple effect in the way we work
• Boomers have accelerated the growing acceptance of working from home

🌊 Confluence of changes

Much entrepreneurial opportunity comes from major changes in:

• Demographics: A major demographic group moving into a significantly different stage in life; minorities increasing business ownership in remarkable numbers
• Society: We have created a society in which we expect to have our problems taken care of
• Technology: The technological revolution stands ready with already-developed solutions

These evolving social and demographic trends, combined with the challenge of operating in a fast-paced technology-dominated business climate, are changing the face of entrepreneurship and small-business ownership.

🧭 Overview

🧠 One-sentence thesis

Small businesses offer unique operational advantages like flexibility and personalized service, but owners face significant challenges including limited capital, regulatory burdens, and the need for deep personal commitment.

📌 Key points (3–5)

• Core advantages: Small businesses can operate efficiently with streamlined structures, respond quickly to market changes, and serve specialized niches profitably.
• Service differentiation: Small firms provide higher levels of personal service compared to large corporations.
• Major disadvantages: Limited managerial expertise, difficulty raising capital, increasing government regulation compliance costs, and substantial personal time investment required.
• Common confusion: Small businesses are not just "scaled-down" large companies—they face fundamentally different challenges (capital access, regulatory burden relative to size) even though they may serve similar markets.
• Why it matters: Understanding these trade-offs helps entrepreneurs prepare realistically and leverage their natural advantages while mitigating weaknesses.

⚡ Operational Advantages

⚡ Streamlined efficiency

• Small businesses benefit from streamlined staffing and structure.
• Fewer layers of management mean faster decision-making and lower overhead.
• Example: A small business owner can approve a new initiative immediately, while a large corporation might require multiple approval levels and weeks of review.

🔄 Market flexibility

Small firms have the flexibility to respond to changing market conditions.

• Because they are not locked into complex bureaucratic processes, small businesses can pivot quickly.
• This agility allows them to adapt products, services, or strategies when customer needs shift.
• Don't confuse: Flexibility is not the same as instability—it means the ability to choose to change direction, not being forced to change constantly.

🎯 Niche market specialization

Aspect	How small businesses excel
Market focus	Can serve specialized markets more profitably than large firms
Customer intimacy	Provide a higher level of personal service
Competitive positioning	Dominate narrow segments that large firms find unprofitable

• Large corporations often cannot justify the cost of serving small, specialized customer segments.
• Small businesses can build deep expertise and relationships in these niches.
• Example: A boutique consulting firm serving only organic food producers can offer specialized knowledge that a large general consultancy cannot match economically.

⚠️ Key Challenges

💼 Managerial limitations

• Limited managerial skill is a significant disadvantage.
• Small-business owners often lack formal training in all the functional areas they must oversee (finance, marketing, operations, HR).
• The owner may be an expert in the product or service but inexperienced in running a business.
• This gap can lead to poor strategic decisions or operational inefficiencies.

💰 Capital constraints

• Difficulty in raising capital affects both start-up and expansion phases.
• Small businesses typically cannot access public equity markets.
• Banks may view them as higher risk, making loans harder to obtain or more expensive.
• Example: A small manufacturer wanting to expand production may struggle to secure a loan, while a large corporation can issue bonds or sell stock to raise funds.

📋 Regulatory burden

• Small businesses face the burden of complying with increasing levels of government regulation.
• The cost of compliance (legal fees, paperwork, staff time) represents a much larger percentage of revenue for small firms than for large ones.
• Large companies can spread compliance costs across many more transactions and often have dedicated legal/compliance departments.
• Don't confuse: The regulations themselves may be the same, but the relative impact is much greater on small businesses.

⏰ Personal commitment demands

• Small-business ownership requires a major personal commitment from the owner.
• Owners often work longer hours than corporate employees.
• The business may consume personal time, family time, and mental energy.
• Financial risk is often personal—owners may have invested personal savings or taken personal loans.
• Example: A small-business owner might work evenings and weekends regularly, be unable to take vacations, and worry constantly about cash flow and payroll.

🔍 Advantages vs. Disadvantages Summary

Dimension	Advantages	Disadvantages
Operations	Efficient, streamlined structure	Limited managerial expertise
Market response	Flexible, quick adaptation	Difficulty scaling or expanding
Customer relationships	High personal service levels	Time-intensive for owner
Financial	Lower overhead in some areas	Hard to raise capital; personal financial risk
Regulatory	—	Disproportionate compliance burden
Market positioning	Profitable niche specialization	Cannot compete on scale economies

🎯 Strategic implications

• Small-business owners should leverage their natural advantages: personal service, flexibility, and niche focus.
• They must actively manage their disadvantages: seek management training, explore creative financing options (SBA loans, angel investors), and use technology or consultants to reduce regulatory compliance costs.
• Success depends on recognizing that small businesses compete differently than large firms—not on the same terms, but by offering what large firms cannot.

🧭 Overview

🧠 One-sentence thesis

The Small Business Administration serves as the main federal agency supporting small businesses through loan guarantees, management assistance, and special programs for underrepresented groups, helping drive economic growth and entrepreneurial diversity.

📌 Key points (3–5)

• Core mission: The SBA speaks on behalf of small business and helps people start, manage, and grow their ventures through financial and management support.
• Financial assistance: Provides guarantees of private-lender loans rather than direct lending, making capital more accessible to small businesses.
• Management support: Offers a wide range of services including courses, publications, consulting, and high-tech tools for grants and loan transactions.
• Special programs: Targets socially and economically disadvantaged groups—women, Native Americans, Hispanics, and veterans—through dedicated programs and Spanish-language materials.
• Operational improvements: Has increased responsiveness by giving regional offices more decision authority and creating modern tools for eligibility reviews and transactions.

🏛️ What the SBA does

🏛️ Primary role and structure

The Small Business Administration (SBA): A government agency that speaks on behalf of small business; specifically it helps people start and manage small businesses, advises them in the areas of finance and management, and helps them win federal contracts.

• The SBA is the main federal agency serving small businesses in the United States.
• It acts as an advocate for small business interests at the federal level.
• The agency has evolved to become more responsive by decentralizing authority to regional offices.

🎯 Core functions

The SBA operates in three main areas:

• Starting businesses: Helps entrepreneurs launch new ventures.
• Managing businesses: Provides ongoing operational guidance.
• Winning contracts: Assists small businesses in securing federal government contracts.

💰 Financial assistance programs

💰 Loan guarantee program

• The SBA provides guarantees of private-lender loans for small businesses.
• Important distinction: The SBA does not typically lend money directly; instead, it guarantees loans made by private lenders.
• This reduces risk for banks and makes them more willing to lend to small businesses that might otherwise struggle to obtain financing.

Example: A small business owner applies for a loan at a bank. The bank is hesitant because the business is new. With an SBA guarantee, the bank has reduced risk and is more likely to approve the loan.

💼 Small Business Investment Company (SBIC)

Small Business Investment Company (SBIC): Privately owned and managed investment companies that are licensed by the Small Business Administration and provide long-term financing for small businesses.

• These are private companies licensed by the SBA, not government entities.
• They provide long-term financing to small businesses.
• This creates a bridge between private capital and small business needs.

🔧 Microloans and specialized financing

• The SBA offers microloans for smaller capital needs.
• These programs help businesses that need smaller amounts of funding than traditional bank loans provide.

📚 Management assistance services

📚 Educational resources

The SBA provides a wide range of management assistance services, including:

• Courses on business management topics
• Publications and informational materials
• Consulting services

🌐 Spanish-language materials

• The SBA publishes Spanish-language informational materials to increase accessibility.
• This supports Hispanic entrepreneurs and reflects the growing diversity of small business ownership.

💻 Technology tools

The agency has created high-tech tools for:

• Grant applications and management
• Loan transactions
• Eligibility reviews

These tools streamline processes and make it easier for small businesses to access SBA services.

