This Document Contains Chapters 1 to 2 CHAPTER 1 Exploring the World of Business and Economics 1.1 A WORD FROM THE AUTHORS This chapter accomplishes three important tasks. First, it sets the stage for the remainder of the course and provides reasons why students should study business. Second, it provides an overview of the economy, competition, and different types of economic systems. Finally, it links events in American history to the present American business system. These concepts are essential to a basic understanding of the American economic system as a whole. We begin Chapter 1 with a discussion of why students should study business and a definition of business. Then we explore the major types of economic systems. Next, we consider how a nation’s economy and productivity are measured. An examination of the major types of competition follows. Finally, we discuss the historical development of business in the United States and the challenges that businesses can expect to encounter in the future. 1.2 TRANSITION GUIDE New in Chapter 1: Exploring the World of Business and Economics • A new objective for “The Business Cycle” is included in the objectives for Chapter 1. • A new Inside Business feature describes the history of Zynga and how it developed games like FarmVille, City Ville, and other social media games. • Current economic problems and how they affect both businesses and consumers are included in the introductory paragraph for this chapter. • New URL information about the student Web site is provided in the first part of the chapter. • A new Figure 1.1, “Who Makes the Most Money?,” provides information about the relationship between education and salaries. • The Career Success feature, “Jump Starting Your Career,” has been deleted. • New information about social networking is provided in the section “For Help in Choosing a Career.” • A new Career Success feature, “Show Off Your Skills with Digital Merit Badges,” describes how employees and job applicants can showcase their accomplishments. • A new Personal Apps describes how personal leadership skills are related to the business skills needed for career success. • Analytical skills are now included in the section “To Improve Your Management Skills.” • In the “To Start Your Own Business” section, a new example describes how Steve Demeter created the Trims app and met the needs of his customers. • The textbook features list in the section “Special Note to Business Students” has been updated. • A new example of how H&R Block provides tax services to its clients is included in the section “The Organized Effort of Individuals.” • Updated information on the number of Walmart stores and number of countries that have Walmart stores is provided in the “Satisfying Needs” section. • Updated material from the General Mills social responsibility report is included in the section “Business Profit.” • A new Sustaining the Planet feature describes Honda’s commitment to the preservation of the environment. • The Entrepreneurial Success feature about Rob Kalin and the Internet firm Etsy has been deleted. • A new Entrepreneurial Success feature about how Nick D’Aloisio built a million-dollar app business is provided. • Updated statistics for gross domestic product (GDP) and real gross domestic product are provided in the section “The Nation’s Gross Domestic Product.” • The statistics for GDP and real GDP in Figure 1.6 have been updated with amounts from the 2012 U.S. Statistical Abstract. • Table 1.2 now provides information about the consumer confidence index. • The material in Table 1.2 about bank credit has been deleted. • New information about the amount of U.S. national debt is provided in the section “The Business Cycle.” • The Spotlight feature, “How Many People Are Really Unemployed?,” has been deleted. • A new Personal Apps illustrates the concept of product differentiation. • “The Equilibrium, or Market, Price” section and Figure 1.7 have been revised to reflect the current wheat prices. • Figure 1.8, “Time Line of American Business,” has been deleted. • New examples of how Procter & Gamble, Unilever, and other U.S. firms are competing in the global marketplace are included in the section “The Global Environment.” • A new definition for social media is provided in the section “The Technology Environment.” • New information about Facebook, Twitter, and social media is provided in the section “The Technology Environment.” • A new Return to Inside Business featuring Zynga is provided at the end of the chapter. • A new Case 1.2 describes how the Walt Disney Company entertains the world. • The Building Skills for Career Success section contains a new Social Media Exercise. • The Exploring the Internet feature in Building Skills for Career Success has been deleted. 1.3 QUICK REFERENCE GUIDE Instructor Resource Location Transition Guide IM, pp. 2–3 Learning Objectives Textbook, p. 2; IM, p. 5 Brief Chapter Outline IM, pp. 5–6 Comprehensive Lecture Outline IM, pp. 6–17 At Issue: Capitalism—Yes or No? IM, p. 12 Career Success Show Off Your Skills with Digital Merit Badges Textbook, p. 6 Sustaining the Planet Honda: Not Just Another Automobile Manufacturer Textbook, p. 12 Entrepreneurial Success Building a Million-Dollar App Business Textbook, p. 13 Inside Business Zynga Zooms into Business Textbook, p. 3 Return to Inside Business Textbook, p. 28 Questions and Suggested Answers, IM, p. 18 Marginal Key Terms List Textbook, p. 30 Review Questions Textbook, p. 30 Questions and Suggested Answers, IM, pp. 18–21 Discussion Questions Textbook, p. 31 Questions and Suggested Answers, IM, pp. 21–22 Video Case 1.1 (Entertainment Means Profits for Nederlander Concerts) and Questions Textbook, p. 31 Questions and Suggested Answers, IM, p. 23 Case 1.2 (The Walt Disney Company Entertains the World) and Questions Textbook, p. 32 Questions and Suggested Answers, IM, p. 24 Building Skills for Career Success Textbook, pp. 32–33 Suggested Answers, IM, pp. 25–27 IM Quiz I & Quiz II IM, pp. 28–30 Answers, IM, p. 30 Classroom Exercises IM, p. 31 1.4 LEARNING OBJECTIVES After studying this chapter, students should be able to: 1. Discuss what you must do to be successful in the world of business. 2. Define business and identify potential risks and rewards. 3. Define economics and describe the two types of economic systems: capitalism and command economy. 4. Identify the ways to measure economic performance. 5. Examine the different phases in the typical business cycle. 6. Outline the four types of competition. 7. Summarize the factors that affect the business environment and the challenges that American businesses will encounter in the future. 1.5 BRIEF CHAPTER OUTLINE I. Your Future in the Changing World of Business A. Why Study Business? 1. For Help in Choosing a Career 2. To Be a Successful Employee 3. To Improve Your Management Skills 4. To Start Your Own Business 5. To Become a Better Informed Consumer and Investor B. Special Note to Business Students II. Business: A Definition A. The Organized Effort of Individuals B. Satisfying Needs C. Business Profit III. Types of Economic Systems A. Capitalism B. Capitalism in the United States 1. Households 2. Businesses 3. Governments C. Command Economies 1. Socialism 2. Communism IV. Measuring Economic Performance A. The Importance of Productivity in the Global Marketplace B. The Nation’s Gross Domestic Product C. Important Economic Indicators that Measure a Nation’s Economy V. The Business Cycle VI. Types of Competition A. Perfect Competition 1. The Basics of Supply and Demand 2. The Equilibrium, or Market, Price B. Monopolistic Competition C. Oligopoly D. Monopoly VII. American Business Today A. Early Business Development B. Business Development in the 1900s C. A New Century: 2000 and Beyond D. The Current Business Environment 1. The Competitive Environment 2. The Global Environment 3. The Technology Environment 4. The Economic Environment E. The Challenges Ahead 1.6 COMPREHENSIVE LECTURE OUTLINE Perhaps the biggest threats to the nation’s economy were the problems associated with the economic crisis that began in late 2007. While politicians, economists, business leaders, and the general public still debate the merits of a federal rescue plan, one factor became very apparent. Something had to be done to correct what some experts described as the nation’s worst economic problems since the Great Depression. Although the economy has improved, there are still problems—the average U.S. unemployment rate is still about 9 percent; consumers are spending but are more careful and selective; in an attempt to stimulate the economy, the government has increased spending; and the stock market remains unstable. Despite these problems, our economic system will survive. In fact, our economy continues to adapt and change to meet the challenges of an ever-changing world. Our economic system provides an amazing amount of freedom that allows businesses that range in size from the small corner grocer to Apple to adapt to changing business environments. Within certain limits, imposed mainly to ensure public safety, the owners of a business can produce any legal good or service they choose and attempt to sell it at a price they set. This system of business, in which individuals decide what to produce, how to produce it, and at what price to sell it, is called free enterprise. I. YOUR FUTURE IN THE CHANGING WORLD OF BUSINESS. To experience success, you must adapt to change in order to take advantage of the opportunities that are out there. To do so, you must bring something to the table that makes you different from the next person. Ask yourself: What can I do that will make employers want to pay me a salary? What skills do I have that employers need? A. Why Study Business? Once you have an education and knowledge, no one can take it away. To begin with, there are economic benefits. (See Figure 1.1.) Further, there are at least five reasons why you should study business. 