PRIDE
HUGHES
KAPOOR
A LT H O U S E
ALLAN
BUSINESS
FIRST CANADIAN EDITION
William M. Pride
Texas A&M University
Robert J. Hughes
Dallas County Community Colleges
Jack R. Kapoor
College of DuPage
Norm R. Althouse
University of Calgary
Laura A. Allan
Wilfrid Laurier University
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Business, First Canadian Edition
by William M. Pride, Robert J. Hughes,
Jack R. Kapoor, Norm R. Althouse,
Laura A. Allan
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COPYRIGHT © 2020 by Nelson
Education Ltd.
Adapted from Business MindTap
V2.0, by William M. Pride, Robert
J. Hughes, and Jack R. Kapoor,
published by Cengage Learning.
Copyright ©2019, 2017 by Cengage
Learning.
Printed and bound in Canada
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BUSINESS
BRIEF CONTENTS
PART 1
1 Exploring the World of Business and Economics 2
2 Being Ethical and Socially Responsible 20
3 Exploring Global Business 38
PART 2
4 Choosing a Form of Business Ownership 56
5 Considering Small Business, Entrepreneurship, and Franchises 72
PART 3
6 Understanding the Management Process 88
7 Creating a Flexible Organization 102
8 Producing Quality Goods and Services 118
PART 4
9 Attracting and Retaining the Best Employees 136
10 Motivating Employees and Teams 152
11 Enhancing Employee–Management Relations 174
PART 5
12
13
14
15
Building Customer Relationships through Effective Marketing
Developing and Managing Products
Managing Distribution and Pricing
188
206
220
Developing Integrated Marketing Communications
240
PART 6
16 Exploring Business Technology 256
17 Using Accounting and Financial Information 274
PART 7
18 Understanding Money, Banking, and Credit 290
19 Recognizing the Basics of Financial Management 304
20 Understanding Personal Finance and Investments 320
Appendix A: Careers in Business
339
Appendix B: Managing Risk and Insurance
349
Appendix C: A Basic Understanding of Our Legal Environment
Glossary
Endnotes
357
363
373
Index 375
NEL
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iii
CONTENTS
PART 1
2 Being
Ethical and Socially
Responsible 20
1 Exploring
the World of
Business and Economics
Introduction: What Is Business?
1-1 Why Study Business?
1-2 Key Takeaway
2
2
4
6
6
7
23
2-3a Ethical Grey Areas
23
2-5Encouraging Ethical Behaviour in Organizations 24
2-5aGovernment’s Role in Encouraging
Ethics 24
7
7
8
1-10 Degrees of Competition and Supply and Demand 8
1-10aWhy Do Degrees of Competition Matter? 9
1-10bPerfect Competition and the Concept of
Supply and Demand 9
2-5bTrade Associations’ Role in Encouraging
Ethics 25
2-5cOrganizations’ Role in Encouraging
Ethics 25
2-6 Key Takeaway 27
2-7Increasing Social Responsibility 27
2-7a Responsibility to Stakeholders
1-10c Monopolistic Competition 10
1-10d Oligopoly 11
2-8 Key Takeaway 28
1-10e Monopoly 11
2-9Protecting Consumer Rights
2-9a Consumer Rights
12
1-12 Measuring Economic Performance
1-12a The Business Cycle
Exercises
Key Terms
15
Case Study 17
13
30
2-12 Key Takeaway 31
15
14
2-13a Basic Environmental Protection 31
2-13b Sustainability Strategies
Lesson Summary
Exercises
16
16
2-10 Key Takeaway 30
32
2-14 Key Takeaway 33
15
Review Questions
29
2-13Concern for the Natural Environment 31
1-14a Career Overviews
Lesson Summary
28
2-11a Responsible Employment Practices
13
14
1-14 Exploring Careers in Business
1-15 Key Takeaway
28
2-11 Concern for Employees 30
1-12c Unemployment and Inflation
1-13 Key Takeaway
12
12
1-12b Gross Domestic Product
iv
2-3 Ethics Starts with Us
2-4 Key Takeaway 23
1-8a Why Do Economic Systems Matter?
1-11 Key Takeaway
21
2-2 Key Takeaway 23
1-6 Responding to the Business Environment
1-9 Key Takeaway
21
2-1c Being Transparent 22
3
1-4 Concerns about the Impact of Business on Society 5
1-8 Economic Systems
2-1The Three Components of Business Ethics 20
2-1b Avoiding Conflicts of Interest
3
1-3a The Benefits of Business to Society
1-7 Key Takeaway
20
2-1a Competing Fairly and Honestly
2
1-3 Understanding Business Basics
1-5 Key Takeaway
Introduction
16
34
Review Questions
Key Terms
Case Study
33
34
34
35
NEL
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
3 Exploring Global Business
38
Introduction 38
3-1 The Basis and Benefits of International Trade
3-1a Exporting for Growth
3-1b Importing for Value
3-2 Key Takeaway
4-7 Taxation and Division of Profits
42
4-7a Division of Profits
42
4-11 Ease of Start-Up and Administration
45
3-11 Methods of Entering International Business
3-11a Exporting and Importing
49
3-11b Contractual Agreements
50
3-11c International Direct Investment
Key Terms
48
50
Key Terms
68
69
5 Considering
Small Business,
Entrepreneurship, and
Franchises 72
51
52
Introduction
52
72
5-1 Characteristics of Entrepreneurs
52
73
5-2 Key Takeaway 74
Case Study 53
5-3 Small Business: A Profile
74
5-4 Key Takeaway 75
PART 2
5-5 Factors Contributing to Entrepreneurship
4 Choosing
a Form of Business
Ownership 56
Introduction 56
4-1a Sole Proprietorships
58
4-1c Corporations 59
57
57
76
5-6 Key Takeaway 76
5-7 The Importance of Small Business in Our
Economy 76
5-7a Providing Technical Innovation
5-7b Providing Employment
4-1 Different Types of Ownership Structure
NEL
68
Case Study
51
4-1b Partnerships
Exercises
67
Review Questions 68
48
Review Questions
65
4-12 Key Takeaway 67
Lesson Summary
46
3-9 Fostering Trade through Economic Communities 46
Exercises
64
4-10 Key Takeaway 65
44
45
Lesson Summary
63
4-9 Legal and Financial Liability Protection
3-7 Promoting International Trade and Prosperity
3-12 Key Takeaway
63
4-8 Key Takeaway 64
43
44
3-5b Reasons for Trade Restrictions
3-10 Key Takeaway
62
4-7b Paying Taxes on Profit 63
43
3-5a Types of Trade Restrictions
3-8 Key Takeaway
4-4 Key Takeaway 62
4-6 Key Takeaway 63
40
3-5 Restrictions to International Business
3-6 Key Takeaway
4-3Key Considerations When Choosing Ownership
Structure 60
4-5 Business Control and Transfer of Ownership
40
3-3 The Impact of Currency Valuations
3-4 Key Takeaway
39
4-2 Key Takeaway 60
76
77
5-7c Providing Competition 77
5-7dMeeting the Needs of Society and Other
Businesses 78
5-8 Key Takeaway 78
Contents
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
v
5-9 The Importance of a Business Plan
78
5-9a Components of a Business Plan
5-10 Key Takeaway
6-10 Key Takeaway 97
79
6-11Managerial Decision Making
80
6-11aMaking Quality Decisions
5-11Sources of Funding for Small Business
80
5-13 Franchising
Exercises
81
82
Key Terms
83
Lesson Summary
83
84
84
7-1a Efficiency
7-1b Control
6 Understanding
the
Management Process
88
6-1c Leading and Motivating
88
90
91
7-8 Key Takeaway 109
7-9 The Span of Management
91
7-12 Key Takeaway 113
93
6-5c Non-traditional Management Roles
95
6-7 Key Skills of Successful Managers
95
6-7aThe Mix of Skills Required for Effective
Management 95
Contents
93
93
7-13Organization Design and Corporate
Culture 113
7-14 Key Takeaway 114
Lesson Summary
Exercises
114
115
Review Questions 115
Key Terms
96
110
7-11aOrganization Design in Today’s
Economy 112
6-5b Areas of Management Specialization
vi
7-11Forms of Organizational Structure
92
96
109
7-10 Key Takeaway 110
92
6-9 Styles of Leadership
106
7-7Centralization and Decentralization of
Authority 107
91
6-5a Levels of Management
6-8 Key Takeaway
105
7-6 Key Takeaway 107
6-3aAssessing Strategic Factors Using
SWOT 92
6-6 Key Takeaway
7-2 Key Takeaway 105
7-5Types of Departmentalization
6-1d Controlling 91
6-5 Types of Managers
104
7-4 Key Takeaway 106
89
6-1b Organizing the Enterprise
103
7-1d Empowerment
7-3 Job Design
6-1a Planning: Setting Goals
103
7-1c Responsiveness 104
88
6-1 The Four Functions of Management
6-4 Key Takeaway
102
7-1Objectives to Consider When Organizing a
Business 102
PART 3
6-3 SWOT Analysis
100
Introduction
Case Study 85
6-2 Key Takeaway
99
7 Creating
a Flexible
Organization 102
84
Introduction
99
Case Study
Review Questions
Key Terms
98
Review Questions 99
5-13a Franchising Success Rates
Exercises
Lesson Summary
81
5-14 Key Takeaway
97
6-12 Key Takeaway 98
5-11a The Growth of Crowdfunding 81
5-12 Key Takeaway
97
Case Study
115
116
NEL
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
8 Producing
Quality Goods and
Services 118
Introduction 118
119
121
8-3 The Increasing Importance of Services
8-3a Planning Quality Services
121
8-5a What Is Design Planning?
123
123
8-7 Selecting Facility Location and Layout
8-7a Choosing a Location
Key Terms
9-13a Avoiding Appraisal Errors
146
147
9-14 Key Takeaway 147
147
148
148
149
150
10 Motivating
Employees and
Teams 152
132
132
Introduction
152
10-1Early Perspectives on Motivation
133
154
10-1a Taylor’s Scientific Management
133
10-1bThe Hawthorne Studies
Case Study 134
155
10-3The Emergence of Motivation Theories
10-3a ERG Theory
9 Attracting
and Retaining the
Best Employees 136
Introduction 136
9-1An Overview of Human Resources Management 137
9-1a The Shared Responsibility of HRM
139
9-3Planning Human Resource Needs
9-3a Job Analysis
154
10-2 Key Takeaway 155
PART 4
NEL
145
9-12 Key Takeaway 146
Case Study
133
9-2 Key Takeaway
144
9-11a Training and Development
Key Terms
128
131
Review Questions
143
9-10 Key Takeaway 144
Exercises
130
Lesson Summary
143
Review Questions 149
8-11a Identify the Critical Path
8-14 Key Takeaway
9-9a Types of Compensation
Lesson Summary
126
128
8-13 Quality Control
9-9 Employee Compensation Strategies
9-16 Key Takeaway 148
128
8-12 Key Takeaway
142
9-8 Key Takeaway 142
9-15The Legal Environment of HRM
126
126
8-9 Supply Chain Management
Exercises
125
125
8-7b Determining a Facility Layout
8-10 Key Takeaway
140
140
9-13Employee Performance Appraisal
125
8-8 Key Takeaway
9-5a Benefits of Diversity
9-11 Orientation and Training
8-5 Where Do New Products Come From?
8-11 Scheduling
121
122
8-6 Key Takeaway
9-5Cultural Diversity in Human Resources
9-7 Recruiting and Hiring Employees
8-1aHow Canadian Manufacturers Compete in the
Global Marketplace 120
8-4 Key Takeaway
140
9-6 Key Takeaway 141
8-1 What Is Production?
8-2 Key Takeaway
9-4Key Takeaway
139
139
138
155
157
10-3b Herzberg’s Two-Factor Theory
157
10-4 Key Takeaway 159
10-5 Reinforcement Theory
159
10-5aPractical Application: Reinforcement Theory
Plus Two-Factor Theory 160
10-6 Key Takeaway 160
10-7 Equity Theory
160
10-7aPractical Application: Classical Motivation
Theories Plus Equity Theory 161
10-7bExpectancy Theory
161
Contents
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
vii
10-7cPractical Application: Adding Expectancy
Theory to the Motivation Mix 162
10-8 Key Takeaway
Lesson Summary
Exercises
163
163
Key Terms
10-9a Goal-Setting Motivation Techniques
10-9bManagement by Objectives
163
10-9c Using Flexibility to Motivate
164
10-9d Job Enrichment and Empowerment
163
Case Study
165
PART 5
10-9ePractical Application: Remembering
Motivation Theories When Using Job
Enrichment 166
10-11 Teams and Teamwork
Exercises
Introduction
167
12-1b Customer Relationship Management
12-2Key Takeaway
169
12-3a The Marketing Mix
Case Study 171
174
174
177
178
178
179
Contents
195
12-6 Key Takeaway 196
12-7 Target Market Selection
196
197
12-9The Marketing Research Process
182
199
12-10 Key Takeaway 200
181
Building Brand Value
Lesson Summary
182
11-9aThe Future of Labour–Management
Relations 182
viii
179
180
11-7b Management’s Negotiating Tactics
183
194
12-8 Key Takeaway 199
11-7a Labour’s Negotiating Tactics
11-10 Key Takeaway
12-4 Key Takeaway 194
12-7cThe Forces of the Marketing
Environment 198
179
11-9Trends in Union Membership
194
12-7bMarketing Strategy: Creating the
Right Marketing Mix for Your
Target Market 198
11-7Union and Management Negotiation Tactics
11-8 Key Takeaway
12-3c The 4 P’s and the Brand Promise
12-7a Market Segmentation
178
11-5a Negotiating the Labour Contract
11-6 Key Takeaway
175
177
11-5 The Unionization Process
193
12-5aHow Branding Makes Purchasing Easier
11-1aThe Beginning of the Labour Movement
11-4 Key Takeaway
192
12-5The Consumer Decision Process
11-1The Industrial Revolution and Poor Working
Conditions 174
11-3Labour–Management Legislation
191
12-3bEvaluating Marketing Strategy Using the
4 P’s 194
11 Enhancing
Employee–
Management Relations
11-1b The Objectives of Unionization
190
191
12-3The Value Added by Marketing
170
11-2 Key Takeaway
188
12-1aThe Evolution of the Marketing Concept
168
169
Introduction
188
12-1 What Is Marketing?
168
Review Questions
Key Terms
185
Effective Marketing 188
167
10-11a The Nature of Teamwork
Lesson Summary
184
12 Building
Customer
Relationships through
167
10-12 Key Takeaway
184
Review Questions 184
10-9 Putting Theory into Action
10-10 Key Takeaway
183
Exercises
200
201
201
Review Questions 202
Key Terms
Case Study
202
203
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
13 Developing
and Managing
Products 206
14-4 Key Takeaway 228
Introduction
14-7 Pricing Considerations
14-5Managing Physical Distribution 228
14-6 Key Takeaway 230
206
13-1 What Is a Product? 207
14-8 Key Takeaway 231
13-1aProducts Bring Value to Customers in a Variety
of Ways 209
13-1bConsumer Product Classifications
13-1cLearning to Classify Products
13-2 Key Takeaway
209
211
13-3b Benefits of Innovation
211
13-4 Key Takeaway
Lesson Summary
Exercises
213
213
13-9a Grouping Products into Product Lines
243
243
15-5a The Personal-Selling Process 246
216
15-6 Key Takeaway 246
15-7 Sales Promotion 247
Case Study 218
14 Managing
Distribution
and Pricing 220
220
14-1a The Benefits of Intermediaries
15-7aSelection of Sales Promotion Methods 247
15-8 Key Takeaway 248
15-9 Public Relations 248
15-9a Types of Public Relations Tools 249
15-9bThe Advantages and Disadvantages of PR as a
Promotional Tool 250
14-1 Channels of Distribution 220
222
15-10 Key Takeaway 251
15-11 Promotional Planning 251
224
14-3The Importance of Retailers 224
NEL
15-3 Advertising
15-5 Personal Selling 245
217
14-2 Key Takeaway
214
15-4 Key Takeaway 245
216
216
Introduction
15-1 The Promotion Mix 240
15-3bAdvantages and Disadvantages of Major
Advertising Media 244
215
215
Review Questions
Key Terms
240
15-3a Evaluating Advertising Media
215
13-11The Functions of Packaging
Exercises
Introduction
240
15-2 Key Takeaway 242
214
Lesson Summary
Communications
15-1aIntegrated Marketing Communications 242
214
13-12 Key Takeaway
238
15 Developing
Integrated Marketing
13-7bMarketing Strategies for Stages of the Product
Life Cycle 214
13-10 Key Takeaway
236
237
Case Study
213
13-7a The Stages of the Product Life Cycle
13-9 Product Mix
236
Key Terms
13-5aActivities of Each Product Development
Phase 212
13-8 Key Takeaway
233
236
Review Questions
13-5The Phases of Product Development 212
13-7 Product Life Cycle
233
14-12 Key Takeaway 235
212
13-6 Key Takeaway
14-10 Key Takeaway 233
14-11a Pricing Strategies
211
13-3aThe Pace of Innovation
14-9 Break-Even Point 231
14-11 Pricing Objectives
210
210
13-3 The Benefits of Innovation
230
15-12 Key Takeaway 252
14-3a The Growth of Online Retailing 226
Lesson Summary
14-3b Non-store Retailing
Exercises
227
252
252
Contents
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
ix
Review Questions
Key Terms
17 Using
Accounting and
Financial Information
253
253
Case Study 254
Introduction
PART 6
17-1 Accounting Fundamentals
16 Exploring
Business
Technology 256
Introduction
17-5 The Balance Sheet 279
17-5a Reading a Balance Sheet
17-11Using Financial Statements for Company
Analysis 283
17-12 Key Takeaway 284
263
17-13Evaluating Financial Statements
263
17-13a Using Financial Ratios
Lesson Summary
Exercises
Key Terms
266
16-9c Simplify Payment Options
16-10 Key Takeaway
269
270
Lesson Summary
271
Case Study 272
269
287
288
268
PART 7
18 Understanding
Money,
Banking, and Credit 290
Introduction
290
18-1 What Is Money?
290
18-2 Key Takeaway 292
270
271
Review Questions
Contents
267
268
16-9a Optimize Design and Functionality
269
286
Case Study
268
16-9b Ensure Compatibility
286
267
16-7cGather Product and Marketing Insight
16-9Using Mobile Technology for Business
285
Review Questions 287
16-7Interacting with Stakeholders Using Online
Tools 266
16-7b Manage Company Reputation
284
17-14 Key Takeaway 285
266
16-7aImprove Customer Service
284
17-13b Calculating Financial Ratios
16-5bUsing Data to Improve Online
Marketing 264
16-9d Mobile Apps
282
17-10 Key Takeaway 282
261
16-5aIntegrating Online Marketing
Tactics 264
16-8 Key Takeaway
281
17-9 The Statement of Cash Flows
261
16-5 Online Marketing Tactics
16-6 Key Takeaway
17-7 The Income Statement
17-8 Key Takeaway 282
16-3aStrategic Considerations for Online
Businesses 262
16-4 Key Takeaway
279
17-6 Key Takeaway 281
258
16-1bTypes of Management Information
Systems 258
16-3 Online Business
278
17-4 Key Takeaway 279
256
16-2 Key Takeaway
277
17-3a The Key Financial Statements
16-1aManagement Information Systems
Key Terms
274
17-2 Key Takeaway 277
16-1Using Technology to Make Better Business
Decisions 257
x
274
17-3 Financial Statements
Exercises
274
18-3 Money Supply and the Economy
292
18-4 Key Takeaway 294
271
18-5The Bank of Canada 294
18-5aUsing Policy Tools to Influence Money
Supply 295
NEL
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
18-6 Key Takeaway
20 Understanding
Personal Finance and
296
18-7 The Financial Services Industry 296
18-8 Key Takeaway
298
18-9 Protecting Your Money
18-10 Key Takeaway
Introduction
299
18-11 Innovations in Banking
18-12 Key Takeaway
Key Terms
20-1c Step 3: Evaluate Alternatives
300
19 Recognizing
the Basics of
Financial Management 304
304
19-1 The Need for Financial Management 304
19-1aCommon Reasons for Needing
Financing 306
308
334
Exercises
313
Key Terms
315
314
335
336
Review Questions
313
19-11c Selling Company Shares (Stock)
334
20-8 Key Takeaway 335
312
19-11b Corporate Bonds 314
336
336
Case Study
337
Appendix A: Careers in Business
339
315
Appendix B: Managing Risk and Insurance 349
316
Appendix C: A Basic Understanding of Our Legal
Environment 357
316
Glossary
363
Endnotes 373
Index
NEL
331
20-7a Investing Wisely 331
Lesson Summary
19-11a Long-Term Loans
Case Study 317
20-7 Investment Returns
20-7b Taking the Next Steps
313
316
328
20-7c Sources of Information
19-11Long-Term Financing Options
Key Terms
327
20-6 Key Takeaway 330
312
Review Questions
20-3d Asset Allocation Goals
20-5dUsing Mutual Funds and ETFs to Provide
Diversification 329
308
19-9 Short-Term Financing Options
Exercises
20-3cInvestment Horizon 1 Risk Tolerance 1
Liquidity Needs 326
20-5c Investments for Growth
308
Lesson Summary
20-3b Investment Horizon 1 Risk Tolerance 326
20-5b Investments for Income 328
19-7aEquity Financing and Company
Valuation 310
19-12 Key Takeaway
20-3a Investment Horizon 326
20-5a Investments for Capital Preservation 327
19-7 Advantages and Disadvantages of Debt and Equity
Financing 309
19-10 Key Takeaway
325
20-5 Investment Alternatives 327
307
19-5 Financing Considerations
19-8 Key Takeaway
20-3 Important Factors for Selecting Investments
20-4 Key Takeaway 327
19-3 Planning: The Basis of Sound Financial
Management 307
19-6 Key Takeaway
325
20-2 Key Takeaway 325
Case Study 301
19-4 Key Takeaway
324
20-1dStep 4: Implement, Monitor, and Revise
300
19-2 Key Takeaway
322
20-1bStep 2: Control Your Finances and Prepare for
Emergencies 323
300
Introduction
320
20-1a Step 1: Set Goals
300
Review Questions
320
20-1 Managing Your Personal Finances 322
299
299
Lesson Summary
Exercises
Investments
298
375
Contents
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xi
PREFACE
This first Canadian edition of Business, delivered within
MindTap, was developed in response to the question,
“What are the ideal ways for students to learn the
concepts commonly taught within the Introduction
to Business course in Canada?” This innovative new
resource contains the comprehensive content that
instructors require, delivered in a personalized program
of digital materials that engage students by offering a
wide range of learning tools. This resource was developed in consultation with students and instructors across
Canada, with the goal of engaging students, developing
critical thinking skills, and ultimately helping learners to
move up Bloom’s Taxonomy, from memorization to mastery of course concepts, all delivered through an active
learning framework.
“MindTap is the manifestation of what current
students want…It is aimed at creating retention and interest in the student…very engaging
in terms of its examples and learning tools”
—Ryan Burnham, student at Wilfrid Laurier
University
This print companion provides the content covered within the MindTap platform. However, the ideal
learning experience for students taking the Introduction
to Business course takes place within the media-rich,
interactive environment of MindTap.
In Business, First Canadian Edition, we begin in
Part 1 with a look at economic systems, how business
benefits society, corporate social responsibility, and
ethical decision making. We then examine the implications of global business on the Canadian economy and
the benefits of international trade and the impact of
trade restrictions. In Part 2, we circle back to a focus
xii
on Canadian business with a discussion of the main
forms of business ownership structures in Canada and
the implications of each. We also look at small business
in Canada, entrepreneurship, and franchising, and consider the major components of a business plan. In Part
3, we focus on the management process including the
four basic management functions, the managerial decision-making process, and the strategic factors a business
must consider to be successful. We examine the different types of organization structures of businesses and
the four objectives that shape the structure. In Lesson
8, we take a critical look at the production process and
operations management to understand the supply chain
process, including producing quality goods and services. In Part 4, the focus is human resources, including
attracting and retaining quality employees, how businesses motivate employees for success, and the ways in
which businesses can enhance relations with employees.
In Part 5, we put on our marketing hats and explore the
ways in which businesses build and maintain relationships with customers and other stakeholders, develop
products that customers want or need at the right price
and at the right place, and discuss how developing integrated marketing communication is essential to success.
In Part 6, we look at business technology, how it is used
to manage organizations, and as a supplement to the
more traditional management practices. We also address
the accounting and financial information that businesses
rely on to be successful while ensuring that the organization meets all laws and regulations. Lastly, in Part 7, we
take a look at how the banking systems work in Canada
and the basics of financial management. An important
component of Part 7 is a detailed discussion on managing personal finance and investments.
NEL
Copyright 2020 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content
may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
FEATURES
MINDTAP
Business, First Canadian Edition, is a digital learning solution for the
Introduction to Business course that presents concepts in a way that resonates with the needs of today’s learners. This resource not only helps introduce students to all of the important concepts that they need to learn in the
Introduction to Business course, but it does so through interactive, media-rich
activities that help them better retain those concepts and get the hands-on
decision-making practice they need for continued success in school and in
business.
MindTap can be fully integrated with most Learning Management Systems
(LMS)—providing students with one place to log in, and allowing instructors
to sync to their LMS gradebook if they wish. It can be personalized for their
course needs. You can hide lessons, move content around, and assign the things
you find most useful!
LEARN, APPLY, SUCCEED
To meet the needs of today’s students and to ultimately provide a more interactive course experience, the MindTap for Business, First Canadian Edition,
encourages students to learn, apply, and succeed. The first way is through the
lessons. The lessons in Business MindTap present the core concepts taught in
the Introduction to Business course. The content is presented in a variety of
ways, including short paragraphs of text and the following assets that appear
in-line in the ebook:
• Mentorship Videos open the lesson with teaching assistants from Wilfrid
Laurier University in Waterloo, Ontario, who engage students while
providing valuable “near peer” style advice and encouragement. Their
experience as recent students and teaching assistants make them the ideal
resource for guiding students through course material in addition to offering
suggestions on choosing academic pathways and preparing for future careers
in business.
▲
• Concept Videos explain
important business ideas
and concepts in a friendly
and approachable manner.
• Concept Checks appear
throughout and fre­
quently ask students to
assess what they have
learned.
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xiii
FEATURES
▲
• Interactive Figures allow
students to apply the key
concepts of each lesson
by manipulating content,
ultimately deepening
their understanding of
concepts.
Through research, we
have seen that students
respond to this type of
format and come to class
more prepared and engaged.
Additionally, the MindTap e-reader has the following functionality to
engage students and support self-study:
• ReadSpeaker will read the text aloud.
• Dictionary makes it easy to look up definitions quickly and efficiently.
• Highlighting and Note Taking allows students to highlight text and make
notes in the MindTap Reader. These notes will flow into Evernote, the
electronic notebook app that you can access anywhere when it is time to
study for the exam.
Within MindTap, students also have access to study tools:
• Adaptive Test Prep reduces exam anxiety and allows students to create
practice quizzes covering multiple lessons in a low-stakes environment.
Students receive immediate feedback so they know where they need
additional help, and the test bank–like questions prepare students for
what to expect on the exam. With about 80 questions per lesson, students can create
multiple unique
practice quizzes.
xiv
Features
▲
• Flashcards are prepopulated to provide
a jump-start for
review and there is
an option to create
new ones.
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
FEATURES
CONNECTING CONCEPTS THROUGH ACTIVE LEARNING
The MindTap for Business, First Canadian Edition, also contains a variety
of activity types intended to help students deepen their understanding of
concepts and move from memorization to mastery. These activities include:
• Tying It Together: Once students have learned about each important
concept and onfirmed their comprehension through the Concept
Checks in the ebook, they will have an opportunity to make connections between those concepts. These exercises present students with a
real-world scenario and ask questions related to each learning objective covered in the lesson, allowing them to see how those concepts are
interrelated in their application to a single scenario.
• Lesson Case Study: Each lesson contains a case study where students
are asked to provide solutions and recommendations to a variety of real
challenges facing Canadian and global businesses.
▲
• Interviews with Industry
Professionals: Through‑
out this engaging video
series, Canadian professionals from a crosssection of industries
reinforce the readings,
activities, and highlighted
skills of lesson concepts.
• You Make the Decision:
To help students focus
on thinking critically, these activities place students in interactive scenarios
and ask them to make decisions on behalf of the company. The scenario
changes at each decision point so that students receive a unique experience
based on the choices they make. The effectiveness of the business decisions they make along the way will result in success, failure, or something
in between.
• Role-Play Activities: These activities develop teamwork, communication,
and critical thinking skills—all vital in today’s business environment.
• The Business Plan: This is developed as students progress through the
course. It shows students how all of the different components of business
work together.
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Features
Copyright 2020 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content
may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xv
SUPPLEMENTS FOR
SUCCESS
INSTRUCTOR RESOURCES
The Nelson Education Teaching Advantage
(NETA) program delivers research-based instructor
resources that promote student engagement and higherorder thinking to enable the success of Canadian students and educators. Visit Nelson Education’s Inspired
Instruction website at nelson.com/inspired/ to find out
more about NETA.
The following instructor resources have been created for Business, First Canadian Edition. Access these
ultimate tools for customizing lectures and presentations
at nelson.com/instructor.
NETA Test Bank
This resource was revised by Mike Wade, Seneca
College. It includes over 1600 multiple-choice questions
written according to NETA guidelines for effective construction and development of higher-order questions.
special installations or downloads are needed, and the
desktop-inspired interface, with its drop-down menus
and familiar, intuitive tools, allows instructors to create
and manage tests with ease. Multiple test versions can
be created in an instant, and content can be imported or
exported into other systems. Tests can be delivered from
a learning management system, the classroom, or wherever an instructor chooses. Nelson Testing Powered by
Cognero for Business, First Canadian Edition, can be
accessed through nelson.com/instructor.
NETA PowerPoint
Microsoft® PowerPoint® lecture slides for every lesson
have been adapted by Philip Eng, George Brown
College. Many slides feature key figures, tables, and
photographs from Business, First Canadian Edition.
NETA principles of clear design and engaging content
have been incorporated throughout, making it simple for
instructors to customize the deck for their courses.
Image Library
This resource consists of digital copies of figures, short
tables, and photographs used in the book. Instructors
may use these jpegs to customize the NETA PowerPoint
or create their own PowerPoint presentations.
NETA Instructor Guide
The NETA Test Bank is available in a new,
cloud-based platform. Nelson Testing Powered by
Cognero® is a secure online testing system that allows
instructors to author, edit, and manage test bank content from anywhere Internet access is available. No
xvi
This resource was written by Stephanie Duncan,
University of Calgary. It is organized according to the
lessons and addresses and key educational concerns.
Other features include classroom activity and discussion
suggestions and additional exercises.
NEL
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
ABOUT THE
AUTHORS
NORM R. ALTHOUSE
Norm Althouse received his Bachelor of Business
Administration (Accounting) and worked in the public
sector before returning to continue his studies in the
Master of Business Program. He has studied in Canada,
Australia, Ireland, and Hungary. Currently, Norm
teaches at the Haskayne School of Business at the University of Calgary.
After several years of teaching only in the Organizational Behaviour and Human Resources area at the University of Calgary, Norm transferred to the Strategy and
Global Management area, where he currently teaches.
Norm has developed a number of courses including a
required core course in business for first- and secondyear business students and introduction to organizational behaviour for graduate students. His commitment
to continuous improvement has resulted in many new
developments, including the integration of materials and
changes in the pedagogy of the course.
Norm’s research activities include team building,
the changing nature of management and managers, the
study of values and diversity in the workplace, and, most
recently, the study of mentor–mentee relationships in
business. Additionally, Norm has presented at conferences such as the Administrative Sciences Association of
Canada (“The Gendering Component of Diversity: How
Is It Faring?”) and the Academy of Management (“Success in the Classroom, Grading Strategies, and Group
Work for New Instructors”), and has been published in
a book of readings from the Global Business and Technology Association—Budapest, Hungary (“Hierarchies
in Transition: Hungary and Canada”). Norm has also
published academic articles and business cases.
LAURA A. ALLAN
Laura Allan received her Honours Bachelor of Business Administration from Wilfrid Laurier University
and, after a brief stint in the private sector working in
an advertising agency, she went on to get her Master
of Business Administration at York University. Laura
went back to her alma mater to teach in 1984 where she
coordinates a first-year introduction to business class at
Laurier, with over 1500 students and 35 teaching assistants, and designs and teaches the entrepreneurship
curriculum. She also conducts executive development
seminars and consults on the topic of emotional intelligence. Laura has been involved on a number of introductory textbooks, as academic editor, writing a study
guide, and contributing chapters and other materials.
She also developed online versions of the two introductory business courses for the university’s distance education department.
Laura’s commitment to an integrative and immersive approach to teaching business led her to completely
redesign the first-year courses around an integrative framework and incorporate a year-long project to
design a new business venture along with two annual
competitions—the New Venture and Pitch competitions, sponsored by BDO Canada and PepsiCo Canada,
respectively. Laura also developed a Social Enterprise
Challenge for the first-year students sponsored by Unilever Canada and an annual Sustainability Challenge for
the second-year students sponsored by IKEA Canada.
Laura is currently serving as the Executive Director
of the Schlegel Centre for Entrepreneurship and Social
Innovation at the university, responsible for the university’s extensive experiential entrepreneurship programming and its two startup incubators.
WILLIAM M. PRIDE
William M. Pride is Professor of Marketing, Mays Business School, at Texas A&M University. He received
his Ph.D. from Louisiana State University. In addition
to this text, he is the co-author of Cengage Learning’s
Foundations of Business, a market leader. Dr. Pride
teaches Principles of Marketing at both undergraduate
and graduate levels and constantly solicits student feedback important to revising a Principles of Marketing
text. Dr. Pride’s research interests are in advertising,
promotion, and distribution channels. His research articles have appeared in major journals in the fields of marketing, such as the Journal of Marketing, the Journal of
Marketing Research, the Journal of the Academy of Marketing Science, and the Journal of Advertising. Dr. Pride
is a member of the American Marketing Association,
Academy of Marketing Science, Society for Marketing
NEL
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xvii
Advances, and the Marketing Management Association. He has received the Marketing Fellow Award from
the Society for Marketing Advances and the Marketing
Innovation Award from the Marketing Management
Association. Both of these are lifetime achievement
awards.