🤝 Special programs for underrepresented groups

🤝 Minority Business Development Agency

• The SBA offers special programs and support services for socially and economically disadvantaged persons.
• Specific groups targeted:
  • Women
  • Native Americans
  • Hispanics
  • Veterans

👩‍💼 Minority small-business program

• Dedicated program focused on increasing business participation among minority groups.
• Reflects the SBA's commitment to entrepreneurial diversity.

🎖️ Veterans support

• The SBA makes a special effort to help veterans go into business for themselves.
• Recognizes the unique skills and challenges veterans face when transitioning to entrepreneurship.

📊 Impact on minority lending

The excerpt notes that in fiscal year 2017:

• Loans to minority business owners set a record: more than $9.5 billion.
• This represented 31 percent of the SBA's total loan portfolio.
• This demonstrates the significant scale of SBA support for minority entrepreneurs.

🔄 Operational improvements

🔄 Decentralized decision-making

• The SBA has increased its responsiveness by giving regional offices more decision authority.
• This allows for faster decisions tailored to local business conditions.
• Reduces bureaucratic delays that can hinder small business growth.

🔄 Modernization efforts

The agency has modernized through:

• High-tech tools for processing applications
• Streamlined eligibility reviews
• Digital transaction systems

Don't confuse: The SBA's modernization is about improving service delivery, not changing its core mission of supporting small businesses.

📈 Connection to economic trends

📈 Supporting entrepreneurial diversity

The SBA's programs align with broader trends in entrepreneurship:

• Women-owned businesses are growing at 2.5 times the national average (114% increase between 2007-2017 vs. 44% overall).
• Minority-owned businesses increased 38% overall.
• Hispanic-owned businesses increased more than 46% between 2007 and 2012.

📈 Small business economic impact

Context for why the SBA matters:

• U.S. small businesses employed 57.9 million people in 2016 (nearly 48% of the workforce).
• Women-owned businesses alone employed nearly 9 million people and generated more than $1.7 trillion in revenue in 2016.
• The SBA's support helps sustain this critical economic engine.

📈 Loan demand parallels growth

• The overwhelming increases in minority business ownership paralleled the demand for SBA loan products.
• This shows the SBA is successfully meeting the needs of a diversifying entrepreneurial landscape.

Example: As more Hispanic entrepreneurs start businesses, SBA loan applications from Hispanic business owners increase, and the agency responds with targeted Spanish-language materials and specialized programs.

🧭 Overview

🧠 One-sentence thesis

The excerpt does not contain substantive content about trends in entrepreneurship and small-business ownership; it consists primarily of student activities, case study questions, and resource links.

📌 Key points (3–5)

• The excerpt provides discussion prompts and team activities for students studying entrepreneurship.
• A critical thinking case about Innovation Pavilion and entrepreneurship in smaller U.S. cities is included.
• Resources and web links for small-business owners (SBA, business plan sites, export assistance) are listed.
• An ethics scenario about minority-owned supplier programs is presented for student analysis.
• No theoretical frameworks, trend data, or analytical content about entrepreneurship trends is provided.

📚 Content Structure

📝 Student Activities and Exercises

The excerpt consists mainly of:

• Discussion questions about entrepreneurship decisions
• Interview prompts for local entrepreneurs
• Team activities for business plan competitions
• Web research assignments about SBA resources and business valuation

These are pedagogical tools rather than content about entrepreneurship trends.

🏢 Innovation Pavilion Case Study

The critical thinking case describes:

• Innovation Pavilion (IP): An 80,000 square foot business incubator in Centennial, Colorado, founded by Vic Ahmed in 2011.
• Services provided: Workspace, mentoring, training, makerspace, industry-specific communities (IoT, healthcare, aerospace).
• Expansion strategy: Targeting second-tier cities across the U.S. rather than major metropolitan areas.
• Partnership: Steve Case's "Rise of the Rest" bus tour investing in start-ups in 33 cities across mid-America.

The case illustrates one approach to fostering entrepreneurship outside traditional tech hubs, but does not analyze broader trends.

🔗 Resource Links

The excerpt lists websites for:

• Business plan development
• SBA services and financing
• Export assistance
• Home-based business support
• Minority business development

These are reference materials rather than analytical content.

⚠️ Note on Content Limitations

📭 Missing Substantive Content

The excerpt does not contain:

• Analysis of entrepreneurship trends over time
• Statistical data about small-business ownership patterns
• Discussion of demographic or technological trends affecting entrepreneurship
• Theoretical frameworks for understanding entrepreneurial ecosystems
• Comparative analysis of different entrepreneurial approaches

The title "Trends in Entrepreneurship and Small-Business Ownership" suggests analytical content that is not present in this excerpt.

🧭 Overview

🧠 One-sentence thesis

Management is the process of guiding organizational resources toward goals through planning, organizing, leading, and controlling, with managers serving as the people responsible for executing this process to increase efficiency and effectiveness.

📌 Key points (3–5)

• Core definition: Management guides the development, maintenance, and allocation of resources to achieve organizational goals.
• Four primary functions: Planning, organizing, leading, and controlling form the foundation of managerial work.
• Who managers are: The people in the organization responsible for developing and carrying out the management process.
• Ultimate purpose: Managers use the four functions to increase efficiency and effectiveness of employees, processes, projects, and the organization as a whole.

🎯 What Management Is

🎯 The management process

Management: the process of guiding the development, maintenance, and allocation of resources to attain organizational goals.

• Not just about giving orders—it's a systematic process with specific components.
• Three key verbs define the scope:
  • Guiding development
  • Maintaining resources
  • Allocating resources
• All activities aim toward organizational goals, not individual preferences.

👥 Who managers are

Managers: the people in the organization responsible for developing and carrying out the management process.

• Managers are defined by their responsibility for the management process, not just their title.
• They translate the abstract process into concrete actions within the organization.

🔧 The Four Primary Functions

🗺️ Planning

• What it involves: Deciding what needs to be done, identifying when and how it will be done, and determining who should do it.
• Sets the direction before action begins.
• Example: An organization determines what objectives to pursue, the timeline, the methods, and the responsible parties.

🧩 Organizing

• What it involves: Coordinating and allocating a firm's resources to carry out its plans.
• Bridges the gap between planning and execution.
• Ensures resources (people, money, equipment) are arranged properly.

🧭 Leading

• What it involves: Guiding and motivating others toward the achievement of organizational goals.
• The human element of management—working through people.
• Focuses on influence and motivation, not just instruction.

📊 Controlling

• Monitoring and adjusting to ensure plans are executed properly.
• Completes the management cycle by checking results against goals.

💡 Why the Four Functions Matter

💡 Increasing efficiency and effectiveness

The excerpt emphasizes that managers use the four functions to increase:

Target	What improves
Employees	Their efficiency and effectiveness
Processes	How work flows and gets done
Projects	Specific initiatives and their outcomes
Organizations as a whole	Overall performance

• Key insight: The four functions are not separate activities but tools that work together.
• Managers apply all four functions systematically to improve multiple organizational levels simultaneously.
• Example: By planning well, organizing resources properly, leading people effectively, and controlling outcomes, a manager helps both individual employees and entire projects perform better.

🧭 Overview

🧠 One-sentence thesis

Planning is the management function that determines what needs to be done to achieve organizational goals, when and how it will be done, and who should do it, using four distinct types of planning that vary in time frame and scope.

📌 Key points (3–5)

• What planning is: deciding what needs to be done, identifying when and how, and determining who should do it.
• Four types of planning: strategic (long-range, broad), tactical (shorter, specific), operational (day-to-day standards), and contingency (crisis alternatives).
• How to distinguish them: time frame and specificity—strategic is longest and broadest; operational is most specific and immediate.
• Common confusion: tactical vs operational—tactical implements strategy over less than one year; operational creates the specific methods and procedures for daily activities.
• Why it matters: planning guides resource allocation and helps achieve organizational objectives at all levels.

🎯 What planning means

🎯 Core definition

Planning: the process of deciding what needs to be done to achieve organizational objectives; identifying when and how it will be done; and determining who should do it.

• Planning is fundamentally about making decisions before action.
• It answers three questions: what, when/how, and who.
• The excerpt emphasizes that planning is tied to organizational goals—it's not just any decision-making, but goal-directed decision-making.