1. For Help in Choosing a Career. This business course will introduce you to a wide array of employment opportunities. One thing to remember as you think about what your ideal career might be is that a person’s choice of a career is ultimately a reflection of what he or she values and holds most important. Teaching Tip: Ask students what careers they think might be the most in demand in the next 10 years. Link to the Bureau of Labor Statistics Occupational Outlook Handbook Web site for detailed information (http://www.bls.gov/ooh/fastest-growing.htm). Some of the fastest growing careers are in health and veterinary care and biomedical engineering. 2. To Be a Successful Employee. To get a job in your chosen field and to be successful at it, you will have to develop a plan, or road map, that ensures you have the skills and knowledge the job requires. This course, your instructor, and all the resources available at your college or university can help you acquire the skills and knowledge you will need for a successful career. 3. To Improve Your Management Skills. To be an effective manager, you must be able to perform four basic management functions: planning, organizing, leading and motivating, and controlling. To successfully perform these management functions, managers must possess three very important skills: interpersonal skills, technical skills, and conceptual skills. 4. To Start Your Own Business. Some people prefer to work for themselves, and they open their own businesses. a) To be successful, business owners must possess many of the same skills that successful employees have. Teaching Tip: Ask students what the chief motivation is for starting a business—money or independence? Independence wins. Which is more important—creativity or self-discipline? Discipline wins. b) It also helps if your small business can provide a product or service that customers want. c) Unfortunately, approximately 70 percent of small businesses fail within the first seven years. Typical reasons for business failures include undercapitalization, poor business location, poor customer service, unqualified or untrained employees, fraud, lack of a proper business plan, and failure to seek outside professional help. 5. To Become a Better Informed Consumer and Investor. By studying business, you will become a more fully informed consumer, which means that you will be able to make more intelligent buying decisions and spend your money more wisely. This same basic understanding of business will also make you a better informed investor. Teaching Tip: Ask students if they are more likely to use price to determine quality if they have no knowledge or understanding of a product. Point out that low-priced private label brands are more likely to be purchased by people with more education than by those with less. B. Special Note to Business Students. This business course doesn’t have to be difficult. All the features in each chapter have been evaluated and recommended by instructors with years of teaching experience. In addition, business students have critiqued each chapter. A number of student supplements to the text will help you explore the world of business, as well as the Web site that accompanies this edition. II. BUSINESS: A DEFINITION. Business is the organized effort of individuals to produce and sell, for a profit, the goods and services that satisfy society’s needs. To be successful, a business must be organized, satisfy needs, and earn a profit. Teaching Tip: Ask students to state the three components of the definition of business: (1) it must be organized, (2) it must serve a need, and (3) it must earn a profit. You will probably need to help with the answers. Once you have the three components, ask them to give examples of outstanding companies in each area. For example, consumer products companies such as Procter & Gamble certainly seem to be well organized, serve a need, and make good profits. IBM is another example. Looking at profit relative to the need served can get good discussion flowing early. A. The Organized Effort of Individuals. For a business to be organized, it must combine four kinds of resources: material, human, financial, and informational. (See Figure 1.2.) 1. Material resources include the raw materials used in manufacturing processes, as well as buildings and machinery. 2. Human resources are the people who furnish their labor to the business in return for wages. 3. The financial resource is the money required to pay employees, purchase materials, and generally keep the business operating. 4. Information is the resource that tells the managers of the business how effectively the other resources are being combined and used. 5. Businesses are usually classified as one of three types. a) Manufacturing businesses process various materials into tangible goods. b) Service businesses produce services. c) Marketing intermediaries buy products from manufacturers and then resell them. B. Satisfying Needs. The ultimate objective of every firm is to satisfy the needs of its customers. When the business understands its customers’ needs and works to satisfy those needs, it is usually successful. C. Business Profit. Profit is what remains after all business expenses have been deducted from sales revenue. (See Figure 1.3.) Negative profit, which results when a firm’s expenses are greater than its sales revenue, is called a loss. The term stakeholders is used to describe all the different people or groups who are affected by the policies, decisions, and activities made by an organization. While stockholders and business owners generally believe that profit is the most important goal for a business, many stakeholders may be just as concerned about a firm’s social responsibility record. The profit earned by a business becomes the property of its owners. Profit is the reward business owners receive for producing goods and services that consumers want and for assuming the risks of ownership. One of these is the risk of not being paid (employees, suppliers, and lenders must be paid before the owners). Another is the risk of losing whatever was invested in the business. Teaching Tip: Apple has been monumentally successful with its iPhone product. Ask students what need the iPhone meets. What makes it different from other cellular phones? What other recent products can they name that meet an existing need well? III. TYPES OF ECONOMIC SYSTEMS. Economics is the study of how wealth is created and distributed. 1. By “wealth” we mean anything of value. “How wealth is distributed” simply means “who gets what.” The way in which people deal with these two issues determines the kind of economic system, or economy, that a nation has. 2. Economics is usually studied from two perspectives: a) Microeconomics—The study of the decisions made by individuals and businesses. b) Macroeconomics—The study of the national economy and the global economy. 3. Factors of production are the resources used to provide goods and services. There are four such factors. a) Land and natural resources—Elements in their natural state that can be used in production, such as crude oil, forests, minerals, land, water, and even air. Teaching Tip: Ask students what resources in addition to oil and gas are in limited supply. Obviously, limitations create problems—but what opportunities might they also represent? b) Labor—Human resources such as managers and employees. c) Capital—Money, facilities, equipment, and machines used in the operation of organizations. d) Entrepreneurship—The willingness to take risks and the knowledge and ability to use the other factors of production efficiently. An entrepreneur is a person who risks his or her time, effort, and money to start and operate a business. 