ROBERT J. HUGHES
Robert J. Hughes (Ph.D., University of North Texas) specializes in business administration and college instruction. He has taught Introduction to Business for more
than 35 years both on campus and online for Richland
College, one of seven campuses that are part of the
Dallas County Community College District. In addition
to Business and Foundations of Business, published by
Cengage Learning, he has authored college textbooks in
personal finance and business mathematics and served
as a content consultant for two popular national television series, It’s Strictly Business and Dollars & Sense:
Personal Finance for the 21st Century. He is also the coauthor of a new online Introduction to Business course
for Dallas County Community Colleges that accompanies the Foundations of Business text. In addition, he is
lead author for a business math project utilizing artificial
intelligence and computer-assisted instruction funded by
the ALEKS Corporation. He is active in many academic
and professional organizations and has served as a consultant and investment adviser to individuals, businesses,
and charitable organizations. Dr. Hughes is the recipient
of three different Teaching in Excellence Awards at Richland College. According to Dr. Hughes, after 35 years
of teaching Introduction to Business, the course is still
xviii
About the Authors
exciting: “There’s nothing quite like the thrill of seeing
students succeed, especially in a course like Introduction
to Business, which provides the foundation for not only
academic courses, but also life in the real world.”
JACK R. KAPOOR
Jack R. Kapoor (Ed.D., Northern Illinois University) is
professor of business and economics in the Business and
Technology Division at the College of DuPage, where he
has taught Introduction to Business, Marketing, Management, Economics, and Personal Finance since 1969.
He previously taught at Illinois Institute of Technology’s
Stuart School of Management, San Francisco State University’s School of World Business, and other colleges.
Professor Kapoor was awarded the Business and Services Division’s Outstanding Professor Award. He has
also served as an Assistant National Bank Examiner for
the U.S. Treasury Department and as an international
trade consultant to Bolting Manufacturing Co., Ltd.,
Mumbai, India. Dr. Kapoor is known internationally as
a coauthor of several textbooks, including Foundations
of Business, 5e (Cengage Learning). He has served as
a content consultant for the popular national television
series The Business File: An Introduction to Business
and has developed two full-length audio courses in business and personal finance. He has been quoted in many
national newspapers and magazines, including USA
Today, U.S. News & World Report, the Chicago SunTimes, Crain’s Small Business, the Chicago Tribune, and
other publications. Dr. Kapoor has travelled around the
world and has studied business practices in capitalist,
socialist, and communist countries.
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
ACKNOWLEDGMENTS
The authors would like to gratefully acknowledge the orig­
inal authors of the American edition for the thoughtful
structure and text with which to work, and the entire
Nelson team who have supported us in this endeavour.
Our thanks in particular to Alexis Hood, Publisher;
Jackie Wood, Director, Qualitative Publishing; and
Claudine O’Donnell, Vice President, Product Solutions
for championing this dynamic digital-first product, and
to Courtney Thorne, Content Manager; Jennifer Hare,
Senior Production Project Manager; and our detailed
and thorough copyeditor Kelli Howey. Their guidance
throughout the development and production of this first
Canadian edition have been invaluable.
In addition, we are grateful to the many reviewers
who offered suggestions and recommendations that
have helped guide our efforts as we developed the first
Canadian edition of Business. We are deeply appreciative of the insights of the following instructor reviewers:
Tyler Case, University of Saskatchewan; Philip
Eng, George Brown College; Peggy Hedges,
University of Calgary; Anthony Mallette, SAIT;
Joyce Manu, George Brown College; Carolan
McLarney, Dalhousie University; Kim Richter,
Kwantlen; Michael Wade, Seneca College;
Andrew Webb, Carleton University.
This innovative resource was built in collaboration
with the following students, who provided extensive feedback through focus groups and in-depth product reviews:
From the University of Calgary: Hadi Ali, Emma
Brown, Katherine Chaadayeva, Natasha Elliott,
Okwuchi Emerole, Brandon Fleming, Ashley
Fung, Danielle Leong, Julie Ly, Ripan Mavi,
Joanna Nguyen, Leslie Nguyen, Kate Welner
From Wilfrid Laurier University: Chetan Bhogal,
Ryan Burnham, Amanda Ens, Nimish Khurana,
Drishka Kureemun, Sonia Parmar, Colin Prentice
From George Brown College: Thasine Arun,
Tafora Belay, Gavin Bennett, Marcela Fontes
Lima Guerra, Adam Hanrahan, Megan Hodgins,
Jae Jung, Shelby Letwinka, Kubenthiran
Suganthan, Katarzyna Wojtowicz
From Seneca College: Meghen Chin, Elham Khan,
Sandra Pattenden, Virgil Wang
Norm Althouse: Sincere thanks to my teaching assistant, Stephanie Duncan, for her research and assistance
in the writing process and my colleague, Peggy Hedges,
for her insights and suggestions on the banking and
finance lessons. The Haskayne Career Centre, in particular Kimberley Dart, offered insightful feedback on
our Careers appendix.
Laura Allan: I would like to acknowledge the work
of Sam Haas, my former Head Teaching Assistant and
now my Coordinator of Programming and Student
Engagement in the entrepreneurship centre, for being
such a huge help in working on the materials for this
edition. And to all my former students and TAs, for continuing to be the inspiration for continuing to work to
improve the experience of learning about business.
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xix
xx
Acknowledgments
NEL
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Copyright 2020 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content
may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
1 Exploring the World
of Business and
Economics
LEARNING OBJECTIVES
Once you complete this lesson, you will be able to:
1-2 Explain how business benefits society.
1-3 Identify potential societal concerns about business.
1-4 Discuss how different factors might affect businesses and
consumers.
1-6 Identify the key strategic considerations related to
competition for companies in various industries.
jiawangkun/Shutterstock.com
1-1 Summarize the four benefits of studying business.
1-7 Identify the effects of various price changes on supply
and demand.
1-8 Explain how different economic indicators are positive or
negative indications of economic conditions.
1-5 Classify various economies as one of the four types of
economic systems.
I NTRODUCTION: WHAT IS BUSINESS?
What is business? It is so many things, as you will learn
in this course. But let us get a preview. The value of
all goods and services produced in Canada in the most
current years has been more than $1.5 trillion CND a
year.1 Approximately 20 million people are employed
in Canada.2 Businesses with less than 100 employees
are the vast majority of business in Canada. And while
some companies make the new goods and services we
hear about every day, other companies do the less glamorous work.3 While there are huge companies, such as
Loblaw Companies Limited, that seemingly dominate
the landscape, they are just one of more than 4 million
businesses across the country.4 You may currently plan
on going into a career that has to do with business, or
you might plan on a career that seemingly has nothing to
do with business. But, no matter our job, we all end up
working for organizations that operate basically the same
way. Money comes in, we spend that money to best serve
our customers and clients, and hopefully at the end there
is some money left over. That sounds a lot like a business.
2 LESSON 1:
Exploring the World of Business and Economics
That is just a tiny glimpse of the world of business,
and we will be discussing so much more as we discuss
operations, management, marketing, finance, and more.
So, what is business? Let us get started.
1-1
WHY STUDY BUSINESS?
1-1 Summarize the four benefits of studying
business.
The potential benefits of studying business are enormous. First, it can help you choose a career. When
you study business, you can evaluate different industries, different sizes and types of employers, and possibilities for starting your own business. Second, it can
improve your career. Often employees become managers. Or you may choose to open your own business.
To succeed at either of these requires many of the same
characteristics. This course will help you improve your
management skills, such as interpersonal, analytical,
technical, and conceptual skills, and learn about business best practices that can make you more valuable to
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
an organization. Third, studying business can help you
become a better-informed consumer and investor. By
understanding how businesses create and market products, you are better able to evaluate purchase decisions.
By understanding the basics of financial management
and investments, you are able to make better personal
financial decisions. Fourth, it can help you become a
more influential community member. When you understand the potential impacts of businesses, you can
direct your purchasing power and your social influence
toward businesses that align with your values. Taken
together, these benefits of studying business can lead
to more fulfilling jobs, higher incomes, and stronger
communities.
1-2
KEY TAKEAWAY
The benefits of studying business include helping you
choose a career, improving your career, making you a
better-informed consumer and investor, and making you
a more influential community member. These benefits
can lead to more fulfilling jobs, higher incomes, and
stronger communities.
NEL
1-3
U NDERSTANDING
BUSINESS BASICS
1-2 Explain how business benefits society.
1-3 Identify potential societal concerns
about business.
A business is an organization that seeks profit by
offering products to satisfy society’s needs. Those products can be goods or services. A good is a tangible
product and a service is an intangible product. A business realizes a profit when its sales revenue is greater
than its expenses.
In this course we
use different names for a
business an organization that
business, such as organseeks profit by offering products
ization, business, or com(goods and services) to satisfy
pany, but they all refer
society’s needs
to the same thing. Busigood a physical, tangible
nesses play an important
product that we can see and touch
role in our economy. For
service an intangible product
instance, businesses create
that we experience or use
jobs, employ people, and
LESSON 1: Exploring the World of Business and Economics 3
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
produce goods and services to sell to customers, other
businesses, and government entities. The remainder
of our economy is made up of the public sector (i.e.,
government) and the non-profit sector. It is important
to remember that the fundamentals of business apply
to these sectors as well. When we discuss subjects
such as ethics, leadership, product development, and
accounting, the takeaways often are transferrable to
any sector of the economy. So if you plan to become a
teacher, city planner, or firefighter, this course is relevant
to you as well.
For a business to be successful, it must be organized and combine four types of resources: material,
human, financial, and informational. Material resources
include the raw materials used in manufacturing as
well as buildings and machinery. Human resources are
the people who provide their labour to a business in
return for wages. The financial resource is the money
required to pay employees, purchase materials, and
generally keep the business operating. Information is
the resource that tells the manager of the business how
effectively the other three resources are being combined and used.
1-3a
buy goods and services simply to own them; they buy
goods and services to satisfy particular needs. Most of
the products you use every day exist because someone
concluded that a profit could be made by fulfilling a
particular need in the market. For example, some of us
may feel that the need for transportation is best satisfied
by an air-conditioned BMW with navigation system,
stereo system, heated and cooled seats, automatic
transmission, power windows, and remote-control side
mirrors. Others may believe that a less expensive car
without all the luxuries will do just fine. Both products
are available to those who want them, along with a
wide variety of other products that satisfy the need for
transportation.
Companies offer value in a variety of ways. For
example, the auto industry has continually improved
over the decades (see Exhibit 1.1).
PROVIDING EMPLOYMENT Offering products
that satisfy customer needs requires the coordination of
many people to manage manufacturing, sales, management, and a variety of other functions. This benefits
society by providing employment.
The Benefits of Business to Society
Businesses bring several benefits to society. These
include offering valuable goods and services, providing
employment, and improving the quality of life.
EXHIBIT 1.1
WAYS COMPANIES OFFER VARIETY:
HOW THE AUTO INDUSTRY HAS
IMPROVED OVER THE DECADES
OFFERING VALUABLE GOODS AND SERVICES
The ultimate objective of every organization must be to
satisfy the needs of its stakeholders. In business, this is
most certainly the customers. People generally do not
EMPLOYEES’ KEY ACTIVITIES IN
A SUCCESSFUL BUSINESS
The employees of a successful business must perform a
variety of key activities. For example,
▸ Marketing and Sales: market and sell the products
that customers want.
▸ Accounting and Finance: manage and control financial activities.
▸ Production and Operations: actually create the
goods or deliver the services that customers want.
© Cengage Learning
▸ Human Resources: help recruit, train, and develop
the company’s most valuable resource—its people.
▸ Research and Development: research ideas for new
products and technologies.
4 LESSON 1:
Exploring the World of Business and Economics
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IMPROVING QUALITY OF LIFE
© Cengage Learning
EXHIBIT 1.2
IMPROVING QUALITY OF LIFE In addition to providing employment, businesses contribute to communities in other ways (see Exhibit 1.2). One is by paying
taxes each year. Another is through charitable giving and
community development. Canadian businesses provide
donations in the form of cash, products, and employee
time. Businesses also contribute to economic growth.
For example, in March 2018 there were 32,300 more
jobs in Canada than there had been in February.5 Many
of these jobs were created by businesses.
1-4
CONCERNS ABOUT THE IMPACT
OF BUSINESS ON SOCIETY
Unfortunately, business can have negative impacts as
well. Most managers today look for ways to balance their
drive to generate profits with the need to harmonize
their operations with social concerns. These social concerns include the following:
Health and Safety Risks: This includes the inherent
risks of working in a production environment, the use
of potentially unsafe materials in manufacturing, and
unsafe product design.
Environmental Damage: Production of any kind
involves the consumption of natural resources. However,
when companies do not focus on making these resources
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sustainable, it can cause irreversible damage to the land,
air, and water. This in turn can negatively impact the
health of citizens in the community.
Social Disruption: When a company is successful,
the increase in employment or customer activity can
increase traffic, crowd schools, damage existing businesses, and even change the culture of a community in
unwanted ways. Some employees may feel they do not
benefit from the success of the company due to low pay
and limited benefits. In addition, when a once-successful
business hits hard times or fails it can throw thousands
of people out of work and bring hardship to entire communities.
Experts agree that several key issues will challenge
our economic system (and our country) over the next
decade. The following are some of the questions to be
resolved:
●●
●●
●●
●●
●●
How can we create a more stable economy and create
new, quality jobs for the unemployed?
How can we reduce the national debt and still stimulate business growth?
How do we restore confidence in our political
systems?
How can we use research and technology to make
Canadian workers more productive?
How can we make Canadian businesses more competitive in the global marketplace?
LESSON 1: Exploring the World of Business and Economics 5
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●●
●●
●●
How can we encourage the growth of small businesses?
How can we conserve natural resources and sustain
the environment?
How can we meet the needs of low-income families,
single parents, and the less fortunate?
How can we combat terrorism and foster peace
throughout the world?
Brasiliao/Shutterstock.com
●●
The answers to these questions are anything but
simple. We must use ingenuity and creativity not only
to solve our current problems but also to compete in the
global marketplace and build a country and economy for
future generations.
KEY TAKEAWAY
1-5
●●
●●
Businesses make a variety of positive contributions to
society, including offering valuable products, providing
employment, and improving quality of life. However,
managers must take care to balance the pursuit of profits
with social concerns.
RESPONDING TO THE BUSINESS
ENVIRONMENT
1-6
1-4 Discuss how different factors might
affect businesses and consumers.
Businesses do not exist in a vacuum. The business
environment is made up of five factors that affect the success or failure of a business, and they affect consumers
as well. The five factors of the business environment are:
●●
Economic
●●
Competitive
●●
Global
●●
Technology
●●
Social
Let us look at each one to see how changes in the
business environment affect our lives.
Economic Factors: The size and health of the economy
must always be considered when making business decisions. This fact is especially important when the country’s economy takes a nosedive or an individual business’s
sales revenues and profits are declining.
Economic slowdowns or upturns affect everything
from employment to consumer spending.
6 LESSON 1:
Exploring the World of Business and Economics
●●
During a downturn the unemployment rate increases;
in an upturn it decreases.
Consumer spending decreases for discretionary items
in a downturn and increases during an upturn.
Government receives less tax revenue during a downturn, which impacts its spending and/or debt levels.
Competitive Factors: Businesses operate in a competitive environment, because competition is an important
component of our economic system. Every day, business
owners must figure out what makes their business successful. A high level of competition forces a company to
focus on strategies such as cost cutting, development of
new products, and/or increased marketing and branding
efforts. For example, the Canadian wireless sector continues to invest in infrastructure to respond to increased
demand and increased competition.
●●
The number of smartphones continues to increase.
●●
Network speeds continue to become faster.
●●
The cost of data plans continues to decrease.
Global Factors: Related to competitive factors are
global factors. Canadian businesses have to compete not
only with other Canadian businesses, but also with businesses from all over the globe. For example, China is one
of the fastest-growing economies in the world and is a
world leader in electronics manufacturing.
●●
●●
●●
North America has lost many of its high-tech manufacturing jobs.
The cost of labour in Asia is considerably lower than
in North America.
Consumer product prices are lower by using less
expensive labour.
Technology Factors: Innovations in technology have
completely changed how companies produce and
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ECONOMIC SYSTEMS
1-8
1-5 Classify various economies as one of the
humphery/Shutterstock.com
four types of economic systems.
distribute products. Technology has also changed the
way companies communicate with customers—and how
we communicate with one another. For example, Instagram launched in late 2010 as a social networking app for
sharing photos and videos.
●●
Most Instagram users are not in North America.
●●
There are more than 500 million Instagram users.
●●
More than 300 million use Instagram on a daily basis.6
Social Factors: Changes in the demographics of our popu­
lation, including age, gender, ethnicity, and family composition, will influence what products companies offer and
how they operate their businesses. It will also affect the
nature of your career and daily life. For example, changing
demographics in Canada are creating many opportunities.
Job opportunities are created by the retiring of the
baby boomers.
●●
Diversity encourages innovation in business.
●●
Increasing life expectancy rates create opportunities
for new products.
●●
1-7
KEY TAKEAWAY
When businesses monitor and understand the five factors
that affect the business environment, they can respond
with management, marketing, and financial strategies
that provide the best chance of success.
FIGURE 1.1
Economic factors are an important component of the
business environment. A growing economy—the way
in which people deal with the creation and distribution
of wealth—typically is good for businesses and consumers. However, if the economy has stalled or begins to
shrink, the result can be fewer jobs, lower incomes, and
less consumer choice.
Another economic factor that can affect the business
environment is a country’s economic system. Different economic systems exist in the world today, and those systems
largely determine how wealth is made and distributed.
1-8a
Why Do Economic Systems Matter?
A country’s economic system significantly affects all the
economic activities of the individuals, businesses, government, and society within a country. By understanding
economic systems, you can better examine how each
system will affect your opportunities to make income
and create wealth. These systems also affect your choices
as a consumer and the prices you pay. Economies are
generally categorized as capitalist, mixed, socialist, or
communist (see Figure 1.1).
For the last several decades, a growing number of
economies around the globe have increasingly embraced
capitalism and free-market economics. Capitalism
is an economic system in which individuals own and
operate the majority of businesses that provide goods
and services. A free-market economy is an economic system in which businesses and individuals decide
what to produce and buy and the market determines
prices and quantities sold. Capitalism stems from the
theories of 18th-century Scottish economist Adam
Smith. In his book, Wealth
of Nations, published in
economy the way in which
1776, Smith argued that a
people deal with the creation and
distribution of wealth
society’s interests are best
served when the individcapitalism an economic
system in which individuals
uals within that society are
own and operate the majority of
businesses that provide goods and
services
CATEGORIES OF ECONOMIC SYSTEMS
free-market economy an
Socialist
Free market
Centrally planned
Mixed
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Communist
© Cengage Learning
Capitalist
economic system in which
businesses and individuals decide
what to produce and buy and the
market determines prices and
quantities sold
LESSON 1: Exploring the World of Business and Economics 7
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The Fundamental Issues
of Adam Smith’s Capitalism
Adam Smith’s capitalism is based on the following
fundamental issues:
1. The right to create wealth: The creation of wealth
is properly the concern of private individuals, not
the government.
2. The right to own private property and resources:
Private individuals must own private property and
the resources used to create wealth.
allowed to pursue their own self-interest. According to
Smith, when individuals act to improve their own fortunes, they indirectly promote the good of their community and the people in that community. Smith went
on to call this concept the invisible hand.
A country’s economy is determined by the way
each system answers the following four basic economic
questions:
invisible hand a term
created by Adam Smith to
describe how an individual’s
personal gain benefits others and
a country’s economy
mixed economy an
economic system where most
land and business are privately
owned but with various levels of
government involvement
command economy an
economic system in which the
government decides what goods and
services will be produced, how they
will be produced, for whom available
goods and services will be produced,
and who owns and controls the
major factors of production
socialism an economic system
in which the key industries are
owned and controlled by the
government
communism an economic
system where all property and profits
are owned by the government,
which then decides what goods and
services will be produced
8 LESSON 1:
1. What goods and services will be produced,
and how much of each?
2. How will these goods and
services be produced?
3. The right to economic freedom and freedom to
compete: Economic freedom ensures the existence
of competitive markets that allow both sellers and
buyers to enter and exit the market as they choose.
4. The right to limited government involvement: The
role of government should be limited to providing
defence against foreign enemies, ensuring internal
order, and furnishing public works and education.
centralized government decides the answers to all four
basic economic questions. Today, two types of economic
systems—socialism and communism—serve as
examples of command economies.
These principles serve as a starting point for understanding economies around the world. We typically classify economies by their level of private ownership and
government involvement. Most countries in the world
today can be categorized as either socialist or mixed. The
primary difference is that in countries with socialism, key
industries and some key natural resources are owned by
the government. In a mixed economy, most industries and
businesses are privately owned but a considerable amount
of government regulation exists in certain industries.
3. F
or whom will these
goods and services be
produced?
1-9
4. Who owns and who
controls the major factors of production?
The level of economic freedom in a country will affect your
opportunities to make income and create wealth. It will also
affect your choices as a consumer and the prices you pay.
The Canadian economy
is a mixed economy,
one that exhibits elements of both capitalism
and socialism. In a mixed
economy, the four basic
economic questions above
are answered through the
interaction of households,
businesses, and governments. A command
economy is an economic system in which a
1-10
Exploring the World of Business and Economics
KEY TAKEAWAY
DEGREES OF COMPETITION
AND SUPPLY AND DEMAND
1-6 Identify the key strategic considerations
related to competition for companies in
various industries.
1-7 Identify the effects of various price
changes on supply and demand.
Business competition is essentially a rivalry among
businesses for sales to potential customers. Some economic decisions are made by our governments, such as
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the majority that involve healthcare, education, transportation, and so on. Other decisions are made by individuals and businesses regarding what to produce, how
to produce it, and what prices to charge. As a consumer,
you get to choose which of these goods and services to
buy and how much you will pay.
1-10a
hy Do Degrees of Competition
W
Matter?
As a consumer, the degree of competition will affect the
number of choices you have and the prices you pay for
goods and services. As a business owner or employee,
knowing the degree of competition in your industry
can help you choose the most effective business strategies. Economists recognize four different degrees
of competition, ranging from complete competition to
no competition at all: perfect competition, monopolistic
competition, oligopoly, and monopoly. For a quick overview of the different types of competition, including
numbers of businesses and examples for each type, see
the following table:
FOUR DIFFERENT TYPES OF COMPETITION
The Number of Businesses Determines the Degree
of Competition within an Industry
Types of
Competition
Number of
Businesses
or Suppliers
1. Perfect
Many
Corn, wheat, peanuts, many
agricultural products
2. Monopolistic
Many
Clothing, shoes
3. Oligopoly
Few
Automobiles, cereals
4. Monopoly
One
Software protected by copyright,
many local public utilities
1-10b
Real-World Examples
erfect Competition and the Concept
P
of Supply and Demand
Perfect (or pure) competition is much like Adam
Smith’s free-market capitalism. In reality, it is not
very common in our modern world. However, understanding the concept of perfect competition provides an
important foundation for understanding more common
types of competition.
Perfect (or pure) competition is the market situation
in which there are many buyers and sellers of a product,
and no single buyer or seller is powerful enough to affect
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the price of that product. When this is the case, prices
are decided by the fundamental economic concept of
supply and demand. To understand the concept of
supply and demand, as you read the following discussion
ask yourself these two questions:
“If there is a decrease in price, how will that affect
demand?”
“If there is a decrease in price, how will that affect
supply?”
Perfect competition is much like Adam Smith’s freemarket capitalism. In reality, it is not very common in
our modern world. However, understanding the concept
of perfect competition provides an important foundation
for understanding more common types of competition.
Five very important concepts are necessary for perfect
competition to exist:
1. We are discussing the market for a single product,
such as bushels of wheat.
2. No restrictions exist on companies entering the
industry.
3. All sellers offer essentially the same product for sale.
4. All buyers and sellers know everything there is to
know about the market (including, in our example,
the prices that all sellers are asking for their wheat).
5. The overall market is not affected by the actions of
any one buyer or seller.
When perfect competition exists, every seller should
ask the same price that every other seller is asking. Why?
Because if one seller wanted 50 cents more per bushel of
wheat than all the others, that seller would not be able to
sell a single bushel. Buyers could—and would—do better
by purchasing wheat from the competition. On the other
hand, a company willing to sell below the going price
would sell all its wheat
competition rivalry among
quickly. However, that
businesses for sales to potential
seller would lose sales revcustomers
enue (and profit) because
perfect (or pure)
buyers are actually willing
competition the market
to pay more.
situation in which there are many
THE EQUILIBRIUM OR
MARKET PRICE There
is always one certain price
at which the demand for
a product is exactly equal
to the quantity of that
product produced. Suppose that producers are
willing to supply 2 million
buyers and sellers of a product, and
no single buyer or seller is powerful
enough to affect the price of that
product
supply the quantity of a
product that producers are willing
to sell at each of various prices
demand the quantity of a
product that buyers are willing to
purchase at each of various prices
LESSON 1: Exploring the World of Business and Economics 9
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
plied increases. The law of supply is shown graphically by
an upward-sloping supply
curve.
equilibrium price the price
The demand for a
at which the quantity demanded
particular product is the
is exactly equal to the quantity
supplied
quantity that buyers are
willing to purchase at each
monopolistic competition
of various prices. Buyers,
a market situation in which there
are many buyers along with a
too, are usually rational,
relatively large number of sellers
so we would expect
that differentiate their products
them—as a group—to buy
from the products of competitors
more of a product when
10 LESSON 1:
Exploring the World of Business and Economics
1-10c
© Cengage Learning
Price per unit
bushels of wheat at a price of $7 per bushel and
FIGURE 1.2 SUPPLY CURVE AND DEMAND CURVE
that buyers are willing to purchase 2 million
$12
bushels of wheat at a price of $7 per bushel. In
other words, supply and demand are in balance,
11
Demand curve
or in equilibrium, at the price of $7. Economists
10
call this price the market price.
9
The equilibrium price—also called market
price—of any product is the price at which the
8
quantity demanded is exactly equal to the quantity
7
Market price
supplied.
In theory and in the real world, market prices
6
are affected by anything that affects supply and
5
Supply curve
demand. The demand for wheat, for example,
4
might change if researchers suddenly discovered
that it offered a previously unknown health benefit.
1.0
1.5
2.0
2.5
3.0
3.5
Buyers would then demand more wheat at every
Quantity in millions of bushels
price level. Or the supply of wheat might change
if new technology permitted the production of
greater quantities of wheat from the same amount
its price is low and to buy less of the product when
of acreage. Other changes that can affect competitive
its price is high, as depicted by the demand curve in
prices are shifts in consumer preferences, the developFigure 1.1. The law of demand states that as the price
ment of new products, fluctuations in income owing to
decreases, the quantity demanded increases. The law
inflation or recession, or even changes in the weather
of demand is shown graphically by a downward-sloping
that affect the production of wheat. Perfect competition
demand curve.
is quite rare in today’s world. Many real markets, howIn perfect competition, sellers—and buyers—
ever, are examples of monopolistic competition.
must accept the going price. The price of each
On the supply and demand chart, this is where
product is determined by the collective actions of all
the downward-sloping demand line intersects with the
buyers and all sellers through the forces of supply and
upward-sloping supply line.
demand. The closest thing we find to perfect competition in today’s world are certain agricultural products,
SUPPLY CURVE AND DEMAND CURVE The
although it is worth noting that pricing for many agrisupply of a particular product is the quantity of the
cultural products can be distorted by government subproduct that producers are willing to sell at each of
sidies and quotas that affect supply and demand. In
various prices. Producers are rational people, so we would
categories where there is something resembling perexpect them to offer more of a product for sale at higher
fect competition, companies must pay special attenprices and to offer less of the product at lower prices, as
tion to minimizing production costs in order to make
illustrated by the supply curve in Figure 1.2. The law of
a profit.
supply states that as the price increases, the quantity sup-
Monopolistic Competition
As mentioned previously, perfect competition is rare
in today’s world. Many real markets are examples of
monopolistic competition. Monopolistic competition is a market situation in which there are many buyers
along with a relatively large number of sellers.
Real-world examples of products sold in a monopolistically competitive market include clothing, shoes,
soaps, furniture, and many consumer items. The various
products available in this type of competitive market are
very similar in nature, and they are all intended to satisfy
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the same need. However, each seller attempts to make
its product different from the others by providing unique
product features, an attention-getting brand name,
unique packaging, or services such as free delivery or a
lifetime warranty.
The key strategic consideration for sellers in these
markets is product differentiation, the process of
developing and promoting differences between one’s
products and all competitive products.
Monopolistic competition. In this market structure we have a large number of sellers and it is relatively easy for new entrants to come into the market. It
sounds a little bit like perfect competition. But in monopolistic competition the key is that each one of these
sellers has differentiated products. Think about restaurants in your local town. They are essentially selling
the same thing—food—but in the eyes of the customer
the products are different, unique. Each business in a
monopolistically competitive market has its own mini
monopoly. The business is the only producer of that
specific product, which is the key to monopolistic competition. Each monopolistically competitive business
is a price maker, facing a downward-sloping demand
curve because its product is unique. But the problem is
that because free entry exists in the market, if a monopolistically competitive business is generating a huge
economic profit in the short run it is going to draw new
participants into the market. A few new restaurants are
going to come to town to access that economic profit.
With monopolistic competition, in the long run there
are no economic profits. There is a large number of
sellers and free entry into the market, and the key is
product differentiation.
It is a fact of life for the producers of many consumer goods, from soaps to clothing to furniture to
STUDY TOOLS
Visit the MindTap to watch videos on competition in the world
of business.
shoes. A furniture manufacturer such as IKEA sees
what looks like a mob of competitors, all trying to chip
away at its share of the ready-to-assemble furniture
market. By differentiating each of its products from
all similar products produced by competitors, IKEA
obtains some limited control over the market price of
its product.
1-10d
An oligopoly is a market (or industry) situation in
which there are few sellers. Generally, these sellers are
quite large, and sizable investments are required to enter
into their market. Examples of oligopolies are the automobile, airline, car rental, cereal, and farm-implement
industries. The few sellers in an oligopoly frequently
match each other’s pricing, then try to win customers
through product differentiation. In this situation, companies in an oligopoly-type industry may use game
theory. Game theory can be used to model the interactions among businesses to determine what will happen
if companies take specific actions regarding changing
prices or introducing new goods or services.
Because few sellers exist in an oligopoly, the market
actions of each seller can have a strong effect on competitors’ sales and prices. If General Motors, for example,
reduces its automobile prices, Ford, Honda, Toyota, and
Nissan usually do the same to retain their market shares.
In the absence of much price competition, product differentiation becomes the major competitive weapon;
this is very evident in the
advertising of the major
product differentiation
automobile manufacturers.
the process of developing and
promoting differences between
For instance, when Toyota
one’s products and all competitive
was faced with declining
products
sales as a result of product
oligopoly a market (or
recalls, it began offering
industry)
in which there are few
buyer incentives to attract
sellers
new-car buyers. Quickly,
game theory used to model
both Ford and General
Motors began offering similar incentives and for the
same reason—to attract
new-car buyers.
1-10e
Go to nelson.com/student to access the digital resources.
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Oligopoly
Monopoly
A monopoly is a market
(or industry) with only one
seller and barriers to keep
other companies from
the interaction between two or
more businesses to determine
what will happen if one or more
companies take specific actions
with regard to changing prices
or introducing new products or
services
monopoly a market (or
industry) with only one seller and
barriers to keep other companies
from entering the industry
LESSON 1: Exploring the World of Business and Economics 11
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entering the industry. In a monopoly, there is no close
substitute for the product or service. Pricing in some
monopoly industries, such as the gas, water, and electric
utilities, is regulated by government. A massive investment is usually required to enter businesses in a monopoly industry, and success usually depends on quickly
achieving a meaningful share of the market. In certain
industries, government regulation effectively prevents
new competitors from entering the market at all.
Today many public utilities are still classified as
monopolies, but there may be increased competition. For example, consumers now have a choice when
selecting a company that provides electrical service to
both homes and businesses in many areas of the country.
Another example of a legal monopoly is created when a
government entity issues a franchise, licence, copyright,
patent, or trademark. For example, a copyright exists for
a specific period of time and can be used to protect the
owners of written materials from unauthorized use by
competitors that have not shared in the time, effort, and
expense required for their development.
1-11 KEY TAKEAWAY
As a consumer, the degree of competition in an industry
will affect the number of choices you have and the prices
you pay. As a business owner or employee, knowing the
degree of competition in an industry can help you choose
the most effective business strategies.
1-12
MEASURING ECONOMIC
PERFORMANCE
1-8 Explain how different economic indica-
tors are positive or negative indications
of economic conditions.
Today, it is hard to turn on the radio, watch the news, or
use the Web without hearing or seeing something about
the economy. These news reports often include numbers
that are supposed to help us interpret the health of the
economy.
1-12a
The Business Cycle
While most countries (and businesspeople, economists,
investors, and politicians) wish for consistent economic
growth, it rarely happens. In fact, if you were to graph
the economic growth rate for a country such as Canada
it would resemble a roller coaster ride, with peaks (high
points) and troughs (low points). These fluctuations are
generally referred to as the business cycle. Generally, the
business cycle consists of four phases: peak, contraction or
recession, trough, and expansion (see Exhibit 1.3). When
Why Does Measuring Economic
Performance Matter?
●●
●●
●●
The financing you need to continue your education
Your ability to get a job
The amount of interest you pay for credit card
purchases, automobiles, homes, and other credit
transactions
●●
For government, the health of a country’s economy
can affect:
●●
●●
For businesses, the health of the country’s economy
can affect plans for:
●●
●●
Hiring employees
Investing in new manufacturing plants and
equipment
12 LESSON 1:
Exploring the World of Business and Economics
Launching new products or services or moving
into new markets
●●
Level of taxes collected and whether budgets
operate at a surplus or deficit
Whether to change the levels of taxation and
government spending to influence the economy
(this is called fiscal policy)
Whether to make changes to the money supply
or interest rates to influence the economy (this is
called monetary policy)
©StudioM1
For individuals, the health of the country’s economy
can affect:
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1-12b
FIGURE 1.3
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
1990
GDP IN CURRENT DOLLARS
GDP in current
dollars
1995
EXHIBIT 1.3
2005
2010
2013
Year
Gross Domestic Product
We measure whether an economy has grown or shrunk
by using a measure called gross domestic product
(GDP), which 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 (see Figure 1.3).
For example, the values of automobiles produced by
employees in an American-owned General Motors plant
in Canada and a Japanese-owned Toyota plant in Canada
are both included in the GDP for Canada. A growing
GDP usually means good things, such as increasing
employment and increasing incomes. But tracking the
level of GDP alone tells only part of the story, which is
why economists look at a variety of economic indicators
to develop a complete picture of an economy’s health.
2000
1-12c
© Cengage Learning
Trillions of dollars
the economy is growing, that is called expansion.