📋 The four types of planning

🗺️ Strategic planning

Strategic planning: the process of creating long-range (one to five years), broad goals for the organization and determining what resources will be needed to accomplish those goals.

• Time frame: one to five years (longest).
• Scope: broad goals for the entire organization.
• Focus: what resources will be needed.
• Example: An organization sets a five-year goal and identifies the major resources required.

🎲 Tactical planning

Tactical planning: the process of beginning to implement a strategic plan by addressing issues of coordination and allocating resources to different parts of the organization; has a shorter time frame (less than one year) and more specific objectives than strategic planning.

• Time frame: less than one year.
• Scope: more specific objectives that support broader strategic goals.
• Purpose: begins implementing the strategic plan.
• Don't confuse with strategic: tactical is shorter and more specific; it translates strategy into actionable parts.

⚙️ Operational planning

Operational planning: the process of creating specific standards, methods, policies, and procedures that are used in specific functional areas of the organization; helps guide and control the implementation of tactical plans.

• Focus: specific standards, methods, policies, and procedures.
• Purpose: guides and controls how tactical plans are implemented.
• Scope: specific functional areas (not organization-wide).
• Don't confuse with tactical: operational creates the detailed "how-to" for daily activities; tactical addresses coordination and resource allocation over a longer period.

🚨 Contingency planning

Contingency plans: identify alternative courses of action for very unusual or crisis situations.

• Purpose: prepare for crises or highly unusual events.
• Nature: alternative courses of action, not the primary plan.
• Example: An organization prepares backup plans for unexpected disruptions.

🔄 How the types relate

🔄 Hierarchy and time frame

Planning type	Time frame	Scope	Purpose
Strategic	1–5 years	Broad organizational goals	Set long-range direction and resource needs
Tactical	< 1 year	Specific objectives supporting strategy	Implement strategy through coordination
Operational	Ongoing/daily	Specific methods and procedures	Guide day-to-day execution
Contingency	As needed	Crisis alternatives	Prepare for unusual situations

🔄 Implementation flow

• Strategic planning sets the broad direction.
• Tactical planning breaks strategy into shorter-term, specific objectives and allocates resources.
• Operational planning creates the detailed standards and procedures for daily work.
• Contingency planning runs parallel, preparing alternatives for crises.

🧭 Overview

🧠 One-sentence thesis

Organizing is the management function that coordinates and allocates a firm's resources to carry out its plans.

📌 Key points (3–5)

• What organizing means: coordinating and allocating resources to execute plans.
• Where it fits: organizing follows planning in the management process—it translates plans into resource allocation.
• Core activity: determining how to distribute and coordinate the firm's resources.
• Common confusion: organizing is not the same as planning; planning decides what to do, organizing decides how to arrange resources to do it.

🔧 What organizing does

🔧 Definition and purpose

Organizing: the process of coordinating and allocating a firm's resources in order to carry out its plans.

• Organizing takes the goals and plans created during planning and figures out how to deploy resources.
• It is about coordination (making sure parts work together) and allocation (deciding who gets what resources).
• Example: An organization sets a strategic goal (planning), then organizing determines which departments get budget, staff, and equipment to achieve that goal.

🔗 Relationship to planning

• Organizing is the step after planning in the management process.
• Planning answers "what needs to be done and when"; organizing answers "how do we arrange our resources to do it."
• Don't confuse: planning creates the roadmap, organizing assembles the team and tools to follow it.

🧩 Key management functions context

🧩 The four primary functions

The excerpt places organizing within the broader management framework:

Function	What it does
Planning	Deciding what needs to be done, when, how, and by whom
Organizing	Coordinating and allocating resources to carry out plans
Leading	Guiding and motivating others toward organizational goals
Controlling	(Not detailed in this excerpt)

• Managers use all four functions to increase efficiency and effectiveness.
• Organizing specifically bridges the gap between having a plan and executing it.

🧭 Overview

🧠 One-sentence thesis

Leading is the process of guiding and motivating others toward organizational goals, and managers' unique leadership styles—ranging from autocratic to free-rein—shape the corporate culture that distinguishes one organization from another.

📌 Key points (3–5)

• What leading means: guiding and motivating others toward achieving organizational goals.
• Leadership style spectrum: managers have unique styles that range from autocratic (directive) to free-rein (hands-off).
• Corporate culture definition: the set of attitudes, values, and standards of behavior that distinguishes one organization from another.
• How culture forms: corporate culture evolves over time based on the accumulated history of the organization, including the founders' vision.
• Common confusion: leadership style vs. corporate culture—styles influence culture, but culture is the broader, accumulated set of organizational characteristics.

🎯 What Leading Means

🎯 The core process

Leading: the process of guiding and motivating others toward the achievement of organizational goals.

• Leading is one of the four primary management functions (alongside planning, organizing, and controlling).
• It focuses on people: guiding (providing direction) and motivating (energizing action).
• The goal is always organizational objectives, not personal preferences.

🔄 How it fits into management

• Managers use leading to increase the efficiency and effectiveness of employees, processes, projects, and the organization as a whole.
• Leading translates plans and structures into actual work by influencing human behavior.

🎨 Leadership Styles

🎨 The style spectrum

The excerpt describes a continuum of leadership styles:

Style extreme	Characteristics
Autocratic	Directive; manager makes decisions and tells others what to do
Free-rein	Hands-off; manager gives employees autonomy and minimal direction

• Every manager has a unique leadership style somewhere on this spectrum.
• The excerpt does not detail intermediate styles, but the range implies varying degrees of control and employee autonomy.

🔍 Don't confuse

• Leadership style is how a manager leads (their personal approach).
• Corporate culture is what the organization becomes over time (the collective attitudes and values).
• The relationship: styles influence culture, but culture is broader and more persistent.

🏛️ Corporate Culture

🏛️ What corporate culture is

Corporate culture: the set of attitudes, values, and standards of behavior that distinguishes one organization from another.

• It is the "personality" of the organization—what makes it different from others.
• Culture encompasses:
  • Attitudes: how people feel about work, customers, innovation, etc.
  • Values: what the organization prioritizes (e.g., quality, speed, collaboration).
  • Standards of behavior: norms for how people act and interact.

🌱 How culture evolves

• Corporate culture evolves over time; it is not created instantly.
• It is based on the accumulated history of the organization.
• The vision of the founders plays a foundational role—early decisions and values set the tone.

Example: An organization founded with a vision of employee empowerment may develop a culture where autonomy and innovation are valued, even as new managers join.

⚙️ The link between leadership and culture

• Leadership styles influence corporate culture.
• Autocratic styles may foster cultures of compliance and hierarchy.
• Free-rein styles may encourage cultures of independence and creativity.
• Over time, repeated leadership behaviors become embedded in the organization's attitudes and values.

🔗 Why Leading Matters

🔗 Achieving organizational goals

• Without effective leading, plans and structures remain inert.
• Guiding provides clarity on what needs to be done; motivating ensures people want to do it.
• Leading bridges the gap between organizational objectives and individual action.

🔗 Shaping long-term identity

• Leadership styles accumulate into corporate culture, which becomes a lasting organizational asset (or liability).
• Culture distinguishes the organization in the marketplace and affects recruitment, retention, and performance.
• The excerpt emphasizes that culture is not static—it evolves as leadership and history accumulate.

🧭 Overview

🧠 One-sentence thesis

Controlling is a cyclical process that assesses organizational progress toward goals and uses feedback to continuously improve future performance standards.

📌 Key points (3–5)

• What controlling does: assesses the organization's progress toward accomplishing its goals through a structured process.
• The five-step control process: set standards, measure performance, compare actual to standards, take corrective action if needed, and use information to set future standards.
• Cyclical nature: information gained from the control process feeds back into setting future performance standards, creating a continuous improvement loop.
• Common confusion: controlling is not just about fixing problems—it also involves using what you learn to improve future goal-setting.

🔄 The control process

📏 Step 1: Set performance standards (goals)

Performance standards are the goals against which actual performance will be measured.

