Unit 1: The Context of Business

1a. Identify foundational business practices

  • What is the goal of a business?
  • What are the benefits of an organization?
  • What are the needs of a market?
  • What is a stakeholder?

Milton Friedman, the author of "Capitalism and Freedom", states that the only obligation businesses have is to focus on their profit margin. He believed businesses contribute to society by increasing profits, providing goods and services, and employing people in the local community. While profit maximization is a fundamental goal for most businesses, other foundational business practices influence how to organize a business to make it more efficient. In addition to profit maximization and having a sound organizational structure, businesses are also defined by the product they offer (a service or a good).

A profit margin occurs when sales revenue exceeds costs in a business. This helps businesses determine how successful they are. Corporate social responsibility (CSR) happens when a business makes a profit, and the environment and society also benefit. Market needs are important to understand because this is what consumers want or need, and a successful business figures out how to address those needs. Stakeholders are those who have a vested interest in the outcome of a corporation or business. These may include consumers, banks, employees, or suppliers, for example. By understanding these foundational business practices, you will better understand business in general.

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1b. Describe economic indicators

We can use several economic indicators to explain the economy's condition at any given moment, such as gross domestic product (GDP), the consumer price index (CPI), and interest rates.

These indicators are either leading economic indicators (predicting the direction the economy is going), coincident (looking at the current state of the economy), or lagging economic indicators (fluctuating for months after a change in the economy has taken place). Some indicators provide more relevant information about the economy than others.

The consumer confidence index (CCI) is an example of a leading indicator. The consumer product index (CPI) is a lagging indicator. The CPI is the best tool for predicting future inflation. Try inserting some numbers in the US Bureau of Labor Statistics CPI calculator to compare the buying power of today's dollar with the buying power of the dollar in past years. This calculator demonstrates how inflation has changed over the decades.

The construction industry provides a common indicator for economic activity since so many businesses are intertwined with construction. For example, an increase or decrease in the number of new houses or businesses being built can tell investors and consumers about the general level of confidence in the economy.

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1c. Identify positive and negative impacts of business on society

  • What are three benefits a local business provides to the community?
  • How does corporate social responsibility positively impact business stakeholders?
  • What is the triple-bottom-line approach?
  • Why do companies agree to promote a triple-bottom-line approach?

While most businesses benefit their societies, some can negatively impact their local community. Some companies commit to a triple-bottom-line approach and agree to strive toward three goals: economic profits, social and moral responsibility, and environmental sustainability.

Companies should identify any potential negative impacts they may have on their local community and put processes in place to mitigate these negative effects. Consider two areas where businesses could negatively impact their local communities: social disruption and environmental damage.

Think about how a company or organization can negatively impact its local community. A gas refinery may harm the air quality of people living there. A lack of corporate social responsibility can negatively affect the community, and a company with a planned corporate social responsibility may positively impact its community.

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1d. Use economic indicators to describe the state and health of an economy

  • How do economic indicators describe the health of the economy?
  • How does inflation impact the economy?
  • What is the difference between an economic depression and a recession?

While news reports usually give inflation a negative connotation, inflation is necessary for a growing economy. In addition to periods of inflation, politicians also use the terms depression and recession to describe the state of the economy. Business owners know these descriptors of the economy can play a large role in their decision-making.

Inflation is when the costs of goods and services rise. Inflation also has the power to positively affect consumers. With low interest rates and inflation, people can afford to purchase homes and easily buy the products they need. But when inflation increases, those same products are more difficult to purchase. From 2007-2009, the United States experienced a depression. The mortgage crisis occurred during this time, and many people lost or had to give up their homes. Depression occurs when there is a long economic decline, and we may also see high unemployment during that time. A recession occurs during a shorter period. For example, we may fall into a recession after only two quarters of negative gross domestic product (GDP) growth. Layoffs also typically occur during a recession.

Economic indicators provide more than simple data points politicians incorporate into their political speeches: business managers and consumers use this data to determine whether they should hire additional employees, open up a new store, build a new production plant, or wait until a more favorable time when their customers can afford to buy more of their products or services. Companies use the statistics they obtain from the US Census Bureau to help them make these decisions.