4. A nation’s economic system significantly affects all the economic activities of its citizens and organizations. A country’s economic system provides answers to four basic economic questions. a) What goods and services—and how much of each—will be produced? b) How will these goods and services be produced? c) For whom will these goods and services be produced? d) Who owns and controls the major factors of production? Teaching Tip: Ask the students to regard the classroom as an economic unit. The goods produced are papers, discussions, and exam results. How are these goods produced? For whom? And most importantly, who has ownership? A. Capitalism. Capitalism is an economic system in which individuals own and operate the majority of businesses that provide goods and services. Adam Smith in his book, Wealth of Nations, published in 1776, argued that a society’s interests are best served when the individuals within that society are allowed to pursue their own self-interest. 1. Adam Smith created the concept he called the invisible hand, which describes how a business owner’s personal gain benefits others (through the product that is produced or through the wages that are paid to workers) and a nation’s economy (through increased GDP, taxes, exports, etc.). 2. Adam Smith’s capitalism is based on four fundamental issues. (See Figure 1.4.) a) First, the creation of wealth is properly the concern of private individuals, not of government. b) Second, private individuals must own the resources used to create wealth, and the owners of resources should be free to determine how these resources are used. c) Third, Smith contended that economic freedom ensures the existence of competitive markets that allow both sellers and buyers to enter and exit as they choose. The freedom to enter or leave a market at will has given rise to the term market economy (sometimes referred to as a free-market economy)—an economic system in which businesses and individuals make the decisions about what to produce and what to buy; the market determines how much is sold and at what prices. d) Finally, in Smith’s view, the role of government should be limited to providing defense against foreign enemies, ensuring internal order, and furnishing public works and education. With regard to the economy, government should act only as rule maker and umpire. Teaching Tip: Ask students to debate whether federal, state, and local governments are properly involved in regulating business. 3. Smith believed that each person should be allowed to work toward his or her own economic gain, without government interference. The French term “laissez faire” describes Smith’s system; loosely translated it means “let them do” (as they see fit). B. Capitalism in the United States. The U.S. economy is a mixed economy because it exhibits elements of both capitalism and socialism. In today’s economy, the four basic economic questions are answered by three groups. (See Figure 1.5.) 1. Households. Households are consumers of goods and services, as well as owners of some of the factors of production. Approximately 70 percent of U.S. production consists of consumer products for personal consumption. a) As “resource owners,” the members of households provide businesses with labor, capital, and other resources. b) As “consumers,” household members use their income to purchase the goods and services produced by business. 2. Businesses. Like households, businesses are engaged in two different exchanges. They exchange money for natural resources, labor, and capital; and they use these resources to produce goods and services. Then they exchange their goods and services for sales revenue. 3. Governments. Government provides a variety of services that are considered important but either (a) would not be produced by private business firms or (b) would be produced only for those who could afford them (e.g., national defense, police/fire protection, education, and construction of roads and highways). C. Command Economies. A command economy is an economic system in which the government decides what will be produced, how it will be produced, for whom available goods and services will be produced, and who owns and controls the major factors of production. Two types of economic systems serve as examples of command economies. 1. Socialism. In a socialist economy, the key industries are owned and controlled by the government. Depending on the country, private ownership of smaller businesses is permitted to varying degrees. What to produce and how to produce it are determined in accordance with national goals. 2. Communism. In a communist economy, almost all economic resources are owned by the government. The basic economic questions are answered through centralized state planning, which also sets prices and wages. Emphasis is placed on the production of goods the government needs rather than on the products that consumers might want. Karl Marx was the father of communism. IV. MEASURING ECONOMIC PERFORMANCE A. The Importance of Productivity in the Global Marketplace. One way to measure a nation’s economic performance is to assess its productivity. Productivity is the average level of output per worker per hour. An increase in productivity results in economic growth. B. The Nation’s Gross Domestic Product. A nation’s gross domestic product (GDP) is the total dollar value of all goods and services produced by all people within the boundaries of a country during a one-year period. 1. This GDP figure facilitates comparisons between the United States and other countries because it is the standard used in international guidelines for economic accounting. 2. To make accurate comparisons of GDP figures for two different years, we must adjust the figures for inflation or deflation. Inflation is a general rise in the level of prices. Deflation is a general decrease in the level of prices. “Real” gross domestic product is the total dollar value, using inflation-adjusted figures, of all goods and services produced by a nation. (See Figure 1.6.) C. Important Economic Indicators that Measure a Nation’s Economy. There are other economic measures that can be used to evaluate a nation’s economy such as the unemployment rate, consumer price index (CPI), which measures the changes in prices of a fixed basket of goods purchased by a typical consumer in an urban area, and producer price index (PPI), which measures prices that producers receive for their finished goods. Table 1.2 in the text lists additional measures used to evaluate the economy. V. THE BUSINESS CYCLE. A nation’s economy fluctuates rather than grows at a steady pace every year. These fluctuations are generally referred to as the business cycle; that is, the recurrence of periods of growth and recession in a nation’s economic activity. Generally, the business cycle consists of four states: peak (sometimes referred to as prosperity), recession, trough, and recovery. A. During the peak period, the economy is at its highest point, unemployment is low, total income is relatively high, and consumers are willing to buy products and services. Businesses often expand and offer new products and services. B. Generally, economists define a recession as two or more consecutive three-month periods of decline in a country’s gross domestic product. Unemployment rises during a recession, and total buying power declines. Economists define a depression as a severe recession that lasts longer than a recession. C. The third phase of the business cycle, the “trough” of a recession or depression, is the phase in which the nation’s output and unemployment reach their lowest levels. To offset the effects of recession and depression, the federal government uses both monetary and fiscal policies. 1. Monetary policies are the Federal Reserve’s decisions that determine the size of the supply of money in the nation and the level of interest rates. 2. The government can also use fiscal policy to influence the amount of savings and expenditures by altering the tax structure and changing the levels of government spending. Although the federal government collects over $2 trillion in annual revenues, the government often spends more than it receives, resulting in the federal deficit. 3. The total of all federal deficits is called the national debt. D. The last economic state is recovery. Recovery is the movement of the economy from depression or recession to prosperity; a greater demand for products and services results. VI. TYPES OF COMPETITION. Business competition is essentially a rivalry among businesses for sales to potential customers. Economists recognize four different degrees of competition, ranging from ideal, complete competition to no competition at all. These are perfect competition, monopolistic competition, oligopoly, and monopoly. (See Table 1.3.) A. Perfect Competition. Perfect competition is a market situation in which there are many buyers and sellers of a product, and no single buyer or seller is powerful enough to affect the price of that product. In perfect competition, buyers and sellers must accept the going price. 1. The Basics of Supply and Demand. The supply of a particular product is the quantity of the product that producers are willing to sell at each of various prices. The demand for a particular product is the quantity that buyers are willing to purchase at each of various prices. (See Figure 1.7.) 