When the economy is shrinking, that is called contraction. When an economy shrinks two quarters
in a row, it is described as a recession. Recessions
typically involve people losing their jobs and an
overall drop in household incomes. A severe recession that lasts longer than a typical recession and
has a larger decline in business activity when compared to a recession is defined by economists as a
depression. The term trough refers to the business
cycle phase when a country’s economy bottoms
out and a country’s production and employment
reach their lowest points. While the economy has
been growing for several years now, economists
generally agree that it has grown too slowly to fully
repair the damage that was done during the most
recent recession that began in 2007.
Unemployment and Inflation
Two additional indicators that can help us interpret
the health of the economy are unemployment rate and
inflation.
The unemployment rate is the percentage of
a country’s labour force unemployed at any time. An
increasing unemployment rate means more people
are losing their jobs. When workers are unemployed,
they, their families, and the country as a whole lose.
Workers and their families lose wages, and the country
loses the goods or services that could have been produced. In addition, the purchasing power of these
workers is lost, which can lead to unemployment for
yet other workers.
THE BUSINESS CYCLE
recession two or more
consecutive three-month periods
of decline in a country’s GDP
gross domestic product
(GDP) the total dollar value of all
goods and services produced by all
people within the boundaries of a
country during a one-year period
© Cengage Learning
unemployment rate the
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percentage of a country’s labour
force unemployed at any time;
calculated as the number of
unemployed divided by the
number of people currently in the
labour force
LESSON 1: Exploring the World of Business and Economics 13
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Inflation is an economics statistic that tracks the
increase in prices of goods and services over a period of
time. This measure is usually calculated on a monthly
or an annual basis. It is called inflation because typically
the price of goods and services increases over time. A
low, stable rate of inflation of around 2% is typically
regarded as a sign of a stable economy. However, if
prices increase too fast—as they did a few decades ago
when inflation jumped to more than 10% a year—your
dollars lose purchasing power, and it can be a sign of
economic trouble.
Inflation is usually measured using the consumer
price index (CPI), a monthly index that measures the
changes in the prices of a fixed basket of goods purchased
by a typical consumer in an urban area. Economists
often use the CPI to determine the effect of inflation on
not only the country’s economy but also individual consumers. Read the following to learn more about the CPI.
Inflation and the CPI. It is important to keep in
mind what inflation is, and what it is not. Inflation is
an ongoing increase in the general level of prices. With
inflation the overall level of prices is going up—and up
and up and up. Do not confuse inflation increases in the
general level of prices with the increase in the price of
a particular good. For example, you can see an increase
in the price of gasoline. Gasoline prices are going to
be up (and up and up). But that’s not necessarily inflation. Inflation is ongoing increases in the general level
of prices. So how do we measure inflation? One of the
oldest and most used measurements of inflation is the
consumer price index, or the CPI. Think about what an
index is. From statistics, an index is a selected sample of
a population—the idea is you do not go out and measure
the entire population. So you do not go out and measure
all the prices, you just measure a selected sample. And
the movement in that selected sample is going to mimic
the movement of the overall population. We use indexes
a lot. Think about the S&P/
inflation an economics statistic
TSX Composite Index. It is
that tracks the increase in prices of
a collection of prices of 250
goods and services over a period
companies from the 1,500
of time
companies listed on the
consumer price index
exchange. As the prices of
(CPI) a monthly index that
those 250 stocks move, it
measures the changes in the
prices of a fixed basket of goods
mimics the overall movepurchased by a typical consumer in
ment of the entire stock
an urban area
market. Indexes are shortdeflation an economics
hand ways of measuring
statistic that tracks the decrease in
just a selected sample of
prices of goods and services over a
the population to give you
period of time
an indication of what’s
14 LESSON 1:
Exploring the World of Business and Economics
happening to the overall population. And so it goes with
the CPI. The consumer price index is a weighted measurement of goods and services that are purchased in a
predefined consumer basket. The idea is movements
in the CPI are going to measure, or mimic, the overall
rate of inflation. That’s the idea of inflation, and how we
measure it with the consumer price index.
Deflation is a general decrease in the price of goods
and services (the opposite of inflation). At first glance this
might seem positive because the purchasing power of your
dollar increases, meaning you can buy more goods and services with the same amount of money. However, deflation is
usually a sign of economic trouble. Declining prices lead to
declining profits for companies, which can lead to declining
employment and a shrinking economy for the country.
1-13
KEY TAKEAWAY
Understanding indicators of economic health can help
individuals, businesses, and governments better allocate
their resources and plan for the future.
1-14
EXPLORING CAREERS
IN BUSINESS
What do you want to do with the rest of your life? Like
many people, you may find this is a difficult question
to answer. Perhaps you are getting ready to begin your
career and are new to the world of business. Or maybe
you have been working for years and want to prepare
yourself for new opportunities. Either way, what you
will learn in this course can help. As we tour the world
of business, it will be like looking over the shoulder of
the people who work in business every day. You will discover what goes on in various corners of a business and
learn about the skills used by successful mangers in those
areas. You will also learn about a variety of important
issues such as business ethics and personal finance. Use
what you learn from this tour to:
●●
Choose a career
●●
Improve your career
●●
Become a more informed customer and investor
●●
Become a more influential member of your
community
On the topic of choosing a career, let us close out
this lesson with an overview of some major occupations
to learn where they fit into the world of business.
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1-14a
Career Overviews
You can start researching your career with an online
search for “career opportunities in Canada.” For each
career, find a job description, an economic outlook, and
links to further resources. To dig deeper, complete a
Web search for news stories that will help you understand how changes in the business environment may
affect your occupation.
If you are undecided about your career at this point,
there is no need to worry. You will most likely be introduced to many opportunities during your postsecondary
LESSON SUMMARY
LO 1-1
Summarize the four benefits of studying
business.
There it is: the Canadian business system in brief. When it 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.
The benefits of studying business include helping you choose
a career, improving your career, making you a better informed consumer and investor, and making you a more influential community
member. These benefits can lead to more fulfilling jobs, higher
incomes, and stronger communities. Businesses bring many benefits
to society, but managers must take care to balance their pursuit of
profits with social concerns.
LO 1-2
Explain how business benefits society.
Businesses make a variety of positive contributions to society,
including offering valuable products, providing employment, and
improving quality of life.
LO 1-3
Identify potential societal concerns about
business.
However, managers must take care to balance their pursuit of profits
with social concerns, including health and safety risks, environmental
damage, and social disruption.
LO 1-4
Discuss how different factors might affect
businesses and consumers.
Businesses do not exist in a vacuum. The business environment is
made up of five factors—economic, competitive, global, technological, and social—that affect the fortunes of a business, and they
affect consumers as well. When businesses monitor and understand
these five factors, they can respond with management, marketing, and
financial strategies that provide the best chance of success.
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education. In addition, this course will familiarize you
with a variety of interesting career choices.
1-15
KEY TAKEAWAY
Perhaps you are getting ready to begin your career and
are new to the world of business. Or maybe you have
been working for years and want to prepare yourself for
new opportunities. Either way, what you will learn in this
course can help you evaluate and enhance your career.
LO 1-5
Classify various economies as one of the
four types of economic systems.
Economic factors have a strong influence on the business environment. One such factor is the economic system of a country.
Different economic systems exist in the world today, and those
systems largely determine how wealth is made and distributed. By
examining economic systems you can better understand how each
will affect your opportunities to make income and create wealth.
These systems also affect your choices as a consumer and the
prices you pay.
LO 1-6
Identify the key strategic considerations
related to competition for companies in various
industries.
Within the Canadian economic system there are levels of industry
competition that also affect businesses and consumers.
LO 1-7
Identify the effects of various price
changes on supply and demand.
As a consumer, the degree of competition in an industry affects the
number of choices you have and the prices you pay for products from
that industry. As a business owner or employee, knowing the degree
of competition in your industry can help you choose the most effective business strategies.
LO 1-8
Explain how different economic indicators are positive or negative indications of economic
conditions.
Today, it is hard to turn on the radio, watch the news, or use the Web
without hearing or seeing something about the economy. These
reports often include numbers that are supposed to help us interpret
the health of the economy. While these numbers are easy to ignore,
understanding indicators of economic health can help individuals,
businesses, and governments better allocate resources and plan for
the future.
LESSON 1: Exploring the World of Business and Economics 15
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EXERCISES
KEY TERMS
Use the Internet, magazines, newspapers, books,
and personal experiences to complete the following
exercises.
business, p. 3
1. Why have you chosen to study business? How do you anticipate
studying business will benefit you in the future? List three potential careers in business that interest you.
2. The business environment consists of economic, competitive,
global, technology, and social factors that affect the success or
failure of a business. Select any Canadian business you are familiar with and discuss how each factor may affect this business
specifically.
capitalism, p. 7
command economy, p. 8
communism, p. 8
competition, p. 9
consumer price index (CPI), p. 14
deflation, p. 14
demand, p. 9
economy, p. 7
3. Monopolistic competition is a market situation in which there
are many buyers along with a relatively large number of sellers,
such as restaurants or hotels. Provide an example of a company
that has used product differentiation as a strategy in this type
of market.
equilibrium price, p. 10
4. Search a reputable source to determine the current trends in
GDP growth, unemployment, and inflation in Canada. What do
these trends tell you about the level of business activity and the
business cycle?
gross domestic product (GDP), p. 13
5. What are some of the factors that lead to economic growth for
Canada? Hint: Think about the external environment (economic,
competitive, global, technology, and social).
mixed economy, p. 8
free-market economy, p. 7
game theory, p. 11
good, p. 3
inflation, p. 14
invisible hand, p. 8
monopolistic competition, p. 10
monopoly, p. 11
oligopoly, p. 11
REVIEW QUESTIONS
perfect (or pure) competition, p. 9
product differentiation, p. 11
1. What is a business? What are the benefits of business to society?
recession, p. 13
2. List some of the social concerns of a business.
service, p. 3
3. What are the four types of economies? Provide a brief summary
of each.
socialism, p. 8
4. Discuss the various types of competition.
5. What is product differentiation? When would a business use this
strategy?
supply, p. 9
unemployment rate, p. 13
6. How is the equilibrium price determined?
7. Explain the four phases of the business cycle.
8. Define GDP. What other indicators are used to determine the
health of the economy?
9. What is the consumer price index? How is this index related to
inflation?
10. What is the difference between monetary policy and fiscal
policy?
16 LESSON 1:
Exploring the World of Business and Economics
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
HOLY OLIGOPOLY,
BATMAN!
When we think of things that are undeniably Canadian, certain ideas come
to mind: hockey, beavers, Mounties, the maple leaf. A concept that does not
immediately spring to mind but is quintessentially Canadian? The oligopoly.
An oligopoly is a market situation where only a few large sellers dominate
the market. In this market, players compete for customer loyalty by trying to
differentiate themselves in a meaningful way. Canada provides some notable
textbook examples of an oligopoly, including in the airline industry (WestJet
and Air Canada), the banking industry (the Big Six banks), and the telecommunications industry (TELUS, Bell, and Rogers). And, it seems, the structure of
the Canadian economy is a big reason why it is a breeding ground for market
control by a few organizations. While Canada is large in land mass it is relatively small when it comes to competition, especially in comparison to the
United States. With fewer people comes fewer competitors in many markets,
and small companies find it hard to set up the infrastructure necessary to
build their business. All this means Canadians are not exposed to a more competitive economic environment for goods and services.
The CBC recently noted that, “Canadian consumers and workers are protected from certain free-market excesses, but that coddled security comes
with a price: oligopolies, in which a few firms dominate, and all the behaviour
that flows from that.” And that behaviour can sometimes be bad behaviour.
There have been recent incidents in Canada where manufacturers, wholesalers, and retailers have teamed up illegally to fix prices. Chocolate bar
manufacturers Cadbury, Hershey, Nestlé, and Mars had to pay $23 million
in a class action suit against them because it was found they had agreed to
set prices on chocolate bars sold in Canada. And Canadian food wholesalers
and retailers were also caught improperly acting together to set the price of
bread. Over a 14-year period the price of bread in stores like Real Canadian
Superstore, Sobeys, Metro, and Giant Tiger was maintained and agreed upon.
While this case is still ongoing, Sobeys has admitted its role in price collusion
and other companies have continued to deny the claims.
One industry where claims of price fixing and collusion have been made
but not substantiated is the telecommunications industry. The Big Three
wireless service providers of Rogers, Bell, and TELUS control nearly 90% of the
wireless market in Canada. At one time, Investopedia’s definition of oligopoly
included as an example “the wireless service industry in Canada.” There have
been attempts to disrupt the Big Three—a long list of competitors have
come and gone in the wireless market in Canada. But, you might be asking,
what about some of the smaller wireless providers in Canada? Let us have
a look. Koodo? Owned by TELUS. Fido? Rogers. Chatr? Rogers again. Okay,
what about Virgin Mobile? Run by Bell in Canada. There is the curious case
of Wind Mobile, run now as Freedom Mobile. It caused a stir in the mobile
market by offering low prices and large data plans. This one had the
Big Three scrambling a bit, trying to match these deals. Unfortunately,
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LESSON 1: Exploring the World of Business and Economics 17
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Shaw Communications—a large telecommunications company that is hoping
to make it a “Big Four”—bought out Freedom Mobile. Freedom indeed.
The result for Canadian wireless consumers? High prices for cell phone
plans. A Canadian government report released in late 2017 revealed that
among countries such as the United States, Italy, Australia, Japan, and France,
Canada had the most expensive mid-range and higher-tier wireless service
plans. And while the prices are high, they are also similar among the Big Three
organizations. Consumers struggle to find alternative options for their wireless provider needs. It seems that if any smaller or upstart business enters the
market, it does so with limited success or ends up being swallowed up by one
of the major players.
Sugar Mobile was one such start-up that began in 2016, offering data
plans as inexpensive as $19 per month. Sugar has not (yet) been purchased
by one of the larger entities, but it has struggled with establishing itself in the
Canadian market. And while gaining attention in the Canadian market with
low prices, this approach has not been sustainable.
Your challenge is to help Sugar Mobile get established in the Canadian
wireless market. But instead of focusing on price, you remember learning that
the way to win customers is through product differentiation. Lay out some
ideas that will lead to a plan to crack the Canadian wireless market. Use your
knowledge of business and competition to help Sugar Mobile get some good
reception with Canadian consumers.
Case Sources: http://www.cbc.ca/news/business/neil-macdonald-competitition-1.3444243; https://www
.theglobeandmail.com/report-on-business/canadian-chocolate-makers-to-pay-232-million-in-price-fixing
-lawsuit/article14361922/; https://globalnews.ca/news/3998023/bread-price-fixing-scandal-competition
-act-crimes/; https://www.huffingtonpost.ca/2017/09/29/canada-s-telcos-appear-in-dictionary-definition
-of-oligopoly_a_23227806/; http://www.capilanocourier.com/2017/11/07/phone-plans-canadian-oligopoly/;
https://www.ic.gc.ca/eic/site/693.nsf/vwapj/Nordicity2017EN.pdf/$file/Nordicity2017EN.pdf.
18 LESSON 1:
Exploring the World of Business and Economics
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Copyright 2020 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content
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2 Being Ethical
and Socially
Responsible
LEARNING OBJECTIVES
2-1 Summarize the three primary components of business ethics.
2-7 Explain the four basic consumer rights.
2-2 Understand if an action is legal, ethical, or both.
2-8 Identify two ways that companies demonstrate
2-3 Discuss how organizations can promote ethical behaviour.
2-4 List the four guidelines for making ethical decisions.
EvgeniyShkolenko/iStock/Getty Images Plus
Once you complete this lesson, you will be able to:
responsibility to employees.
2-9 Understand how business practices can help protect the
natural environment.
2-5 Describe different models of social responsibility.
2-6 Identify the various stakeholders and how organizational
decisions impact them.
I NTRODUCTION
Is it possible for an individual with strong moral values
to make ethically questionable decisions? What factors
affect a person’s inclination to make unethical or even
illegal decisions? These are questions that businesses
face every day. In a highly competitive business environment, an increasing number of companies strive to set
themselves apart by developing a reputation for ethical
and socially responsible behaviour.
In this lesson, we explore the components of business ethics and look at how ethical behaviour can be
encouraged. We also look at how companies—and other
stakeholders—can go beyond basic ethics by promoting
a commitment to social responsibility.
2-1
T HE THREE COMPONENTS
OF BUSINESS ETHICS
2-1 Summarize the three primary components
of business ethics.
Ethics is the study of right and wrong and of the morality of
the choices individuals make. An ethical decision or action is
one that is “right” according to some standard of behaviour.
20 LESSON 2:
Being Ethical and Socially Responsible
Business ethics is the application of moral standards to
business situations. Maintaining high ethical standards can
be hard enough in everyday life, but it can get even more
complicated in business. Why would that be?
Ethical issues often arise out of a business’s relationship with investors, customers, employees, creditors,
suppliers, or competitors. Each of these stakeholder
groups has specific concerns and usually exerts pressure
on the organization’s managers. Investors want managers to make sensible financial decisions that will boost
sales, profits, and returns on their investments. Customers expect a business’s products to be safe, reliable,
and reasonably priced. Employees demand to be treated
fairly in hiring, promotion, and compensation decisions.
Creditors require accounts to be paid on time and the
accounting information furnished by the business to be
accurate. Competitors expect the business’s competitive
practices to be fair and honest. These demands sometimes compete with each other, and balancing them can
become difficult. When you add the fast pace of business
and the high financial stakes associated with it, you can
see why ethics does not just happen naturally. A good first
step in maintaining high ethical standards is knowing the
three primary components of business ethics.
People in business face ethical issues every day, and
some of these issues can be hard to assess. They often
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
fall into three categories: competing fairly and honestly,
avoiding conflicts of interest, and being transparent.
2-1a
Competing Fairly and Honestly
Flamingo Images/Shutterstock.com
Fairness and honesty in business are two important ethical concerns. The first priority is to obey all laws and
regulations. However, this does not always happen.
Consider the case of Juan Alejandro Rodriguez Cuya,
who was sentenced to decades in prison after being convicted of deceiving and intimidating Spanish-speaking
customers of a call centre into fraudulent settlements.
In court, prosecutors explained that Cuya extorted victims into believing that they had to pay for deliveries of
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non-existent products or else be subject to huge fines
and lawsuits and even deportation.
Beyond obeying the law, ethical businesspeople are
expected to refrain from knowingly deceiving, misrepresenting, or intimidating others. For example, Deere &
Company requires each employee to deal fairly with
its customers, suppliers, competitors, and employees.
“No employee should take unfair advantage of anyone
through manipulation, concealment, abuse of privileged
information, misrepresentation of material facts or any
other unfair dealing practice.”
2-1b
Avoiding Conflicts of Interest
In business, a conflict of
interest results when an
employee takes advantage
of a situation for his or her
own interest rather than the
employer’s interest. Such
conflict may occur when
payments and gifts make
their way into business deals.
A wise rule to remember
is that anything given to a
person that might unfairly
influence that person’s
ethics the study of
right and wrong, and of
the morality of the choices
individuals make
business ethics the
application of moral standards
to business situations
conflict of interest
occurs when a businessperson
takes advantage of a situation
for his or her own personal
interest rather than for the
employer’s interest
LESSON 2: Being Ethical and Socially Responsible 21
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
business decision is a bribe, and all bribes are unethical.
Although bribes—gifts, favours, or payments offered with
the intent of influencing an outcome—are sometimes part
of business negotiations overseas, it is illegal for Canadian
businesspersons to use bribes in North America or abroad.
Relationships among co-workers often create ethical
problems. Unethical behaviour in these areas includes
taking credit for others’ ideas or work, not meeting one’s
commitments and mutual agreements, and pressuring
others to behave unethically.
When misconduct occurs in business, investors also
suffer. Investors and owners must be able to trust that
companies are acting in their best interests and reporting
their activities truthfully.
2-1c
Being Transparent
Transparency is the free flow of information inside
and outside the company. This includes the flow of information to employees, investors, customers, and other
stakeholders. Sometimes transparency alone can help discourage the temptation to compete unfairly or cover up
conflicts of interest. A common question used to promote
ethics is, “How would
transparency the free flow of
you feel if your actions
information inside and outside the
were on the front page
company
of the newspaper?” If your
social responsibility audits
actions were balanced and
comprehensive reports of what an
fair, then you would not
organization is doing in regard to
mind others knowing about
social issues that affect it
them. When companies
promote transparency they proactively make information
publicly available to encourage ethical decision making
throughout the organization. This includes disclosing anything that could even appear to be a conflict of interest.
Business communications, especially advertising,
can present ethical problems. False and misleading
advertising is illegal and unethical, which can infuriate
customers. For example, recently “Clean Diesel” was
the focus of Volkswagen’s massive marketing campaign
touting its vehicles as an attractive option for environmentally conscious car buyers. According to the U.S.
Federal Trade Commission, however, VW scored those
numbers by installing in each car a “defeat device” that
cheated on testing. Consequently, the company will
return as much as $10 billion to owners of VW and Audi
2.0-litre diesel cars.
Many companies have come under pressure for
labour practices (e.g., treat of foreign workers) and
working conditions (e.g., unsafe construction of manufacturing conditions) especially at their overseas operations/
suppliers. Social responsibility audits are comprehensive reports of what an organization is doing in regard
to social issues that affect it. BMO, Suncor, and Molson
Coors (among many other companies) have come under
pressure for labour practices and work conditions at their
overseas suppliers. In the past, many companies would try
to conceal controversial issues from coming to light, and
in many cases the companies did not even know about
them. By having third-party inspectors audit suppliers,
companies can address urgent concerns, create a plan for
improvement, or switch suppliers.
EXAMPLES OF COMPETING FAIRLY AND HONESTLY, AVOIDING CONFLICTS OF INTEREST, AND BEING TRANSPARENT
DO THIS
NOT THIS
Examples of Competing Fairly and Honestly
Negotiate in good faith with suppliers to get the best price.
Threaten your suppliers with cancellation of contracts if they do not accept your ultra-low price.
Compare the benefits of your products with those of your competitors.
Knowingly misrepresent your competitor’s products and make false claims about the benefits
of your products.
Inform your customers that their rates will increase 10% next year.
Tell customers there will be no rate changes. Let them find out when they receive their next bill.
Examples of Avoiding Conflicts of Interest
Build a strong relationship with your suppliers
Demand that your suppliers give you gifts if they want to keep you as a customer.
Disclose to your employer any outside business activities that may
conflict with your job.
Start a side business servicing your employer’s customers, with the plan to quit your job once
you have taken enough customers to support your business.
Use company expense budgets only for necessary expenses that are
business related.
Take home company supplies for personal use.
Examples of Being Transparent
Report accurate earnings to your investors so they can fairly assess the
value of the company.
Manipulate earnings so that investors do not know how much the company is really losing.
Respond to reports of poor working conditions at a supplier.
Cover up reports of poor working conditions at a supplier.
Disclose a dangerous product defect and recall the product.
Do not disclose product defects and hope you do not get sued.
22 LESSON 2:
Being Ethical and Socially Responsible
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STUDY TOOLS
Visit MindTap to watch videos on ethical decision making in
business.
Go to nelson.com/student to access the digital resources.
It is important that we, as individuals, can discern
what constitutes an ethical decision and what factors
lead to unethical decisions, because violating ethics
can be humiliating and costly. Our knowledge of the
three components of business ethics provides a basic
foundation.
Now that we know some factors that influence
ethics, we can further improve our ability to behave ethically. See “Suggestions for Filtering Your Decisions” for
four suggestions.
2-3a
2-2
KEY TAKEAWAY
Concerns about business ethics often arise out of the
relationships the business has with investors, customers, employees, creditors, and competitors. Understanding the three primary components of business
ethics can help you identify and address potential ethical concerns.
2-3
ETHICS STARTS WITH US
2-2 Understand if an action is legal, ethical,
or both.
What factors affect a person’s inclination to make either
ethical or unethical decisions in a business organization?
Although the answer to this question is not entirely clear,
some factors do appear to influence the standards of
behaviour in an organization.
Ethical Grey Areas
Even if you are equipped with an ethical framework
such as the one described in this section, exercising
good personal ethics is not always easy. What about the
grey areas? Laws and regulations are sometimes hard to
interpret and cannot be expected to address every situation. And some situations do not lend themselves to a
clear-cut analysis.
Example: You are walking on campus and find an
unmarked envelope that someone has dropped. You
open the envelope and discover that it contains $100 in
cash. Do you keep the money, or try to find the owner of
the envelope? How would you decide? It would not be
easy, but revisiting the three factors that influence ethical behaviour is a good place to start.
2-4
KEY TAKEAWAY
Several factors influence a person’s inclination to make
either ethical or unethical decisions. When we combine
an understanding of those factors with the three components of business ethics, we can better evaluate the
ethics of our decisions.
FACTORS THAT AFFECT THE LEVEL OF ETHICAL BEHAVIOUR IN AN ORGANIZATION
Factors That Affect Ethics Key Influencers of Each Factor Examples
Individual factors
Social factors
Opportunity
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An employee who is new to the accounting industry shares sensitive financial
details about a client because the employee does not understand confidentiality
requirements.
●●
Knowledge of an issue
●●
Personal values and goals
●●
The law
●●
Cultural norms
A visitor from another country gives money to a government official and
does not realize it is considered a bribe because this practice is normal in their
home country.
●●
Competitive environment
A cashier gives you too much change.
●●
Level of supervision
●●
Enforcement
Your manager lets you shop online and use social media at work because he does
the same thing.
LESSON 2: Being Ethical and Socially Responsible 23
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Suggestions for Filtering
Your Decisions
1. Understand and obey the law: The legal system
establishes the basic framework for ethical behaviour. If it is illegal you should not do it, even if it
seems your actions would benefit someone. In
other words, your actions might seem ethical, but
they could still be illegal. For example, collusion
with other businesses to offer artificially low prices
is illegal because it unfairly harms potential competitors. But that is just the start. You also must . . .
2. Understand and obey the policies of your industry
and organization: Certain industries have specific
policies that may be driven by laws or by industry
standards. For example, in Canada the Personal
Information Protection and Electronic Documents
Act (PIPEDA) regulates the collection, use, and disclosure of personal information by private-sector
organizations. While laws and regulations serve
as the “floor” for how to behave, often companies
will draft policies that go above and beyond legal
requirements. It is common for behaviours to be
perfectly legal but still unethical because they
violate company policy.
3. Recognize factors that lead to ethical compromises:
Situations that are highly competitive and
unsupervised typically promote ethical lapses. If
the consequences of unethical actions are unclear
or minimal, that only provides fuel for questionable
2-5
E NCOURAGING ETHICAL
BEHAVIOUR IN ORGANIZATIONS
2-3 Discuss how organizations can promote
ethical behaviour.
2-4 List the four guidelines for making eth-
ical decisions.
Although you may have high ethical standards, most
authorities agree that there is room for improvement in
business ethics. At some point, you may be responsible
24 LESSON 2:
Being Ethical and Socially Responsible
choices. While these situations do not necessarily
mean that unethical behaviours will take place,
being aware of the factors that influence behaviour can protect you and your career.
4. Ensure your actions satisfy the three components of
business ethics: In some cases, you may be following the law of your country, the standards of
your industry, and the policies of your company.
However, it is important to ask whether you are
potentially treating someone unfairly or knowingly harming someone by your actions. If so, it
is worth evaluating another more ethical course
of action.
1. Follow laws.
2. Follow industry
standards and
company policies.
3. Recognize factors
that lead to unethical
actions: individual,
social, and
opportunity.
4. Ensure your actions
satisfy the three
components of business
ethics: competing fairly
and honestly, avoiding
conflicts of interest, and
being transparent.
© Cengage Learning
Here are four suggestions for filtering your decisions
to discern whether they are legal, ethical, or both.
for promoting business ethics among your work team,
or among your entire company. Majority opinion on
this issue suggests that three main parties can promote
acceptable levels of ethical behaviour: the government,
trade associations (such as the Canadian Association of
Petroleum Producers), and organizations.
2-5a
Government’s Role in Encouraging Ethics
The government can encourage ethical behaviour by
legislating more stringent regulations. For example, all
businesses that are publicly listed in Canada are required
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Four Important Ways Companies
Can Promote Ethical Behaviour
1. Demonstrate commitment from leadership: It is
possible to establish a culture of ethics only if
top management demonstrates support through
consistent policies and leading by example.
someone to consult if they are not sure of the right
thing to do. An ethics officer meets employees and
top management to answer questions about ethical
issues and take action on ethics code violations.
2. Adopt a code of ethics: A code of ethics is a written
guide to acceptable and ethical behaviour as
defined by an organization; it outlines uniform
policies, standards, and consequences for violations. Because employees know what is expected
of them and what will happen if they violate the
rules, a code of ethics goes a long way toward
encouraging ethical behaviour.
4. Protect whistle-blowers: Whistle-blowing is the
process of exposing or reporting unethical practices within one’s organization; the employee who
exposes or reports unethical practices within the
organization is called a whistle-blower. Employees
often hesitate to report unethical behaviour
because they fear negative consequences. Businesses can promote ethical behaviour by providing safe and confidential options for employees
to report unethical behaviour, such as anonymous
hotlines.
3. Designate an ethics officer: Designating an ethics
officer, such as a human resources manager or
member of the legal team, gives employees
to comply with Bill 198, also known as the “Canadian
Sarbanes-Oxley Act” or C-SOX, which regulates internal
controls on financial statements and disclosures. However,
new rules and regulations require enforcement, and
the unethical businessperson frequently seems to “slip
something by” without getting caught. Increased regulation
may help, but it cannot solve the entire ethics problem.
2-5b
Trade Associations’ Role in
Encouraging Ethics
Trade associations can and often do provide ethical
guidelines for their members. These organizations,
which operate within particular industries, are in an
excellent position to exert pressure on members to stop
engaging in questionable business practices. However,
enforcement and authority vary from association to
association. A pharmaceutical trade group that adopts
guidelines to prohibit gifts and extravagant dinners for
physicians from sales representatives is one example of
how trade associations may encourage ethical behaviour.
2-5c
Organizations’ Role in Encouraging Ethics
Besides the law, the most important influencer of business ethics will be the organization itself. When businesses create an environment that educates employees
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and nurtures ethical behaviour, fewer ethical problems
arise. Companies can promote ethical behaviour in four
important ways:
●●
Demonstrate commitment from leadership;
●●
Adopt a code of ethics;
●●
Designate an ethics officer; and
●●
Protect whistle-blowers.
When businesses create an environment that educates employees and nurtures ethical behaviour, fewer
ethical problems arise.
NAVIGATING ETHICAL DILEMMAS AS A MANAGER It is difficult for an organization to develop ethics
codes, policies, and procedures to deal with all relationships and every situation. Some situations will present
ethical dilemmas, a
code of ethics a written guide
decision where every
alternative
impacts
various stakeholders
in unpleasant ways. In
these cases, the first
priority is to remain
open and communicate about the choices.
Ethical decisions will
to acceptable and ethical behaviour
as defined by an organization
whistle-blower an employee
who exposes or reports unethical
practices within the organization
ethical dilemmas decisions
where every alternative impacts various stakeholders in unpleasant ways
LESSON 2: Being Ethical and Socially Responsible 25
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Canada Consumer Product Safety Act (2010)
Regulates safety of consumer products
Competition Act (1985)
Prevents anti-competitive practices in the marketplace
Food and Drugs Act (1985)
Protects Canadians against fraud and health hazards in the sale of food and drugs
Consumer Packaging and Labelling Act (1985)
Requires uniform packaging and labelling of consumer goods to prevent misinterpretation or deception
Textile Labelling Act (1985)
Requires textile labels to contain meaningful information to allow consumers to
make informed decisions
Motor Vehicle Safety Act (1993)
Regulates manufacture and importation of motor vehicles to prevent damages
and injuries
© Cengage Learning
© Cengage Learning
© Cengage Learning
© Cengage Learning
SOME GUIDELINES FOR MAKING ETHICAL DECISIONS
Source: https://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca02965.html
withstand scrutiny when the decisions are made transparently and methodically.
The following is a list of communication tips for
managers who face ethical dilemmas:
2. Identify the ethical issues: Examine how the situation
affects you, your co-workers, and other stakeholders.
Attempt to understand the viewpoints of all those
involved in the decision or its consequences.
1. Listen and learn: Listen and review until you understand the problem or opportunity confronting your
organization.
3. Analyze the options: Put emotion aside and consider
several alternatives before developing an analysis.
Ask others for ideas about the best long-term results.
26 LESSON 2:
Being Ethical and Socially Responsible
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Determine which option preserves your self-respect
even if things do not work out.
4. Identify the best option: Test it against established criteria such as respect, understanding, caring, fairness,
honesty, and openness.
5. Explain your decision and resolve differences: Seek
neutral arbitration from a trusted manager or take time
to reconsider, consult, or exchange written proposals.
2-6
KEY TAKEAWAY
Improving ethical business behaviour is a role for governments, trade associations, and organizations. Companies can promote ethical behaviour by demonstrating
commitment to ethics, adopting an ethics code of conduct, designating an ethics officer, and offering clear
protections for whistle-blowers. Managers who face ethical dilemmas are advised to methodically navigate their
decisions through communication and openness.
2-7
I NCREASING SOCIAL
RESPONSIBILITY
2-5 Describe different models of social
responsibility.
2-6 Identify the various stakeholders and
how organizational decisions impact
them.
Not all business decisions are a matter of right and
wrong; some decisions present dilemmas because they
affect various stakeholders in different ways. Social
responsibility is the recognition that business activities have an impact on society, and that those impacts are
to be considered when making decisions. Of course, not
all companies evaluate these impacts the same way. Two
contrasting philosophies, or models, define the range of
management attitudes toward social responsibility.
THE ECONOMIC MODEL According to the traditional concept of business, a business exists to produce
quality goods and services, earn a reasonable profit, and
provide jobs. In line with this concept, 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. Companies
that adopt this model believe their social obligations are
met through the basic functioning of the business, and
that any additional concerns should be addressed by
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government and social institutions. Those who support
this position argue as follows:
●●
●●
●●
Business managers are responsible primarily to shareholders, so management must be concerned with providing a return on investment.
Corporate time, money, and talent should be used to
maximize profits, not to solve society’s problems.
Social problems affect society in general, so individual
businesses should not be expected to solve these
problems.
These arguments are based on the assumption that
the primary objective of a business is to maximize profit,
rather than solve social problems.
THE SOCIOECONOMIC MODEL In contrast, some
managers believe that they have a responsibility not
only to investors (shareholders, in the example of a corporation) but also to customers, employees, suppliers,
and the general public. This broader view, referred to
as the socioeconomic model of social responsibility, places emphasis not only on profits but also on
the impact of business decisions on society. Recently,
increasing numbers of managers and businesses have
adopted the socioeconomic model.