• These standards define what success looks like for the organization.
• They must be established before you can measure or compare anything.
• Example: An organization sets a goal to increase customer satisfaction scores by 10% this quarter.

📊 Step 2: Measure performance

• Collect data on actual performance across the organization's activities.
• This step requires tracking and recording what is actually happening.
• The measurement must align with the standards set in Step 1.

⚖️ Step 3: Compare actual performance to established standards

• Evaluate whether actual performance meets, exceeds, or falls short of the goals.
• This comparison reveals gaps between what was planned and what was achieved.
• Example: If the standard was 10% improvement but actual improvement was only 5%, there is a 5% gap.

🛠️ Taking action and learning

🔧 Step 4: Take corrective action (if necessary)

• When actual performance does not meet standards, managers must intervene.
• Corrective action addresses the gap identified in Step 3.
• Note: This step is conditional—if performance meets or exceeds standards, no correction may be needed.
• Example: If customer satisfaction fell short, the organization might implement additional training for service staff.

🔁 Step 5: Use information to set future performance standards

• The control process is not one-time; it is cyclical.
• Insights gained from measuring, comparing, and correcting inform the next round of goal-setting.
• This creates a feedback loop that drives continuous improvement.
• Don't confuse: controlling is not just backward-looking (fixing past problems)—it is also forward-looking (improving future standards based on what was learned).

🎯 Why controlling matters

🎯 Assessing organizational progress

• Controlling provides a systematic way to determine whether the organization is on track to accomplish its goals.
• Without this process, managers would lack visibility into whether plans are working.

🔄 Continuous improvement

• By feeding information back into future standard-setting, controlling enables organizations to refine their goals and methods over time.
• Each cycle of the control process builds on the lessons of the previous cycle.

🧭 Overview

🧠 One-sentence thesis

Managers take on different roles—informational, interpersonal, and representational—depending on the organizational setting and the interactions required.

📌 Key points (3–5)

• Three role categories: informational, interpersonal, and spokesperson/representational roles.
• Informational roles: gathering information, distributing it internally, or speaking for the company.
• Interpersonal roles: acting as figurehead, leader, or liaison based on interactions with others.
• Common confusion: roles are situational—the same manager switches between roles depending on what the situation demands, not a fixed job title.

📡 Informational roles

📥 Information gatherer

• The manager collects data and intelligence relevant to the organization.
• This role focuses on input: bringing information into the manager's awareness.
• Example: A manager monitors industry trends or competitor activity to stay informed.

📤 Information distributor

• The manager shares information internally with employees or other parts of the organization.
• This role focuses on internal flow: ensuring relevant people have the data they need.
• Example: A manager relays strategic priorities from top management to their team.

📢 Spokesperson

• The manager represents the company and communicates information to external audiences.
• This role focuses on outward communication: the manager speaks on behalf of the organization.
• Example: A manager presents the company's position to the media or stakeholders.

🤝 Interpersonal roles

🎭 Figurehead

• The manager performs ceremonial or symbolic duties.
• This role is based on the manager's position and authority, not necessarily on direct task execution.
• Example: A manager attends official events or signs documents as a representative of the organization.

🧭 Company leader

• The manager guides and motivates employees toward organizational goals.
• This role emphasizes direction and influence within the team or organization.
• Example: A manager sets the vision for their department and inspires the team to achieve it.

🔗 Liaison

• The manager builds and maintains relationships with people outside their direct area of responsibility.
• This role focuses on networking and coordination across boundaries.
• Example: A manager coordinates with other departments or external partners to facilitate collaboration.

🔄 Role flexibility

🔄 Situational adaptation

• The excerpt emphasizes that managers switch roles "depending on the situation."
• A manager does not occupy only one role; they shift between informational, interpersonal, and representational functions as needed.
• Don't confuse: roles with fixed job titles—roles are behaviors and functions, not permanent assignments.

🧩 Role interdependence

Role type	Focus	Key function
Informational	Data and communication	Gather, distribute, or speak information
Interpersonal	Relationships and influence	Act as figurehead, leader, or liaison

• All three role types support the manager's overall responsibility to guide the organization.
• Example: A manager may gather information (informational role), then use it to motivate the team (interpersonal role as leader), and finally present results to stakeholders (informational role as spokesperson).

🧭 Overview

🧠 One-sentence thesis

Managerial success requires three distinct categories of skills—technical, human relations, and conceptual—that enable managers to apply expertise, work with people, and understand the organization as a whole.

📌 Key points (3–5)

• Three skill categories: technical skills (specialized knowledge), human relations skills (working with people), and conceptual skills (big-picture thinking).
• Technical skills: specialized areas of knowledge and expertise, plus the ability to apply that knowledge in practice.
• Human relations skills: understanding behavior, communicating effectively, and motivating individuals toward objectives.
• Conceptual skills: viewing the organization as a whole, understanding interdependencies, and assessing external environment relationships.
• Common confusion: these are not job titles or roles—they are capabilities that managers need to develop across different dimensions of their work.

🔧 Technical Skills

🔧 What technical skills are

A manager's technical skills: specialized areas of knowledge and expertise, as well as the ability to apply that knowledge.

• Not just knowing facts or theories—the excerpt emphasizes both having specialized knowledge and being able to apply it.
• These skills are domain-specific: they relate to particular functional areas or industries.
• Example: A manager in operations needs knowledge of production processes and the ability to use that knowledge to solve real production problems.

🎯 Why application matters

• The excerpt distinguishes between possessing knowledge and applying it.
• Technical skills require both dimensions: understanding the specialized area and translating that understanding into action.
• Don't confuse: technical skills are not just about being an expert—they require practical implementation ability.

🤝 Human Relations Skills

🤝 What human relations skills include

Human relations skills: the ability to understand human behavior, to communicate effectively with others, and to motivate individuals to accomplish their objectives.

The excerpt identifies three components:

Component	What it means
Understanding human behavior	Recognizing how and why people act as they do
Communicating effectively	Conveying information and ideas clearly to others
Motivating individuals	Inspiring people to work toward their objectives

💬 Why these skills matter

• Managers work through other people, so understanding and influencing behavior is essential.
• Communication is not just talking—it must be effective, meaning the message is understood and actionable.
• Motivation is objective-focused: the goal is to help individuals accomplish their objectives (which align with organizational goals).
• Example: A manager who understands why team members resist a change can communicate the reasons more effectively and motivate them by connecting the change to their personal goals.

🧠 Conceptual Skills

🧠 What conceptual skills involve

Conceptual skills: the ability to view the organization as a whole, understand how the various parts are interdependent, and assess how the organization relates to its external environment.

Three key abilities:

1. Viewing the organization as a whole: seeing beyond individual departments or functions to the entire system.
2. Understanding interdependencies: recognizing how different parts of the organization affect and depend on each other.
3. Assessing external relationships: evaluating how the organization connects to and is influenced by its external environment.

🔗 Why interdependence matters

• Organizations are not collections of isolated units—changes in one area ripple through others.
• Managers with conceptual skills can anticipate these ripple effects and make decisions that account for system-wide impacts.
• Example: A decision to cut costs in one department might save money but could disrupt workflows in another department that depends on those resources.

🌍 External environment awareness

• The excerpt emphasizes that conceptual skills extend beyond internal operations to include the organization's relationship with its external environment.
• This means understanding markets, competitors, regulations, and other outside forces.
• Don't confuse: conceptual skills are not just abstract thinking—they require practical assessment of real relationships and dependencies.

🎯 How the Three Skills Work Together

🎯 Complementary nature

• The excerpt presents these as three basic categories, suggesting they are distinct but all necessary.
• Technical skills provide the specialized foundation; human relations skills enable working through people; conceptual skills ensure decisions fit the bigger picture.
• A manager needs all three, though the balance may shift depending on the level and context of management.

⚖️ Different dimensions of success

• Each skill category addresses a different dimension of managerial work:
  • Technical: what specialized knowledge to apply
  • Human relations: who to work with and how to influence them
  • Conceptual: where the organization fits and how parts connect
• Example: A manager launching a new product needs technical skills to understand the product, human relations skills to coordinate the team, and conceptual skills to see how the launch affects other business units and market positioning.