2. The Equilibrium, or Market, Price. Under pure competition, the market price of any product is the price at which the quantity demanded is exactly equal to the quantity supplied. Market prices are affected by anything that affects supply and demand. B. Monopolistic Competition. Monopolistic competition is a market situation in which there are many buyers along with a relatively large number of sellers. The various products available in this market are similar and intended to satisfy the same need. However, each seller attempts to make its products different. Product differentiation is the process of developing and promoting differences between one’s products and all similar products. C. Oligopoly. An oligopoly is a market situation (or industry) in which there are few sellers. These sellers are quite large and must make sizable investments to enter into their markets. Because there are few sellers, the market actions of each can have a strong effect on competitors’ sales and prices. D. Monopoly. A monopoly is a market (or industry) with only one seller. A firm in a monopoly position must consider the demand for its product and set the price at the most profitable level. A natural monopoly is an industry that requires a huge investment in capital and within which any duplication of facilities would be wasteful. Many public utilities are still classified as natural monopolies, but competition is increasing in many industries. 1. In addition to natural monopolies, another type of legal monopoly—sometimes referred to as “limited monopoly”—is created when the federal government issues a copyright, patent, or trademark. 2. Except for natural and limited monopolies, federal antitrust laws prohibit both monopolies and attempts to form monopolies. Teaching Tip: Ask students to debate whether monopolies are always bad or if they should be permitted on occasions. Most European and Asian companies are larger than many American companies, and many are government owned or subsidized. For example, many national airlines such as Air France and Boeing’s European competitor Airbus receive government subsidies. You could make an argument that we need very large companies to compete effectively in the global marketplace. VII. AMERICAN BUSINESS TODAY. Compared with people in other countries, Americans have a high standard of living, which refers to a subjective measure of how well off an individual or a society is in terms of want satisfaction through goods and services. Understanding the current business environment is enhanced by understanding some of the history of business. A. Early Business Development. Almost all families lived on farms, and the entire family worked at the business of surviving. 1. The early colonists used barter—a system of exchange in which goods or services are traded directly for other goods and/or services without using money. 2. The domestic system was a method of manufacturing in which an entrepreneur distributed raw materials to various homes, where families would process them into finished goods. 3. In 1790, Samuel Slater, an Englishman, set up a textile factory in Rhode Island to spin raw cotton into thread. Slater’s ingenuity resulted in America’s first use of the factory system of manufacturing, in which all the materials, machinery, and workers required to manufacture a product are assembled in one place. 4. A manufacturing technique called specialization was used to improve productivity. Specialization is the separation of a manufacturing process into distinct tasks and the assignment of different tasks to different workers. 5. The years from 1820 to 1900 were the golden age of invention and innovation in machinery. 6. At the same time, new means of transportation greatly expanded the domestic markets for American products. B. Business Development in the 1900s 1. Industrial growth and prosperity continued well into the twentieth century. Henry Ford’s moving automotive assembly line refined the concept of specialization and helped spur on the mass production of consumer goods. 2. Fundamental changes occurred in business ownership and management. No longer were the largest businesses owned by one individual; instead, ownership was in the hands of thousands of corporate shareholders. 3. The Roaring Twenties ended with the sudden crash of the stock market in 1929 and the near collapse of the economy. The Great Depression that followed in the 1930s was a time of misery and human suffering. 4. After Franklin D. Roosevelt became president in 1933, the federal government got deeply involved in business for the first time by implementing programs to get the economy moving again. 5. Major events that shaped the nation’s economy occurred from 1940 to 2000: • World War II, the Korean War, and the Vietnam War. • Rapid economic growth and higher standard of living during the 1950s and 1960s. • The social responsibility movement during the 1960s. • A shortage of crude oil and higher prices for most goods in the mid-1970s. • High inflation, high interest rates, and reduced business profits during the early 1980s. • Sustained economic growth in the 1990s. 6. During the last part of the 20th century, the Internet became a major force in the economy. e-Business became an accepted method of conducting business. C. A New Century: 2000 and Beyond. According to economic experts, the time period from 2000 to 2010 might be characterized as the best of times and the worst of times rolled into one package. 1. On the plus side, technology became available at an affordable price. The growth of service businesses and increasing opportunities for global trade has changed the way American firms do business. A service economy is an economy in which more effort is devoted to the production of services than to the production of goods. 2. On the negative side, there is still a certain amount of pessimism surrounding the economy. D. The Current Business Environment. Business is affected by the following environments: 1. The Competitive Environment. Successful firms compete with competitors by satisfying customer needs. 2. The Global Environment. There are winners and losers from globalization. Consumers win because they have more product choices and lower prices. On the negative side, many people have and will lose their jobs because of lower offshore wages or due to technological innovation. 3. The Technological Environment. Changes in manufacturing equipment, communication with customers, and distribution of products are examples of how technology has changed business practices. Many businesses now promote their products and services through social media. 4. The Economic Environment. Managers and business owners do not have unlimited resources to pay for all the business activities they want to fund. This is especially important if the nation’s economy drops precipitously or an individual firm’s sales and profits are declining. Sustainability has become a major concern for today’s business managers. E. The Challenges Ahead. When our business system works well, it provides jobs for those who are willing to work, a standard of living that few countries can match, and many opportunities for personal advancement. But our system is far from perfect. It also gave us the Great Depression of the 1930s and the economic problems of the 1970s, the late 1980s, and the economic crisis that began in the fall of 2007. The challenges to the U.S. economic system over the next decade are many. Some of the issues to be resolved include the following: 1. How can we create a more stable economy and create new jobs for the unemployed? 2. How can we regulate banks, savings and loan associations, credit unions, and other financial institutions to prevent the type of abuses that led to the recent economic crisis? 3. How do we reduce the national debt and still maintain a healthy economy and stimulate business growth? 4. How can we use technology to make American workers more productive and American firms more competitive in the global marketplace? 5. How can we preserve the benefits of competition and small business in our American economic system? 6. How can we encourage economic growth and at the same time continue to conserve natural resources and sustain our environment? 7. How can we meet the needs of two-income families, single parents, older Americans, and the less fortunate who need health care and social programs to exist? 