Proponents of the socioeconomic model maintain
that a business must do more than simply seek profits.
To support their position, they offer the following arguments:
●●
●●
●●
●●
Because business is a part of our society, it cannot
ignore social issues.
Business has the technical, financial, and managerial
resources needed to tackle today’s complex social
issues.
By helping resolve
social issues, business
can create a more stable
environment for longterm profitability.
Socially responsible
decision making by
businesses can prevent
increased government
intervention, which would
force businesses to do
what they fail to do
voluntarily.
These arguments are
based on the assumption
that a business has a
social responsibility the
recognition that business activities
have an impact on society and the
consideration of that impact in
business decision making
economic model of social
responsibility the view that
society will benefit most when
business is left alone to produce
and market profitable products
that society needs
socioeconomic model of
social responsibility the
concept that business should
emphasize not only profits but
also the impact of its decisions on
society
LESSON 2: Being Ethical and Socially Responsible 27
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responsibility not only to its shareholders but also to
its customers, employees, suppliers, and the general
public. Opponents of the socioeconomic model argue
that business should do what it does best: earn a profit
by manufacturing and marketing goods and services
that people want.
Today, few businesses are either purely economic
or purely socioeconomic in outlook; most have chosen
some middle ground between the two extremes.
Society generally seems to want—and even expect—
some degree of social responsibility from business.
However, even the purest of social enterprises must
achieve financial stability to ensure the sustainability of
their organization.
2-7a
Responsibility to Stakeholders
A socially responsible business recognizes that its decisions have an impact on society. But how can this impact
be measured in order to make the wisest decisions?
One way is to evaluate how decisions affect various
stakeholders in the business. A stakeholder is
stakeholder anyone who
is impacted by the activities of
considered to be any indithe business, including investors,
vidual, group, or organemployees, customers, suppliers
ization that has a vested
and the general public (i.e.,
interest in the business.
government and society).
The primary stakeholders
caveat emptor a Latin phrase
of a business include
meaning “let the buyer beware”
investors,
employees,
Possible
Stakeholders
Investors
Employees
Customers
What Makes
Them
Stakeholders?
They invest money in the
company.
They commit their
time and energy to the
company.
They purchase the
company’s products.
Consumers
They use the company’s
products.
Local community
They are impacted by
company’s presence in the
community.
Government
28 LESSON 2:
They collect tax revenue
from the company and also
enforce regulations.
Issues That
Impact Them
●●
●●
Level of profits
Public perception of
company
●●
Number of jobs
●●
Job pay, security, safety
●●
Quality
●●
Price
●●
Quality
●●
●●
●●
●●
Economic impact on
community
Social and environmental
impact on community
Tax receipts
Cost of social benefits
for unemployed
Being Ethical and Socially Responsible
customers, suppliers, and the general public (i.e., government and society).
The first step is to evaluate the impact of the company’s decisions or activities on each of the stakeholder
groups. This includes looking at short- and long-term
impacts. Balancing the needs of these groups is difficult,
because often a decision that is beneficial for one group
might negatively impact another.
While it is important for companies to make decisions that meet their strategic objectives, a company
that holds to the socioeconomic model of social responsibility will try to balance the needs of stakeholders in
a way that provides the best long-term benefit. Negatively impacting certain stakeholders may be inevitable
at times, though; in these cases, companies will look
for ways to mitigate and minimize these impacts. For
instance, when an auto manufacturing plant announces
a plant closure, employees may be compensated with
buyout packages for early retirement.
2-8
KEY TAKEAWAY
Social responsibility is the recognition that business
activities have an impact on society, and that those
impacts are to be considered when making decisions.
By analyzing the impact of company activities on various
stakeholders, companies can attempt to balance the
needs of these stakeholders and make a positive overall
contribution to society.
2-9
P ROTECTING CONSUMER RIGHTS
2-7 Explain the four basic consumer rights.
In the past, consumers generally were subject to the
doctrine of caveat emptor, a Latin phrase meaning
“let the buyer beware.” In other words, “what you see is
what you get,” and if it is not what you expected, too bad.
Although victims of unscrupulous business practices
could take legal action, going to court was very expensive, and consumers rarely won their cases. Moreover,
no consumer groups or government agencies existed
to publicize consumers’ grievances or to hold sellers
accountable for their actions.
This began to change in the 1940s, after Canada had
been at war for two years and the country was faced with
a crisis of shortages and, as a result, rising prices. In 1947,
the Canadian Association of Consumers was formed,
prompting Canada’s consumer movement. The formation of this movement effectively reduced the seller’s
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
control of the market and propelled improvements in
policy at both the federal and provincial level, such as
the creation of the Hazardous Products Act in 1970.1
2-9a
Consumer Rights
In Canada, consumers are protected by legislation at
both the provincial and federal level. For instance, federal agencies and departments are responsible for regulating consumer product safety, food safety, product
packaging and labelling, and anti-competitive practices.
Each province also has its own consumer protection
legislation. Consumer complaints and issues related to
purchase of goods and services, contracts, and repair of
motor vehicles are all covered under provincial and territorial jurisdiction.2
Four basic consumer rights have formed much of
the consumer-oriented legislation to date: the right to
safety, the right to be informed, the right to choose,
and the right to be heard. These rights also provide an
effective outline of the objectives and accomplishments
of the consumer movement.
© Cengage Learning
FOUR BASIC CONSUMER RIGHTS
The consumer’s right to safety means that the products they purchase must be safe for their intended use, must include thorough and explicit directions for proper use, and must be tested by the manufacturer to ensure product quality and reliability.
Agencies such as the Canadian Food Inspection Agency and Health Canada have the power to force businesses that make or
sell defective products to take corrective actions such as offering refunds, recalling defective products, issuing public warnings,
and reimbursing consumers—all of which can be expensive. Moreover, consumers and the government have been winning an
increasing number of product-liability lawsuits against sellers of defective products. The amount of the awards in these suits
has been increasing steadily. Yet another major reason for improving product safety is consumers’ demand for safe products.
People simply will stop buying a product they believe is unsafe or unreliable.
© Cengage Learning
Right to Safety
The right to be informed means that consumers must have access to complete information about a product before they buy
it. Detailed information about ingredients and nutrition must be provided on food containers, information about fabrics and
laundering methods must be attached to clothing, and lenders must disclose the true cost of borrowing the money they make
available to customers who purchase merchandise on credit. In addition, manufacturers must inform consumers about the
potential dangers of using their products. Manufacturers that fail to provide such information can be held responsible for
personal injuries suffered because of their products.
Right to Be Informed
© Cengage Learning
The right to choose means that consumers must have a choice of products, offered by different manufacturers and sellers,
to satisfy a particular need. The government has done its part by encouraging competition through antitrust legislation. The
greater the competition, the greater is the choice available to consumers. Competition and the resulting freedom of choice
provide additional benefits for customers by reducing prices.
© Cengage Learning
Right to Choose
The right to be heard means that someone will listen and take appropriate action when customers complain. Actually, management began to listen to consumers after the Second World War, when competition among businesses that manufactured and
sold consumer goods increased. One way that businesses gained a competitive edge was to listen to consumers and provide the
products they said they wanted and needed. Today, businesses are listening even more attentively, and many larger businesses
have consumer relations departments that can be contacted easily via toll-free telephone numbers, Facebook, or Twitter. Other
groups listen, too. Most levels of government have entities that are mandated to act on citizens’ complaints.
Right to Be Heard
NEL
LESSON 2: Being Ethical and Socially Responsible 29
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
2-10 KEY TAKEAWAY
Most businesses now realize they ignore consumer
issues at their own peril. The consumer movement has
prompted improvements in the quality of goods and
services we use today, helping individuals become more
educated and informed consumers.
2-11 CONCERN FOR EMPLOYEES
2-8 Identify two ways that companies dem-
onstrate responsibility to employees.
Imagine you live in a small town that has one big
employer. This organization is highly profitable, makes
incredible products, pays its employees very well, emits
zero emissions into the environment, and contributes
large sums of money to community programs.
Now imagine you are prohibited from working at the
company because of your ethnicity or gender. Or imagine
that you did get a job at the company, then found out that
you had to work 12 hours per day with hazardous chemicals and operating dangerous machinery that you had
not been trained to use.
The way a company treats its employees is a particularly
important aspect of social responsibility. Everyone should
have the opportunity to land a job for which they are qualified and to be rewarded on the basis of ability and performance. They should also have reasonable protections for their
health and safety in the workplace. These are important
issues for society, and also make good business sense.
Equality and occupational safety are two ways that
companies demonstrate responsibility to employees.
The federal government
minority a racial, religious,
responded to public outcry
political, national, or other group
by passing laws that forbid
regarded as different from the
discrimination and establarger group of which it is a part
and that is often singled out for
lish standards of workplace
unfavourable treatment
safety. Additional laws have
been passed since then to
employment equity
increased representation of
further raise standards.
minority groups in the workplace
Socially responsible comthrough provision of equal
panies always look for ways
employment opportunities for all
to go above and beyond
Canadian Human Rights
these laws to provide opporCommission (CHRC)
tunity, safety, and work/
ensures federally regulated employers
life balance. Each year,
are fulfilling their legal obligation
to provide equal employment
different magazines and
opportunities to women, people with
websites publish listings of
disabilities, Aboriginal peoples, and
the best companies to work
visible minorities.
for. For example, Google
30 LESSON 2:
Being Ethical and Socially Responsible
recently made it to the top of Fortune’s list. The $75 billion
tech titan is famous for luxe perks, of course, such as free
gourmet food, haircuts, and laundry services. But it also
takes a rigorous analytical approach to morale.3 Google is
proactive in its response to the reality of the demographics
of its workers. For example, responding to high rates of
mothers leaving the company, Google enhanced its parental leave, decreasing the number of mothers leaving by
50%. The company responds to diversity in many ways,
including providing support for transgender workers and
unconscious-bias workshops—both of these examples help
the company to foster a safe and inclusive workplace.
Yet, over the years, this opportunity has been denied
to members of various minority groups. 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 unfavourable
treatment. In Canada, federal legislation prohibits discrimination on the basis of gender, race, or ethnicity and
protects an individual’s right to be treated fairly in the
workplace. The Canadian Human Rights Act was passed
in 1977, with the goal of ensuring all employees in federally regulated activities are treated equally. Soon after,
the Employment Equity Act (1986) was established to
mandate provision of equal employment opportunities
for four designated groups: women, people with disabilities, Aboriginal peoples, and visible minorities. This
Act also states that to achieve employment equity,
employers may be required to take special measures for
accommodation of differences (e.g., making changes
to an employee’s work environment), a concept also
referred to as the duty to accommodate. The Canadian
Human Rights Commission (CHRC) is responsible
for determining whether employers are fulfilling their
legal obligation to proactively increase representation of
minority groups.
Bullying, sexual harassment, and other abusive
conduct are also concerns in the workplace. To mitigate these issues, managers need to provide programs,
in addition to formal policies, to foster more ethical
conduct in the workplace. Companies should strive to
create an anti-bullying organizational culture by modelling good behaviour and sending a strong message that
improper conduct will be punished. Companies can
even go further and offer training and additional services
through employee-assistance programs such as counselling to ensure that all employees feel supported.
2-11a
Responsible Employment Practices
The following table summarizes the development of
responsible employment practices.
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DEVELOPMENT OF RESPONSIBLE EMPLOYMENT PRACTICES
Equality
Occupational Safety
Key Concerns
●●
Access for minority groups
●●
Equal pay for men and women
●●
Access for disabled workers
●●
Reductions in workplace injuries and death
●●
In Canada, each province/territory has its own occupational health and safety legislation
●●
Ongoing safety training programs
●●
Mandatory use of safety goggles and earplugs in certain production environments
●●
Workplace campaigns promoting number of days since last injury
●●
Providing ergonomic workstations for employees
Major Legislation
●●
Canadian Human Rights Act of 1977
●●
Canadian Charter of Rights and Freedoms
Company Best Practices
●●
●●
●●
Programs that promote company opportunities to minority communities
Appointing diversity officers to oversee hiring practices and diversity
training
Objective performance appraisal systems to reduce opportunities for
discrimination in promotions and pay increase
2-12 KEY TAKEAWAY
Everyone 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. Socially responsible
companies demonstrate commitment to employees
by promoting equality and occupational safety in the
workplace. It is good for society, and it makes good
business sense.
2-13 C ONCERN FOR THE NATURAL
ENVIRONMENT
contribute to pollution in a variety of ways. Increasing
concern about the natural environment has led to a
variety of laws and sustainability initiatives designed to
reverse some of the effects of past negligence and to
conserve a healthy environment for future generations.
2-13a
Basic Environmental Protection
Major environmental concerns revolve around the contamination and responsible use of water, land, and air. As
in other areas of concern, legislation and regulation play
a critical role in pollution control. When they are aware
of a pollution problem, many businesses respond to it
rather than wait to be cited by the regulating body. Other
owners and managers, however, take the position that
2-9 Understand how business practices can
What does the word “pollution” make you think of? The
most common picture is a factory spewing smoke into
the air or spilling chemicals into our waterways. These
are indeed serious concerns, but the idea of protecting the
environment is much broader than just reducing industrial pollution. It includes conserving natural resources
for future generations. And we all play a part. Think
about the simple act of eating a hamburger. By some estimates, it takes several hundred litres of water to produce
just one kilogram of beef. Or think about the act of performing a Google search or watching a YouTube video.
This would seem entirely harmless for the environment,
but Google and YouTube are made possible through the
use of huge data centres that consume enough electricity
in a year to power over 200,000 homes. Businesses and
consumers both use natural resources and potentially
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Aleksei Potov/Shutterstock.com
help protect the natural environment.
Concern for the natural environment
means more than just combating pollution.
It means creating and preserving a healthy
environment for future generations.
LESSON 2: Being Ethical and Socially Responsible 31
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environmental standards are too strict. (Loosely translated, this means that compliance with present standards
is too expensive.) Consequently, it often has been necessary for environmental regulators to take legal action to
force businesses to install antipollution equipment and
clean up waste storage areas. Experience has shown
that the combination of environmental legislation, voluntary compliance, and regulatory action can succeed in
cleaning up the environment and keeping it clean.
One of the most effective ways that companies can
reduce their impact on the environment is to reduce
waste from operations and other activities. Identifying and eliminating inefficiencies in production and
operations is where most businesses begin that process. Finding alternative uses for waste is another. For
example, leftover food from supermarkets and restaurants is often donated to local food banks or sold to
farmers who feed it to livestock. Most companies strive
to recycle as much as possible. Recycling involves converting used materials into new products or components
for new products to prevent their unnecessary disposal.
Recognizing public demand for greater environmental responsibility, more and more businesses are
adopting environmentrecycling Converting used
ally friendly practices
materials into new products or
and products that are less
components for new products to
harmful to the environprevent their unnecessary disposal.
ment. Green marketing
green marketing The
is the process of creating,
process of creating, making,
making, delivering, and
delivering, and promoting products
that are environmentally safe.
promoting products that
are environmentally safe.
sustainability protecting
It may include making
the natural environment to ensure
survival for present and future
modifications to products,
generations
manufacturing processes,
packaging, and/or promotion activities to make or
deliver products that are better for the environment.
Freshii, for example, built its reputation as a green
marketer by strictly adhering to its mantra, which
includes a promise to “be good to the Earth.”4 The
company has also adopted a “Mission Green” and uses
biodegradable corn and potato resin for most packaging requirements.
2-13b
Sustainability Strategies
It is fair to expect that companies will use natural
resources to create the goods and services that society
wants and needs. As companies grow, their impact on
the natural environment becomes more prominent,
which can lead to public scrutiny. In recent years, Starbucks has faced pressure related to the amount of waste
created by its coffee cups; Google and Facebook have
been criticized for their high consumption of electricity;
and Apple has been scrutinized for the environmental
impacts of its proposed new headquarters in California.
As awareness of environmental issues has increased,
companies have made increased efforts to implement
sustainable business practices to protect the environment and conserve natural resources. Sustainability is
defined as activities that “meet the needs of the present
without compromising the ability of future generations
to meet their own needs.”5
Sustainability practices can involve a variety of strategies (see table below). While some of these strategies,
including recycling and green marketing, can increase
costs in the short term, they can lead to long-term reductions in energy and material costs. Thus, sustainability
practices can be good for society and improve a company’s profits.
STRATEGIES FOR SUSTAINABILITY
Sustainability Strategy Examples
Benefits
Product design improvements
Less environmental contamination (less pollution)
●●
Reduce use of hazardous materials
●●
●●
Reduce packaging materials
●●
Less waste
●●
Lower energy consumption
●●
Facility and vehicle improvements
Community outreach
●●
Design service delivery to maximize efficiency
●●
Energy efficiency campaigns
●●
Lower energy consumption
●●
Use of alternative energy to power facilities and vehicles
●●
Less environmental contamination (cleaner energy)
●●
Strategies to reduce or recycle waste from facility
●●
Less waste
●●
Recycling campaigns
●●
Less waste
●●
●●
32 LESSON 2:
Design goods for reduced energy consumption during
production and consumer use
Promotion of environmentally sustainable or energy-efficient
alternatives
Contribution to environmental cleanup and restoration efforts
Being Ethical and Socially Responsible
●●
●●
Less environmental contamination (less pollution) and lower
energy consumption
Environmental restoration
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2-14 KEY TAKEAWAY
Businesses use natural resources and create waste
in the process of making products that society wants
and needs. Consumers use natural resources and
create waste in the process of using these products.
LESSON SUMMARY
LO 2-1
Summarize the three primary
components of business ethics.
Ethics is the study of right and wrong and of the morality of the
choices individuals make. An ethical decision or action is one that is
“right” according to some standard of behaviour. Business ethics is
the application of moral standards to business situations. People in
business face ethical issues every day, and some of these issues can
be hard to assess. They often fall into three categories: competing
fairly and honestly, avoiding conflicts of interest, and being
transparent.
LO 2-2
Understand if an action is legal, ethical,
or both.
Several factors influence a person’s inclination to make either ethical
or unethical decisions, including individual factors, social factors, and
opportunity. While some ethical decisions fall into a grey area, we can
better evaluate the ethics of our decisions if we use a framework for
evaluating our choices.
LO 2-3
Discuss how organizations can promote
ethical behaviour.
LO 2-4
List the four guidelines for making
ethical decisions.
At some point, you may be responsible for promoting business ethics
among your work team, or among your entire company. Improving
ethical business behaviour is a role for governments, trade associations, and organizations. Organizations can promote ethical behaviour
by demonstrating a commitment to ethics, adopting an ethics code of
conduct, designating an ethics officer, and offering clear protections
for whistle-blowers. Managers who face ethical dilemmas are advised
to methodically navigate their decisions through communication and
openness.
LO 2-5
Describe different models of social
responsibility.
Not all business decisions are a simple matter of right and wrong.
Some decisions present dilemmas because they affect various shareholders in different ways. Social responsibility is the recognition that
business activities have an impact on society, and that those impacts
are to be considered when making decisions.
NEL
Increased concern about the environment has led to
laws and sustainability strategies designed to reduce
the impact of these activities. When properly implemented, sustainability practices can help companies
control costs and conserve natural resources for
future generations.
Two contrasting philosophies define the range of management
attitudes toward social responsibility: the economic model and the
socioeconomic model. A business following the socioeconomic model
will evaluate the impact of its decisions on the various stakeholders in
the business, including investors, employees, customers, local communities, and government.
LO 2-6
Identify the various stakeholders and
how organizational decisions impact them.
A socially responsible business recognizes that its decisions have an
impact on society. One way is to evaluate how the decision affects
various stakeholders in the business. A stakeholder is anyone who
is impacted by the activities of the business, including investors,
employees, customers, local communities, and government. Balancing
the needs of these groups is difficult, because often a decision that is
beneficial for one group might negatively impact another. A company
that holds to the socioeconomic model of social responsibility will try
to balance the needs of stakeholders in a way that provides the best
long-term benefit.
LO 2-7
Explain the four basic consumer rights.
The increasing power of consumers has also influenced business
behaviour. Most businesses now realize they ignore consumer
issues at their own peril. The consumer movement has prompted
improvements in the quality of goods and services we use
today, helping individuals become more educated and informed
consumers.
LO 2-8
Identify two ways that companies
demonstrate responsibility to employees.
Socially responsible companies also demonstrate commitment to
employees by promoting equality and occupational safety in the
workplace. While legislation has brought about improvement in these
areas, socially responsible companies are always looking for ways to
go above and beyond these laws to provide opportunity, safety, and
work/life balance.
LO 2-9
Understand how business practices can
help protect the natural environment.
Increased concern about the environment has led to laws and sustainability strategies that are designed to reduce the impact of business
activities. When properly implemented, sustainability practices can
help companies control costs and conserve natural resources for future
generations.
LESSON 2: Being Ethical and Socially Responsible 33
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EXERCISES
KEY TERMS
Use the Internet, magazines, newspapers, books,
and personal experiences to complete the following
exercises.
business ethics, p. 20
1. Recall a time when you observed unethical behaviour in the
workplace or at school. Describe the situation. How did you feel?
What was the outcome?
code of ethics, p. 25
2. When you enter the job market, how can you determine whether
an organization is socially responsible or not? What values would
you want the organization to possess?
Canadian Human Rights Commission (CHRC), p. 30
caveat emptor, p. 28
conflict of interest, p. 21
economic model of social responsibility, p. 27
employment equity, p. 30
ethical dilemmas, p. 25
3. Creating a code of ethics (also known as a code of conduct or a
policy manual) requires understanding the company, its culture,
and its vision. What do you think should be included in a code of
ethics?
ethics, p. 20
4. Recall a situation when a business failed to be transparent with
any of its stakeholder groups. Describe the situation and the
outcome.
recycling, p. 32
5. Select an organization in the energy industry and research
its commitment to sustainable business practices. Does this
organization demonstrate concern for the natural environment?
How so?
green marketing, p. 32
minority, p. 30
social responsibility, p. 27
social responsibility audits, p. 22
socioeconomic model of social responsibility, p. 27
stakeholder, p. 28
sustainability, p. 32
transparency, p. 22
REVIEW QUESTIONS
whistle-blower, p. 25
1. What are the three primary components of business ethics?
Briefly describe each.
2. What are the factors that affect the level of ethical behaviour in
an organization?
3. What are four ways companies can promote ethical behaviour?
4. To make ethical decisions, what guidelines should managers
follow?
5. What is a whistle-blower?
6. Discuss the economic model of social responsibility. How does
this differ from the socioeconomic model of social responsibility?
7. List the various types of stakeholders of an organization.
8. What are the four basic consumer rights? Briefly explain each.
9. Define sustainability. What are some of the different sustainability
strategies used in business?
10. Define green marketing.
34 LESSON 2:
Being Ethical and Socially Responsible
NEL
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FOR YOUR OWN
PROTECTION
The website of the Canadian government’s consumer protection body (the
Office of Consumer Affairs, or OCA) seems at first glance to be quite exhaustive.
There is a list of government regulations, both provincial and national, that
highlights important consumer protection issues including product safety and
privacy complaints. Numerous resources are available to consumers to help
them become more informed and stand up for themselves when necessary.
However, this website belies the actual erosion of the consumer protection movement in Canada. After the Second World War the Canadian
government created the Canadian Association of Consumers (CAC), with a
mandate to protect consumers from the post-war industrialization. Canada’s
leadership in the area of consumer protection was in its heyday during the
1960s and 1970s when there was a dedicated cabinet member in the government to handle consumer protection issues. Over the years, this leadership
in consumer protection has waned in Canada. While countries like the United
States and the United Kingdom publish magazines and financials relating to
consumer protection interests, Canadian representation in these areas is completely absent.
As big, bloated government budgets became the target of Canadians’ ire
in the 1990s, the CAC became less important, and much of its responsibilities
were moved to the provinces. But with this decentralization came disorganization—some provinces have strong consumer protection mandates (Quebec),
while many others are far behind international standards.
Now the re-named government consumer protection group, the OCA, is
faced with the task of trying to keep some momentum in this area. But what
does all of this government organization and disorganization have to do with
Canadian consumers?
In short—a lot. Consumers face a daunting world where many groups
are after their attention and money. And not all of them are ethical in their
approaches, leaving consumers confused. With a lack of cohesion in legislation and protection, Canadian consumers are often left to their own devices
to protect their interests.
An important area for consumer protection is with food recalls. It is
important that consumers are made aware of any issues with their food,
especially given the potential consequences of consuming contaminated
food. Dalhousie University in Nova Scotia conducted a study in 2018 asking
Canadians about food recalls. Most Canadians who were asked felt as though
they knew about food recalls and felt confident they were not in danger of
consuming recalled products.
Of those asked in the poll, more than 60% stated that there were fewer than
50 food recalls in 2017; there were in fact 155 food recalls in 2017. Part of the
problem with food recalls is that government groups rely on traditional media
like television to communicate food recalls. And in today’s connected world, old
media could just be a bit too antiquated to help the modern consumer.
NEL
LESSON 2: Being Ethical and Socially Responsible 35
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When consumers in the same study were asked to identify between real
and fake food product recalls, a measly 4% were able to properly pick out the
real product recalls. Only recently did Canada incorporate mandatory recalls
on products that were deemed to be a considerable issue.
An area of great importance for consumers is the ability to choose. Given
the wide array of choices available thanks to a globalized economy, Canadians
often seek out the best deal regardless of a product’s origin. However, with
trade impediments like tariffs and quotas, consumers are often limited to a
certain number of choices. In Canada, given a relatively weak competitive
makeup of some industries, consumers are faced with limited choice due to
an oligopolistic market structure. Government and industry are becoming
aware of these issues, and have begun to approach consumers for their input.
The oligopoly of airline travel recently sought out consumer feedback on air
passenger protection before final regulations were set.
An important consumer right involves the ability to speak out, or speak
back, at businesses with which they have interacted. This has become an
important issue in the modern digital age, with consumers relying on and
providing reviews of companies. Some businesses had attempted to contractually obligate consumers not to post any reviews online, and included
potential retribution against consumers. There were cases across Canada
of businesses reneging on agreements after a consumer’s online reviews
had come to their attention. Provinces have been quick to react to this by
enabling new legislation that allows consumers to post reviews without fear
of reprisal.
While these paragraphs paint a relatively bleak picture for the protection
of Canadian consumers, there is still hope. Across the globe consumers and
advocacy groups are banding together to create sweeping consumer protection rules.
Your task is to help with this process by creating a short presentation on
consumer rights. You should use your course notes and any other allowable
external materials to help create your presentation. When completed, this
presentation should help shape the protection of consumers moving forward—giving all Canadians something positive to recall.
Case Sources: http://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca02965.html; http://policyoptions.irpp.org/magazines/
june-2018/the-steady-decline-of-consumer-protection-in-canada/; https://globalnews.ca/news/4121121/canada
-food-recall-study/; https://www.newswire.ca/news-releases/air-passenger-protection-regulations---have-your
-say-683863991.html; http://www.mondaq.com/canada/x/682966/Consumer+Law/Fair+Trading+Act+Becomes
+The+Consumer+Protection+Act+And+Other+Key+Amendments
36 LESSON 2:
Being Ethical and Socially Responsible
NEL
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3 Exploring Global
Business
LEARNING OBJECTIVES
3-1 Identify key benefits of international trade.
3-2 Discuss the impact of currency rate changes on trade.
3-3 Understand how changing trade policy impacts trade
between countries.
3-5 Distinguish among the primary goals of the WTO, IMF, and
the World Bank.
3-6 List the benefits of regional economic integration.
3-7 Discuss the various ways of entering international business.
3-4 Describe how imposing trade restrictions impacts a country.
I NTRODUCTION
Many would describe our increasingly interconnected
global economy as a “small world.” But when you look
at it through the eyes of an individual, our world has
actually grown over the years. Let us consider what it was
like in the past. You grew your own food, made your own
clothes, and built your own shelter. You did not travel far
or have much contact with people outside your village or
town. In other words, your world was very small. Some
exciting developments changed that. The invention of
currency replaced the bartering of goods and made it
easier to trade with others. The development of transportation increased your reach; now you could trade with
people from far-off lands. This made it possible to get all
kinds of new foods, spices, clothes, and other products.
Suddenly your world is now much bigger. New transportation routes in turn increased the amount of communication between countries, further increasing the amount
of trade. Intermediaries such as traders created a whole
new opportunity: Instead of trading directly with others
or travelling to a central market to sell your goods, you
could sell your goods to a trading company that would
take your products to customers on the other side of the
world. This was the first glimpse of globalization. But the
size of our world really took off in the last few decades,
when all four of the drivers for globalization accelerated.
Systems for exchanging and using foreign currencies
38 LESSON 3:
Exploring Global Business
zhaojiankang/iStock/Getty Images Plus
Once you complete this lesson, you will be able to:
became easier than ever. We went from ships and horses
to sophisticated logistics networks that include planes,
trains, and huge fleets of vehicles to deliver goods almost
anywhere in as little as one day. The introduction of
mobile phones and the Internet made global communication as easy as pushing a button. And the trading companies of yesterday became the global retailers of today,
which buy goods from every corner of the world and
make it available right around the corner from where you
are now. We can travel the world, use products from all
around the world, and talk to people all over the world.
Your world is not small in the way it was for people in the
past. Your world is now as big as the whole world.
Your world is now as big as the whole world. This is
also true for businesses: Not only can they make and buy
products from all over the world, but they can also sell
to customers all over the world. Global business encompasses all business activities that involve exchanges
across national boundaries. Thus, a company is engaged
in international business when it buys some portion of
its input from, or sells some portion of its output to,
an organization located in a foreign country. This creates many opportunities for the companies to profit and
for consumers to benefit by having more choices, lower
prices, and access to new cultural experiences. That is
the promise of globalization. But there are challenges
as well. We will discuss both in this lesson on global
business.
NEL
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A very strong interrelationship exists between the
political and economic environments and global trade.
The most obvious connection is how critical international trade is to our economy. About half of what we
manufacture is exported. Trade imbalances can seriously
affect the economic climate for business. And these
trade imbalances are often a result of government policy
in both the foreign and the domestic country.
Unquestionably, the international environment
offers many opportunities for business, but it also presents a number of threats. A business needs to consider
these opportunities and threats when determining its
strategy for going global. Governments often help to
create opportunities for business to expand internationally. How a business capitalizes on these political initiatives depends on its strategy.
The economic infrastructure of a country is a large
consideration for a business. Without a strong infrastructure, it is very difficult to do business in that country,
and of course the stronger its economy, the greater the
purchasing power of its people—the customers. Currency differences also need to be taken into account
and can seriously restrict a company’s ability to operate
profitably.
NEL
STUDY TOOLS
Visit MindTap to watch videos on factors affecting international
business opportunities.
Go to nelson.com/student to access the digital resources.
3-1
T HE BASIS AND BENEFITS
OF INTERNATIONAL TRADE
3-1 Identify key benefits of international trade.
Some countries are better equipped than others to produce particular goods or services. The reason may be
a country’s natural resources, its labour supply, or even
its cultural norms. Such a country would be best off if
it could specialize in the production of the products it
LESSON 3: Exploring Global Business 39
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
3-1a
Exporting for Growth
Exporting is the selling and shipping of raw materials
or products to other countries. Bombardier Inc., for
example, exports its regional and business jets to a
number of countries. One of Canada’s important contributions to the global marketplace is in the technology
sector. Both private and public funding is used to advance
technology in Canada, which allows for these technologies to be exported
around the world. Some
absolute advantage the
ability to produce a specific
of the more significant
product more efficiently than any
projects have occurred in
other country
the aerospace and clean
comparative advantage
technologies sectors. The
the ability to produce a specific
aerospace industry conproduct more efficiently than any
tributes
approximately
other product
$28 billion to our gross
exporting the selling and
domestic product (GDP)
shipping of raw materials or
and employs approximately
products to other countries
208,000 Canadians.1 The
importing the buying of raw
clean technology industry
materials or products from other
involves developing techcountries
nologies that use resources
40 LESSON 3:
Exploring Global Business
EXHIBIT 3.1
THE BENEFITS OF INTERNATIONAL
TRADE
© Cengage Learning; Data source: Statistics Canada. Table 12-10-0011-01 International merchandise trade for all countries and
by Principal Trading Partners (x 1,000,000). https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1210001101
can produce most efficiently. The country could use
what it needed of these products and then trade the surplus for products it could not produce efficiently on its
own. Absolute advantage is the ability to produce a
specific product more efficiently than any other country.
For example, Canada has long specialized in the production of wheat. Because of its natural resource, Canada
and some other countries enjoy an absolute advantage—
their ability to produce wheat more efficiently than
countries in other parts of the world. Canada also has
advantages in softwood and certain technologies.
A country may have no absolute advantage at all,
yet it is still worthwhile for this country to trade with
other countries. A comparative advantage is the
ability to produce a specific product more efficiently
than any other product. For example, Canada is very
successful in the production of certain agricultural
products and in the energy sector, mining, and financial services, but is restricted in industries that require
a steady warm climate or in labour-intense industries
(e.g., textile industries).
International trade has been going on for centuries,
but the volume of trade has skyrocketed in the last several decades (see Figure 3.1).
Is all of this increased trade a good thing? What
value does international trade bring to consumers, businesses, and a country overall?
more responsibly and to reduce or eliminate any negative impact on the environment.
BENEFIT: INCREASED JOBS AND INCOME
With exporting, there are more potential customers and
increased jobs and income. Without exporting, there is
a limited number of customers. The customers that can
be acquired via exporting mean more jobs and more
income for the business selling the goods. This of course
means more jobs and income in the country exporting
the goods, leading to a healthy, growing economy. Emerging countries such as China and Brazil have heavily utilized exporting to help increase their economic growth.
Because of its large pool of skilled and inexpensive
labour resources, China is sometimes referred to as “the
world’s factory.” Brazil is abundant in natural resources,
which allows it to export to resource-hungry countries.
Such resource surpluses can help a country develop
more quickly than a country that lacks basic resources.
3-1b
Importing for Value
Why does a large, resource-rich country such as Canada
need to import? Could we be self-sufficient and produce
almost everything here? In some cases, yes—but even in
those cases, importing might be a better choice.
NEL
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FIGURE 3.1
INCREASE IN VOLUME OF INTERNATIONAL TRADE
2,600
2,400
2,200
2,000
Billions of dollars
1,800
1,600
1,400
1,200
1,000
800
600
Imports
Exports
© Cengage Learning
400
200
0
EXHIBIT 3.2
BENEFIT: INCREASED JOBS AND INCOME
With exporting, there are more potential customers and increased
jobs and income. Without exporting, there is a limited number of
customers.