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1e. Identify and explain current economic trends

Business managers use economic indicators to predict economic trends to make decisions, such as calculating how their company will fare during a particular phase of the business cycle. These different phases represent the economic climate or trends that are taking place in the country or within a certain industry. Each phase of the business cycle presents an economic trend during a given period.

Every business goes through a business cycle, including expansion, peak, contraction, and trough. These stages can be analyzed for every business; some companies may stay on a stage longer than others. Some business managers are good at keeping their business in these stages longer, which ensures the business' overall success in the long run.

ent of a financial indicator. The gross domestic product (GDP) is the total value of all goods and services produced in one country, typically measured over a specific period. The GDP is a measurement used to determine a country's overall health.

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1f. Identify the four phases of the business cycle in real-life situations

  • What are the four phases of the business cycle?
  • Which business cycle corresponds to a period of inflation?
  • Which two of the four phases of the business cycle represent a turn in the cycle?
  • What are business owners likely to do when the economy is in a trough, and customers are not buying products?

The four phases of the business cycle include expansion (a period of growth), peak (the highest point of sales/profits), contraction (a decline in sales/profits), and trough (the lowest point of economic activity before the next expansion stage begins). The four phases of the business cycle are extremely important in real-life situations: they help business managers make decisions for their companies. For example, knowing what phase the economy is in can help managers predict whether it is a good time to spend their savings to make needed investments in their company. Making investments during an inopportune time could put their organization at risk.

Today's companies are more interconnected than ever on a national and global scale. For example, when a company or industry sees fewer sales due to a contraction in the economy, they may need to lay off workers, buy fewer raw materials, or postpone buying a warehouse to house a new production facility. Fewer workers mean real estate sales plummet, and local small businesses suffer when no one comes into their stores to make purchases.

However, the global economy can protect companies from these economic trends. For example, while the US economy is experiencing a recession, companies may find new buyers for their products in foreign countries that are undergoing expansion.

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1g. Use economic indicators to predict where a business is heading in the business cycle

  • What is the money supply?
  • What are the functions of the US Federal Reserve?
  • Can you give an example of how the business cycle demonstrates increases and decreases?
  • Can the actions of the US Federal Reserve cause changes in the business cycle?

Business managers use economic indicators to predict where their company may be heading in the business cycle. In other words, economic indicators help managers predict the future. Consider the following scenario: a real estate company hires additional salespeople to respond to an increase in the volume of new houses it has listed during the past three months.

Before 2008, the real estate market was in the expansion phase of the business cycle and then reached its peak. Almost immediately, contraction began, and the market fell over the next few years, which led to a depression. By 2011, interest rates had fallen, and home prices were very low; over the next decade, the real estate market took its time to expand. By 2022, interest rates were at an all-time high.

The US Federal Reserve plays a large role in changing the business cycle. Typically, the Federal Reserve creates policies to control the money supply (the total amount of currency and other liquid instruments circulating in the economy at a given time) and inflation, which can influence employment levels in the United States. The Federal Reserve also controls the interest rate. In 2022, when mortgage interest rates and consumer spending were high, the Federal Reserve started to increase the interest rate to control inflation.

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1h. Describe global trade restrictions

  • What trade restrictions can governments impose on foreign businesses?
  • What is a trade embargo?
  • Can you think of an example of a country that imposed tariffs for political reasons?
  • How do tariffs and embargoes affect the country's economy that imposes the restrictions?

Many companies like to do business globally because it expands their pool of potential customers, which can lead to increased profits. However, business managers have to consider and overcome many barriers to global trade, such as trade restrictions foreign governments impose on outside businesses. Luckily, pathways exist to help alleviate the burden of these government-imposed restrictions.

Differences in currencies present another barrier to global trade. Since most countries use different currencies, how can businesses and consumers know whether they are making an equitable deal? They need to be able to compare and determine the value of each currency in terms of the other. These calculations involve using a currency exchange rate that can change rapidly.