8. How can we defeat terrorism and resolve conflict with Iran, North Korea, and other countries throughout the world? The answers to these questions are anything but simple. Yet they directly affect our own future, our children’s future, and the future of our nation. Within the American economic and political system, the answers are ours to provide. CHAPTER 2 Being Ethical and Socially Responsible 2.1 A WORD FROM THE AUTHORS The material on ethics and social responsibility is presented early in the text to underscore the importance of business’s role in our society. In this context, we define business ethics and discuss the major factors believed to influence the level of ethical behavior in an organization. We also examine several types of ethical issues. As in Chapter 1, we turn to American history to trace the evolution of socially responsible business practices. Next, we define and contrast two contemporary views of social responsibility: the economic model and the socioeconomic model. In the process, we present arguments both for and against increased social responsibility in business. We consider social changes in three specific areas: consumerism, employment practices, and the environment. We identify public and private agencies that regulate or monitor business practices in these areas, including the Equal Employment Opportunity Commission and the Environmental Protection Agency. Finally, we outline the steps in the development and implementation of an effective corporate program for social responsibility. 2.2 TRANSITION GUIDE New in Chapter 2: Being Ethical and Socially Responsible • A new Inside Business feature describes how Panera cares about its communities by “suggested funding levels” rather than specific prices for its meals. • New URL information about the student Web site is provided in the first part of the chapter. • Information has been added about John and Timothy Rigas of Adelphia Communications Corp. and how Adelphia’s investors lost more than $60 billion. • A new Personal Apps describes how business ethics apply to customers, managers, and employees. • In the “Fairness and Honesty” section, information about how more than 1,500 clients of Anderson’s Ark and Associates lost about $31 million has been added. • The Ethical Challenges and Successful Solutions feature has been deleted. • The whistle-blowing section has been updated, and the Whistleblower Protection Act of 1989 is now included in the discussion. • In the “Social Responsibility” section, the General Mills Foundation’s philanthropic activities are revised and updated. • A discussion of IBM’s Corporate Service Corps., a “corporate version” of the Peace Corps, is now included. • A new example of GE’s $20 million grant to Milwaukee Public Schools to improve academic achievement is now included. • Charles Schwab Foundation’s philanthropic efforts are updated. • A new example of how ExxonMobil celebrated 2011 International Women’s Day by granting $6 million to support economic opportunities for women around the world has been added. • A new example of how AT&T responded to the high school drop-out crisis with a $100 million philanthropic program is given. • The Sustaining the Planet feature about major companies and nonprofit groups has been deleted. • A new Personal Apps explains that we should keep consumer rights in mind when we shop around for goods and services or have a problem with a purchase. • A new Ethical Success or Failure? feature reveals how everything we do online is being tracked by business. • Figure 2.3, “Comparative Income Levels,” has been updated to reflect the latest census data available. • Figure 2.4, “Relative Earnings of Male and Female Workers,” has been updated to reflect the latest census data available. • A new Sustaining the Planet feature describes how Xerox approaches its corporate social responsibility and citizenship by designing waste-free products. • The Spotlight feature, “Recession and Responsibility,” has been deleted. • British Petroleum’s 2012 settlement to pay out $7.8 billion has been added to the discussion of the Deepwater Horizon disaster. • A new Entrepreneurial Success feature describes how growing numbers of young entrepreneurs are starting businesses with the goal of using their skills for a socially responsible purpose. • The Entrepreneurial Success feature about recycling entrepreneurs has been deleted. • A new Return to Inside Business featuring Panera Cares is provided at the end of the chapter. • A new Case 2.2 describes Unilever’s plan for green and clean growth. • The Building Skills for Career Success section contains a new Social Media Exercise. • The Exploring the Internet feature in Building Skills for Career Success has been deleted. 2.3 QUICK REFERENCE GUIDE Instructor Resource Location Transition Guide IM, pp. 41–42 Learning Objectives Textbook, p. 35; IM, p. 44 Brief Chapter Outline IM, pp. 44–45 Comprehensive Lecture Outline IM, pp. 45–57 Ethical Success or Failure? Is Personal Data Really Private? Textbook, p. 53 At Issue: How should employers deal with proselytizing? IM, p. 55 Sustaining the Planet Social Responsibility at Xerox Textbook, p. 59 Entrepreneurial Success Social Entrepreneurs of Tomorrow Textbook, p. 61 Inside Business Panera Cares About Its Communities Textbook, p. 36 Return to Inside Business Textbook, p. 63 Questions and Suggested Answers, IM, p. 58 Marginal Key Terms List Textbook, p. 64 Review Questions Textbook, p. 64 Questions and Suggested Answers, IM, pp. 58–61 Discussion Questions Textbook, p. 65 Questions and Suggested Answers, IM, pp. 61–62 Video Case 2.1 (Scholfield Honda—Going Green with Honda) and Questions Textbook, p. 65 Questions and Suggested Answers, IM, p. 62 Case 2.2 (Unilever’s Plan for Green and Clean Growth) and Questions Textbook, p. 66 Questions and Suggested Answers, IM, pp. 62–63 Building Skills for Career Success Textbook, pp. 66–67 Suggested Answers, IM, pp. 63–65 IM Quiz I & Quiz II IM, pp. 66–68 Answers, IM, p. 69 Classroom Exercises IM, pp. 69–70 2.4 LEARNING OBJECTIVES After studying this chapter, students should be able to: 1. Understand what is meant by business ethics. 2. Identify the types of ethical concerns that arise in the business world. 3. Discuss the factors that affect the level of ethical behavior in organizations. 4. Explain how ethical decision making can be encouraged. 5. Describe how our current views on the social responsibility of business have evolved. 6. Explain the two views on the social responsibility of business and understand the arguments for and against increased social responsibility. 7. Discuss the factors that led to the consumer movement and list some of its results. 8. Analyze how present employment practices are being used to counteract past abuses. 9. Describe the major types of pollution, their causes, and their cures. 10. Identify the steps a business must take to implement a program of social responsibility. 2.5 BRIEF CHAPTER OUTLINE VI. Business Ethics Defined VII. Ethical Issues A. Fairness and Honesty B. Organizational Relationships C. Conflict of Interest D. Communications VIII. Factors Affecting Ethical Behavior A. Individual Factors Affecting Ethics B. Social Factors Affecting Ethics C. “Opportunity” as a Factor Affecting Ethics IX. Encouraging Ethical Behavior A. Government’s Role in Encouraging Ethics B. Trade Associations’ Role in Encouraging Ethics C. Individual Companies’ Role in Encouraging Ethics X. Social Responsibility XI. The Evolution of Social Responsibility in Business A. Historical Evolution of Business Social Responsibility XII. Two Views of Social Responsibility A. The Economic Model B. The Socioeconomic Model C. The Pros and Cons of Social Responsibility 1. Arguments for Increased Social Responsibility 2. Arguments Against Increased Social Responsibility XIII. Consumerism A. The Six Basic Rights of Consumers 1. The Right to Safety 2. The Right to Be Informed 3. The Right to Choose 4. The Right to Be Heard 5. Additional Consumer Rights B. Major Consumerism Forces XIV. Employment Practices A. Affirmative Action Programs B. Training Programs for the Hard-Core Unemployed XV. Concern for the Environment A. Effects of Environmental Legislation 1. Water Pollution 2. Air Pollution 3. Land Pollution 4. Noise Pollution B. Who Should Pay for a Clean Environment? XI. Implementing a Program of Social Responsibility A. Developing a Program of Social Responsibility 1. Commitment of Top Executives 2. Planning 3. Appointment of a Director 4. The Social Audit B. Funding the Program 2.6 COMPREHENSIVE LECTURE OUTLINE Most managers today are finding ways of balancing a growing agenda of socially responsible activities with the drive to generate profits. I. BUSINESS ETHICS DEFINED. Ethics is the study of right and wrong and of the morality of choices individuals make. Business ethics is the application of moral standards to business situations. Teaching Tip: Ask students how they decide what is right and what is wrong. Is there an internal mechanism or process they use or a code? Follow up by asking where they learned their personal code. II. ETHICAL ISSUES. Businesspeople face ethical issues every day, and some of these issues can be difficult to assess. These issues arise out of a business’s relationship with investors, customers, employees, creditors, and competitors. A. Fairness and Honesty. Fairness and honesty in business are important ethical concerns. Businesspeople must obey all laws and regulations as well as refrain from knowingly deceiving, misrepresenting, or intimidating others. B. Organizational Relationships. It may be tempting to place personal welfare above the welfare of others or of the organization. Relationships with customers and co-workers often create ethical problems such as taking credit for others’ ideas or work, not meeting one’s commitments, and pressuring others to behave unethically. C. Conflict of Interest. Conflict of interest results when a businessperson takes advantage of a situation for his or her own personal interest rather than for the employer’s interest. D. Communications. Business communications, especially advertising, can present ethical questions. Advertisers must take precautions to guard against deception. III. FACTORS AFFECTING ETHICAL BEHAVIOR. The factors that affect the level of ethical behavior in organizations are individual, social, and opportunity. (See Figure 2.1.) A. Individual Factors Affecting Ethics 1. Individual Knowledge of an Issue. A decision maker with a greater amount of knowledge regarding a situation may take steps to avoid ethical problems, whereas a less-informed person may take action unknowingly that leads to an ethical quagmire. 