NEL
BENEFIT: ACCESS TO RESOURCES
Without importing, Canada would face shortages
of key natural resources. With importing, we
have access to all the resources we need. Fuelling
an economy as large as Canada’s requires significant natural resources. While Canada does have
resources of its own, importing additional energy
resources provides an efficient means of fuelling
economic growth. Access to resources does not
always mean physical resources. For instance,
many countries around the world import movies
and TV shows from the U.S. entertainment
industry because they have no significant entertainment industry of their own.
BENEFIT: LOWER PRICES Without im­­
porting, prices are driven by the local costs of
production. With importing, we have access to
lower-priced goods. Because some countries
have lower labour costs or abundant access
to natural resources, products may be less
LESSON 3: Exploring Global Business 41
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expensive to produce in those countries. This also now
extends to service industries because of the emergence
of educated and skilled professionals around the world.
For example, some Canadian citizens travel to countries
such as Mexico to access dental and medical services
at a fraction of the cost of accessing those services
at home.
BENEFIT: MORE CHOICE FOR CONSUMERS
Without importing, there is a limited selection of products. With importing, the selection is nearly unlimited.
Each country has a unique combination of resources and
skills for making products, which might make its version
of a product different, less expensive, or better than
what we could produce domestically. For example, while
Canada produces many of its own wines, wine connoisseurs appreciate the ability to purchase wines made in
France, Italy, and Australia.
BENEFIT: MOST VALUABLE USE OF A COUNTRY’S RESOURCES Without importing, resources
are spent making lower-value goods. With importing,
resources are allocated to highest-value activities. When countries enter more advanced stages
of economic development, they begin looking for
ways to shift their production resources to highervalue products. The basic example is a piece of
land that might be used to grow wheat that sells for
$8 per bushel. Perhaps that land is better utilized
by building a factory making shirts that sell for $15
each. Taking this one step further, perhaps that land
is even better utilized by building a software company that sells programs for $1,000 each. By shifting
resources to higher-value activities, investors can
achieve greater returns and a country can grow more
prosperous. Canada is considered the global leader in
many high-value industries such as financial services,
telecommunications, and technology development.
By importing lower-value goods, we are able to shift
our production resources to higher-value activities.
In this way the benefits of importing can ultimately
lead to increased jobs and income in the same way
that exporting products can. If a country imports more
than it exports, it is called a trade deficit, which is a
negative balance of trade,
trade deficit a negative
while a country’s balbalance of trade
ance of payments is the
foreign-exchange
total flow of money into
control a restriction on the
a country minus the total
amount of a particular foreign
flow of money out of that
currency that can be purchased
country over some period
or sold
of time.
42 LESSON 3:
Exploring Global Business
3-2
KEY TAKEAWAY
International trade has increased dramatically in the last
few decades. This can benefit consumers, businesses,
and countries in a variety of ways, including:
●●
Increased jobs and income
●●
Access to resources
●●
Lower prices
●●
More choice for consumers
●●
Most valuable use of a country’s resources
3-3
T HE IMPACT OF CURRENCY
VALUATIONS
3-2 Discuss the impact of currency rate
changes on trade.
Before there was money, trading could be done only
by barter, a system of exchange in which goods or services are traded directly for other goods or services. The
trouble with the barter system is that the two parties in
the exchange must need each other’s products at the
same time, and the two products must be roughly equal
in value. Because of these limitations, most countries
develop some sort of money, or currency, to eliminate
the inconvenience of trading by barter. The development
of money made it easier for communities and countries
to trade, increasing the volume of trade.
Since different countries usually have different
currencies, the parties in a trade must have a system
for exchanging currencies. This is called a foreignexchange control, which is a restriction on the amount
of a particular foreign currency that can be purchased
or sold. By limiting the amount of foreign currency
importers can obtain, a government limits the amount of
goods importers can purchase with that currency. This has
the effect of limiting imports from the country whose foreign exchange is being controlled. Exchange-rate changes
are determined by a number of factors related to each
country’s economy, including interest rates, inflation, economic strength, and the amount of imports and exports.
The ability to easily exchange currencies has helped
drive international trade. Without it, international trade
would be difficult and complicated. While foreign
exchange rates usually experience only small fluctuations,
there can sometimes be large changes in exchange rates.
These changes may be due to longer-term economic
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with the permission of the Bank of Canada
Large changes in currency exchange rates
will have an impact on the imports to and
exports from the country.
conditions or might be the result of a country’s monetary
policies. Large changes can impact the flows of international trade between countries.
Large changes in currency exchange rates can
impact the flow of international trade between countries.
For example, suppose the British pound is worth two
Canadian dollars. In other words, it takes two Canadian
dollars to buy one British pound. If a set of English bone
china cost 500 pounds, it would mean a Canadian who
wanted to purchase this china would need $1,000. The
$1,000 would buy 500 pounds at the current exchange
rate, enough to purchase the china. Suppose that the
value of the British pound fell relative to the dollar. Now
it only takes $1 to buy 1 British pound. This is great for the
Canadian who wants to purchase the china, because they
now only need $500 to buy 500 pounds, which allows
them to buy that same set of china for half as many dollars
as before. In this scenario, buying any product from the
United Kingdom will be less expensive for someone with
Canadian dollars, which makes it likely that exports from
the United Kingdom will increase dramatically.
But how does this affect imports to the United
Kingdom? Suppose a Canadian-mined diamond costs
$2,000. When the pound was worth $2, it would only
take 1,000 pounds to buy that diamond. If the value of
the pound decreases to one pound equals one dollar, now
it takes 2,000 pounds to buy that diamond. That’s twice
as expensive for the British person, which makes it less
likely that someone from the United Kingdom will want
to buy diamonds or any other products from Canada.
To summarize, when the value of your currency
drops relative to other currencies, it will increase exports
from your country. Since your currency is now cheaper,
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more people from other countries will want to buy your
goods. International investors also are more likely to
invest in your markets. But now, importing goods from
other countries is more expensive for buyers in your
country, so imports will decrease.
The opposite is true as well. When the value of your
currency increases relative to other currencies, it will
decrease exports and increase imports.
In the past, countries in financial crisis have intentionally devalued their currency—an action called
currency devaluation—to attract international
buyers and investors. By devaluing their currency, they
hoped to increase exports that can increase jobs and
incomes for the home country.
An example relevant to many Canadian citizens is
the currency exchange rate between the U.S. dollar
and the Canadian dollar. In recent years, the U.S. dollar
has been higher than the Canadian dollar. Since the true
price of goods was very similar in both countries, many
U.S. citizens travel to Canada because it is less expensive. Also, many of these travellers will buy a variety of
goods to take back to the United States. In effect, they
are importing goods from Canada.
3-4
KEY TAKEAWAY
Changing currency values can affect the prices that customers pay for products from other countries. It can also
impact the volume of imports and exports for a country,
which can in turn affect employment, economic growth,
inflation, and even customers’ choice of products.
3-5
R ESTRICTIONS TO
INTERNATIONAL BUSINESS
3-3 Understand how changing trade policy
impacts trade between countries.
3-4 Describe how imposing trade restrictions
impacts a country.
International business and
“free trade” is steadily
increasing. However, not
everyone agrees that free
trade is good for a country,
and countries of the world
frequently build barriers to
free trade. They do so for
currency devaluation
a drop in the value of one
country’s currency relative to
other currencies
currency exchange
rate the value of one
currency in relation to another
LESSON 3: Exploring Global Business 43
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reasons ranging from internal political and economic
pressures to simple mistrust of other countries. We will
first look at types of trade restrictions, then look at reasons for trade restrictions.
3-5a
Types of Trade Restrictions
Countries are generally eager to export their products.
They want to provide markets for their industries and
develop a favourable balance of trade, which is the
value of exports minus the value of imports for that
country. 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 often represent pitfalls in
the global marketplace. International trade is carried out
by both businesses and governments—as long as no one
puts up trade barriers. In general, trade barriers keep
companies from selling to one another in foreign markets. The two most common types of trade restrictions
are tariffs and quotas.
These are also two of the oldest concepts in economics. A tariff is simply a tax on an imported good. The
idea behind this is to drive up the price of the imported
good. If the price of the imported good increases, what
does that mean? It means customers are going to be
buying less of it. And what it also means is that the
domestically made good is going to appear to be relatively less expensive. So the domestic producers like
it, and the consumers generally hate it. But the government also likes it because it results in tax revenue
for them. Perhaps the most commonly applied trade
restriction is the customs (or import) duty. An import
duty, also called a tariff, is a tax levied on a particular
foreign product entering a country. Now compare this
to a quota. A quota is simply the limiting of the amount
of a good that is allowed
balance of trade the value of
into the country. Right, so
exports minus the value of imports
what a quota is going to do,
for a country
is it too is going to raise up
tariff tax on a particular foreign
the price of that foreignproduct being imported into a
made good and it is going
country
to result in domestic proquota limit on the amount of
ducers being able to get
a particular good that may be
more of the market. And,
imported into a country during a
again, consumers are not
given period of time
going to like it because
embargo a complete halt to
they are going to have
trading with a particular country or
to pay a higher price.
in a particular product
But with a quota, what
44 LESSON 3:
Exploring Global Business
happens is there is no revenue that comes in to the government. So what happens is tariffs and quotas are both
ways to limit international trade designed to protect the
domestic producer, but it ultimately winds up hurting
the domestic consumer.
In an attempt to protect domestic trade, governments set up obstacles for foreign competition by making
foreign goods more expensive through tariffs or by
restricting the import of foreign goods through quotas.
These barriers are meant to create opportunities for
domestic companies to grow within a protected domestic
environment; however, they may stifle these companies
instead because they do not have to innovate (one of the
critical success factors) and improve their operations to
compete with foreign competition.
For example, Canada imposes a 2.2% import duty
on fresh Chilean tomatoes, an 8.7% duty if tomatoes
are dried and packaged, and nearly 12% if tomatoes are
made into ketchup or salsa. The two types of tariffs
are revenue tariffs and protective tariffs; both have the
effect of raising the price of the product in the importing
countries, but for different reasons. Revenue tariffs are
imposed solely to generate income for the government.
For example, Canada imposes a duty on Scotch whisky
solely for revenue purposes. Protective tariffs, on the
other hand, are imposed to protect a domestic industry
from competition by keeping the price of competing
imports level with or higher than the price of similar
domestic products. Because fewer units of the product
will be sold at the increased price, fewer units will be
imported.
An additional example of a trade barrier is an
embargo, which is the complete halt of trading with
a particular country or of a particular product. For
example, Canada does not allow the sale of military
exports that would threaten peace, security, or stability
in any region of the world.2
The challenge with embargos is that they can be difficult to enforce, which creates a black market for certain goods. The embargo has been used most often as a
political weapon. At present, Canada has import embargoes against Iran and North Korea—both as a result of
extremely poor political relations.
3-5b
Reasons for Trade Restrictions
Countries cite a variety of reasons for imposing trade
restrictions. Frequently cited reasons are discussed in
the following table:
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Example
To protect new or weak industries
Quotas on textiles, intended to protect the fast-declining Canadian textile industry from inexpensive imports
To protect domestic jobs
U.S. protective tariffs on imported steel
To protect the health of citizens
Canadian restrictions on imports of meat and poultry products
To retaliate for another country’s trade restrictions
Large U.S. tariffs on imports of Chinese steel in retaliation for China “dumping” steel on the U.S. market at unfair prices
To protect national security
Export restrictions on certain types of technology products that could have military use
Critics emphasize that trade restrictions have both
immediate and long-term consequences within the
restricting country and in world trade patterns. These
include:
●●
Higher prices for consumers
●●
Restriction of consumer choices
●●
Misallocation of resources to weak or dying industries
●●
Increased hostility between countries
3-6
KEY TAKEAWAY
Although international free trade is increasing steadily,
countries often build barriers to trade for economic or
political reasons. Restrictions include tariffs, quotas,
embargoes, and changes to currency valuation. In some
cases, trade restrictions can help protect industries, consumers, and national security. However, trade restrictions can also increase prices, limit choices, and lead to
inefficiencies in global markets.
3-7
© Cengage Learning
Reason for Trade Restriction
P ROMOTING INTERNATIONAL
TRADE AND PROSPERITY
3-5 Distinguish among the primary goals of
the WTO, IMF, and the World Bank.
The dramatic increase in world trade was driven by the
continued development of currency exchange, transportation, communication, and intermediaries. And the
benefits of international trade are clear: more jobs, more
consumer choices, lower prices, and an efficient utilization of resources that seemingly benefits all countries
involved.
Why is all trade not considered “free trade”? Why
are all countries not benefiting from this increase in
globalization? There are several reasons.
National Rivalries: Nations compete with each other
economically, politically, and sometimes militarily.
These rivalries affect trade policy between nations. For
example, a small trade dispute between two countries
Cultural Barriers to Trade
One often-overlooked type of trade restriction
is cultural barriers. Cultural barriers can impede
acceptance of products in foreign countries. When
customers are unfamiliar with particular products
from another country, their general perceptions of
the country itself affect their attitude toward the
product and help determine whether they will buy
it. Because Mexican cars have not been viewed by
the world as being quality products, Volkswagen,
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for example, may not want to advertise that some
of its models sold in Canada are made in Mexico.
Many retailers on the Internet have yet to come to
grips with the task of designing an online shopping
site that is attractive and functional for all global
customers. Gifts to authorities—sometimes quite
large ones—may be standard business procedure
in some countries. In others, including Canada, they
are called bribes or payoffs and are strictly illegal.
LESSON 3: Exploring Global Business 45
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over one type of good can sometimes lead to an all-out
trade war, with each country raising tariffs on more of the
other country’s goods. Sometimes allies of each country
will join in the trade war by raising tariffs as well. This
can quickly lead to a decrease of international trade and
an increase in consumer prices for many countries.
Economic Instability: Even developed nations can
become unstable for a variety of reasons, including war,
social and political change, and resource shortages.
This can create an economic crisis that causes foreign
investments in that country to dry up, currency values to
plummet, and economic growth to stall out.
Lack of Economic Development: Some nations are
not active participants in the global economy because
they lack basic resources for building a sustainable
economy of their own. This could be due to lack of
natural resources, skilled labour, or even basic infrastructure such as highways, railroads, and ports. Citizens
of these countries are effectively like our ancestors from
hundreds of years ago; farming for subsistence, with very
little trade and very little chance of sharing in the economic prosperity of more developed nations.
These factors and others can disrupt the growth of
international trade, and in some instances can threaten
the economic progress of the global economy. Three
international organizations that address these issues are
the World Trade Organization, the International
Monetary Fund, and the World Bank.
●●
World Trade Organization
(WTO) powerful successor to
the General Agreement on Tariffs
and Trade (GATT) that incorporates
trade in goods, services, and ideas
International Monetary
Fund (IMF) an international
bank that makes short-term
loans to developing countries
experiencing balance-of-payment
deficits
The World Bank the most
familiar type of multilateral
development bank; provides lowinterest loans, interest-free credit,
and grants to developing countries
economic community
organization of countries formed
to promote the free movement
of resources and products among
its members (also referred to as
regional economic integration)
46 LESSON 3:
●●
World Trade Organization (WTO)—164
member countries. The
WTO aims to open markets and trade barriers.
The WTO addresses
trade barriers that prevent free trade among
countries, and WTO
provides a permanent
forum for trade negotiations and mediates
trade disputes among
its members.
International Monetary Fund (IMF)—
189 member countries.
The IMF is concerned
with economic instability. Economic instability can ruin a country,
and that instability can
Exploring Global Business
spread to the global economy. The IMF provides
policy advice to governments and central banks on
economic issues. It also provides lending for economies in crisis (lender of last resort for troubled
nations). The IMF works to promote exchange-rate
stability by helping countries better manage their
economies.
●●
The World Bank—189 member countries. The World
Bank seeks to help countries that lack basic resources
to build a viable economy and reduce poverty. It
provides low-interest loans and grants to developing
countries. It further supports investments in developing countries in areas such as education, health,
infrastructure, and agriculture. The World Bank also
focuses on relieving debt of developing countries.
The key activities for each of these organizations are
different, but their work contributes to the same fundamental goal: to promote global economic development.
3-8
KEY TAKEAWAY
Disputes between countries can slow the growth of
international trade and increase prices for consumers.
The WTO provides a place for resolving these disputes
and promoting world trade and stability. National economies can face economic crisis, which can impact the
global economy. The IMF provides policy advice and
crisis lending to stabilize these economies and promote
stable exchange rates. Many developing economies lack
basic resources for sustained economic development.
The World Bank provides low-interest loans and grants
to fund development projects in these developing countries. The collective aim of these three organizations
is to promote global economic development through
increased trade, stable economies, and reduced poverty.
3-9
F OSTERING TRADE THROUGH
ECONOMIC COMMUNITIES
3-6 List the benefits of regional economic
integration.
An economic community is an organization of countries formed to promote the free movement of resources
and products among its members. This can be founded
on a simple trade agreement between countries that
lowers tariffs, or a more binding agreement that creates
stronger economic and political ties between members.
This is also called regional economic integration.
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KEY ACTIVITIES FOR INTERNATIONAL TRADE ORGANIZATIONS
© Cengage Learning
EXHIBIT 3.3
Three of the biggest examples are:
Jorisvo/iStock/Getty Images Plus
1. The European Union (EU), a community of over
30 European countries including member countries
and candidate countries with more than 500 million
A number of economic communities now
exist, including the European Union, the
North American Free Trade Agreement, and
the Asia-Pacific Economic Cooperation.
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people. The objective of the EU was to freely conduct
commerce among these countries and make Europe
more of an economic force in the world. On a continent that was torn apart by World War II, the growth
of the EU is particularly noteworthy. In celebrating
the EU’s 50th anniversary in 2007, the president of
the European Commission, José Manuel Durão
Barroso, declared, “Let us first recognize 50 years of
achievement. Peace, liberty, and prosperity, beyond
the dreams of even the most optimistic founding
fathers of Europe. In 1957, 15 of our 28 members
were either under dictatorship or not allowed to exist
as independent countries. Now we are all prospering
democracies.” The collective economy of the EU is
larger than the United States and almost three times
larger than Japan.
2. In 2018 the United States-Mexico-Canada Agreement (USMCA) replaced the 1994 North American
Free Trade Agreement (NAFTA). The USMCA represents over 500 million people.
LESSON 3: Exploring Global Business 47
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3. The Asia-Pacific Economic Cooperation (APEC) is
an organization of 21 countries in the Pacific Rim,
including Canada, the United States, China, Japan, and
Australia. The economies together account for 40% of
world population and 44% of world trade. APEC’s goal
of “free and open” trade among Asian-Pacific countries is showing signs of success. The objective of these
and other economic communities is to:
●●
●●
●●
Reduce trade barriers, such as tariffs and quotas.
Increase the flow of international trade between
countries, giving consumers more choices and providing increased opportunities for businesses.
Promote peaceful relationships between countries,
economically, politically, and militarily.
The ultimate goal is to provide increased prosperity
for the citizens of each member country.
Lower trade barriers and increased trade among
members of these economic communities provides solid
evidence for their positive impact. However, these communities are not without critics. For instance, critics
maintain that USMCA:
●●
Hurts workers by eroding labour standards and
lowering wages in Canada and the United States
●●
Undermines national sovereignty and independence
●●
Does not address environmental issues
●●
Hurts the agricultural sector in Canada
●●
Can potentially increase the Canadian trade deficit,
which occurs when the value of our imports exceeds
the value of our exports.
The proponents of USMCA call the agreement a
remarkable economic success story for all three partners.
They maintain that USMCA:
●●
●●
●●
●●
●●
Contributes to significant increases in trade and
investment
Benefits companies in all three countries
Results in increased sales, new partnerships, and new
opportunities
Creates high-paying export-related jobs
Results in better prices and selection in consumer
goods
Similar criticisms arose recently in the EU, with
more prosperous countries such as Germany expressing
reservations about bailing out unstable economies such
as Greece. Still, regional economic integration appears
to be a permanent trend in the global economy, as economic communities continue to expand and integrate.
48 LESSON 3:
Exploring Global Business
Since NAFTA and the USMCA came into effect,
trade and investment levels have increased, resulting in
strong economic growth, job creation, and better pricing
and selection in consumer goods. As well, the agreement
has eliminated most tariff and non-tariff barriers to trade
and investment in the three countries by creating an
environment of confidence and stability.
3-10
KEY TAKEAWAY
Economic communities are organizations of countries
formed to reduce trade barriers and promote international trade and peaceful relationships between
countries. Regional economic integration can be
accomplished through simple trade agreements such
as USMCA, or more comprehensive agreements that
specify greater economic and political integration for the
member countries. The goal of integration is to increase
prosperity for the citizens of each member country.
3-11
METHODS OF ENTERING
INTERNATIONAL BUSINESS
3-7 Discuss the various ways of entering
international business.
Up to now, we have been discussing the benefits of international trade, along with the ways that countries partner
to promote international trade. However, it is important
to note that most trade does not happen between the
countries themselves, it happens between businesses
and consumers in those countries.
How does this trade take place? It starts when a
company decides to enter international business markets, either as a buyer or a seller. For example, a company that is already successful in its home country
might want to take advantage of increasingly open
markets in another country. Or a successful entrepreneur in one country might want to offer customers
more choice by importing products from another
country.
A company that has decided to enter international
markets can do so in several ways. These different
approaches require varying degrees of involvement in
international business. Often, a company begins its
international operations at the simplest level. Then,
depending on its goals, it may progress to higher
levels of involvement. See Figure 3.2 for a summary
of the primary methods for entering international
markets.
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Importing and Exporting: Mitigating
the Risk of International Transactions
Importing and exporting raises a two-sided issue:
The exporter would like to be paid before shipping
the merchandise, whereas the importer would prefer
to know that it has received the shipment before
releasing any funds. Neither side wants to take the
risk of fulfilling its part of the deal only to discover
later that the other side has not. The solution is for
both parties to use a mutually trusted go-between
who can ensure that the payment is held until the
merchandise is in fact delivered according to the
terms of the sales contract. The go-betweens are
usually local, domestic banks involved in international business that will control the shipping and
payment documents until the transaction is complete. A common form of payment for international
business transactions is called a letter of credit.
The importer’s bank forwards the letter of credit to
the exporter’s bank, which also normally deals in
international transactions. The exporter’s bank then
notifies the exporter that a letter of credit has been
received in its name, and the exporter can go ahead
with the shipment. The carrier transporting the merchandise provides the exporter with a bill of lading,
which is a document issued by a transport carrier
to an exporter to prove that merchandise has been
shipped. The exporter signs over title to the merchandise (now in transit) to its bank by delivering
signed copies of the bill of lading and the letter of
credit. In exchange, the exporter issues a draft from
the bank. The draft, bill of lading, and letter of credit
are sent from the exporter’s bank to the importer’s
bank. Acceptance by the importer’s bank leads to
return of the draft and its sale by the exporter to its
bank, meaning that the exporter receives cash and
the bank assumes the risk of collecting the funds
from the foreign bank. The importer is obliged to
pay its bank on delivery of the merchandise, and the
deal is complete.
Exporting and Importing
A key characteristic of pure exporting and importing
is that you have limited control over the partnering comLOWER CONTROL, LOWER RISK A company may
panies in the other country. When exporting, companies
manufacture products in its home country and export
may ship their products to export–import companies, who
them for sale in foreign markets. Or a company may
arrange for the sale of the product in the foreign country.
import products that are manufactured by companies
If your retail partner in a
letter of credit
in other countries. This can be a relatively low-risk
market poorly represents
document
issued by a bank
method of entering international business. The company
your product, or underon request of an importer
exporting products can have access to additional cusstating that the bank will pay
mines your product by
tomers, and the company importing products can offer
an amount of money to a
giving competing products
stated beneficiary
more choices and perhaps lower prices to its existing
more attention, then your
customers.
bill of lading document
company’s efforts to sell in
issued
by a transport carrier
that market could fail. An
to an exporter to prove
alternative
that merchandise has been
FIGURE 3.2 METHODS OF ENTERING INTERNATIONAL BUSINESS
is for your
shipped
Degree of control
company
to
Low
Moderate
High
draft document issued by
open branch
the exporter’s bank, ordering
Contractual Agreements
International Direct Investment
Exporting
offices in forthe importer’s bank to pay
Franchising
Acquisitions
and
for the merchandise, thus
eign counForeign licensing
Joint ventures
Importing
guaranteeing payment once
Subcontracting
Overseas divisions
tries. While
accepted by the importer’s
Low
Moderate
High
this is more
bank
Degree of risk
expensive,
© Cengage Learning
3-11a
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LESSON 3: Exploring Global Business 49
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the exporting company maintains control over sales, and
gains experience and knowledge in those foreign markets. When importing, you are limited to the products
sold by the factories in other countries, and you do not
control the quality or manufacturing schedule for the
goods you are purchasing.
3-11b
Contractual Agreements
MORE CONTROL, MORE RISK The downside of
pure exporting and importing can be overcome through
contractual involvement with your international partners. These agreements can take a variety of forms.
Licensing is a contractual agreement in which one
company permits another to produce and market its
product and use its brand name in return for a royalty
or other compensation. For example, Yoplait yogurt is
a French brand licensed for production in Canada. The
Yoplait brand maintains an appealing French image,
and in return, the Canadian producer pays the French
company a licensing fee and a percentage of its income
from sales of the product. Many companies have eagerly
embraced the licensing concept. For instance, Philip
Morris licensed Labatt Brewing Company to produce
Miller High Life in Canada. Licensing is especially
advantageous for small manufacturers wanting to launch
a well-known domestic brand internationally. Licensing
provides a simple method for expanding into a foreign
market with virtually no investment, but if the licensee
does not maintain the licensor’s product standards the
product’s image may be damaged.
Franchising is similar to licensing, but the contractual agreement may include provisions for how the entire
business is to be operated, including use of company
marketing materials, purinternational direct
chase agreements for raw
investment method for
materials, and penalties for
entering international business
lack of performance by the
that provides complete control
franchisor.
over operations. Options for
international direct investment
Subcontracting is the
include acquisitions, joint ventures,
use of contractual agreeand creation of totally owned
ments to specify the duties
facilities in foreign markets
of the partnering comacquisition purchase of an
pany. When exporting, this
existing company
could include sales and
joint venture the creation of a
distribution responsibilseparate company that will be run
ities for companies that
jointly by partnering companies
purchase your goods for
strategic alliance a
sale in foreign markets.
partnership formed to create
When importing, this
competitive advantage on a
could be manufacturing
worldwide basis
specifications and delivery
50 LESSON 3:
Exploring Global Business
requirements for manufacturing where you are sourcing
product. This method is commonly used by companies
such as Apple and Joe Fresh, which actually do not own
the factories where their products are manufactured.
These types of agreements can provide your company additional control when entering international
business; however, they create increased risk. If you pick
the wrong companies to represent your brand or manufacture your product, it could damage the reputation of
your company. In addition, enforcing international contracts related to business performance can be difficult
and costly.
3-11c
International Direct Investment
MOST CONTROL, MOST RISK When a company
has ambitious goals for entering international business,
it will typically pursue some form of international
direct investment. Direct investment provides complete control over operations, but carries the most risk
because of the substantial investment required. Most
companies pursue this option only if they have access to
significant knowledge of the foreign market.
Acquisition involves the purchase of an existing
company in a foreign country. For example, Marriott
International purchased British Columbia–based Delta
Hotels and Resorts to have a broader presence in Canada.
A joint venture is a partnership formed to achieve
a specific goal or to operate for a specific period of time.
It involves the creation of a separate company that will be
run jointly by the partnering companies. A joint venture
with an established company in a foreign country provides immediate market knowledge and access, reduced
risk, and control over product attributes. However,
joint-venture agreements established across national
borders can become extremely complex, and as a result
they generally require a very high level of commitment
from all the parties involved.
At a still deeper level of involvement in international
business, a company may develop totally owned facilities
(that is, its own production and marketing facilities in
one or more foreign nations). This direct investment provides complete control over operations, but it carries a
greater risk than the joint venture. The company is really
establishing a subsidiary in a foreign country. Most companies do so only after they have acquired some knowledge of the host country’s markets.
A strategic alliance, the newest form of international business structure, is a partnership formed
to create competitive advantage on a worldwide basis.
Strategic alliances are very similar to joint ventures. The
number of strategic alliances is growing at an estimated
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rate of about 20% per year. In fact, in the automobile and
computer industries, strategic alliances are becoming the
predominant means of competing. International competition is so fierce, and the costs of competing on a global
basis so high, that few companies have all the resources
needed to do it alone. Thus, individual companies that
lack the internal resources essential for international success may seek to collaborate with other companies. An
example of such an alliance was the New United Motor
Manufacturing, Inc. (NUMMI), formed by Toyota and
General Motors to make the automobiles of both companies. This enterprise united the quality engineering of
Japanese cars with the marketing expertise and market
access of General Motors.
Regardless of the method a company chooses to
enter into foreign markets, it potentially can improve
not only the financial performance of the Canadian company, but also the economy of the other country. For
example, the emerging Asian markets of China and India
have welcomed foreign investment in the manufacturing
and technology industries. China’s exports have boomed,
largely thanks to foreign investment. China continues to
lift restrictions on certain forms of foreign investment.
Manufacturing companies are lured by low labour costs;
big manufacturers have surged into China to expand
their production base and push down prices globally.
Now manufacturers of all sizes are trying to reduce costs
in Canada or to outsource more frequently in cheaper
locales.
With this increase in economic activity in Asia,
especially in the manufacturing sector, one of the most
important factors of production is natural resources
(specifically oil and gas). Acquisitions, joint ventures, and
partnerships between Asian companies and Canadian
producers are becoming routine so that Asia can secure
a low-risk and predictable source of energy.
LESSON SUMMARY
LO 3-4
LO 3-1
Identify key benefits of international trade.
International trade has been going on for centuries, but the volume
of trade has skyrocketed in the last several decades. Exporting is the
selling and shipping of raw materials or products to other nations.
The benefits of exporting are increased jobs and income. Importing
is buying and shipping products from other nations. The benefits of
importing include access to resources, lower prices, more consumer
choice, and the opportunity to use your country’s resources more
efficiently.
LO 3-2
Discuss the impact of currency rate
changes on trade.
The ability to easily exchange currencies has helped drive international
trade. Without it, international trade would be difficult and complicated. However, large changes in currency exchange rates can impact
the flow of international trade between countries, which can in turn
affect employment, economic growth, inflation, and even consumer
choice of products.
LO 3-3
Understand how changing trade policy
impacts trade between countries.
Although international free trade is increasing steadily, countries often
build barriers to trade for economic or political reasons.
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3-12
KEY TAKEAWAY
A company that has decided to enter international markets can do so in several ways. Methods range from those
that carry low risk and a low degree of control to those
that carry high risk and a high degree of control. The
decision about which international business method to
use will depend on the company’s goals, risk tolerance,
and level of commitment to pursuing opportunities in
global business.
Describe how imposing trade restrictions
impacts a country.
Restrictions include tariffs, quotas, embargoes, and changes to currency valuation. In some cases, trade restrictions can help protect
industries, consumers, and national security. However, trade restrictions can also increase prices, limit choices, and lead to inefficiencies in
global markets.
LO 3-5
Distinguish among the primary goals of
the WTO, IMF, and the World Bank.
Several factors can disrupt the growth of international trade, and in
some instances can threaten the economic progress of the global
economy. For example, disputes between countries can slow the
growth of international trade and increase prices for consumers.
The World Trade Organization (WTO) provides a forum for resolving
these disputes and promoting increases in world trade and stability.
National economies can face economic crisis, which can in turn shake
the global economy. The International Monetary Fund (IMF) provides
policy advice and crisis lending to stabilize these economies and
promote stable exchange rates. Many developing economies lack
basic resources for sustained economic development. The World Bank
provides low-interest loans and grants to fund development projects
in these countries. The collective aim of these three organizations is
to promote global economic development through increased trade,
stable economies, and reduced poverty.
LESSON 3: Exploring Global Business 51
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LO 3-6
List the benefits of regional economic
integration.
Economic communities are organizations of countries formed to
reduce trade barriers and promote international trade and peaceful
relationships among countries. This type of regional economic integration can be accomplished through simple trade agreements, such as
USMCA, or more comprehensive agreements, such as the European
Union (EU), that specify greater economic and political integration for
the member countries. The goal of integration is to increase prosperity
for the citizens of each member country.
4. How might changes in currency exchange rates impact international trade?
LO 3-7
9. What are some of the primary benefits of USMCA? What are the
main criticisms?
Discuss the various ways of entering
international business.
A company that has decided to enter international markets can do so
in several ways. Methods range from those that carry low risk and a
low degree of control to those that carry high risk and a high degree
of control. The decision about which international business method
to use will depend on the company’s goals, risk tolerance, and level of
commitment to pursuing opportunities in global business.
5. What are the two most common types of trade restrictions?
Explain each.
6. Discuss various reasons countries impose trade restrictions.
7. What is an embargo? Which countries does Canada have an
embargo against?
8. Discuss how the WTO, the IMF, and the World Bank promote
global economic development.
10. Briefly explain the differences among an acquisition, a joint
venture, and a strategic alliance.
KEY TERMS
absolute advantage, p. 40
EXERCISES
acquisition, p. 50
Use the Internet, magazines, newspapers, books,
and personal experiences to complete the following
exercises.
bill of lading, p. 49
1. Look up the exchange rate between the Canadian dollar and a
country you have been wanting to visit. How will the currency
conversion affect your spending on vacation?
2. Research some of the fluctuations of the Canadian dollar. Choose
one. When did this occur? What was the change in dollar value?