🧭 Overview

🧠 One-sentence thesis

Management trends today center on crisis preparedness, leveraging information technology for faster decisions, and developing multinational cultural competencies as organizations globalize.

📌 Key points (3–5)

• Three major trends: crisis management, information technology adoption, and multinational cultural management skills.
• Crisis management approach: requires quick action, transparency, deploying top talent, and learning from the event to prevent recurrence.
• Technology's role: tools like dashboard software enable managers to make quicker, better-informed decisions.
• Multinational cultural management: as companies expand globally, managers must set examples, create personal involvement for all employees, and build a culture of trust.
• Common confusion: these trends are not separate initiatives but interconnected capabilities that modern managers must integrate into their overall leadership approach.

🚨 Crisis management capabilities

🚨 What crisis management requires

Crisis management: the organizational capability to respond effectively when unexpected problems threaten the company.

The excerpt identifies four essential components:

• Quick action: speed matters when crises emerge.
• Transparency: telling the truth about the situation, not hiding or downplaying problems.
• Talent deployment: putting the best people on the task to correct the situation.
• Learning: management must learn from the crisis to prevent it from happening again.

🔄 Why learning matters

• The excerpt emphasizes prevention through learning—crisis management is not just about response but about improvement.
• Don't confuse: crisis management is not only reactive; the learning phase makes it a forward-looking capability.
• Example: An organization faces a crisis, responds quickly and honestly, assigns top performers to fix it, then analyzes what went wrong to update procedures and training.

💻 Information technology in decision-making

💻 How technology improves management

The excerpt highlights dashboard software as a specific example of information technology that managers use.

Benefits of using the latest information technology:

• Managers can make quicker decisions.
• Managers can make better-informed decisions.

📊 What dashboard software does

• Dashboard software consolidates data and presents it in an accessible format.
• This allows managers to see key metrics at a glance and respond faster to changing conditions.
• Example: A manager uses dashboard software to monitor real-time performance indicators, spots a problem immediately, and adjusts operations before the issue escalates.

🌍 Multinational cultural management

🌍 Why cultural management skills are growing in importance

The excerpt states: "As more companies 'go global,' the need for multinational cultural management skills is growing."

What drives this trend:

• Companies are expanding internationally.
• Managing across different cultures requires specific skills beyond traditional management competencies.

🤝 Three key practices for multinational cultural management

Practice	What it means	Why it matters
Set a good example	Managers model the behavior they expect	Leadership by example establishes standards across cultures
Create personal involvement for all employees	Engage every employee, regardless of location or background	Involvement builds commitment and bridges cultural differences
Develop a culture of trust	Build an organizational environment where trust is foundational	Trust enables collaboration across diverse cultural contexts

🔍 How these practices work together

• Setting an example provides the behavioral template.
• Personal involvement ensures no one is excluded or marginalized.
• A culture of trust creates the foundation for effective cross-cultural collaboration.
• Don't confuse: multinational cultural management is not just about understanding different cultures intellectually; it requires active practices that build inclusion and trust.

🔗 Integration of the three trends

🔗 How the trends connect

While the excerpt presents three distinct trends, they share common themes:

• Speed and responsiveness: both crisis management and information technology emphasize quick action.
• People-centered approaches: crisis management requires deploying the best people; multinational cultural management focuses on involvement and trust.
• Continuous improvement: crisis management emphasizes learning; technology adoption requires staying current; cultural management demands ongoing attention to inclusion.

📈 What this means for future managers

The excerpt's framing ("What trends will affect management in the future?") indicates these are not optional specializations but core competencies:

• Managers must be prepared for crises, not just routine operations.
• Managers must be comfortable with technology as a decision-making tool.
• Managers must be culturally competent as organizations operate across borders.

Example: A manager in a global organization uses dashboard software to monitor operations across multiple countries, quickly identifies a supply chain disruption (crisis), responds transparently with the best available team, and ensures all employees in different cultural contexts feel involved in the solution and trust the leadership's approach.

🧭 Overview

🧠 One-sentence thesis

Organizational structures are built by dividing labor, grouping jobs through departmentalization, and assigning authority to coordinate resources so firms can execute plans and respond to dynamic business environments.

📌 Key points (3–5)

• Organizing function: managers coordinate and allocate resources by determining work activities, grouping jobs, and assigning authority.
• Division of labor and specialization: work is divided into separate jobs; high specialization increases efficiency but may reduce employee engagement.
• Five traditional departmentalization types: functional, product, process, customer, and geographic—each groups work differently based on what the organization needs.
• Common confusion: line vs. staff positions—line positions directly create goods/services (production, marketing, finance), while staff positions provide advisory and support services (legal, HR, consulting).
• Why structure matters: the choice of structure affects authority, communication, resource allocation, and the organization's ability to respond to competitive threats and customer needs.

🏗️ The organizing process

🏗️ What organizing involves

Organizing: coordinating and allocating a firm's resources so that the firm can carry out its plans and achieve its goals.

• Organizing is one of the key management functions (alongside planning, leading, and controlling).
• The process produces a formal structure within the organization.
• An organization is defined as two or more people working together with a common objective and clarity of purpose, with well-defined authority lines, information channels, and control mechanisms.

🔧 Three steps of organizing

The organizing process is accomplished by:

1. Determining work activities and dividing up tasks (division of labor)
2. Grouping jobs and employees (departmentalization)
3. Assigning authority and responsibilities (delegation)

• These steps connect human, material, financial, and information resources deliberately.
• Some connections are long-lasting (e.g., finance department links); others are temporary (e.g., a problem-solving committee).

✂️ Division of labor and specialization

✂️ How work is divided

Division of labor: the process of dividing work into separate jobs and assigning tasks to workers.

• Example: In a fast-food restaurant, some employees take orders, others prepare food, a few clean equipment, and at least one supervises.
• Example: In an auto assembly plant, some workers install rearview mirrors while others mount bumpers.

🎯 What specialization means

Specialization: the degree to which tasks are subdivided into smaller jobs.

• Highly specialized jobs involve a limited number and variety of tasks (e.g., assembly-line workers).
• Benefits: employees become specialists, leading to greater skill, efficiency, and consistency in production.
• Drawbacks: high specialization can result in disinterested or bored employees due to lack of variety and challenge.

Don't confuse: specialization is about how narrow the job is, not about whether the employee is skilled—even a narrow job can require skill, but the variety is limited.

🗂️ Traditional departmentalization

🗂️ What departmentalization is

Departmentalization: the grouping of people, tasks, and resources into organizational units.

• It facilitates planning, leading, and control processes.
• An organization chart is a visual representation of structured relationships among tasks and people with authority.
• Each figure on the chart represents a job that includes several tasks (e.g., a sales manager hires salespeople, establishes territories, motivates, trains, and controls sales operations).

📋 Five basic types

Type	Basis	Example from excerpt
Functional	Primary functions performed (marketing, finance, production, sales)	Ethan Allen Interiors: retail, manufacturing, product design, logistics, operations
Product	Goods or services produced or sold	ITT: Industrial Process, Control Technologies, Motion Technologies, Interconnect Solutions divisions
Process	Production process used	Gazprom Neft: exploration, production (drilling), refining, marketing/distribution; Pixar: technology development, creative development, production
Customer	Primary type of customer served	PNC Financial Services: retail banking (consumers), asset management (individuals/corporations), corporate banking (middle-market companies)
Geographic	Geographic segmentation	U.S. marketing, Canadian marketing, European marketing, Latin American marketing

🌐 Combining multiple types

• Large organizations often use several types simultaneously.
• Example: Procter & Gamble uses four "pillars":
  1. Global Business Units (GBU): product-based (baby care, beauty, fabric care, health/grooming)
  2. Selling and Market Operations (SMO): geographic (North America, Latin America, Europe, Asia Pacific, Greater China, India/Middle East/Africa)
  3. Global Business Services (GBS): geographic support for technology, accounting, IT, payroll, facilities
  4. Corporate Functions: functional specialties (customer development, HR, legal, marketing, R&D, workplace services)

🧭 Why departmentalization choices matter

• Decisions about how to departmentalize affect:
  • How management assigns authority
  • How resources are distributed
  • How performance is rewarded
  • How lines of communication are set up

📊 Line-and-staff organization

📊 Line organization basics

Line organization: designed with direct, clear lines of authority and communication flowing from top managers downward.