Tariffs are a tax on goods that are imported into a country. Trade embargoes occur when one government imposes a ban on trading with another country. This ban may apply to goods, services, or money. Cuba and North Korea are examples of recent trade embargoes. The currency exchange rate is the difference between the currencies of two countries. For instance, if the exchange rate for the dollar is 1 and the Euro is 1.10, then it costs 1.10 to purchase one dollar (1:1.10).

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1i. Identify factors affecting the success of businesses

  • What factors affect the success of a business?
  • How important is infrastructure, such as the availability of roads or railways, to the success of a business?
  • What is an example of demographics?

Entrepreneurs know many factors influencing their business success and must consider many options. Understanding the demographics of customers is important, as well as determining who their target market is. Demographics are a person's characteristics, including gender, education level, income, religion, and culture. If your target market is female business owners between the ages of 45 and 60, then as a business owner, you will need to better understand that market and their needs to market your products to those individuals.

Changing demographics (or your target market) can harm the profit margins of a business, and it is important to understand why this may be needed and how the company will shift its focus as a result. Changing the demographics of your target market can be a major change in your business, and it is important to understand the pros and cons of this process.

The infrastructure in the United States may include roads, railways, or waterways. Companies need to use this infrastructure to get their products to consumers. When the infrastructure is interrupted, such as a major freeway being shut down for construction, this may affect getting products to consumers.

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1j. Evaluate the feasibility of doing business in a specific country

  • Why is it important to review the feasibility of conducting business in another country?
  • What is an example of a national rivalry that could prevent a company from operating successfully in a foreign country?
  • What are some barriers to international business?

There are some barriers to conducting global business, and business owners need to understand all issues before expanding into another country. There are also restrictions that governments place on foreign companies. Corporations need to consider other factors as they look to expand globally, and it is important to conduct research before expanding.

In the previous section, we looked at factors contributing to or hindering business success. It is important to understand these factors when expanding into another country. Global competition is another area of research that is important to understand before expanding into another country. By conducting research, a business owner can learn about competition in that country or other countries that operate in the country to make expansion possible. Examples of barriers to international business might include language, regulations, cultural differences, or currency differences.

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1k. Describe methods for business entry into the global marketplace

  • How does importing differ from franchising?
  • Which methods allow foreign business managers to maintain the most control over their products and operations?
  • Which method businesses use to enter the global marketplace is the least expensive option?

Once a company has decided to explore avenues of international trade, it needs to consider the best method for launching its business abroad. For example, the originating business could maintain or relinquish control over its operations. Franchising is another option available to a business owner, and a franchise may be purchased to help eliminate some of the risks of starting a business. Franchising is a business arrangement where one party (the franchisor) grants another party (the franchisee) the right to use its trademark, business model, and systems in exchange for fees and royalties. A business owner with a successful business may want to franchise their business to other potential owners.

Retail companies that import their products may sell online or in their stores. Importing products from another country is one way a company can expand its product line. A company can also export its products to other countries, and this helps it expand into the global marketplace. Since the primary goal of most companies is to make a profit, cost is an important consideration when choosing the best method for entering a foreign marketplace.

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1l. Identify trade facilitators

  • Which trade facilitator is most likely to resolve trade disputes?
  • Can you name two major international trade facilitators?
  • Where should a company go if it wants to conduct business with a foreign company but needs a third party to "hold" its money until it can take possession of the product?

Barriers to entering a global marketplace include overcoming government-imposed restrictions and other obstructions that can make international ventures risky. Organizations exist whose sole purpose is to help businesses navigate these potential barriers to facilitate global trade.

Some trade facilitators help businesses understand legal differences, while others allow them to manage the monetary aspects of business globally. By using these trade facilitators, a company that wishes to expand globally can make the process easier.

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Unit 1 Vocabulary

This vocabulary list includes terms you will need to know to successfully complete the final exam.

  • consumer confidence index (CCI)
  • consumer product index (CPI)
  • corporate social responsibility (CSR)
  • currency exchange rate
  • demographics
  • economic indicator
  • franchising
  • gross domestic product (GDP)
  • inflation
  • infrastructure
  • lagging economic indicator
  • leading economic indicator
  • money supply
  • stakeholder
  • tariff
  • trade embargo
  • triple-bottom-line approach
  • US Federal Reserve
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