2. Personal Values. An individual’s moral values and central, value-related attitudes also clearly influence his or her business behavior. 3. Personal Goals. The types of personal goals an individual aspires to and the manner in which these goals are pursued have a significant impact on that individual’s behavior in an organization. B. Social Factors Affecting Ethics 1. Cultural Norms. A person’s behavior in the workplace, to some degree, is determined by cultural norms, and these social factors vary from one culture to another. 2. Co-workers. The actions and decisions of co-workers constitute another social factor believed to shape a person’s sense of business ethics. 3. Significant Others. The moral values and attitudes of “significant others”—spouses, friends, and relatives—can also affect an employee’s perception of what is ethical and unethical behavior in the workplace. 4. Use of the Internet. Even the Internet presents new challenges for firms whose employees enjoy easy access to sites through convenient high-speed connections at work. An employee’s behavior online can be viewed as offensive to co-workers and possibly lead to lawsuits against the firm if employees engage in unethical behavior on controversial Web sites not related to their job. Teaching Tip: A classroom can be considered a workplace for the time students are there. Ask students to take a minute and write down three examples of ethical behavior in the classroom and three examples of unethical behavior. Beyond the obvious cheating issues, students may mention things such as one student constantly monopolizing the instructor’s time, etc. C. “Opportunity” as a Factor Affecting Ethics 1. Presence of Opportunity. Opportunity refers to the amount of freedom an organization gives an employee to behave unethically if he or she makes that choice. 2. Ethical Codes. The existence of an ethical code and the importance management places on this code are other determinants of opportunity. 3. Enforcement. The degree of enforcement of company policies, procedures, and ethical codes is a major force affecting opportunity. IV. ENCOURAGING ETHICAL BEHAVIOR. Most authorities agree that there is room for improvement in business ethics. A more problematic issue is whether business can be made more ethical in the real world. A. Government’s Role in Encouraging Ethics. The government can establish acceptable levels of behavior by passing more stringent regulations. For example, the Sarbanes-Oxley Act of 2002 gives those who report corporate misconduct sweeping new legal protection. B. Trade Associations’ Role in Encouraging Ethics. Trade associations can, and often do, provide ethical guidelines for their members to follow. C. Individual Companies’ Role in Encouraging Ethics 1. Codes of ethics that companies provide to their employees are perhaps the most effective way to encourage ethical behavior. A code of ethics is a written guide to acceptable and ethical behavior as defined by an organization that outlines uniform policies, standards, and punishments for violations. 2. However, codes cannot possibly cover every situation. a) Companies must also create an environment in which employees recognize the importance of following the written code. b) Managers must provide direction by fostering communication, actively encouraging ethical decision making, and training employees to make ethical decisions. c) Assigning an ethics officer who coordinates ethical conduct gives employees someone to go to if they aren’t sure of the right thing to do. d) An ethics officer meets with employees and top management to provide ethical advice, establishes and maintains an anonymous confidential service to answer questions about ethical issues, and takes action on ethics code violations. 3. See Figure 2.2 for Texas Instruments’ code of ethics. 4. Unethical practices often become ingrained in an organization. 5. Employees with high personal ethics may take a controversial step called whistle-blowing—informing the press or government officials about unethical practices within one’s organization. a) Whistle-blowing can have serious repercussions for an employee. b) The Sarbanes-Oxley Act of 2002 protects whistle-blowers who report corporate misconduct. Any executive who retaliates against a whistle-blower can be held criminally liable and imprisoned for up to 10 years. c) The Whistleblower Protection Act of 1989 protects federal employees who report an agency’s misconduct. 6. When firms set up anonymous ethical hotlines to handle ethically questionable situations, employees may be more likely to engage in whistle-blowing. 7. When firms create an environment that educates employees and nurtures ethical behavior, whistle-blowing is greatly reduced because fewer ethical problems arise. 8. See Table 2.1 for general guidelines for making ethical decisions. V. SOCIAL RESPONSIBILITY A. Social responsibility is the recognition that business activities have an impact on society and the consideration of that impact in business decision making. 1. Social responsibility can cost companies a considerable amount of money, but it is also good business. B. Examples of Socially Responsible Organizations 1. Through Young Eagles, underwritten by S. C. Johnson, Phillips Petroleum, Lockheed Martin, Jaguar, and other corporations, 22,000 volunteer pilots take a half million youngsters on free flights to teach flying basics. 2. The General Mills Foundation, created in 1954, is one of the largest U.S. company-sponsored foundations and has awarded over $535 million to communities since its creation. Millions of dollars have been donated to Feeding America. 3. Dell’s outreach programs include projects that bring technology to underserved communities around the world. Globally, the Michael and Susan Dell Foundation has contributed more than $700 million to improve student performance and increase access to education. 4. Improving public schools around the world continues to be IBM’s top social priority. Its efforts are focused on preparing the next generation of leaders and workers. IBM launched the World Community Grid in 2004. It combines excess processing power from thousands of computers in a virtual supercomputer that enables researchers to gather and analyze unprecedented quantities of data aimed at advancing research on genomics, diseases, and natural disasters. IBM’s Corporate Service Corps. is a group of high performing employees that provide technology-related assistance to foreign governments and communities including economic development, health care, and entrepreneurship. 5. General Electric Company (GE) has a long history of supporting the communities where its employees work and live through its unique combination of resources, equipment, and employee and retiree volunteers. The company devotes its efforts in philanthropy to making communities around the world stronger. For example, the GE Foundation awarded $20 million to Milwaukee Public Schools as part of GE’s Developing Futures™ in Education program to help students compete in a global economy. 6. With the help of dedicated Schwab volunteers, the Charles Schwab Foundation provides programs and funding to help adults and children learn the basics of financial literacy. Since 1993, the Schwab Foundation has distributed an average of $4 million a year to 2,300 nonprofit organizations. 7. Improving basic literacy skills in the United States is among the Verizon Foundation’s major priorities because of its enormous impact on education, health, and economic development. Recently, Verizon employees and retirees donated more than 608,000 hours of service and, with the Verizon Foundation, contributed over $25 million in combined matching gift funds, making Verizon Volunteers one of the largest corporate volunteer incentive programs in the United States. 