• Managers have direct control over all activities, including administrative duties.
• An organization chart shows all positions directly connected via an imaginary line from highest to lowest position (where production of goods/services occurs).
• Suited for: small, entrepreneurial firms due to simple design and broad managerial control.

🔀 Adding staff positions

Line-and-staff organization: staff positions provide specialized advisory and support services to line managers.

• As organizations grow and become more complex, staff positions enhance the line structure.

Position type	Role	Typical areas
Line positions	Directly involved in processes that create goods and services	Production, marketing, finance
Staff positions	Provide administrative and support services that line employees need	Legal counseling, managerial consulting, public relations, human resource management

Don't confuse: line positions are not "higher" than staff positions—the distinction is about function. Line positions directly produce/sell; staff positions advise and support those who do.

🔍 How to distinguish line from staff

• Ask: "Does this position directly create the product or service the company sells?"
  • Yes → line position
  • No, but it helps those who do → staff position
• Example: A production worker and a marketing manager are both line positions (one makes, one sells). An HR manager is a staff position (supports both but doesn't directly produce or sell).

🌟 Why structure design matters today

🌟 Dynamic business environment

• Today's environment requires structures that allow organizations to quickly respond to:
  • New competitive threats
  • Changing customer needs
• Future success depends on flexibility and responsiveness.

🎯 What managers must consider

• Companies base frameworks on traditional, contemporary, or team-based approaches:
  • Traditional structures: more rigid; group employees by function, products, processes, customers, or regions.
  • Contemporary and team-based structures: more flexible; assemble employees to respond quickly to dynamic environments.
• Regardless of framework, all managers must first consider what kind of work needs to be done within the firm.

📢 Real-world context: communications role

• The excerpt opens with a case about American Airlines' chief communications officer.
• Key insight: corporate communication is no longer just marketing—it requires a strategic mindset that goes beyond day-to-day activities and looks ahead to future possibilities.
• Nearly 40% of Fortune 500 chief communications officers report directly to the CEO, reflecting the expanded role of communications in organizational structure.
• Example: American Airlines' social media hub has ~30 team members in three groups (customer service, engagement, insights), empowered to reach any department directly to answer customer questions—illustrating how structure supports responsiveness.

🧭 Overview

🧠 One-sentence thesis

Contemporary organizational structures like matrix and committee forms combine functional expertise with project flexibility to help companies leverage diverse employee skills more effectively than traditional departmentalization alone.

📌 Key points (3–5)

• Matrix structure combines two departmentalization types: functional and product approaches work together, giving employees two supervisors (functional manager + project manager).
• Committee structure distributes authority: a group rather than an individual holds decision-making power, often in advisory roles.
• Key trade-off: matrix and committee structures increase flexibility and teamwork but can create power struggles, confusion, and accountability problems.
• Common confusion: matrix structures are used "in conjunction with" traditional line-and-staff, not as a complete replacement—they layer project teams onto existing functional departments.
• Why companies adopt them: to pool specialized skills, adapt quickly to change, and tackle complex tasks that single departments cannot handle alone.

🔀 Matrix Structure

🔀 What the matrix structure is

Matrix structure (also called the project management approach): combines two different forms of departmentalization—functional and product—that have complementary strengths and weaknesses.

• Brings together people from different functional areas (manufacturing, finance, marketing) to work on a special project.
• Each employee reports to two direct supervisors: the line manager from their functional area and the project manager.
• The excerpt shows four special project groups (A, B, C, D), each with its own project manager.
• This dual chain of command creates unique challenges for both managers and subordinates.

✅ Advantages of matrix structure

Advantage	What it means
Teamwork	Pooling skills and abilities of various specialists increases creativity, innovation, and ability to tackle complex tasks
Efficient use of resources	Project managers use only the specialized staff they need, instead of building large groups of underused personnel
Flexibility	The project structure adapts quickly to environmental changes; groups can be disbanded when no longer needed
Balance conflicting objectives	Different representatives (marketing for customer, finance for profits, engineers for technical capability) serve as focal points for directing activities and overcoming conflict
Higher performance	Employees on special project teams may experience increased feelings of ownership, commitment, and motivation
Development opportunities	Gives individuals chances to develop and strengthen technical and interpersonal skills

Example: A company wants to launch a new product. The matrix structure lets them pull a marketing specialist, a finance analyst, and an engineer onto one project team without permanently removing them from their home departments.

❌ Disadvantages of matrix structure

Disadvantage	What it means
Power struggles	Functional and product managers may have different goals and management styles
Confusion among team members	Reporting relationships and job responsibilities may be unclear
Lack of cohesiveness	Team members from different functional areas may have difficulty communicating effectively and working together as a team

• Don't confuse: The excerpt notes some companies are trying to "unravel complex matrix structures" because they create limited accountability and complicate day-to-day operations.
• Some CEOs suggest matrix structures make it easier to blame others when things don't go as planned.

🏛️ Committee Structure

🏛️ What committee structure is

Committee structure: authority and responsibility are held by a group rather than an individual.

• Committees are typically part of a larger line-and-staff organization.
• Often the committee's role is only advisory, but in some situations the committee has the power to make and implement decisions.
• Committees can make coordination of tasks in the organization much easier.

🏢 Real-world example: Novartis

• Novartis (a huge Swiss pharmaceutical company) has a committee structure that reports to its board of directors.
• The executive committee oversees business operations of group companies within the global organization.
• Members include: CEO, CFO, head of HR, general counsel, president of operations, head of biomedical research, global head of drug development, CEOs of pharmaceutical and oncology units, and CEOs of other Novartis companies (Sandoz and Alcon).
• Members are selected by the company's board of directors.

⚖️ Trade-offs of committee structure

Advantages:

• Committees bring diverse viewpoints to a problem.
• Expand the range of possible solutions.

Disadvantages:

• Can be slow to reach a decision.
• Sometimes dominated by a single individual.
• More difficult to hold any one individual accountable for a decision made by a group.
• Committee meetings can sometimes go on for long periods with seemingly little being accomplished.

Don't confuse: Committee structure with matrix structure—committees hold authority as a group and are often advisory; matrix structures assign individuals to dual reporting lines for specific projects.

🔍 Relationship to Traditional Structures

🔍 How contemporary structures fit with traditional forms

• The excerpt states that "traditional forms of departmentalization still represent how many companies organize their work."
• Newer, more flexible organizational structures are in use at many firms alongside traditional structures.
• Matrix structure is "sometimes used in conjunction with the traditional line-and-staff structure."
• Committee structure: "Committees are typically part of a larger line-and-staff organization."

Key insight: Contemporary structures are not wholesale replacements—they are layered on top of or integrated with traditional line-and-staff and functional departmentalization to add flexibility and cross-functional collaboration.

🧭 Overview

🧠 One-sentence thesis

Organizations increasingly use team-based structures to boost motivation and performance by leveraging collaboration and synergy, though success requires understanding the differences between work groups and work teams and building high-performance characteristics.

📌 Key points (3–5)

• Why teams matter: Team-based structures can increase individual and group motivation and performance when properly implemented.
• Work groups vs work teams: Work groups coordinate to help individuals perform better (additive contributions), while work teams collaborate to create synergy (collective performance exceeds the sum of individual contributions).
• Common confusion: Simply labeling employees as a "team" does not guarantee success—managers and members must commit to creating, developing, and maintaining high-performance teams.
• Three team types: Problem-solving teams (same department, advisory role), self-managed teams (autonomous, no formal supervision), and cross-functional teams (different functions, same level).
• Building high-performance teams: Requires selecting collaborative members with diverse skills, setting clear goals, practicing good communication with detached feedback, and having skilled leaders.