What were some of the causes?
balance of trade, p. 44
comparative advantage, p. 40
currency devaluation, p. 43
currency exchange rate, p. 43
draft, p. 49
economic community, p. 46
embargo, p. 44
exporting, p. 40
3. What impact do foreign multinationals have on the Canadian
economy? Provide some examples.
foreign-exchange control, p. 42
4. Identify some Canadian multinational companies that have
been successful in world markets. How do you think they have
achieved their success?
international direct investment , p. 50
5. Nations compete with each other economically, politically, and
sometimes militarily. Provide an example of a trade war between
two countries. Describe the situation. How has this trade war
affected the global business environment?
importing, p. 40
International Monetary Fund (IMF), p. 46
joint venture, p. 50
letter of credit, p. 49
quota, p. 44
strategic alliance, p. 50
REVIEW QUESTIONS
1. Differentiate between an absolute advantage and a comparative
advantage.
tariff, p. 44
trade deficit, p. 42
The World Bank, p. 46
World Trade Organization (WTO), p. 46
2. Define exporting and importing and explain the benefits of each.
3. What is a trade deficit?
52 LESSON 3:
Exploring Global Business
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DURUM SOLO
While much could be written on Canada’s trade relationships in the wake of
recent events involving the United States, a smaller trade dispute presents
some enlightening insights into the subject. Canada is a founding member of
the World Trade Organization (WTO), a global trading body in operation since
1995. While much of the WTO’s mandate involves establishing and monitoring
global trade policy, the entity appears in the news when there is a trade dispute. And although there is a global body to help regulate trade, most countries around the world are quite protective of their products. For example,
Canada protects its dairy industry by imposing a more than 200% tariff on
products from other countries entering the market. Despite this protectionism, the exchange of products still occurs—Canadian exports account for
more than 30% of Canada’s gross domestic product (GDP). And while much
controversy and hand wringing surround industries like forestry and steel, the
food industry provides a telling insight into the world of global trade. Which
brings us to the case of Canada, Italy, and pasta.
In the summer of 2017, Italy decided it would require manufacturers to
label all pasta products sold in the country to indicate where the ingredients
had been produced and processed. This is a common tactic among countries
to create a “Made in ____” appeal and encourage buying locally. Canada does
it with dairy products; indeed, all trading countries use this tactic.
Canada supplies Italy with much of its durum wheat, an essential
ingredient in many types of pasta. But with this decree by the Italian government, it became clear that a “Buy Italian” campaign might dissuade consumers
from purchasing foreign food products over local ones.
As with most trade disputes, there is more here than meets the eye (see
also: Donald Trump). The idea of consumers buying local is a traditional international trade tactic called “country of origin.” Nothing new here. However,
it is in having labelling showing the source of raw materials—in this case,
Canada—that the true intentions of Italian lawmakers and pasta producers
are revealed.
Italian producers struggle to meet the demand for pasta, accounting for
only about 60% of durum wheat to the country. Canada makes up a significant portion of the remainder of supply, and does so with high-protein durum
wheat. This fact, it is believed, is the reason behind the “Made in Italy” trade
tactic.
But why might “Made in Canada” be considered a bad thing from an
Italian’s perspective? The answer is in how Canadian farmers treat their
crops, specifically the type of herbicide used: glyphosate. Although this is a
common herbicide, rules for spraying crops are different between Canada
and the European Union. And while Canadian research has shown that 98%
of food exports from Canada with glyphosate were within acceptable limits
for human consumption, it was this fear of contamination that was seized
upon. The chemical has been banned in Italy since 2016, and the country has
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LESSON 3: Exploring Global Business 53
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set very strict limits on what is tolerable when it comes to glyphosate traces
in food product imports. The result: Italian pasta manufacturers have bought
less durum wheat from Canada because of the new regulations.
A key purchaser of Canadian durum wheat is the largest pasta maker
in the world, Barilla. The company’s main purchaser, Emilio Ferrari, recently
noted: “Italian farmers took the opportunity to blame imported wheat… in
Italy we need to import durum wheat for quantity and quality reasons.” Ferrari
went on to say that Barilla cut back its import of Canadian wheat by 35% due
to this trade conflict.
And while this dispute has been going on since 2015, Canada has not
officially entered a grievance through the WTO against Italy’s pasta labelling
decision. In the meantime, Canadian farm lobby groups have been appealing
to the government of Canada to take their case to the WTO.
You have just taken on a role in the federal government’s agriculture
ministry, and are asked to provide your position on this stalemate. Using your
understanding of different trade organizations, trade policies, and overall
benefits of international trade, create a list of reasons for and against taking
this grievance to the WTO. Use your notes and other course materials to guide
your way to a decision. The time for patience has “pasta”—something concrete needs to be done, and you are just the person to do it.
Case Sources: http://www.wto.org; https://www.fraserinstitute.org/sites/default/files/the-importance-of
-international-trade-to-the-canadan-economy-an-overview-post.pdf; http://www.cbc.ca/news/world/italy
-canada-durum-wheat-dispute-1.4191615; https://ipolitics.ca/2018/05/29/canada-considering-taking-pasta
-spat-to-wto-macaulay/; https://ipolitics.ca/2018/04/03/pasta-spats-canadian-wheat-exports-to-italy-slump/.
54 LESSON 3:
Exploring Global Business
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Copyright 2020 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content
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4 Choosing a Form of
Business Ownership
LEARNING OBJECTIVES
Once you complete this lesson, you will be able to:
4-5 Identify the liability exposure of the owners of different
in Canada.
businesses.
4-2 Summarize the four key considerations for evaluating
4-6 Determine the most appropriate business structure for ease
ownership structure.
of start-up and administration.
4-3 Determine the most appropriate ownership structure for
business control and ease of transferring ownership.
4-4 Determine how taxation and division of profits affect the
choice of ownership structure.
INTRODUCTION
Choosing the right ownership structure is an important
decision because each of the common forms of business
ownership has advantages and disadvantages. A business
start-up will choose its ownership structure based on
considerations that are specific to its situation. We will
discuss those considerations in this lesson on forms of
business ownership.
Not all businesses are the same. What if instead of
going to Tim Hortons you went to a small coffee stand
owned by a friend? Instead of going to a huge company
like Canadian Tire for an oil change, you went to a local
car dealer? Instead of going to a nationwide grocery
chain like Loblaws or Sobeys, you went to a local grocery
store that has been owned and operated by the same
family for three generations? It is easy for you to see how
these businesses might differ from one another in terms
of who owns the company and the size of their business. But what you do not see is that these businesses
may be different in another way—ownership structure.
Choosing the right ownership structure is an important
decision because each of the common forms of business
ownership has advantages and disadvantages. A business
FORMS OF BUSINESS OWNERSHIP
© Cengage Learning
EXHIBIT 4 .1
g-stockstudio/Shutterstock.com
4-1 Outline the three main forms of ownership structure used
In an average day, our lives are affected by the activities of many different businesses.
56 LESSON 4:
Choosing a Form of Business Ownership
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
start-up will choose its ownership structure based on
considerations that are specific to its situation. We will
discuss those considerations in this lesson on forms of
business ownership.
4-1
DIFFERENT TYPES OF
OWNERSHIP STRUCTURE
4-1 Outline the three main forms of
ownership structure used in Canada.
Three common forms of business ownership exist in
Canada:
●●
Sole proprietorships
●●
Partnerships
●●
Corporations
We will first describe these common forms, and
then analyze the advantages and disadvantages of each.
4-1a
Sole Proprietorships
A sole proprietorship is a business that is owned
(and usually operated) by one person. Although a few
sole proprietorships are large and have many employees,
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most are small. Sole proprietorship is the simplest form
of business ownership and the easiest to start. In most
instances, the owner (the sole proprietor) simply decides
that he or she is in business and begins operations.
Because sole proprietorships have few legal requirements and are not expensive to form, this is the business
organization of choice for many small companies and
start-ups.
Entrepreneurs often choose this type of ownership
because it offers a number of advantages, including:
●●
Easy and inexpensive to form
●●
Easy to dissolve
●●
Pride of ownership
●●
Flexibility of being your own boss and having control
over decisions
●●
Retention of all profits
●●
Relative freedom from government regulation
●●
No special taxes on the business—business income is
treated as personal income of the sole proprietor
Although there are
many advantages to the sole
proprietorship, you should
also consider potential
sole proprietorship a
business that is owned (and
usually operated) by one
person
LESSON 4: Choosing a Form of Business Ownership 57
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
disadvantages for this type of business ownership, which
include:
●●
●●
●●
●●
●●
STUDY TOOLS
Unlimited liability—sole personal responsibility for
the debts of the business
Responsibility for all losses
Visit MindTap to watch videos on important considerations
related to business ownership.
Lack of continuity if something happens to the sole
proprietor
Difficulty obtaining capital from investors or banks—
backed by assets of sole proprietor only
Go to nelson.com/student to access the digital resources.
Management skills and expertise limited to sole
proprietor
●●
Large time commitment for one owner
●●
Difficulty attracting highly qualified employees
Some of today’s largest corporations, including
George Weston Limited (Loblaw and Weston Foods),
Cirque du Soleil, and Bombardier started out as tiny—
and in many cases struggling—sole proprietorships.
Often entrepreneurs with a promising idea choose the
sole proprietorship form of ownership so that they can
get started quickly, and get out easily.
BEYOND THE SOLE PROPRIETORSHIP Like
many others, you may decide that the major disadvantage of a sole proprietorship is the limited amount that
one person can do in a workday. One way to reduce
the effect of this disadvantage (and retain many of the
advantages) is to have more than one owner.
4-1b
Partnerships
A person who would not think of starting and running a
business alone may enthusiastically seize the opportunity
to form a business partnership. According to the Government of Canada, a partnership is “an association or
relationship between two or more individuals … that
join together to carry on a
partnership an association or
trade or business.”1
relationship between two or more
Although it is not a
individuals who join together to
legal requirement, most
carry on a trade or business
experts recommend that
general partner a person
people who want to form a
who shares responsibility for
partnership should create
operating a business, and
a partnership agreement.
unlimited liability for the debts of
the business
Although both oral and
written partnership agreelimited partner a person
ments are legal, a written
who invests money in a business
but has no management
agreement has an obvious
responsibility or liability for losses
advantage. It is not subbeyond the amount he or she
ject to lapses of memory.
invested in the partnership
Important decisions about
58 LESSON 4:
Choosing a Form of Business Ownership
who will make decisions, what each partner’s duties will
be, the investment each partner will make, and what
percentage of the company’s profits each partner will
receive should be included in a partnership agreement.
Although there is no legal maximum on the number
of partners a partnership may have, most keep the number
of partners low. In fact, many partnerships have only two
partners. Regardless of the number of people involved,
a partnership often represents a pooling of special managerial skills and talents; at other times, it is the result of
a sole proprietor taking on a partner for the purpose of
obtaining more capital. A general partner is a person
who shares responsibility for operating the business and
who assumes unlimited liability for the debts of the business. A limited partner is a person who invests money
in the business but has no management responsibility,
and whose liability is limited to his/her investment.
Like the sole proprietorship, a number of advantages
attract entrepreneurs and would-be business owners to
the partnership form of ownership. These include:
●●
●●
●●
Easy to form
Greater availability of capital and credit, due to the
increased financial strength of more owners
Combined business skills and knowledge—ideally,
partnerships bring together people with complementary backgrounds rather than those with similar
experience, skills, and talents
●●
Spread the workload between owners
●●
Relative freedom from government regulation
●●
No special taxes on the business—business income is
treated as personal income of the partners
However, partnerships are the least common form
of ownership due to the number of disadvantages:
●●
Unlimited liability—general partners have joint
and several liability, which means they can be held
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
personally responsible for all the partnership’s debts,
regardless of who created them. You can limit your liability as a limited partner but you cannot be involved
in day-to-day management of the business or make
any management decisions. To get around this some
people form limited liability partnerships (LLPs),
wherein each partner is protected from responsibility for the acts of other partners, and each partner’s
liability is limited to harm resulting from his or her
own actions. Ontario was the first province to allow
LLPs in 1998, followed by Alberta in 1999. Today
most provinces allow LLPs to operate, and they are
common in accounting and law firms.
●●
●●
Management disagreements over how to run the
business, and from differences in personalities and
work styles.
Frozen investment—difficulty getting your money
out of the business or exiting the partnership. For this
reason, most partnership agreements have provisions
for transfer of ownership and buy–sell agreements.
BEYOND THE PARTNERSHIP The main advantages of a partnership over a sole proprietorship are
increased availability of capital and credit, and the combined business skills and knowledge of the partners.
However, some of the basic disadvantages of the sole
proprietorship also plague the general partnership. One
disadvantage in particular—unlimited liability—can
cause problems for a partner with substantial personal
wealth, well beyond that of a sole proprietorship. A general partner who can afford to cover the debt may end
up responsible for all the debt, beyond his or her share,
due to other partners being unable to pay. A third form
of business ownership, the corporation, overcomes this
disadvantage.
4-1c
Corporations
Perhaps the best definition of a corporation was given by
Chief Justice John Marshall in a famous U.S. Supreme
Court decision in 1819. A corporation, he said, “is an artificial person, invisible, intangible, and existing only in contemplation of the law.” In other words, a corporation
is a separate entity created by law, with most of the legal
rights of a real person. These include the right to:
●●
Start and operate a business
●●
Buy or sell property
●●
Borrow money
●●
Sue or be sued
●●
Enter into binding contracts
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Corporations can be either public or private. A
public corporation’s shares are widely held and
available to the general public. Some public companies
choose to list their shares on organized stock markets
(e.g., Toronto Stock Exchange) or in the over-thecounter markets (e.g., NASDAQ). Not all public companies’ shares are traded on a stock exchange or in the
over-the-counter markets. Companies that are traded
on a stock exchange or in the over-the-counter markets
are called listed companies; every listed company is a
public company but not all public companies are listed.
A private corporation normally has a limited number
of shareholders and typically places restrictions on the
sale or transfer of shares to a third party (i.e., shares are
not available to the general public). Examples of private
corporations include small and professional corporations (e.g., your doctor or dentist is most likely a professional corporation). But not all private corporations are
small; McCain Foods and Irving Oil are prime examples.
Most corporations begin as private corporations. If they
choose, they may become public corporations to raise
extra money or as an exit strategy for the owners. Just
as private corporations can become public corporations,
public corporations can become private. This is normally
called a leveraged buyout and happens only when a group
of investors or management of the company offers to buy
shares of the others in the market and is successful in
obtaining the required number of shares.
SETTING UP A CORPORATION Unlike a real
person, a corporation exists only on paper. Setting up
a corporation is more difficult than starting a sole proprietorship or partnership. If the business activity is
primarily in only one province, it is necessary to incorporate only as a provincorporation an artificial
cial company under that
person created by law with most
province’s Companies Act
of the legal rights of a real person,
(or other similarly named
including the rights to start and
act), although there is no
operate a business, to buy or sell
property, to borrow money, to
restriction on a provinsue or be sued, and to enter into
cially incorporated combinding contracts
pany operating in other
public corporation a
provinces or territories;
corporation whose shares are
it can even have most or
widely held and available to the
even all of its operations
general public.
in another province. A corprivate corporation a
poration can also be set up
corporation whose number of
under the Canada Busishareholders is limited; normally
ness Corporations Act if it
restricts the transfer of shares
to third parties, and shares do
is to operate in more than
not trade on a recognized stock
one province or across
exchange.
Canada. Either route of
LESSON 4: Choosing a Form of Business Ownership 59
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KEY ADVANTAGES AND DISADVANTAGES OF A SOLE PROPRIETORSHIP, PARTNERSHIP, AND CORPORATION
Sole Proprietorship
Partnership
Corporation
Liability for debts
Unlimited personal liability
General partner has unlimited personal
liability for all partners’ debts
Limited to investment
Raising capital
Limited by personal assets
Able to draw on assets of all partners as
collateral
Easier access to public markets
Continuity of business
Dies with owner
Difficult to transfer ownership
Separate legal entity with unlimited life
Government regulations
Few
Few
Many
Formation
Easy
Easy
Difficult
Income taxation
Business income taxed as personal
income
Business income split and taxed as
personal income
Taxed as business income and again if distributed
to shareholders as personal income
incorporation requires more steps than setting up a sole
proprietorship or partnership.
To distinguish a corporation from other forms of
ownership, corporations must use Limited (Ltd./Ltée),
Incorporated (Inc.), or Corporation (Corp.) at the end of
the company name. This tells the customers, suppliers,
and other shareholders that the owners have limited liability for the corporate obligations.
Typical advantages of the corporate form of ownership include:
●●
●●
●●
●●
●●
Limited liability—a corporation is a legal entity separate from its owners, who therefore are not personally liable for its debts. It is important that although
shareholders of a corporation are protected by limited
liability, directors and officers of a corporation are
accountable for their action and can be sued in cases
of wrongdoing or wilful negligence.
Availability of capital and credit—a corporation can
raise funds by selling equity/ownership in the company through shares, and it generally has greater
access to bank funding.
Ease of transferring ownership—shareholders of
public corporations can usually easily sell their shares
through the public exchanges.
Perpetual life—because a corporation exists only on
paper, and it is a separate entity from its owners, the
death or exit of an owner does not affect its existence.
Ability to attract highly qualified management—due to
the relative opportunities available in a large company.
Like its advantages, many of the disadvantages of
the corporation stem from its legal definition as an artificial person or legal entity. These include:
●●
Difficulty and expense of formation—the process
is complex and lawyers and accountants are usually
involved.
60 LESSON 4:
Choosing a Form of Business Ownership
●●
●●
●●
Government regulation and reporting requirements.
Double taxation—a corporation must pay federal and
provincial income taxes on its profits, and then the
after-tax profit that is distributed to the shareholders
(in the form of dividends) is again taxed personally in
the hands of the shareholders as investment income.
Lack of secrecy—public corporations are required to
file annual reports.
See the table above for a comparison of some of the
key advantages and disadvantages of a sole proprietorship, partnership, and corporation.
4-2
KEY TAKEAWAY
The three common forms of ownership structure are sole
proprietorship, partnership, and corporation. Choosing
the appropriate form will depend on the size and goals
of each business.
4-3
K EY CONSIDERATIONS WHEN
CHOOSING OWNERSHIP
STRUCTURE
4-2 Summarize the four key considerations
for evaluating ownership structure.
While the advantages and disadvantages of different
forms of ownership were briefly mentioned in the last
section, the material in the rest of this lesson goes into
more depth and can help you decide what type of ownership you should choose when starting a business.
If you are starting a business, there is no sure-fire
method for deciding which form of business ownership
is best. There are four key considerations to analyze.
NEL
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KEY CONSIDERATIONS FOR CHOOSING AN OWNERSHIP STRUCTURE
The degree of control over the business and the ability to bring in new owners or sell share of ownership.
© Cengage Learning
Questions to ask when evaluating this ownership structure:
●●
Do I want complete control of the business, or am I willing to share control?
●●
Will the business want to have additional owners or investors in the future?
●●
How will day-to-day management decisions be made?
Business Control and
Transfer of Ownership
Tax treatment of business expenses and profit, plus the method for dividing profits among owners.
© Cengage Learning
Questions to ask when evaluating this ownership structure:
●●
Which ownership structure will minimize the tax burden for the company and for me?
●●
How should profits be divided at the end of the year?
Taxation and Division
of Profits
The amount of legal and financial liability for which the business owners are personally responsible.
© Cengage Learning
Questions to ask when evaluating this ownership structure:
●●
How risky is this business?
●●
How likely am I to be sued?
●●
Am I willing to be personally liable for the company’s legal and financial commitments?
Legal and Financial
Liability Protection
The paperwork and fees required to start and maintain the business.
Questions to ask when evaluating this ownership structure:
© Cengage Learning
●●
●●
●●
Is this really a business or just a moneymaking hobby?
How much time and energy am I willing to commit to following various legal requirements for starting and
running this business?
What is the cost of starting and running this business?
By understanding these key considerations, you can better analyze your situation and choose the form of
business ownership most appropriate for your situation.
Ease of Start-Up and
Administration
NEL
LESSON 4: Choosing a Form of Business Ownership 61
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4-4
KEY TAKEAWAY
There are four key considerations when choosing a form
of business:
●●
Business ownership and control
●●
Taxation and treatment of profits
●●
Legal and financial liability
●●
Ease of start-up and administration
When examining these considerations one by one,
multiple ownership structures may appear to be a good
fit. Examining your business goals against all four of the
key considerations will help you select the best form of
ownership.
One other very important consideration is often
overlooked. Discussions about the corporate form of
ownership can be misleading, because when we think of
corporations we think of large, established businesses—
but many owners of smaller businesses choose to incorporate for some of the reasons listed above. When you
are a small corporation the advantages and disadvantages
listed previously are primarily potential rather than real.
Most of them typically occur as the business grows. We
will cover this as we examine each consideration.
4-5
BUSINESS CONTROL AND
TRANSFER OF OWNERSHIP
4-3 Determine the most appropriate
ownership structure for business control
and ease of transferring ownership.
The person, or people, starting a business will often
possess a clear vision of what the business will look like
in the future. Some owners might want a small, simple
business they run by themselves. Others might plan for
explosive growth and hope to become a global brand
someday. This vision will affect the choice of ownership
structure, because the form of business ownership affects
how much control the owners have, as well as the ease
of transferring ownership to others—an important consideration if you hope to sell the business in the future.
The first consideration when choosing a form of
business is who controls the business. A sole proprietorship has one owner who has complete control over the
business. Any company decisions will be made solely by
that owner, which allows for decisive decision making.
A sole proprietorship is appropriate for a small, simple
business that is likely to have no employees. However,
62 LESSON 4:
Choosing a Form of Business Ownership
because many small businesses do decide to incorporate
that does not mean you will instantly or necessarily lose
control. You can choose to become a one-person corporation. This is common in professional practices,
such as those of doctors, accountants, and lawyers, and
in the trades, such as plumbers and electricians.
Partnerships and corporations usually have two or
more owners who agree either verbally or in writing
about how the business will be managed. These forms of
business can combine the business skills and knowledge
of multiple people, which can lead to more effective
management. The downside is that there can be a conflict when business partners do not agree on important
issues such as compensation, equipment purchases, and
other investments in the business.
Another aspect to consider is ease of transferring
ownership. If a sole proprietor or partner dies or retires,
the business typically ceases to exist. Partnerships can
make provisions in their ownership documents that allow
remaining business owners to continue the business if
they so choose, but the procedure for such an ownership
transfer must be clearly spelled out in company documents. On the other hand, corporations are separate entities and exist independently of the owners. This means
they essentially have perpetual life. George Weston, the
founder of George Weston Limited—Loblaw and Weston
Foods—passed away long ago. But you can still buy your
groceries at Loblaws because it is a corporation. In addition, it is easy to exchange shares of ownership in a corporation. This makes raising money for the business easier,
because shares of the company can be sold in exchange for
investment capital. Level of control and ease of ownership
transfer are important issues to consider when selecting
the ownership structure of a new business.
Often, business owners who are responsible for controlling a business ignore the possibility of management
disagreements. The possibility is real and is an important
factor to consider when choosing a form of ownership. For
example, what happens to a partnership if one of the partners wants to withdraw more money from the business
than the other partner(s) do? Conflict within corporations
is also common—especially when control of the business
becomes an issue. In many cases, management disagreements and conflict occur in partnerships and corporations
because of the human factor. Business owners, employees,
managers, and executives with egos, ambitions, and
money on the line are especially susceptible to friction.
When the people involved in a business begin to disagree
about decisions, policies, or ethics, distrust may build and
get worse as time passes, often to the point where the
business suffers, until the conflict can be resolved.
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4-6
KEY TAKEAWAY
Sole proprietorships (or one-person corporations) offer
the most control, but make transfer of ownership very
difficult. Partnerships and corporations require shared
control of the business because there are usually multiple
owners. Corporations allow for easy transfer of ownership,
making them the best choice for businesses intending to
attract investment capital by selling shares in the company. However, ease of ownership transfer and the ability
to attract financing are both more likely as the business
grows, because when the corporation is small and the
shares are privately held the market for shares is small.
4-7
TAXATION AND DIVISION
OF PROFITS
4-4 Determine how taxation and division
of profits affect the choice of ownership
structure.
An important goal of every business is to make a profit.
Profit is what remains after all business expenses have
been deducted from sales revenue. The form of business
4-7a
Division of Profits
As Exhibit 4.2 shows, profits are divided differently
depending on the type of business.
4-7b
Paying Taxes on Profit
The type of tax treatment is based on the form of business you have chosen. There are two basic methods for
tax treatment of profits,
pass-through taxation
pass-through taxation
and corporate (dual)
taxation.
Pass-Through Taxation: Profits from the
business pass through the
business, straight to the
owners. The owners report
their share of profits (or
losses) in the business on
their individual tax returns.
Sole proprietorships and
occurs when an owner’s share of
business profits is reported on his
or her individual tax return, as in
an unincorporated business (sole
proprietorship or partnership)
corporate (dual) taxation
occurs when profits of a business
are taxed at the entity level before
profits are distributed to owners;
distributions are reported on the
owners’ individual tax returns
as dividends and are taxed a
second time
DIVISION OF PROFITS
© Cengage Learning
© Cengage Learning
EXHIBIT 4.2
affects how profits can be divided and how they will be
taxed. We will start by discussing division of profits, and
will then discuss how those profits are taxed.
NEL
LESSON 4: Choosing a Form of Business Ownership 63
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partnerships both feature pass-through taxation because
the law does not separate the business from the owners in
unincorporated businesses. Therefore, business income
in sole proprietorships and partnerships is treated as personal income.
In a partnership the people involved in the business
agree on the amount of profit each owner should receive,
and the details about how profits should be divided
should be spelled out in the partnership agreement.
Corporate (Dual) Taxation: Because a corporation is a separate legal entity, it must pay taxes on company profits at a corporate rate. This can lead to double
taxation because when after-tax profits are distributed to
company owners that money gets taxed again as dividend
income. Dividend distributions must be approved by the
board of directors of the corporation. For shareholders,
dividends are taxable as personal income and must be
reported to the Canada Revenue Agency on their personal income tax returns.
All corporate profits are taxed twice regardless
of the size of the business, but it is important to note
that the federal and provincial governments offer lower
small-business tax rates that reduce the burden for
smaller corporations.
Let us look at a few examples to illustrate passthrough versus corporate taxation.
Why would any company choose to be a corporation
and face double taxation?
●●
●●
Corporations offer other advantages such as better
ability to attract investment capital as they grow.
Corporations can deduct certain business expenses
that other forms of business cannot, which may significantly lower the amount of money subject to taxes.
●
unlimited liability a legal
concept that holds a business
owner personally responsible for
all the debts of the business
Depending on the level
of profits, corporate
rates may be lower than
individual tax rates.
This is one of the most
important reasons, and sometimes the sole reason,
why many business owners choose to incorporate—
the Canadian and most provincial governments offer
lower small-business tax rates to Canadian-controlled
private corporations (CCPCs). This often amounts to
a corporate tax rate that is lower than what the owner
would pay at his/her personal tax rate. If the owner
then takes dividends from the business, these are also
taxed at a preferential rate, which negates the effect
of the dual taxation.
●●
Corporations do not have to distribute profits at the
end of the year. They can invest after-tax profits back
into the business to drive growth. This avoids the
problem of double taxation and potentially increases
the long-term value of the owners’ shares.
4-8
KEY TAKEAWAY
Business profits are divided based on the form of business ownership. The two primary forms of business taxation are pass-through or corporate taxation. After taxes
are paid, the profits earned by sole proprietorships and
partnerships are taxed as the personal income of the
owner. Partnerships can divide profits by any method
agreed upon by the owners. Because a corporation is
a separate legal entity, it must pay taxes on company
profits at a corporate rate. This can lead to double taxation because after-tax profits may be distributed to company owners and that money gets taxed again as dividend
income. While corporate profits can be subject to double
taxation, this may be offset by other advantages of corporate ownership.
4-9
LEGAL AND FINANCIAL
LIABILITY PROTECTION
4-5 Identify the liability exposure of the
PASS-THROUGH VS. CORPORATE TAXATION
Suppose you had a business that made $250,000 in
profit. If the business were a sole proprietorship or
partnership, that money would be distributed to the
business owners and taxed at their individual rates.
If the business were a corporation, that $250,000 in
profit would be taxed at the corporate rate. What is left
over is often distributed as dividends to the business
owners, and taxed again as a dividend on the owner’s
individual tax return.
64 LESSON 4:
Choosing a Form of Business Ownership
owners of different businesses.
The concept of legal and financial liability is one of the
most important considerations when forming a business.
Business activities can lead to unplanned debts and legal
liabilities for which the business owners can be held
personally liable. Typically one of the biggest disadvantages for sole proprietorships and general partnerships is
unlimited liability. Unlimited liability is a legal concept that holds a business owner personally responsible
for all the debts of the business, meaning that this liability is not limited to what the business can cover—it
NEL
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
4-10
KEY TAKEAWAY
The concept of legal and financial liability is one of the
most important considerations when forming a business. Sole proprietorships and general partnerships
can expose business owners to unlimited personal liability for company debts and legal judgments. Limited
liability partnerships and corporations provide limitedliability protection, which makes them an attractive
choice for business owners who wish to limit their risk
and protect their personal assets.
NEL
However, often the advantages of corporations are
obtained as the business grows and are not evident when
the business is just starting out. For example, although
limited liability is technically an advantage of a corporation, because lenders know that they can access only the
assets of the corporation to satisfy debts they are often
less willing to loan money to a young business unless
the owner guarantees the loan with personal assets. This
guarantee extends the liability beyond the corporation
and therefore it is no longer “limited.” As the business
grows and is more able to satisfy its obligations, this condition of personal guarantees is less likely to occur.
4-11
E ASE OF START-UP AND
ADMINISTRATION
4-6 Determine the most appropriate
business structure for ease of start-up
and administration.
The legal requirements for setting up a sole proprietorship or partnership business are generally simple and
inexpensive. Typically, establishing a corporation is more
complex and more expensive.
Sole proprietorship: Simplest and least expensive
to form. Register business name and obtain business
licences or permits (see Figure 4.1).
Partnership: Easy to form. Register business name
and obtain business licences and permits. While a
written partnership agreement is not required, a written
agreement can help specify the duties and authority of
each partner, in addition to mandating how profits will
be split and how changes in ownership might take place.
The partnership agreement is an internal document and
does not need to be filed with provincial or federal agencies (see Figure 4.2).
Corporation:
Modlimited liability a feature
that limits each owner’s financial
erately difficult to form,
liability to the amount of money
plus additional administhat she or he has invested in the
tration requirements. In
business
addition to registering
FIGURE 4.1
SOLE PROPRIETORSHIP
Register Name
Business Licence
© Cengage Learning
extends to the personal assets of the owner. Fortunately,
certain forms of business ownership including limited
partnerships (where there is at least one general partner
but some partners may be limited partners) and corporations provide limited liability protection for business
owners. Limited liability limits each owner’s financial liability to the amount of money that she or he has
invested in the business.
Unlimited liability is a legal concept that holds a
business owner personally responsible for all the debts
of the business. In other words, there is legally no difference between the debts of the business and the debts of
the owner. Suppose the business fails and has $200,000
in outstanding debts to various creditors. Those creditors
can seize the owner’s personal property—including savings and other assets—to pay the debts left behind by
the business. The same is true of a lawsuit: If a lawsuit
is brought against the business, and the business loses,
the owner is personally responsible for paying damages.
Sole proprietorships expose the owner to unlimited
liability. In general, partnerships also expose owners to
unlimited liability, although limited liability partnerships
allow owners to shield their personal assets from business liability.
One of the most attractive features of corporations
is limited liability. With few exceptions, each owner’s
financial liability is limited to the amount of money he
or she invested in the business. This feature originally
arose from the fact that the corporation is itself a legal
entity separate from its owners. This is commonly called
the corporate umbrella, because it protects the business owners. Of course, if the business fails, owners and
investors do not get their original investment back. But
if a corporation fails, or loses a lawsuit, creditors have a
claim only on the company’s assets, not on the owners’
personal assets. Because it eliminates the problem of
unlimited liability connected with sole proprietorships
and general partnerships, limited liability is a key reason
entrepreneurs choose the corporate form of ownership.
LESSON 4: Choosing a Form of Business Ownership 65
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Register Name
Business Licence
Articles of Partnership (optional,
but suggested)
business name and obtaining business licences and permits, owners must file articles of incorporation with the
provincial or federal authorities. The articles include
details such as the amount of shares to be issued, rights
and privileges of shareholders, and the purpose of the
corporation. Finally, the incorporators and original
shareholders must meet to adopt corporate by-laws
and elect a board of directors, which will set company
goals and provide governance for the corporation. The
board in turn appoints officers to run the company day
by day. Corporations must hold an annual shareholders’
meeting. This model of governance and the requirement
for annual meetings are the key administrative differences between corporations and other forms of business.
FIGURE 4.3
© Cengage Learning
PARTNERSHIP
Smaller corporations are, however, not as complex and
costly to form as larger corporations or public corporations, and the government tends to support smaller businesses to help them grow instead of heavily regulating
them (see Figure 4.3).
Requirements can vary from province to province.
Online services can be used to complete the business
setup process quickly and easily. Consulting a lawyer is
typically recommended if multiple business owners or
investors are involved. This will add to the cost of business
setup, but is worth it to ensure that documents are filed
properly and that agreements are clear and complete.
In addition, an accountant can help the business comply
with various provincial and federal tax requirements.
CORPORATION
Register Name
Business Licence
Articles of Incorporation
© Cengage Learning
FIGURE 4.2
Annual Meeting
PUTTING IT ALL TOGETHER
Sole Proprietorship
Partnership
Corporation
Control
Complete control
Shared control
Formal governance (less so in a small private corporation)
Transfer of ownership
Difficult
Difficult
Easy in a public corporation (less so in a small private
corporation)
Taxation
Pass-through, treated as
personal income
Pass-through, treated as
personal income
Corporate (double taxation—once at the corporate level
and again as personal income when dividends are paid to
shareholders) but small business rates apply to CCPCs
Liability
Unlimited
Unlimited (except in LLP)
Limited (unless small corporation signs personal guarantees)
Division of profits
100% to the owner
Shared equally unless specified
in partnership agreement
After-tax profits distributed to shareholders and based on
the number of shares a shareholder owns
Ease of start-up and
administration
Easy
Easy
Moderate to difficult (if public corporation)
66 LESSON 4:
Choosing a Form of Business Ownership
NEL
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4-12
KEY TAKEAWAY
The basic start-up and administration requirements for
the sole proprietorship and partnership forms of business are simple and inexpensive. Corporations are more
complicated and expensive to establish. For example,
LESSON SUMMARY
LO 4-1
Outline the three main forms of
ownership structure used in Canada.
There are three common forms of ownership structure: sole proprietorship, partnership, and corporation. Choosing the appropriate form will
depend on the size and goals for each business.
LO 4-2
Summarize the four key considerations
for evaluating ownership structure.
Choosing the right ownership structure is an important decision
because each of the common forms of business ownership has advantages and disadvantages. A business start-up will choose an ownership structure based on considerations specific to their situation. These
considerations include:
●
Business control and transfer of ownership
●
Taxation and division of profits
●
Legal and financial liability
●
Ease of starting up and administration
When examining these considerations one by one, multiple ownership structures may appear to be a good fit. Examining your business
goals against all four of the key factors will help you select the best
form of ownership.
LO 4-3
Determine the most appropriate ownership structure for business control and ease of
transferring ownership.