8. ExxonMobil’s commitment to education spans all levels of achievement. The National Math and Science Initiative and the Mickelson ExxonMobil Teachers Academy are programs emphasizing long-term educational improvement. The company supports new generations pursuing studies and careers in math and science. Recently, ExxonMobil employees and retirees contributed a total of $238 million to communities worldwide. In addition, the company celebrated 2011 International Women’s Day by granting $6 million to support economic opportunities for women around the world. 9. AT&T has built a tradition of supporting education, health and human services, the environment, public policy, and the arts in the communities it serves. Since 1984, AT&T has invested more than $600 million in support of education. To respond to the high school drop-out crisis, AT&T launched Aspire, a $100 million job shadowing program that has reached more than 23,000 students in over 200 cities. 10. At Merck & Co., Inc., the Patient Assistance Program makes the company’s medicines available to low-income Americans and their families at no cost. For over 50 years, Merck has provided its medicines completely free of charge to people in need through this program. Since 1957, the Merck Company Foundation has contributed more than $560 million to develop programs that help improve the health and well-being of people around the world. These are just a few illustrations from a long list of companies big and small that attempt to behave in socially responsible ways. VI. THE EVOLUTION OF SOCIAL RESPONSIBILITY IN BUSINESS A. Historical Evolution of Business Social Responsibility. During the first quarter of the twentieth century, businesses were free to operate pretty much as they chose. 1. Working conditions were often deplorable by today’s standards. a) The average work week exceeded 60 hours in most industries. b) There was no minimum-wage law. c) There were no employee benefits. d) Work areas were crowded and unsafe, and industrial accidents were the rule rather than the exception. 2. During this period, consumers were generally subject to the doctrine of caveat emptor, a Latin phrase meaning “let the buyer beware.” a) Victims of unscrupulous business practices could take legal action, but going to court was very expensive and consumers rarely won their cases. b) There were no consumer groups or government agencies to hold sellers responsible for their activities. 3. Prior to the 1930s, government became involved in day-to-day business activities only when there was an obvious abuse of the free-market system and competition was endangered. (See Table 2.2 for a list of early government regulations affecting business.) B. The collapse of the stock market on October 29, 1929, triggered the Great Depression and years of economic problems for the United States. 1. Public pressure mounted for government to “do something” about the economy and about worsening social conditions. 2. As a result, laws were passed to correct what many viewed as monopolistic abuses of big business, and various social services were provided for individuals. VII. TWO VIEWS OF SOCIAL RESPONSIBILITY. Government regulation and public awareness are external forces that have increased the social responsibility of business. But business decisions are made within the firm—and there, social responsibility begins with the attitude of management. There are two models of social responsibility. A. The Economic Model. The economic model of social responsibility holds that society will benefit most when business is left alone to produce and market profitable products that society needs. B. The Socioeconomic Model. The socioeconomic model of social responsibility holds that business should emphasize not only profits but also the impact of its decisions on society. C. The Pros and Cons of Social Responsibility. The merits of the economic and socio-economic models have been debated for years. Each side seems to have four arguments. 1. Arguments for Increased Social Responsibility. Proponents of the socioeconomic model offer the following arguments: a) Business cannot ignore social issues because business is a part of our society. b) Business has the technical, financial, and managerial resources needed to tackle today’s complex social issues. c) By helping to resolve social issues, business can create a more stable environment for long-term profitability. d) Socially responsible decision making by business firms can prevent increased government intervention, which would force businesses to do what they fail to do voluntarily. 2. Arguments Against Increased Social Responsibility. Opponents of the socioeconomic model offer these arguments: a) Business managers are responsible primarily to stockholders, so management must be concerned with providing a return on owners’ investments. b) Corporate time, money, and talent should be used to maximize profits, not to solve society’s problems. c) Social problems affect society in general, so individual businesses should not be expected to solve these problems. d) Social issues are the responsibility of government officials who are elected for that purpose and who are accountable to the voters for their decisions. 3. Table 2.3 compares the economic and socioeconomic viewpoints in terms of business emphasis. 4. Today, few firms are either purely economic or purely socioeconomic in outlook; most have chosen some middle ground between the two. a) However, our society generally seems to want—and even to expect—some degree of social responsibility from business. b) Thus, within this middle ground between the two extremes, businesses are leaning toward the socioeconomic view. VIII. CONSUMERISM. Consumerism consists of all those activities that are undertaken to protect the rights of consumers. The consumer movement issues fall into three categories: environmental protection, product performance and safety, and information disclosure. A. The Six Basic Rights of Consumers. During the 1960s, President John F. Kennedy declared that the consumer was entitled to a new “bill of rights.” 1. The Right to Safety. The right to safety means that products purchased by consumers must be safe for their intended use, include thorough and explicit directions for proper use, and have been tested by the manufacturer to ensure product quality and reliability. American business firms must be concerned about product safety for several reasons. a) Federal agencies have the power to force businesses that make or sell defective products to take corrective actions. b) Consumers and the government have been winning an increasing number of product-liability lawsuits against sellers of defective products. c) The consumer is demanding safe products. 2. The Right to Be Informed. The right to be informed means that consumers must have access to complete information about a product before they buy it. In addition, manufacturers must inform consumers about the potential dangers of using their products. 3. The Right to Choose. The right to choose means that consumers have a choice of products, offered by different manufacturers and sellers, to satisfy a particular need. a) The government has encouraged competition through antitrust legislation. b) Competition and the resulting freedom of choice provide an additional benefit for consumers by reducing prices. 4. The Right to Be Heard. The right to be heard means that someone will listen and take appropriate action when customers complain. a) Today, businesses are listening more attentively, and many larger firms have consumer relations departments that can easily be contacted via toll-free phone numbers. b) Most large cities and some states have consumer affairs offices to act on citizens’ complaints. 5. Additional Consumer Rights. In 1975, President Ford added the right to consumer education which entitles people to be fully informed about their rights as consumers. In 1994, President Clinton added the sixth right—the right to service, which entitles consumers to convenience, courtesy, and responsiveness from manufacturers and suppliers. Teaching Tip: Go to the Federal Trade Commission’s site and view the rights provided to consumers (http://www.ftc.gov/consumer). Students may want to know about these rights. B. Major Consumerism Forces. Major advances in consumerism have come through federal legislation. Major federal laws that have been passed since 1960 to protect consumer rights are listed and described in Table 2.4. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was passed by the House of Representatives to protect consumers and investors. IX. EMPLOYMENT PRACTICES. Everyone who works for a living should have the opportunity to land a job for which he or she is qualified and to be rewarded on the basis of ability and performance. Although this is an important issue for society, over the years this opportunity has been denied to members of various minority groups. 1. A minority is a racial, religious, political, national, or other group regarded as different from the larger group of which it is a part and that is often singled out for unfavorable treatment. 