👥 Understanding groups as the foundation

👥 What groups are

Groups: social units of two or more people who share the same goals and cooperate to achieve those goals.

• Every organization contains groups; teams are a specific type of organizational group.
• Understanding group behavior provides the foundation for understanding work teams.

🏢 Formal vs informal groups

Type	Definition	Purpose
Formal groups	Designated and sanctioned by the organization	Behavior directed toward accomplishing organizational goals
Informal groups	Based on social relationships	Not determined or sanctioned by the organization

• Example: The sales department at Apple is a formal group that must operate within the larger Apple organizational system.

🧩 What affects group behavior

Factors that influence how organizational groups behave:

• Larger organizational system: Strategy, policies, procedures, available resources, corporate culture
• Individual member characteristics: Ability, training, personality
• Group norms and roles: Implicit behavioral guidelines or standards for acceptable/nonacceptable behavior
• Group size and cohesiveness: How much members want to stay and resist outside influences

Example: An Apple sales manager may be expected to work at least two Saturdays per month without extra pay—this isn't written anywhere, but it is the expected norm.

🤝 Group cohesiveness

Group cohesiveness: the degree to which group members want to stay in the group and tend to resist outside influences (such as a change in company policies).

When cohesiveness increases:

• Group size is small
• Individual and group goals are similar
• The group has high status in the organization
• Rewards are group-based rather than individual-based
• The group competes with other groups within the organization

Positive impacts (when performance norms are high):

• Increased productivity
• Enhanced worker self-image from group success
• Increased company loyalty
• Reduced employee turnover
• Reduced absenteeism

Potential drawbacks:

• Restricted output
• Resistance to change
• Conflict with other work groups

Example: Southwest Airlines is known for its work group cohesiveness.

⚖️ Group decision-making trade-offs

Strengths	Weaknesses
Groups bring more information and knowledge	Groups typically take longer to reach a solution
Diversity of perspectives generates more alternatives	Group members may pressure others to conform
Higher-quality decisions than individual decision-making	Process may be dominated by one or a few participants
Participation increases likelihood of acceptance	Groups lack accountability—difficult to assign responsibility to any one individual

Don't confuse: The opportunity for diverse skills is an argument for using groups, but effectiveness requires both managers and members to understand these strengths and weaknesses.

🔄 Work groups versus work teams

🔄 The critical distinction

Work groups: share resources and coordinate efforts to help members better perform their individual duties and responsibilities. The performance of the group can be evaluated by adding up the contributions of the individual group members.

Work teams: require not only coordination but also collaboration—the pooling of knowledge, skills, abilities, and resources in a collective effort to attain a common goal.

Key difference: Work teams create synergy, causing the performance of the team as a whole to be greater than the sum of team members' individual contributions.

⚠️ Common pitfall

Simply assigning employees to groups and labeling them a team does not guarantee a positive outcome.

• Managers and team members must be committed to creating, developing, and maintaining high-performance work teams.
• Success requires deliberate effort beyond just forming the group.

🛠️ Three types of work teams

🛠️ Problem-solving teams

Composition:

• Employees from the same department or area of expertise
• Same level of the organizational hierarchy

What they do:

• Meet regularly to share information
• Discuss ways to improve processes and procedures in specific functional areas
• Generate ideas and alternatives
• May recommend a specific course of action

Limitations:

• Typically do not make final decisions
• Do not allocate resources
• Do not implement change

🚀 Self-managed work teams

Key characteristic: Highly autonomous groups that manage themselves without any formal supervision.

Responsibilities:

• Setting goals
• Planning and scheduling work activities
• Selecting team members
• Evaluating team performance

Prevalence: Approximately 80 percent of Fortune 1000 companies use some sort of self-managed teams.

Example: Zappos shifted to self-managed work teams in 2013, eliminating the traditional organizational structure and bosses according to a system called holacracy.

Example: At W. L. Gore (inventor of Gore-Tex fabric and Glide dental floss), three employees invented Elixir guitar strings by contributing spare time and persuading colleagues to help. They worked three years entirely on their own—without asking for supervisory or top management permission or being subjected to any oversight—before seeking company support to take the strings to market. Today, Elixir is the number one selling string brand for acoustic guitar players.

🔀 Cross-functional teams

Composition:

• Employees from about the same hierarchical level
• Different functional areas of the organization

Duration: Often team members work together only until they solve a given problem or complete a specific project.

Purpose: Allow people with various levels and areas of expertise to pool resources, develop new ideas, solve problems, and coordinate complex projects.

Note: Both problem-solving teams and self-managed teams may also be cross-functional teams.

🏆 Building high-performance teams

🏆 Selecting the right members

Priority: Select employees who are more willing to work together to accomplish a common goal, rather than employees more interested in their own personal achievement.

Skill diversity: Team members should possess a variety of skills—diverse skills strengthen overall effectiveness, so teams should consciously recruit members to fill gaps in the collective skill set.

🎯 Setting clear goals

Why it matters: Teams must have clearly defined goals.

• Vague or unclear goals will not provide necessary direction
• Clear goals allow employees to measure their performance against expectations

💬 Practicing good communication

What good communication includes:

• Team members communicate messages clearly
• Give appropriate feedback that seeks to correct misunderstandings
• Feedback should be detached—critique ideas rather than criticize the person who suggests them

Don't confuse: Critiquing ideas vs attacking people—nothing can degrade team effectiveness like personal attacks.

👨‍✈️ Having great leaders

What skilled team leaders do:

• Divide work so tasks are not repeated
• Help members set and track goals
• Monitor team performance
• Communicate openly
• Remain flexible to adapt to changing goals or management demands

🏭 Real-world example: GE Aviation

"Teaming" approach: Self-managed groups of employees work together to make decisions to help them do their work efficiently, maintain quality, and meet critical deadlines.

How it works:

• Decision-making and authority are moved as close to the end-product as possible
• Front-line employees are accountable for meeting performance goals daily
• Workers have coaches who give specific goals, not supervisors who give direction
• Teams manage typical supervisory functions: planning, developing processes, monitoring vacation and overtime
• Team members sit on a joint council with management and HR to make decisions affecting overall plant operations (e.g., eliminating overtime, promotions, terminations)

Benefits:

• Workers gain confidence and motivation to fix problems directly rather than waiting for directives
• People doing the work daily come up with the best ideas to resolve issues and perform tasks most efficiently

Hiring implications: Job candidates need to demonstrate both technical skills and soft skills (e.g., ability to communicate clearly, accept feedback, participate in discussions respectfully).

History: GE Aviation plants in Durham, North Carolina, and Bromont, Quebec, Canada, have used self-managed teams for more than 30 years; the approach is now used at most of its 77 manufacturing facilities worldwide.

🧭 Overview

🧠 One-sentence thesis

Organizations must establish clear reporting relationships, decide how many management layers they need, determine how much control each manager should have, and choose where decisions will be made—all of which shape whether the structure becomes mechanistic or organic.

📌 Key points (3–5)

• Managerial hierarchy and chain of command: Organizations use layers of management and clear reporting lines to coordinate work and clarify who reports to whom.
• Authority, delegation, and accountability: Authority flows downward as managers delegate tasks; accountability flows upward as managers answer for their subordinates' actions.
• Span of control trade-offs: Narrow spans allow close supervision but add costly layers; wide spans reduce costs but may weaken control.
• Centralization vs. decentralization: Centralized structures concentrate decisions at the top for tight control; decentralized structures push decisions down for speed and flexibility.
• Common confusion—mechanistic vs. organic: Mechanistic structures are tall, specialized, and centralized (efficient in stable environments); organic structures are flat, flexible, and decentralized (agile in dynamic environments).

🏛️ Managerial hierarchy and chain of command

🏛️ What the managerial hierarchy is

Managerial hierarchy (also called the management pyramid): the levels of management within an organization.