The first consideration is business control and transfer of ownership. Sole proprietorships offer the most control but make transfer of
ownership very difficult. Partnerships and corporations require shared
control of the business because there are usually multiple owners.
Corporations allow for easy transfer of ownership, making them the
best choice for businesses intending to attract investors and investment capital by selling shares in the company. Smaller, private corporations may gain these advantages as they grow.
NEL
corporations have the most start-up requirements, have
a distinct governance structure, and are the only form of
ownership that requires an annual shareholders’ meeting.
Even for ownership structures that are easy to start and
administer it is beneficial to consult a lawyer, especially if
the business has multiple owners, partners, or investors.
LO 4-4
Determine how taxation and
division of profits affect the choice of
ownership structure.
The second consideration is taxation and division of profits. Sole
proprietorships and corporations always distribute profits based
on percentage of ownership. Partnerships can divide profits by any
method agreed upon by the owners. The two primary forms of business taxation are pass-through or corporate taxation. While corporate
profits can be subject to double taxation, this may be offset by other
advantages of corporate ownership, and tax rates for small, private
corporations can be very attractive.
LO 4-5
Identify the liability exposure of the
owners of different businesses.
The third consideration, legal and financial liability, is one of the
most important considerations when forming a business. Sole
proprietorships and partnerships can expose business owners to
unlimited personal liability for company debts and legal judgments.
Corporations provide limited-liability protection, which makes them
an attractive choice for business owners who wish to limit their risk of
losing their personal assets. Smaller corporations may be required to
sign personal guarantees for loans, which increase the personal liability
of the owners.
LO 4-6
Determine the most appropriate
business structure for ease of start-up and
administration.
The final consideration is ease of starting up and administration.
The basic start-up and administration requirements for the sole
proprietorship and general partnership forms of business are simple
and inexpensive. A corporation is more complicated and expensive
to establish. For example, a corporation has a distinct governance
structure, and is the only form of ownership that requires an annual
shareholders’ meeting.
Even for ownership structures that are easy to start and administer,
it is beneficial to consult a lawyer, especially if the business has multiple owners, partners, or investors.
LESSON 4: Choosing a Form of Business Ownership 67
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EXERCISES
KEY TERMS
Use the Internet, magazines, newspapers, books,
and personal experiences to complete the following
exercises.
corporate (dual) taxation, p. 63
1. Imagine you want to become a sole proprietor and run your own
small business. Visit the Government of Canada website for information on how to start your business. Do you need to register
with your province or territory? Do you require any permits or
licences? What challenges do you anticipate you would face as a
sole proprietor?
2. A good friend approaches you with an idea for a start-up business. You must now determine if you should establish a partnership or incorporate your business. Make a list of advantages and
disadvantages for both scenarios. Which ownership structure will
be most beneficial for your business?
corporation, p. 59
general partner, p. 58
limited liability, p. 65
limited partner, p. 58
partnership, p. 58
pass-through taxation, p. 63
private corporation, p. 59
public corporation, p. 59
sole proprietorship, p. 57
unlimited liability, p. 64
3. Management disagreements over how to run the business,
conflicting personalities, and differences in work styles are all
factors that can create challenges in a partnership. Brainstorm
ways in which partners can attempt to prevent these issues from
occurring.
4. Research corporation tax rates for the province you live in. How
do they compare to the rest of Canada?
5. If you are starting a business, there is no sure-fire method for
deciding which form of business ownership is best. Of the four
key considerations discussed in the chapter, which takes highest
priority for you?
REVIEW QUESTIONS
1. Define the three main forms of ownership structure used in
Canada. What are the advantages and disadvantages of each?
2. Differentiate between a general partner and a limited partner.
3. What are the legal rights of a corporation?
4. Differentiate between a public and private corporation.
5. Discuss key considerations for choosing an ownership structure.
6. Differentiate between pass-through taxation and corporate
(dual) taxation.
7. Why would any company choose to be a corporation and face
double taxation?
8. Differentiate between limited and unlimited liability.
9. Discuss ease of start-up and administration for each type of
ownership structure.
10. Explain how profits are divided for each type of ownership
structure.
68 LESSON 4:
Choosing a Form of Business Ownership
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INDIGENOUS
PARTNERSHIPS
Indigenous peoples have cultivated business relationships with newcomers
and non-Indigenous Canadians for centuries. Historically, Indigenous peoples
were crucial partners in the fur trade. Many Indigenous people continue to
engage in business relationships with non-Indigenous Canadians today. An
estimated 43,000 Indigenous-owned businesses operate in Canada, and
these businesses are diverse across regions, industries, markets, and size. It is
essential that all Canadians work toward reconciliation by building reciprocal
relationships with Indigenous peoples and the land.
The Canadian Council for Aboriginal Business (CCAB) is an organization that encourages businesses to build these reciprocal relationships with
Indigenous people and communities. The CCAB’s Progressive Aboriginal
Relations (PAR) certification program has become the foremost social
responsibility program related to Indigenous peoples and communities.
Businesses certified under the PAR program have demonstrated that they are
good business partners, good places to work, and committed to prosperity
in Indigenous communities. Specifically, the program encourages leadership actions that drive positive Indigenous relations within an organization,
equitable employment of Indigenous people, development of positive relationships with Indigenous-owned businesses, and positive and progressive
community engagement. Businesses do not have to be large to participate in
the PAR program.
The cultivation of ongoing reciprocal relationships and investment in
Indigenous communities is the key to success in partnerships with Indigenous
peoples and Indigenous-owned businesses. Business deals that serve only
short-term (mostly financial) gains are becoming obsolete. Due to legal precedents that have recognized the land rights of Indigenous peoples, resource
extraction businesses usually have departments dedicated to Indigenous
relations. Yet, positive business relationships with Indigenous peoples and
communities extend well beyond the resource sector.
A survey conducted by Leger and Sodexo Canada found that 81% of
Canadians agree that corporations should include Indigenous businesses in
their supplier networks. This figure speaks to an increasing public awareness
of the need for reconciliation. CCAB President and CEO J. P. Gladu calls for
Canadian businesses to take action: “That’s about ensuring that our communities have access to all the business tools and opportunities to grow an
economy so that we’re managing wealth, rather than managing the poverty
that we have been managing for a very long time.”
Reconciliation requires all Canadians to learn about the truth of past
harm and to understand ongoing systemic discrimination against Indigenous
peoples. There are over 600 distinct First Nations in Canada, and Métis
peoples and Inuit represent separate and diverse communities as well. As
there are many Indigenous cultures, it can be a process to discover what the
traditions and protocols are for the specific situation but it is important to
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LESSON 4: Choosing a Form of Business Ownership 69
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respect the specific cultural traditions and protocols of the individuals or communities involved in all business relationships.
One action that businesses can readily incorporate into meetings and
conferences is a territory or land acknowledgment. This protocol involves recognizing the traditional territory of the Indigenous peoples who lived on the
land before colonization and who continue to share the land with Canadians
and other newcomers. Acknowledging the traditional territories and that
Indigenous peoples continue to reside on the land reinforces enduring
participation in business also in cities and towns across Canada—not just
on reserves and in Indigenous communities. Indeed, Gladu suggests that
“with over half of our population now living in urban centres, there’s a strong
Indigenous business presence that can be tapped into.”
The Aboriginal Business Match (ABM) is an Indigenous-driven initiative
that brings communities and all sizes of businesses together to find deals
that are mutually beneficial for Indigenous and non-Indigenous groups.
ABM exchange events are held across Canada and the United States. These
events operate as a series of 20-minute pre-screened meetings held at
conference centres in metropolitan areas. During the 2016 ABM shows, one
in five delegate groups made a deal on the conference floor. More than 90%
of delegates stated that they developed key contacts that may lead to future
business deals.
The next ABM meeting is scheduled in a location near to you in a few
months. You have been hired by a local firm to set up some parameters on
how best to interact at an ABM meeting. You represent a business that is
looking to develop a relationship with an Indigenous organization or community in your geographic area. Your job is to establish basic guidelines on
partnerships and joint ventures and to decide how best to structure this relationship moving forward.
Case Sources: https://www.tdslaw.com/publication/doing-business-with-first-nations/; https://www.ccab.com/
about-ccab/; http://business.financialpost.com/news/partnerships-spur-first-nations-business-growth; https://
aboriginalbusinessmatch.com/how-it-works/; https://www.northernontariobusiness.com/industry-news/
aboriginal-businesses/aboriginal-business-match-takes-place-in-sudbury-this-august-911652.
70 LESSON 4:
Choosing a Form of Business Ownership
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Copyright 2020 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content
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5 Considering
LightFieldStudios/iStock/Getty Images Plus
Small Business,
Entrepreneurship,
and Franchises
LEARNING OBJECTIVES
Once you complete this lesson, you will be able to:
5-1 Describe the five common characteristics of successful
entrepreneurs.
5-5 List the five major components of a business plan,
and the nine blocks of a business model canvas.
5-2 Characterize the small business sector of the Canadian
economy in terms of size, employment, and economic
impacts.
5-3 Understand three factors contributing to the high
5-6 Determine the most likely source of financing for
different businesses.
5-7 Contrast the advantages and disadvantages of a
franchise with those of a new business start-up.
number of small businesses in Canada.
5-4 Summarize the four contributions that small businesses
make to the Canadian economy.
INTRODUCTION
While FedEx and Instagram make different types of
“deliveries,” they are similar in one profound way: They
started with a simple idea for a business.
●●
●●
In 1965, Fred Smith wrote a term paper about the
inadequacies of using the passenger routing system
for delivering airfreight. This led him to establish
FedEx in 1971.
In 2010, Kevin Systrom and Mike Krieger decided to
cut everything from Kevin’s feature-laden Burbn app
except for its photo, comment, and like capabilities,
and Instagram was born.
entrepreneurial spirit
being aware of entrepreneurial
activity, perceiving there are good
opportunities, and believing in
your ability to start a business
72 LESSON 5:
Since then, both companies changed the way we
do things, and changed our
vocabulary along the way.
Now we “FedEx” packages
and “Instagram” photos. More importantly, these companies have created wealth for their owners and jobs
for thousands of employees. Fred Smith, Kevin Systrom,
and Mike Krieger demonstrate the importance of
entrepreneurial spirit.
Entrepreneurial spirit is measured by the Global
Entrepreneurship Monitor (GEM) based on three factors: entrepreneurial awareness (knowing someone who
has started a business in the past year), entrepreneurial
opportunity perception (thinking there are good opportunities for starting a business in your local area), and
entrepreneurial self-efficacy (thinking you have the
knowledge, skills, and experience to start a business).
These measures are compiled into the GESI (Global
Entrepreneurial Spirit Index). In a recent survey. Canada
ranked 6th among the 23 innovation-driven economies
of the world, ahead of the United States and Australia.1
Entrepreneurship is a crucial foundation for our
economy because it leads to the creation of new businesses. These new businesses provide many innovations,
Considering Small Business, Entrepreneurship, and Franchises
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create employment, and deliver other benefits to our
society. Creating a new business can be challenging,
though, and there are different methods for getting
started. We discuss these topics in this lesson.
5-1
CHARACTERISTICS
OF ENTREPRENEURS
ability to control their own destiny—even if this involves
a risk, it is one they are willing to take.
This country’s economic history abounds with stories
of ambitious men and women who turned their ideas into
business dynasties. The Molson Brewery, the 5th largest
brewery in the world, was started by John Molson at the
age of 18 with funds borrowed from his grandmother. Similarly, brothers Harrison and Wallace McCain, instead of
farming potatoes like their father, started one of the first
5-1 Describe the five common characteristics
The entrepreneurial spirit is alive and well in Canada and
has resulted in a great deal of entrepreneurial activity.
According to the GEM, Canada ranked 2nd among 23
innovation-driven economies in terms of the percentage
of the population that is engaged in early-stage entrepreneurial activity, just behind Estonia and ahead of the
United States, Korea, Israel, and Australia.2
Many of the businesses started by those with an
entrepreneurial spirit remain small. These small businesses are typically managed by the people who started
and own them. Most of these people have held jobs with
other companies and could still be employed if they
wanted. Yet owners of small businesses often prefer the
freedom that their own business provides them and the
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Milan Ilic Photographer/Shutterstock.com
of successful entrepreneurs.
Five key characteristics influence whether
an entrepreneur will be successful:
confidence, energy, internal drive, vision,
and tolerance for uncertainty.
LESSON 5: Considering Small Business, Entrepreneurship, and Franchises 73
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factories producing frozen French fries, which grew to
become the world’s largest supplier of frozen foods. More
recently, Heather Reisman launched the big-box bookstore
chain Indigo Books & Music, starting with her first store in
Burlington, Ontario, in 1997 and growing rapidly to purchase Chapters and become Canada’s largest book retailer.3
These businesses exist because of entrepreneurs
who had an idea and the will to pursue it.
Five key characteristics influence whether an entrepreneur will be successful. Keep in mind that these characteristics can be valuable to your career whether or not
you plan on starting a business.
include confidence, energy, internal drive, vision, and
tolerance for uncertainty. Even if you never plan to open
your own business, these characteristics can be valuable
in your career because most of them are the same characteristics that managers look for when hiring talent.
Confidence: An entrepreneur needs the ability to act
decisively and lead the business.
Some entrepreneurs start their business with hopes
of becoming a large company like FedEx, Instagram,
Molson Brewery, Indigo, or Lululemon. However, there
are a variety of motivations for starting a business, such as:
●●
●●
●●
●●
●●
Energy: Entrepreneurs typically put in long hours
making their business dreams come true.
Internal Drive: The desire to control one’s own destiny motivates many entrepreneurs, and the belief
that they can control their own destiny helps them
take action to overcome setbacks.
Vision: Successful entrepreneurs think strategically
and creatively. They also effectively manage the details
required to make their vision a reality.
Lack of Tolerance for Risk: When launching a new venture, success is not guaranteed and failure is common.
Those who are comfortable in this environment are
more likely to persevere and learn from their mistakes.
These characteristics are important because most
of them are the same characteristics that many managers seek. In today’s increasingly competitive economy
large companies look for intrapreneurs, employees
who apply entrepreneurial principles and spirit to their
organization. Confidence, energy, internal drive, and
vision can all be developed. If you have a low tolerance
for uncertainty and need stability in your job, then traditional employment in an established organization may
be the best fit for you. If you possess the first four characteristics plus a tolerance for uncertainty, entrepreneurship may be an exciting possibility for you to consider.
5-2
5-3
5-2 Characterize the small business sector of
the Canadian economy in terms of size,
employment, and economic impacts.
●●
●●
●●
●●
The decision that you have had enough of working for
someone else.
The loss of a job and the decision to start the business
you have always wanted rather than to seek another job.
An idea for a new product or a new way to sell an
existing product.
An opportunity to go into business as the result of a
hobby that appears to have moneymaking potential.
Many of today’s big businesses were started for
reasons similar to the ones above. They were small
businesses that grew large. With that said, most small
businesses actually stay small—but you might be surprised by what “small” actually means.
The typical definition of small business is one that
is independently owned and operated for profit and is
not dominant in its field. How small must a business be
to not dominate its field? The Small Business Branch
of Innovation, Science and Economic Development
Canada (ISED) defines business size by the number
KEY TAKEAWAY
Entrepreneurial spirit involves awareness of entrepreneurial activity, perception of opportunities, and belief
in the ability to start a busiintrapreneurs employees
ness. Research suggests
who bring an entrepreneurial spirit
that the factors leading to
to their organization
entrepreneurial success
74 LESSON 5:
SMALL BUSINESS: A PROFILE
Considering Small Business, Entrepreneurship, and Franchises
STUDY TOOLS
Visit MindTap to watch videos to learn more about small
businesses in Canada.
Go to nelson.com/student to access the digital resources.
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
EXHIBIT 5.1
ADVANTAGES OF SMALL BUSINESSES
THE SIZE AND SCOPE OF SMALL
BUSINESS IN CANADA
▸ Personal relationships with customers and employees
▸ Ability to adapt quickly to change
▸ Simplified record keeping
▸ Independence
▸ Ease and low cost of going into business
In contrast, the dark side reflects problems unique to
small businesses:
▸ High risk of failure
▸ Limited potential
▸ Limited ability to raise capital and hire qualified
talent
of employees, with small businesses having 1 to 99
employees.4 This definition excludes self-employed
individuals with no employees, but shows that even a
“small” business can be relatively large by some standards and provide a good income and lifestyle for the
entrepreneur. Small businesses are very important to
the Canadian economy.
Driving through the average city will take you past
a variety of stores. You might also drive by a number of
small warehouses and office parks. Taken together, these
businesses represent the foundation of the Canadian
economy. Here are some examples.5
As of December 2015, small businesses represented 97.9% of all companies with employees in
Canada. In fact, less than 3,000 of the over 1.17 million
businesses in Canada (or 0.3%) are considered large
businesses (with more than 500 paid employees), such
as Molson and Indigo. The rest are small or mediumsized businesses (SMEs), with medium making up
1.8% of the total.
Small businesses employ about 8.2 million individuals in Canada, or 70.5% of all private sector employees,
and generated over 87% of net employment change from
2005 to 2015. Approximately one-quarter of all exports
in Canada were exported by SMEs.
Small businesses account for approximately onequarter of total research and development expenditures in Canada, with the highest percentage of
innovating companies being found in manufacturing,
the wholesale trade, and professional, scientific, and
technical services.
Small business spans the gamut from the corner
coffee shop to the fledgling Internet start-up. The
owners of small businesses drill for oil, arrange flowers,
and sell groceries. They publish magazines, haul freight,
and make food products. They build new homes and
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restore old ones. They fix appliances and they drive cabs.
They make us well when we are ill and keep our pets
healthy, too.
Over half of the small businesses in Canada are concentrated in the retail trade, construction, professional,
scientific and technical services, other various services,
and health care and social assistance. Small businesses
contribute an average of 30% to the gross domestic
product (GDP) of their province.
Even if you work for the largest corporation, it is
likely that corporation buys goods and services from
small businesses and sells its goods through small businesses. The influence small business has on our economy
and our daily life is everywhere apparent.
Why are there so many small businesses? Because
small business owners enjoy several advantages. Most
of these advantages arise from two main characteristics:
simplicity and individual control.
Although every person who considers starting a
small business should be aware of the hazards and pitfalls, a solid well-conceived business model will increase
the odds of success, and a thorough business plan will
help with funding.
5-4
KEY TAKEAWAY
Entrepreneurs start businesses for a variety of reasons.
Many of these businesses remain small, but together
they represent a major portion of the Canadian economy.
Small businesses are found in many industries, but most
are concentrated in certain industries. They contribute a
significant portion to GDP.
LESSON 5: Considering Small Business, Entrepreneurship, and Franchises 75
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5-5
FACTORS CONTRIBUTING
TO ENTREPRENEURSHIP
companies and research institutions. Today, that same
processing power can be found in a smartphone and
held in the palm of your hand (and it costs about 99%
less than the supercomputers of yesteryear).
5-3 Understand three factors contributing
3. Downsizing and outsourcing. While downsizing and
outsourcing can often have a negative impact on the
employees being displaced, this trend has fuelled the
growth of small business. For one, employees who
are downsized sometimes realize they have skills and
an entrepreneurial spirit that they previously never
recognized. Second, when companies outsource they
create opportunities for new, specialized companies
to serve them. For example, a larger corporation that
decides to outsource employee recruiting creates an
opportunity for a recruiting specialist to start her own
business and sign that corporation as a client.
to the high number of small businesses
in Canada.
Just how did small business become such an important
driver of our economy, especially in the last few decades?
A variety of factors contribute to the high number of
start-ups. Three important ones are a culture of entrepreneurship, advances in technology, and corporate downsizing and outsourcing. Let us explore these three factors.
1. A culture of entrepreneurship. In Canada, the idea
of entrepreneurship is respected and supported. Hit
television shows like Dragons’ Den celebrate the
entrepreneurial spirit. Organizations such as local
Chambers of Commerce promote small businesses
in their communities. And government organizations
such as StartUP Canada (http://www.startupcan.ca/get
-involved/government/), the Canada Business Network
(https://canadabusiness.ca/growing/business-support
-organizations/), and Canada.ca (https://www.canada
.ca/en/services/business/grants.html) provide information, advice, and funding to start-ups.
5-6
Three reasons why small business is such a large and
important part of the Canadian economy are a culture
of entrepreneurship, advances in technology, and downsizing and outsourcing. While entrepreneurship exists
all over the world, the combination of these factors and
others makes Canada a leader in entrepreneurial activity.
2. Advances in technology. Fewer than 20 years ago, a
supercomputer filled most of a room and cost many
millions of dollars. It could be found only in large
EXHIBIT 5.2
KEY TAKEAWAY
5-7
FACTORS CONTRIBUTING
TO ENTREPRENEURSHIP
THE IMPORTANCE OF SMALL
BUSINESS IN OUR ECONOMY
5-4 Summarize the four contributions that
© Cengage Learning
small businesses make to the Canadian
economy.
A variety of factors contribute to the high number of
start-ups. Three important ones are a culture of entrepreneurship, advances in technology, and corporate
downsizing and outsourcing.
76 LESSON 5:
As we have profiled the size and scope of small business
in Canada, it is obvious that small business makes a variety
of contributions to the Canadian economy. We celebrate
these contributions through supporting Global Entrepreneurship Week every November since its inception in
2007, and BDC’s (Business Development Canada’s) Small
Business Week6 each year. EY has also hosted the EY
Entrepreneur of the Year Awards for 25 years7 to recognize
the achievements and contributions of Canadian entrepreneurs. Let us look at four of these contributions in detail.
5-7a
Providing Technical Innovation
Invention and innovation are part of the foundations of
our economy. The increases in productivity that have
characterized the past 200 years of our history are all
rooted in one principal source: new ways to do a job with
Considering Small Business, Entrepreneurship, and Franchises
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
●●
Basketball
●●
Odometers
●●
BlackBerry smartphones
●●
Paint rollers
●●
Ebola vaccine
●●
Peanut butter
●●
Egg cartons
●●
Ski-Doo snowmobiles
●●
Electric wheelchairs
●●
Time zones
●●
Garbage bags
●●
Walkie Talkie radios
●●
IMAX theatres
●●
Wonderbra bras
●●
Insulin
●●
Zippers
5-7c
Small business is also at the forefront of today’s emerging “green economy,” which will create the alternative
fuels and energy-saving technologies of tomorrow. And,
of course, there is the app revolution. Many of the bestselling mobile apps of all time were created by individual
programmers or small companies that grew large due to
their success.
5-7b
Providing Competition
Small businesses challenge larger, established companies in many ways, pushing them to become more efficient and more responsive to consumer needs. A small
business cannot compete with a large company in all
respects; however, a number of small companies, each
competing in its own particular area and its own particular way, together have the desired competitive effect.
Thus, several small janitorial companies together add
up to reasonable competition for the no-longer-small
ServiceMaster.
EXHIBIT 5.3
PROVIDING COMPETITION
Providing Employment
Small companies traditionally have added more than
their proportional share of new jobs to the economy.
Small business was responsible for the vast majority
(87.7%) of net employment change between 2005 and
2015—1.2 million jobs. In fact, the majority (8.2 million, or 70.5%) of private sector employees work for
small businesses. These people are employed mostly in
the wholesale and retail trade, accommodation and food
services, and manufacturing and construction industries.
These industries alone account for over 55% of all jobs in
small businesses in Canada.
A significant portion of this employment is coming
from businesses founded by women. According to the
GEM Canada Report on Women’s Entrepreneurship,
women have been at the forefront of Canada’s surge
in entrepreneurship, launching businesses at rates that
often outpace men. The report concludes that women
in Canada are more likely to open their own businesses
than in any other nation in the world.8 Over 13% of
Canadian women are engaged in some form of early-stage
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business activity, concentrated primarily in consumer services followed by business services and manufacturing.
The Royal Bank of Canada (RBC) estimates that by
2011 female SMEs had already contributed $148 billion
to the Canadian economy.9
To visualize just how much impact small business
has on employment, compare the Canadian economy
with and without small business. Canadian women in
particular are more likely to open their own businesses
than in any other nation in the world. Over 13% of
Canadian women are engaged in some form of earlystage business activity.
© Cengage Learning; Photos: Paul McKinnon/Shutterstock.com, pixinoo/Shutterstock.com, weedezign/Shutterstock.com
less effort for less money. Studies show that the incidence of innovation among small business workers is significantly higher than among workers in large businesses.
Small companies are particularly innovative, with over
40% implementing at least one type of innovation. Small
companies tend to produce more innovations than large
companies relative to the number of persons employed.
Many major technological advances of the 20th
century originated with individual inventors and small
companies. Even just a sampling of those innovations is
remarkable. Imagine living in a world without some of
these Canadian inventions:
Small businesses provide competition for large,
well-established companies.
LESSON 5: Considering Small Business, Entrepreneurship, and Franchises 77
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5-7d
Meeting the Needs of Society
and Other Businesses
Small companies also provide a variety of goods and services to each other and to much larger companies. A large
number of small businesses exist in local service industries. In many of these industries there is little advantage
to being big, which leaves room for many small businesses
to thrive. Examples of these industries include:
●●
Dry cleaning
●●
Food service
●●
House cleaning
●●
Landscaping
●●
Hair styling
●●
Certain types of medical care
Small businesses contribute to the Canadian economy
in many important ways, including providing technical
innovation and employment, and meeting the needs of
society and larger organizations.
THE IMPORTANCE OF
A BUSINESS PLAN
5-9
5-5 List the five major components of a
business plan, and the nine blocks of a
business model canvas.
Without small, local businesses like these, consumers and businesses would have less access to some of
the basic services they need.
In addition, small companies provide a variety
of goods and services to each other and to much
larger companies (see Figure 5.1). Large Canadian
retailers purchase merchandise from many suppliers,
most of them small businesses. Small businesses are
critical to the supply chains of most large businesses
in Canada. Large companies generally buy parts from
smaller companies for one very good reason: It is less
expensive than manufacturing the parts in their own
factories. This lower cost
business plan a written docueventually is reflected in
ment that describes the opportunity,
the price that consumers
goals, and plans for a business
pay for products.
FIGURE 5.1
KEY TAKEAWAY
5-8
Planning is important to any business, large or small, and
should never be overlooked or taken lightly. In fact, lack
of planning is frequently cited as a top reason for business failure. A successful business needs to be able to
adapt to its changing environment and use the business
plan as a guide. The key advantage to creating the business plan is the rigour involved. This conscious process
of building a business plan can point out flaws in your
original thinking that require reworking. A business
plan is a written document that describes the opportunity, goals, and plans for a business and is a carefully
constructed guide for the person starting a business.
Consider it a tool with three basic purposes: communication, management, and planning.
●●
As a communication tool, a business plan serves
as a concise document that potential investors can
examine to see if they would like to invest or assist in
MEETING THE NEEDS OF SOCIETY AND OTHER BUSINESSES
Suppliers
Dealers
Suppliers
Suppliers
Dealers
Suppliers
Dealers
Dealers
Canadian
Tire
Suppliers
Dealers
Suppliers
Dealers
Suppliers
Dealers
Suppliers
Dealers
Small businesses provide goods and services to each other and to much larger businesses.
78 LESSON 5:
Considering Small Business, Entrepreneurship, and Franchises
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
financing a new venture. It shows whether a business
has the potential to make a profit.
●●
●●
As a management tool, the business plan helps you
track, monitor, and evaluate progress. The business plan is a living document; it is modified as you
gain knowledge of and experience in the business.
It also serves to establish timelines and milestones,
and allows comparison of growth projections against
actual accomplishments.
As a planning tool, the business plan guides a businessperson through the various phases of business.
For example, the plan helps to identify obstacles to
avoid and to establish alternatives.
The business plan should answer the four questions
bankers and investors are most interested in:
●●
What exactly is the nature and mission of the new
venture?
●●
Why is this new business a good idea?
●●
What are the goals and milestones for the business?
●●
How much will the new business cost?
The great amount of time and consideration that
should go into creating a business plan probably will
end up saving time later. Realistic expectations are
crucial to an effective business plan. It is unethical
to deceive loan officers, and it is unwise to deceive
yourself.
But it is primarily the due diligence necessary to
preparing a business plan that makes it worthwhile.
The numbers are not likely to hold—they are just estimates. The key is that you have thought it through
carefully and are making assumptions that are realistic while at the same time recognize the need to
be flexible.
You also need to think carefully through all the
steps necessary to start your business, what roadblocks
you might be faced with, and how you will deal with
those challenges, not only so you can be prepared,
but also because investors and funders will want you
to have done this. But, as they say in the military,
“no plan survives contact with the enemy.” In a new
business, according to Steve Blank of The Startup
Owner’s Manual, “no plan survives first contact with
the customer.” It is very unlikely you will be able to
follow your plan to the letter—and it is not advisable
to try. Running a business requires constant iteration, learning from every encounter and misstep, and
always adjusting to improve and succeed. This is why
it is called a “living” plan—it needs to be constantly
evolving as the future is never certain.
NEL
5-9a
Components of a Business Plan
There is no one correct way to write a business plan. If
you read business planning books or use business plan
software, you will come across a variety of suggestions
for how the plan should be structured. However, all good
plans include five major components.
1. Executive Summary. A one- to two-page overview of
the key aspects of the business plan, including a justification for why the business will succeed.
2. Product Description and Market Analysis. Description of the product, with special emphasis on:
●●
Why it is unique
●●
What problem it solves in the market
●●
Who is likely to buy the product (target market)
●●
Initial evidence of market demand
3. Marketing Plan. Strategy for pricing, distributing, and
promoting the product.
4. Operations Plan. Description of how the product will
be produced and delivered to customers. It includes
details about:
●●
Management team
●●
Personnel needs
●●
Facility requirements
●●
Launch schedule
5. Financial Projections:
●●
Sales and cash flow forecasts
●●
Breakeven analysis
●●
Start-up costs
●●
Funding sources
The key aspects of any business plan stem from
the business model developed for the business by its
founder(s). A business model essentially explains how the
business will make money. According to Alex Osterwalder
of Business Model Generation and creator of the business
model canvas, a company’s business model describes “the
rationale of how an organization creates, delivers and
captures value” for its customers. Osterwalder created a
canvas to be used as a visual tool for creating your business model. It consists of nine building blocks that flow
together logically to tell the story of the business.
The table on the next page is an example of what
Vancouver-based Lululembusiness model explains
on’s business model might
how the business will make
look like using these
money
building blocks.
LESSON 5: Considering Small Business, Entrepreneurship, and Franchises 79
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BUILDING BLOCKS OF A BUSINESS MODEL
Value proposition
Provide yoga-inspired technical athletic apparel for people to live longer, healthier, more fun lives
Customer segment
Targeted primarily at 30-something women who are sophisticated, educated, fashion-conscious urban
professionals with an active lifestyle (although actually has mass appeal and wider customer base)
(Sales, marketing, and distribution)
channels
Company-owned physical stores promoted primarily through word-of-mouth
Customer relationship
Create a cult-like following—customers feel Lululemon clothing is helping them connect with their better self
Revenue stream
Physical asset sales of apparel and accessories
Key activities
Communicating brand values as expressed on tote bags given with every sale, engaging yoga teachers and
fitness trainers as brand ambassadors to connect customers with the brand and its values, and having a core
product line and constantly developing items produced in limited quantities to create sense of scarcity and
uniqueness
Key resources
Committed brand ambassadors; carefully chosen locations and clothing design
Key partnerships
Brand ambassadors and local fitness community
Cost structure
Mainly product and physical store overhead; high profit margins maintained on apparel
5-10
KEY TAKEAWAY
A business plan is an important tool for businesses large
and small, particularly when applying for funding. The
five components of a business plan are the executive
summary, product and market description, marketing
plan, operations plan, and financial projections. The key
aspects of the business plan come from the company’s
business model. Both need to be flexible and iterative
given the uncertainty of the business environment and
changing customer needs.
5-11
S OURCES OF FUNDING
FOR SMALL BUSINESS
5-6 Determine the most likely source
of financing for different businesses.
Starting a business requires money for things such as
equipment, inventory, hiring employees, and creating marketing materials. But every business is different; some are
very capital intensive, and others can be started with little
to no capital.
Growing a business
angel investors private
usually requires more capindividuals who invest money in
ital than starting one. A
exchange for ownership in a company
growing business may need
venture capital (VC)
additional space, more
companies that invest money in
employees, higher levels
high-growth companies that have
of inventory, and bigger
the potential to become large and
successful
marketing campaigns. A
80 LESSON 5:
number of special financial assistance programs are
available for Canadians looking to start and/or grow
a business. Canada.ca10 is an excellent source of information for grants, loans, and private and public sector
sources of financing, with links to a number of programs.
For example, Futurpreneur Canada’s start-up program
provides loans to qualified start-ups that can be topped
up with BDC funding; Industrial Research Assistance
Program (IRAP) provides non-repayable financial support for companies developing, adopting, or adapting
technology innovations; and the Canada Small Business Financing Program (CSBFP) works with financial
institutions to help companies obtain funding for capital
assets purchases.
While most entrepreneurs are 100% confident
in their business prospects and believe that attracting
funding should be easy, the truth is that start-up businesses typically have a limited ability to obtain capital.
As they build a track record of increasing sales, more
financing options usually become available. Understanding the different sources of business funding can
help the entrepreneur plan a realistic strategy for finding
the money he or she needs. The following paragraphs
describe funding sources including angel investors
and venture capital (VC).
When starting a business, you have no sales and
your growth potential is unproven. This usually limits the
sources of funds available to you. The most common source
of start-up funds is your own personal resources from savings, credit cards, equity from a home, and even funds
from a retirement account. In addition, family and friends
are sometimes willing to provide loans or investments in a
Considering Small Business, Entrepreneurship, and Franchises
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company. Overall, close to 80% of new business start-ups
use these sources to get their business off the ground.
A business that has built some track record of success can also pursue angel investors, private individuals
who invest money in exchange for ownership in the
company. Angels look for companies that show potential
but might be overlooked by banks and other investors.
Angels sometimes provide technical advice to the company to help them grow, and for good reason: the angel
at some point hopes to sell his or her ownership stake
for a profit.
As the business grows, additional financing options
such as bank loans become available. While banks sometimes provide start-up financing, and are more likely to
through government programs like CSBFP, they more
often loan money to existing businesses with a track
record, to use for expansion and growth such as the
purchase of new buildings or equipment. As a business
grows, the amount of funding it can acquire through
bank lending grows as well.
Businesses with very high growth potential may seek
venture capital funding. VC funds raise large pools of
money from private and institutional investors to invest
in companies that have the potential to become large and
successful. VCs are extremely selective, and access to VC
funding is highly competitive. It also puts considerable
pressure upon the company to deliver fast growth. Companies such as Facebook, Twitter, Google, and Amazon
all had VC funding before going public. One recent
Canadian company is Shopify.