2. The federal government responded to the outcry of minority groups during the 1960s and 1970s by passing a number of laws forbidding discrimination in the workplace. a) Now, almost 50 years after passage of the Civil Rights Act of 1964, abuses still exist. b) There is a disparity among income levels for whites, blacks, and Hispanics. (See Figure 2.3.) c) Lower incomes and higher unemployment rates also affect Native Americans, handicapped persons, and women. 3. Responsible managers have instituted several programs to counteract the results of discrimination. A. Affirmative Action Programs. An affirmative action program is a plan designed to increase the number of minority employees at all levels within an organization. 1. Employers with federal contracts of more than $50,000 per year must have written affirmative action plans. The objective of such programs is to ensure that minorities are represented within the organization in approximately the same proportion as in the surrounding community. 2. Affirmative action programs have been plagued by two problems. a) The first problem involves quotas. In the beginning, many firms pledged to recruit and hire a certain number of minority members by a specific date. To achieve this goal, they were forced to consider only minority applicants for job openings. b) The second problem is that not all businesspeople are in favor of affirmative action programs, although most such programs have been reasonably successful. 3. Congress created (and later strengthened) the Equal Employment Opportunity Commission (EEOC), a government agency with the power to investigate complaints of employment discrimination and sue firms that practice it. 4. The threat of legal action has persuaded some corporations to amend their hiring and promotional practices, but the discrepancy between men’s and women’s salaries still exists. (See Figure 2.4.) B. Training Programs for the Hard-Core Unemployed. Some firms have assumed the task of helping the hard-core unemployed: workers with little education or vocational training and a long history of unemployment. 1. Such workers require training; this training can be expensive and time consuming. 2. To share the costs, business and government have joined together in a number of cooperative programs. The National Alliance of Business (NAB) is a joint business-government program to train the hard-core unemployed. The National Alliance’s 5,000 members include companies of all sizes and industries as well as educators and community leaders. X. CONCERN FOR THE ENVIRONMENT. Pollution is the contamination of water, air, or land through the actions of people in an industrialized society. 1. For several decades, environmentalists have been warning us about the dangers of industrial pollution. 2. Unfortunately, business and government leaders either ignored the problem or weren’t concerned about it until pollution became a threat to life and health in America. 3. Today, Americans expect business and government leaders to take swift action to clean up our environment—and to keep it clean. A. Effects of Environmental Legislation. As in other areas of concern to our society, legislation and regulations play a crucial role in pollution control. The Environmental Protection Agency (EPA) is the federal agency charged with enforcing laws designed to protect the environment. (See Table 2.5.) Some business owners and managers take the position that environmental standards are too strict. Consequently, it has often been necessary for the EPA to take legal action to force firms to install antipollution equipment and clean up waste storage areas. Experience has shown that the combination of environmental legislation, voluntary compliance, and EPA action can succeed in cleaning up the environment and keeping it clean. 1. Water Pollution. The Clean Water Act has been credited with greatly improving the condition of waters in the United States. However, the task of water cleanup has proved to be extremely complicated and costly due to pollution runoff and toxic contamination. Improved water quality is not only necessary, but it is also achievable. Today, acid rain, which results from sulfur emitted by smokestacks in industrialized areas, is destroying many lakes and reservoirs. 2. Air Pollution. Aviation emissions are a potentially significant and growing percentage of greenhouse gases that contribute to global warming. Usually, two or three factors combine to form air pollution in any given location. a) The first factor is large amounts of carbon monoxide and hydrocarbons emitted by many motor vehicles concentrated in a relatively small area. b) The second factor is the smoke and other pollutants emitted by manufacturing facilities. c) The third factor is the combination of weather and geography. d) Air pollution control efforts are encouraging. The EPA estimates that the Clean Air Act eventually will result in the removal of 56 billion pounds of pollution from the air each year, thus measurably reducing lung disease, cancer, and other serious health problems. 3. Land Pollution. Today, land pollution is a serious problem. a) The fundamental issues are basically twofold. (1) The first issue is how to restore damaged or contaminated land at a reasonable cost. (2) The second issue is how to protect unpolluted land from future damage. b) The land pollution problem has been worsening over the past few years because modern technology has continued to produce more and more chemical and radioactive wastes. c) To help pay for the enormous costs of cleaning up land polluted with chemicals, Congress created a $1.6 billion Superfund in 1980. 4. Noise Pollution. The Noise Control Act of 1972 established noise emission standards for aircraft and airports, railroads, and interstate motor carriers. Noise levels can be reduced by two methods. a) The source of noise pollution can be isolated as much as possible, and engineers can modify machinery and equipment to reduce noise levels. b) If it is impossible to reduce industrial noise to acceptable levels, workers should be required to wear earplugs to guard against permanent hearing damage. B. Who Should Pay for a Clean Environment? Government and business are spending billions of dollars annually to reduce pollution. 1. Current estimates of the annual costs of improving the environment are $45 billion to control air pollution, $33 billion to control water pollution, and $12 billion to treat hazardous wastes. 2. Much of the money required to purify the environment is supposed to come from already depressed industries. 3. The big question is: “Who will pay for the environmental cleanup?” a) Business leaders believe tax money should be used to clean up the environment. b) Environmentalists believe that the cost of proper treatment and disposal of industrial wastes is an expense of doing business and therefore the responsibility of the manufacturer. c) In either case, consumers will probably pay a large part of the cost either in the form of taxes or through higher prices. Teaching Tip: Bring in three to five products from home. Write down the approximate prices. Tell students how much each cost, and then ask how much more they would be willing to pay in order for these products to be “environmentally friendly.” Products might include an apple or other fruit that was grown with pesticides, a package of non-biodegradable garbage bags, and so forth. XI. IMPLEMENTING A PROGRAM OF SOCIAL RESPONSIBILITY. A firm’s decision to be socially responsible is a step in the right direction—but only a first step. The firm must then develop and implement a tangible program to reach this goal. A. Developing a Program of Social Responsibility. The following steps are required to implement a social responsibility program. 1. Commitment of Top Executives. Without the support of top executives, any program will soon falter and become ineffective. 2. Planning. A committee of managers should be appointed to plan the program. 3. Appointment of a Director. A top-level executive should be chosen to direct the organization’s activities in implementing the plan. 4. The Social Audit. The director of the program should prepare a social audit for the firm at specified intervals. A social audit is a comprehensive report of what an organization has done, and is doing, with regard to social issues that affect it. B. Funding the Program. Like any other program, a program to improve social responsibility must be funded. Funding can come from three sources. 1. Management can pass the cost on to consumers in the form of higher prices. 2. The corporation may be forced to absorb the cost of the program if, for example, the competitive situation does not permit a price increase. 3. The federal government may pay for all or part of the cost through special tax reductions or other incentives. Instructor Manual for Business William M. Pride, Robert J. Hughes, Jack R. Kapoor 9781133595854, 9780538478083, 9781285095158, 9781285555485, 9781133936671, 9781305037083
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