• Traditionally has three levels: top, middle, and supervisory management.
• Each unit is controlled and supervised by a manager in a higher unit.
• The person with the most formal authority is at the top; power decreases as you move down, while the number of employees increases.
• Not all companies use this traditional configuration—some, like The Morning Star Company, have eliminated hierarchy altogether and use self-management.

🔗 Chain of command and unity of command

Chain of command: the line of authority that extends from one level of the organization to the next, from top to bottom, and makes clear who reports to whom.

• Shown in the organization chart; can be traced from the CEO down to employees producing goods and services.
• Unity of command principle: everyone reports to and gets instructions from only one boss.
  • Guarantees that everyone has a direct supervisor and won't take orders from multiple supervisors.
  • Gives clear directions and helps coordinate people doing different jobs.
• Don't confuse: Matrix organizations automatically violate unity of command because employees report to more than one boss (at least for the duration of a project).
  • Example: Unilever used to have a matrix structure with one CEO for North America and another for Europe; employees in divisions operating in both locations were unsure which CEO's decisions took precedence. The company abandoned the matrix structure due to unclear or duplicate reporting relationships.

⚖️ Authority, delegation, and accountability

Authority: legitimate power, granted by the organization and acknowledged by employees, that allows an individual to request action and expect compliance.

• Exercising authority means making decisions and seeing that they are carried out.
• Individuals who are part of the chain of command have authority over other persons in the organization.

Delegation of authority: when managers assign some degree of authority and responsibility to others below them in the chain of command.

• Makes employees accountable to their supervisor.

Accountability: responsibility for outcomes.

• How authority and accountability flow:
  • Authority and responsibility move downward as managers assign activities and share decision-making with subordinates.
  • Accountability moves upward as managers in each successively higher level are held accountable for the actions of their subordinates.

📏 Span of control

📏 What span of control means

Span of control (sometimes called span of management): the number of employees the manager directly supervises.

• Can be as narrow as two or three employees or as wide as 50 or more.
• In general, the larger the span of control, the more efficient the organization.
• Both narrow and wide spans have benefits and drawbacks.

⚖️ Trade-offs between narrow and wide spans

Span type	Advantages	Disadvantages
Narrow	• High degree of control<br>• Manager more familiar with each individual<br>• Close supervision provides immediate feedback	• More levels of management → more expensive<br>• Decision-making slower due to vertical layers<br>• Top management isolated<br>• Discourages employee autonomy
Wide	• Fewer levels → increased efficiency and reduced costs<br>• Increased subordinate autonomy → quicker decision-making<br>• Greater organizational flexibility<br>• Higher job satisfaction due to empowerment	• Less control<br>• Managers may lack familiarity with subordinates<br>• Managers spread too thin to provide necessary leadership or support<br>• Lack of coordination or synchronization

🔍 Five factors that determine optimal span of control

1. Nature of the task: The more complex the task, the narrower the span of control.
2. Location of the workers: The more locations, the narrower the span of control.
3. Ability of the manager to delegate responsibility: The greater the ability to delegate, the wider the span of control.
4. Amount of interaction and feedback between workers and manager: The more feedback and interaction required, the narrower the span of control.
5. Level of skill and motivation of the workers: The higher the skill level and motivation, the wider the span of control.

• Example: If hundreds of employees perform the same job (e.g., sewing machine operators working from identical patterns), one supervisor may manage a very large number. But if employees perform complex and dissimilar tasks (e.g., research chemists in a pharmaceutical R&D area), a manager can effectively supervise only a much smaller number.

🎯 Centralization vs. decentralization

🎯 What centralization and decentralization mean

Centralization: the degree to which formal authority is concentrated in one area or level of the organization.

• In a highly centralized structure, top management makes most of the key decisions, with very little input from lower-level employees.

Decentralization: the process of pushing decision-making authority down the organizational hierarchy, giving lower-level personnel more responsibility and power to make and implement decisions.

✅ Benefits and risks of centralization

Benefits:

• Top managers develop a broad view of operations.
• Tight financial controls.
• Can reduce costs by eliminating redundancy.

Risks:

• Lower-level personnel don't get a chance to develop decision-making and leadership skills.
• Organization is less able to respond quickly to customer demands.

✅ Benefits and risks of decentralization

Benefits:

• Quicker decision-making.
• Increased levels of innovation and creativity.
• Greater organizational flexibility.
• Faster development of lower-level managers.
• Increased levels of job satisfaction and employee commitment.

Risks:

• If lower-level personnel don't have the necessary skills and training, they may make costly mistakes.
• May increase the likelihood of inefficient lines of communication, competing objectives, and duplication of effort.

🧭 When decentralization is usually desirable

Decentralization is usually desirable when the following conditions are met:

• The organization is very large (e.g., ExxonMobil, Ford, or General Electric).
• The firm is in a dynamic environment where quick, local decisions must be made (e.g., many high-tech industries).
• Managers are willing to share power with their subordinates.
• Employees are willing and able to take more responsibility.
• The company is spread out geographically (e.g., Nordstrom, Caterpillar, or Ford).

🔄 Factors to consider when choosing the degree of centralization

Several factors must be considered when deciding how much decision-making authority to delegate:

• The size of the organization.
• The speed of change in its environment.
• Managers' willingness to give up authority.
• Employees' willingness to accept more authority.
• The organization's geographic dispersion.

Note: As organizations grow and change, they continually reevaluate their structure to determine whether it is helping the company achieve its goals.

🏗️ Mechanistic vs. organic organizational structures

🏗️ Two basic structural models

Structural design generally follows one of two basic models:

Mechanistic organization: characterized by a relatively high degree of job specialization, rigid departmentalization, many layers of management (particularly middle management), narrow spans of control, centralized decision-making, and a long chain of command.

• Results in a tall organizational structure.
• Example: The U.S. Army and the United Nations are typical mechanistic organizations.

Organic organization: characterized by a relatively low degree of job specialization, loose departmentalization, few levels of management, wide spans of control, decentralized decision-making, and a short chain of command.

• Results in a flat organizational structure.
• Example: Colleges and universities tend to have flat organizational structures, with only two or three levels of administration between the faculty and the president.

📊 Comparison table

Structural Characteristic	Mechanistic	Organic
Job specialization	High	Low
Departmentalization	Rigid	Loose
Managerial hierarchy (levels of management)	Tall (many levels)	Flat (few levels)
Span of control	Narrow	Wide
Decision-making authority	Centralized	Decentralized
Chain of command	Long	Short

Don't confuse: Few organizations are purely mechanistic or purely organic; most organizations tend more toward one type or the other.

🧩 Factors influencing the choice between mechanistic and organic structures

🎯 Strategy

• A company's organizational structure should enable it to achieve its goals.
• Because setting corporate goals is part of a firm's overall strategy-making process, a company's structure depends on its strategy.
• Innovation strategy → needs the flexibility and fluid movement of information that an organic organization provides.
• Cost-control strategy → requires the efficiency and tight control of a mechanistic organization.
• Example: Microsoft CEO Satya Nadella cut more than 18,000 jobs in 2014 (mostly from the failed Nokia acquisition) while also trying to encourage employees and managers to break down barriers between divisions and increase the pace of innovation. Struggling companies often try to simultaneously increase innovation and rein in costs, which can be organizational challenges for managers.

📏 Size

• Much research shows a company's size has a significant impact on its organizational structure.
• Smaller companies tend to follow the more organic model—easier to be successful with decentralized decision-making and less employee specialization when you have only 50 employees.
• As a company grows, it becomes more mechanistic—systems are put in place to manage the greater number of employees; procedures, rules, and regulations replace flexibility, innovation, and independence.
• Exception: W. L. Gore has nearly 10,000 employees and more than $3 billion in annual revenues but uses an extremely organic organizational structure (employees have no bosses, participate on teams, and often create roles for themselves).

🌍 Business environment

• The business in which a company operates has a significant impact on its organizational structure.
• Complex, dynamic, and unstable environments → companies need to organize for flexibility and agility; their organizational structures need to respond to rapid and unexpected changes.
• Simple, stable environments → companies benefit from the efficiencies created by a mechanistic organizational structure; the environment is predictable, so demands for flexibility and agility are not so great.