Companies that have grown large and continue to
have high growth potential can explore “going public” by
selling their stock on the open market. Companies who
do a public offering are subject to a variety of regulatory
requirements and increased pressure from investors.
Only a very small fraction of businesses ever go public.
5-11a
The Growth of Crowdfunding
An emerging alternative to traditional financing is online
crowdfunding through sites such as Kickstarter and
Indiegogo. In crowdfunding, entrepreneurs post
descriptions of their project or business then invite
people to contribute. Contributors are not investors in
the traditional sense because they do not receive ownership in the company. Instead, they typically get a reward,
depending on their contribution level. A sampling of
projects on Kickstarter includes fundraising campaigns
by musical artists, filmmakers, app developers, and a
variety of inventors. The global crowdfunding industry
grew immensely in 2014—expanding by 167% to reach
NEL
$16.2 billion, up from $6.1 billion in 2013. In 2015, the
industry expanded by more than double once again, this
time reaching $34.4 billion.11
5-12
KEY TAKEAWAY
Starting and growing a business requires funding.
Small business start-ups typically have limited access to
capital, but options for funding increase in number
and size as the business increases sales and proves its
growth potential.
5-13
FRANCHISING
5-7 Contrast the advantages and disadvan-
tages of a franchise with those of a new
business start-up.
Entrepreneurs who dream of running their own business
do not necessarily have to start one from scratch. Sometimes a better alternative is to buy a franchise.
A franchise is a licence to operate an individually
owned business as if it were part of a chain of outlets or
stores. Often, the business itself is also called a franchise.
Among the most familiar Canadian-based franchises
are Booster Juice, Mr. Sub, Boston Pizza, Tim Hortons,
M&M Food Market, and Second Cup. Many other franchises carry familiar names; this method of doing business has become very popular in the last 60 years or so.
Franchising is the actual granting of a franchise.
A franchisor is an individual or organization granting
a franchise. A franchisee is a person or organization
purchasing a franchise, which in many ways is like purchasing a tested and validcrowdfunding when
ated “business in a box.”
entrepreneurs invite people to
The franchisor supplies
contribute to a business or project,
a known and advertised
usually via an online platform
business name, managefranchise a licence to operate
ment skills, the required
an individually owned business as
if it were part of a chain of outlets
training and materials, and
or stores
the products and production methods for serving
franchising the actual
granting of a franchise
customers. The franchisee
supplies labour and capital,
franchisor an individual or
operates the franchised
organization granting a franchise
business, and agrees to
franchisee a person or
abide by the provisions of
organization purchasing a franchise
the franchise agreement.
LESSON 5: Considering Small Business, Entrepreneurship, and Franchises 81
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EXHIBIT 5.5
DISADVANTAGES OF FRANCHISING
© Cengage Learning
ADVANTAGES OF FRANCHISING
© Cengage Learning
EXHIBIT 5.4
ADVANTAGES OF FRANCHISING Franchising
plays a vital role in our economy, contributing $96 billion
or 5% to Canada’s GDP12; the majority of franchises
are small businesses. Why? Because franchising allows
someone to be “in business for themselves, but not by
themselves.”13 And it offers advantages to both the franchisor and the franchisee.
To the Franchisor. The franchisor gains fast and
well-controlled distribution of its products without
incurring the high cost of constructing and operating
its own outlets. The franchisor thus has more capital
available to expand production and to use for advertising. At the same time, it can ensure, through the
franchise agreement, that outlets are maintained and
operated according to its own standards. The franchisor
also benefits from the fact that the franchisee—a sole
proprietor in most cases—is likely to be very highly
motivated to succeed. The success of the franchise
means more sales, which translate into higher royalties
for the franchisor.
To the Franchisee. The franchisee gets the opportunity to start a business with limited capital and to make
use of the business experience of others. Moreover, an
outlet with a nationally advertised name, such as Boston
Pizza, Tim Hortons, and Canadian Tire, has guaranteed
customers as soon as it opens. If business problems arise,
the franchisor gives the franchisee guidance and advice.
This counselling is primarily responsible for the
very high degree of success enjoyed by franchises.
The franchisee also receives materials to use in local
advertising and can take part in national promotional
campaigns sponsored by the franchisor. For example,
the Tim Hortons “RRRoll Up the Rim” and “True
Stories” campaigns drive a great deal of customer
82 LESSON 5:
loyalty, which translates to sales for the franchises.
Finally, the franchisee may be able to minimize the
cost of advertising, supplies, and various business
necessities by purchasing them in cooperation with
other franchisees.
DISADVANTAGES OF FRANCHISING However,
there are trade-offs when buying a franchise. The franchisee typically pays a franchise fee to the franchisor
that can range from a few thousand to several hundred
thousand dollars, depending on the franchise. Plus, franchisees pay a certain percentage of gross sales or profits
to the franchisor for the life of the business. In addition,
the cost of building or remodelling the franchise location is usually paid by the franchisee. Finally, franchise
agreements often dictate every aspect of the business,
including decor, employee uniforms, signs, and all details
of business operations. All Tim Hortons donuts taste the
same way because all Tim Hortons franchises have to
make them the same way.
Franchise operators work hard. They often put in
10- and 12-hour days, six days a week. The Canadian
Franchise Association provides information to those
considering buying a franchise in its Ultimate Guide to
Buying a Franchise in Canada. The guide provides suggestions for evaluating opportunities and conducting due
diligence before making a commitment. Franchises vary
widely in approach as well as in products. Some, such
as Tim Hortons and Pizza Pizza, demand long hours
serving customers. Others, such as M&M Food Market
and Canadian Tire, are more appropriate for those who
want more typical working hours.
5-13a
Franchising Success Rates
Conflicting information exists as to the success rates
of franchising. Some sources claim that the success
Considering Small Business, Entrepreneurship, and Franchises
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rate for businesses owned and operated by franchisees
is significantly higher than the success rate for other
independently owned businesses. But other sources,
such as a 2017 article in The Globe and Mail,14 claim
that franchise failure rates are no lower than for
independent small businesses. The important point to
remember is that franchising offers no guarantee of
success for either franchisees or franchisors. Expanding
too quickly, inadequate capital or management skills,
and a host of other problems can cause failure for both
franchisee and franchisor. And anyone looking to start
their own business should do their due diligence and
not assume anything.
LESSON SUMMARY
LO 5-4
LO 5-1
Describe the five common characteristics
of successful entrepreneurs.
Having an entrepreneurial spirit suggests being aware of entrepreneurial activity, perceiving there are good opportunities, and
believing in your ability to start a business. Research suggests that
factors leading to entrepreneurial success include confidence, energy,
internal drive, vision, and tolerance for uncertainty. Even if you never
plan to open your own business these characteristics can be valuable
in your career, because most of them are the same things managers
look for when hiring talent.
LO 5-2
5-14
Franchising is an alternative to starting a business from
scratch. Buying a franchise can simplify the launch of a
business, and offers support so that you are not going
it alone. But franchisees give up control and a share of
profits when they enter a franchise agreement.
Summarize the four contributions that
small businesses make to the Canadian economy.
Small businesses contribute to the Canadian economy in many important ways, including providing technical innovation, employment, and
competition, and meeting the needs of society and larger organizations.
LO 5-5
List the five major components of a
business plan, and the nine blocks of a business
model canvas.
Planning is important to any business, large or small, and should never
be overlooked or taken lightly. In fact, lack of planning is frequently cited
as a top reason for business failure. The preparation of a business plan is
normally required for funding, and is an important process for start-ups
to engage in for due diligence purposes. The five components of a typical
business plan are the executive summary, product and market descrip­
tion, marketing plan, operations plan, and financial projections. A startup’s business plan is based on its business model, which explains how the
company will make money. The nine building blocks of a business model
are its value proposition, customer segments, channels (through which
it reaches its customers), the customer relationship, revenue streams, key
activities, resources, and partnerships, and cost structure.
Characterize the small business sector
of the Canadian economy in terms of size,
employment, and economic impacts.
Canada is a top country for entrepreneurial activity, with small businesses representing over 97% of all companies with employees in
Canada. In fact, fewer than 3,000—or only 0.3%—of businesses in
Canada are considered large; these are big businesses such as Magna
International Inc. and George Weston Ltd. Small businesses employ
over 8 million individuals in Canada, or over 70% of all private sector
employees.
Entrepreneurs start businesses for a variety of reasons. Many of
these businesses remain small, but together they represent a major
portion of the Canadian economy. Over half of the small businesses in
Canada are concentrated in the retail trade, construction, professional,
scientific and technical services, other various services, and health
care and social assistance. Small businesses contribute an average of
30% to the gross domestic product (GDP) of their province.
LO 5-6
LO 5-3
LO 5-7
Understand three factors contributing to
the high number of small businesses in Canada.
Three reasons why small business is such a large and important
part of the Canadian economy are a culture of entrepreneurship,
advances in technology, and downsizing and outsourcing. While
entrepreneurship exists all over the world, the combination
of these factors and others makes Canada a leader in entrepreneurial activity.
NEL
KEY TAKEAWAY
Determine the most likely source
of financing for different businesses.
Starting a business requires money for things such as equipment,
inventory, hiring employees, and creating marketing materials. Small
business start-ups typically have limited access to capital, so they often
utilize personal funds, friends, and family as sources of funding in the
beginning. As companies grow and demonstrate an ability to increase
revenues consistently, their funding options may increase to include
angel investors, banks, venture capital, and public stock offerings.
Contrast the advantages and disadvantages of a franchise with those of a new business
start-up.
Franchising is an alternative to starting a business from scratch. Buying
a franchise can simplify the launch of a business, and allow a small business owner be in business for themselves but not by themselves; that is,
with the support of an established organization. But franchisees give up
control and a share of profits when they enter a franchise agreement.
LESSON 5: Considering Small Business, Entrepreneurship, and Franchises 83
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EXERCISES
KEY TERMS
Use the Internet, magazines, newspapers, books,
and personal experiences to complete the
following exercises.
angel investors, p. 80
business model, p. 79
business plan, p. 78
1. Starting a business from your home is one of the easiest ways to
become self-employed. Choose an idea that you feel is suited to
this type of business. What other issues do you need to investigate before start-up? How feasible is your idea?
crowdfunding, p. 81
2. Search for sample templates for business plans for all types of
businesses. Select an idea for a company in a field that interests
you, and using the information provided in the template, prepare
an outline for its business plan.
franchisee, p. 81
3. You want to buy a business but don’t know much about valuing
small companies. Research various methods for valuing small
companies. What did you learn?
intrapreneurs, p. 74
entrepreneurial spirit, p. 72
franchise, p. 81
franchising, p. 81
franchisor, p. 81
venture capital (VC), p. 80
4. Imagine you have a dream to become a franchisee. Choose two
Canadian franchises and conduct research to determine which
one you should purchase. Explain your reasoning.
5. Research successful crowdfunding campaigns. Select one and
describe the business. How many supporters contributed and how
much money was raised? If you were to run your own crowdfunding
campaign, what methods would you use to attract investors?
REVIEW QUESTIONS
1. Differentiate between an entrepreneur and an intrapreneur.
2. Discuss five primary characteristics that may influence the success of an entrepreneur.
3. What are the two main characteristics of small businesses? What
are the advantages and disadvantages of being a small business
owner?
4. What are three important factors that contribute to the high
number of start-ups in Canada? Explain each.
5. How are small businesses advancing the Canadian economy?
6. What is a business plan? What basic purposes does a business
plan serve?
7. What are four essential questions that a business plan should
answer?
8. What is a business model? Describe the key components.
9. Discuss sources of funding for small businesses.
10. What is a franchise? What is franchising?
84 LESSON 5:
Considering Small Business, Entrepreneurship, and Franchises
NEL
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START ME UP
As you picture yourself crossing the graduation stage a few years from now—
picking up your diploma, shaking hands and exchanging hugs—you stop to
wonder. What might it be like to be your own boss?
Often business school teaches students to be employees, with content
and examples heavily structured around existing businesses and large corporations. The entrepreneurial journey is not provided as much focus, leaving
students wondering what it might be like to start their own business.
This case is all about the process of looking into the big and small picture when it comes to starting a new business. The first challenge, of course,
is coming up with an idea for an offering to the market, some combination
of product and service that would meet demand. One of the first challenges
faced by an entrepreneur is figuring out what they should bring to the
market. A key here is to think about what you offer based on a problem. Think
about a problem that people out there have—it can be almost anything, from
not being able to sync their digital calendars to frustration over always having
to tie their children’s shoelaces. No matter what idea is devised, it is important
that whatever you offer is based on solving a particular problem.
In doing this, you should begin to think about a name for your business.
Once you have brainstormed some ideas, it is wise to check whether another
business in your industry or a related industry has the same or a similar
name. You can go online or to a registry office and ask for a NUANS—
a Newly Upgraded Automated Name Search—which provides a list of
company names, both provincially and nationally, that are similar to the
one being searched.
Another consideration when coming up with a name is one that did not
exist 20 years ago. That is, of course, finding a name that has a unique URL
(Uniform Resource Locator), or Web domain. Many online resources, from
WHOIS to GoDaddy, can check to see if your name is taken or already in use
by another company or person. When you find your unique URL you can
secure it through one of these companies and begin to establish your initial
online presence. Once you have a name, it is important to also establish identifiers on social media sites like Facebook, Twitter, Instagram, and YouTube.
These names should be similar to your company name and URL. Consistency
in the use and application of your name is an important part of establishing
your brand in the burgeoning online marketplace.
With a name and online presence secured, it is time to create a proper
business plan. A number of elements are necessary to a strong business
plan, but it is key to keep in mind what potential interested parties might be
looking for. Being able to make connections between your idea, marketing,
operations, and finance is a key part of convincing others to support you
financially. These elements of a business are key to a successful venture, and
also form the basis of a business plan. The Government of Canada offers templates for business plans on the Canada Business Network.
NEL
LESSON 5: Considering Small Business, Entrepreneurship, and Franchises 85
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Sadly, money does not always flow easily for a start-up business. If you
are financially capable, you could use your own money to start your company.
However, most people are in need of some assistance to start their business.
And while family and friends are potential backers, especially given the
increased prominence of online crowd-source funding sites like GoFundMe,
it is more than likely that you will be looking for outside sources of financing.
Entrepreneurs are often bootstrapping their way through, looking for help
and support that does not cost too much and seeking out mentors and support along the way. Outside of this, and without asking friends and family,
entrepreneurs can look to traditional sources of financial support (banks,
credit unions), and specific providers that specialize in helping start-ups and
entrepreneurs (angel investors, venture capitalists).
It is around the time of securing funds that entrepreneurs often realize
they actually have to produce what they want to sell. This can be a challenge
if the offering is expensive to produce or it is difficult to provide a prototype.
Government funds are often available to help build these samples, and these
are often vital in providing the necessary proof of concept, be it to investors
or potential customers. And that brings us to another vital component of the
process—customers. You will need them, and finding them is going to be
the most important part of this entire process. You should be keeping them
in mind at every stage, never forgetting the problem you are trying to solve
for them.
As you finish reading this case, things must seem daunting. You are
just learning about business and now you are asked to think about angel
investing and prototype development. All the more reason to pay attention
in class—especially one that will teach you so many of the things described
in this case.
It is your turn now. Come up with an idea and take it through the process
outlined in this case. Start thinking right now about being your own boss. You
might have a taste for the entrepreneur life, and this your chance to try a few
samples off the menu to begin finding out.
Case Sources: https://www.ic.gc.ca/eic/site/075.nsf/eng/home; https://ca.godaddy.com; https://www.whois
.net; https://ca.gofundme.com; https://canadabusiness.ca.
86 LESSON 5:
Considering Small Business, Entrepreneurship, and Franchises
NEL
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6 Understanding
the Management
Process
LEARNING OBJECTIVES
6-1 Summarize the four basic management functions.
6-5 Explain the different leadership styles.
6-2 Discuss the strategic factors of an organization and
6-6 List the four steps of the managerial decision-
classify the factors using SWOT analysis.
Monkey Business Images/Shutterstock.com
Once you complete this lesson, you will be able to:
making process.
6-3 Identify the various levels of management.
6-4 Characterize how the required mix of skills changes for
managers at different levels.
I NTRODUCTION
When you buy something online or at the store, it is easy
to forget how much effort went into getting that product
to you. Consider the following example of what is going
on behind the scenes when you make a simple purchase.
When you type in “Amazon.ca,” what you see is a
Web page. But when you look behind the scenes, that
Web page is the portal to a frenzy of business activity.
Amazon, headquartered in Seattle, Washington,
has 310 million customers1 who buy over $228 billion
CAD in goods and services from Amazon each year. In
2013, on Cyber Monday, Amazon received 33.6 million
orders in one day alone. That is 426 orders per second,
shipping to over 185 countries. Just one Amazon distribution warehouse is 112,000 square metres—the size of
more than 13 Canadian football fields. And Amazon has
over 96 distribution warehouses around the globe. In
addition to selling physical products, Amazon’s digital
catalogue includes 27 million TV shows, songs, books,
and movies available on their site, requiring legions
of computers to store and deliver all of that data. As
you might have guessed, it takes many people to make
an operation such as this possible: Amazon has over
500,000 employees.2
88 LESSON 6:
Understanding the Management Process
All of this activity might sound like chaos—and without
good management it would be. But managers coordinate
an organization’s resources to achieve the organization’s
goals. Coordination makes it possible to take an extremely
complex mix of resources and turn it into a successful business such as Amazon. We will begin exploring how this is
done in this lesson about the management process.
6-1
THE FOUR FUNCTIONS
OF MANAGEMENT
6-1 Summarize the four basic management
functions.
Business is complex. For example, when starting a new
business you need more than just an idea. You need to
develop a strategy of how your business will operate
and be successful. This includes planning your financial
strategy—for example, how much start-up capital you
need, and how you are going to finance it. You will also
need to plan your marketing strategy. This would include
understanding who your potential customers are, what
products they want, what prices they are willing to
pay, and how you are going to promote the product
so that they know it exists. These are only a few of the
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considerations you need to make for your new business
to have a better chance of being successful.
How can all of these activities be managed at once?
The first step is to understand the four key functions of
management:
●●
Planning
●●
Organizing
●●
Leading and motivating
●●
Controlling
How well managers perform these functions determines whether a business is successful. Understanding them
can serve as a roadmap that tells a manager which functions
he or she executes well, and which need more attention.
FOUR FUNCTIONS OF MANAGEMENT
Planning: Establishing organizational goals and
deciding how to accomplish them
Organizing: Arranging resources and activities in a way
that effectively and efficiently accomplishes the goals.
Leading and motivating: Influencing people to work
toward a common goal
Controlling: Measuring results against goals and
making corrections when needed.
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All the activities within the process of management—
planning, organizing, leading, and controlling—are
highly integrated. They form a tightly integrated cycle
of thoughts and actions. They are highly interdependent
and are performed in such a way that it is difficult, if not
impossible, to separate them.
Managers who can perform these functions well
are extremely valuable to an organization because they
create order from what could become chaos. This helps
the organization reach its goals, which ultimately should
benefit its employees and customers.
6-1a
Planning: Setting Goals
Planning is establishing organizational goals and
deciding how to accomplish them. The plans developed
must be consistent with the
management coordinating
organization’s vision statement. A vision statement is a clear and concise
outline of an organization’s
values and goals that it
would like to achieve.
The planning process
itself is also highly integrative. Planning has different
levels—the main ones being
people and other resources to
achieve the goals of an organization
planning establishing
organizational goals and deciding
how to accomplish them
vision statement a clear and
concise outline of an organization’s
values and goals that it would like
to achieve
LESSON 6: Understanding the Management Process 89
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Strategic
Tactical
●
Broad guide for major policy setting
●
Designed to achieve long-term goals
●
Set by board of directors and top
management
90 LESSON 6:
●
Smaller-scale plan to implement
strategic plan
●
May be updated periodically
●
Easier to change than strategic plans
Understanding the Management Process
mikecphoto/Shutterstock.com
strategic, tactical, and operational—but they must all work
together. Strategic planning is broad based and determines
the goals and plans for the entire organization, typically for
one to five years. Then, at the tactical level, each functional
area determines its own goals and plans, which enables
that area to fulfill its role in achieving the overall strategic
plan, typically less than one year. Finally, at the operational
level, each unit within each functional area determines its
goals and plans to implement those at the next higher level,
typically the day-to-day operations.
Additionally, many companies develop contingency plans, the “what if” plans. Effective contingency
plans allow organizations to respond to situations that
would render their current plans unsuitable. Since the
future has no guarantees, managers must make contingency plans. By having contingency plans developed in
advance, managers can properly react to situations as
they arise. If no contingency plans are in place, managers
may have to make decisions without all relevant information, resulting in potential disastrous outcomes.
Organizations begin the planning process by developing a mission statement, which is a clear, concise
articulation of how the company intends to achieve its
vision—how it is different from its competition and the
keys to its success.
The strategic planning process involves establishing an organization’s major goals, then allocating
resources to achieve them. The strategic planning process
is a broad guide for the company and is usually developed
by top management. From there, specific divisions and
departments create their
mission statement a clear,
own goals and plans for
concise articulation of how the
helping accomplish the stracompany intends to achieve its
tegic plan. Every member of
vision—how it is different from its
competition and the keys to its success
an organization—the chief
executive officer, the head
strategic planning
of a department, an operprocess establishing an
organization’s major goals and
ating employee at the lowest
objectives and allocating resources
level—has a set of goals that
to achieve them
they hope to achieve.
organizing grouping
Most organizations
resources and activities to
de­
velop several types of
accomplish some end result in an
plans—strategic, tactical,
efficient and effective manner
oper­ational, and contingency.
Tim Hortons sets specific and measurable
goals in its planning process. One
example might be “Tim Hortons will
purchase 100% of its coffee from farmers
who grow their coffee using sustainable
farming practices.”
6-1b
Organizing the Enterprise
After goal setting and planning, the manager’s second
major function is organizing. Managers are constantly
organizing as a company grows.
Consider the case of an inventor who creates a
new product and goes into business to sell it. At first,
the inventor will do everything on his or her own—
purchase raw materials, make the product, advertise
it, sell it, and keep business records. Eventually, as the
business grows, the inventor will need help. To begin
with, he or she might hire a professional sales representative. Then she might hire a part-time bookkeeper.
Later, it also might be necessary to hire sales staff,
people to assist with production, and an accountant.
As the inventor hires new staff, he or she must decide
what each person will do, to whom each person will
report, and how each person can best take part in the
organization’s activities.
Operational
●
Designed to implement tactical plans
●
Plan is one year or less
●
Deals with how to accomplish specific
objectives
Contingency
●
●
Outline of alternative courses of action if
other plans are disrupted or non-effective
Used in conjunction with strategic, tactical,
and operational plans
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6-1c
Leading and Motivating
is providing reasons for people to work in the best interests of an organization. They are concerned with the
human resources in an organization—usually the most
important resource an organization has. Given their
importance, leading and motivating are critical activities; together they are known as directing, which is the
combined processes of leading and motivating.
Different people do things for different reasons; that
is, they have different motivations. Some are interested
primarily in earning as much money as they can. Others
may be driven by opportunities to get promoted. Part
of a manager’s job, then, is to determine what factors
motivate workers and to provide proper incentives to
encourage effective performance. The style and tactics
managers use to influence their team toward a common
goal is the essence of leadership. Later in this lesson we
explore leadership styles in detail.
6-1d
Controlling
Controlling is the process of evaluating and regulating
ongoing activities to ensure that goals are achieved. To
see how controlling works, consider a rocket launched by
NASA to place a satellite in orbit. Do NASA personnel
simply fire the rocket and then check back in a few days
to find out whether the satellite is in place? Of course
not. The rocket is monitored constantly, and its course is
regulated and adjusted as needed to get the satellite to
its destination.
The control function includes three steps. The
first is setting standards with which performance can
be compared. The second is measuring actual performance and comparing it with the standard. The third is
taking corrective action as necessary. Notice that the
control function is circular in nature. The steps in the
control function must be repeated periodically until
the goal is achieved. For example, suppose that WestJet
Airlines establishes a goal of increasing profits by 12%.
To ensure that this goal is reached, WestJet’s management might monitor its profit on a monthly basis. After
three months, if profit has increased by 3%, management might be able to assume that plans are going
according to schedule. In this case, it is likely that no
action will be taken. However, if after three months
profit has increased by only 1%, some corrective action
is needed to get the business on track. The particular
action that is required depends on the reason for the
small increase in profit.
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Leading is the process of guiding others toward the
achievement of organizational goals, while motivating
The control function is circular in nature.
Companies like WestJet Airlines might
first set standards of performance, then
measure actual performance, and take
corrective action as needed.
6-2
KEY TAKEAWAY
The four functions of management are planning, organizing, leading and motivating, and controlling. Managers
who perform these functions well are extremely valuable
to an organization because they help the organization
meet its objectives effectively and efficiently.
6-3
SWOT ANALYSIS
6-2 Discuss the
strategic
factors of an
organization
and classify the
factors using
SWOT analysis.
Part of the strategic planning process for top
management is to properly assess where the
company is strongest and
most capable, and where
it might be vulnerable. A
great tool for this assessment is SWOT analysis,
which is used for identifying and evaluating a
leading the process of guiding
others toward the achievement of
organizational goals
motivating the process of
providing reasons for people to
work in the best interests of an
organization
directing the combined
processes of leading and
motivating
controlling measuring
results against goals and making
corrections when needed
SWOT analysis a tool for
identifying and evaluating a
business’s strengths, weaknesses,
opportunities, and threats. It can be
used during the strategic planning
process to set goals and objectives
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business’s strengths, weaknesses, opportunities, and threats. SWOT is the identification of:
●●
EXHIBIT 6.1
ASSESSING STRATEGIC FACTORS USING SWOT
Strengths. Internal capabilities and core
competencies that give the company
an advantage over its competitors.
Strengths are positive for the company.
●●
●●
Weaknesses. Internal limitations a
company faces in developing or implementing plans. Weaknesses are potentially negative for the company.
Opportunities. External conditions in
the business environment that could
produce rewards for the company if
properly pursued. Opportunities are
potentially positive for the company.
Threats. External conditions or barriers
in the business environment that could
prevent the company from reaching its
objectives. Threats are potentially negative for the company.
When top managers complete a SWOT analysis,
they can better set goals and objectives for capitalizing
on their strengths and opportunities. In addition, they
can set goals for minimizing the business’s weaknesses
and protecting it from threats.
© Cengage Learning
●●
In addition, creating a SWOT analysis sometimes directly results in the identification of key goals and strategies. Here are a few examples:
●●
●●
6-3a
Assessing Strategic Factors
Using SWOT
SWOT is an excellent analysis tool because it helps top
managers brainstorm and categorize a variety of factors
that will either help or hinder the company. It forces
them to look both inside the company and outside the
company, and to consider both the positive and the negative. One method for completing a SWOT analysis is to
select a single element—for example, strengths—and
brainstorm about that element until all relevant strategic
factors have been identified. Then repeat for each of the
other three elements. Another method is to brainstorm
any and all strategic factors that will affect the business,
and then categorize them as strengths, weaknesses,
opportunities, or threats as the factors are identified.
Exhibit 6.1 shows examples of the types of strategic factors a company might identify for each element of SWOT.
An added benefit of
core competencies
using SWOT is that each
approaches and processes that
element of the analysis can
a company performs well that
better help an organization
may give it an advantage over its
competitors
assess the other elements.
92 LESSON 6:
Understanding the Management Process
●●
●●
Identifying strengths can help identify opportunities.
Identifying weaknesses that can easily be fixed may
reveal opportunities.
Identifying weaknesses can help define threats.
Identifying strengths can lead to strategies for avoid­ing
threats.
6-4
KEY TAKEAWAY
SWOT is an analysis tool that can be used during the
strategic planning process to set goals and objectives
for an organization. SWOT involves assessing the
strengths, weaknesses, opportunities, and threats for
the company.
6-5
TYPES OF MANAGERS
6-3 Identify the various levels
of management.
As an organization grows it needs an increasing number
of managers. Those managers need to be organized
in a way that best helps the organization achieve the
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goals identified in the planning stage. Managers can be
classified in two ways:
●●
According to their level within an organization
●●
According to their area of management
In this section, we use both perspectives to learn
about the various types of managers.
6-5a
Levels of Management
For the moment, think of an organization as a threestorey structure. Each storey corresponds to one of the
three general levels of management: top managers,
middle managers, and front-line managers.
Top Management: A top manager is an upper-level
executive who guides and controls an organization’s
overall resources. Top managers constitute a small
group. In terms of planning, they are generally responsible for developing the organization’s mission. They also
determine the business’s strategy. It takes years of hard
work, long hours, and perseverance, as well as talent and
no small share of good luck, to reach the ranks of top
management in large companies. Common job titles
associated with top managers are chief executive officer
(CEO), chief operating officer (COO), and chief marketing officer (CMO).
Middle Management: Middle managers probably
make up the largest group of managers in most organizations. A middle manager is a manager who implements the strategy and major policies developed by top
management. Middle managers develop tactical plans
and operational plans, and they coordinate and supervise the activities of front-line managers. Titles at the
middle-management level include division manager,
department head, plant manager, operations manager,
and marketing manager.
Front-Line Management: A front-line manager is a
manager who coordinates and supervises the activities of
operating employees (those with no employees reporting
to them). Front-line managers spend most of their time
working with and motivating their employees, answering
questions, and solving day-to-day problems.
Most front-line managers are former operating
employees who, owing to their hard work and potential, were promoted into management. Many of today’s
middle and top managers began their careers on this first
management level. Common titles for front-line managers include office manager, supervisor, team manager,
site supervisor, and area supervisor.
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6-5b
Areas of Management Specialization
Organizational structure can also be divided into areas
of management specialization. The most common
areas are finance, operations, marketing, and human
resources. These are commonly called functional areas
because they are groups of employees who specialize
in a particular business function. The following feature
describes specialized types of managers who might work
within functional areas, including finance managers,
operations managers, marketing managers,
human resources managers, and administrative
managers.
6-5c
Non-traditional Management Roles
It is important to note that these management levels and
areas are traditional ways of classifying management. In
some cases, managers are squeezed into multiple roles
or are reorganized into different roles every few years.
This is especially true at
top manager an upper-level
the middle- and front-line
executive who guides and controls
management levels.
an organization’s overall fortunes
In addition, some organ­­­
middle manager a manager
izations do not organ­
ize
who implements the strategy and
employees according to
major policies developed by top
management
traditional
functional
areas such as operations,
front-line manager a
marketing, and human
manager who coordinates and
supervises the activities of
resources. Rather, they
operating employees (those with
organize employees into
no employees reporting to them)
project and product teams
finance manager primarily
that work on specific initiaresponsible for an organization’s
tives for the company.
financial resources
In these cases, identifying
operations manager
the level and area of a
manages the systems that convert
particular manager may
resources into goods and services
be difficult. For example,
marketing manager
at clothing manufacturer
responsible for facilitating the
Gore, makers of Gore-Tex,
exchange of products between
there are no traditional
an organization and its customers
or clients
managers or organizational
charts, even though it is a
human resources
$3 billion company with
manager charged with
managing an organization’s human
10,000 employees worldresources programs
wide.3 Many companies see
non-traditional manageadministrative manager a
manager who is not associated
ment structures as a key
with any specific functional area
to empowering employees
but provides overall administrative
and staying responsive to
guidance and leadership
market needs.
LESSON 6: Understanding the Management Process 93
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Areas of Management Specialization
To help visualize the roles and relationships among
people in a business, an organizational chart is used.
An organizational chart is a diagram that represents
the positions and relationships of the people within
an organization.
Finance: A finance manager is primarily responsible for an organization’s financial resources.
Accounting and investment are specialized areas
within financial management. Because financing
affects the operation of the entire business, many
of the CEOs of Canada’s largest companies are
people who got their “basic training” as finance
managers.
Operations: An operations manager, the person
charged with managing and supervising the
conversion process, plays a vital role in today’s
business. He or she often controls about threefourths of a company’s assets (e.g., inventories,
machinery, and building facilities) and makes
decisions that affect wages and benefits. He or
she works closely with other major functions
of the company, such as marketing, finance,
accounting, and human resources, to help ensure
that the company produces its goods and provides
its services profitably, and continually satisfies
customers. The operations manager faces the
challenge of combining people and other resources
to produce high-quality goods and services in
a timely manner and at a reasonable cost, and
becomes involved with the development and
design of goods and determines what production
processes will be most effective. Traditionally,
operations management has been equated
with manufacturing—the production of goods.
However, in recent years, many of the techniques
and procedures of operations management have
been applied to the production of services and to a
variety of non-business activities. As with financial
management, operations management has
produced a large percentage of today’s
company CEOs.
Marketing: A marketing manager is responsible
for facilitating the exchange of goods and services
94 LESSON 6:
Understanding the Management Process
between an organization and its customers or
clients. Specific areas within marketing are marketing research, product management, advertising, promotion, sales, and distribution. A sizable
number of today’s CEOs have risen from the ranks
of marketing management.
Human Resources: A human resources manager is
charged with managing an organization’s human
resources programs. He or she engages in human
resources planning; designs systems for hiring,
training, and evaluating the performance of
employees; and ensures that the organization follows government regulations concerning employment practices. More of the workforce today
has grown up with technology than ever before,
and business must respond to these changes.
Technology is incorporated into every aspect of
business, including the management of people.
Whether it is tracking the talent of the employees
or the objectives met, technology plays an
important role in management. An important use
of technology in human resources is the strategic
alignment of the human resources with the business. This includes identifying the best people for
various responsibilities, engaging the employees
in the decision-making process, providing social
connections (internal and external), and so on.
Business is moving to cloud-based technology,
and it is increasingly important in the management of human resources, as well as in business in
general. Cloud-based technology allows access to
information by any authorized people, regardless
of their location.
Administrative: An administrative manager is
not associated with any specific functional area,
but provides overall administrative guidance and
leadership. A hospital administrator is an example
of an administrative manager. He or she does
not specialize in operations, finance, marketing,
or human resources management but instead
coordinates the activities of specialized managers
in all of these areas. In many respects, many top
managers are really administrative managers.
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6-6
KEY TAKEAWAY
Managers are classified by their level and area of specialization in the organization. The nature of a manager’s
job is directly related to his or her level and area of specialization. Classification of managers in this way is an
example of the organizing function of management.
6-7
KEY SKILLS OF SUCCESSFUL
MANAGERS
6-4 Characterize how the required mix
of skills changes for managers at
different levels.
Managers who can effectively plan, organize, lead,
and control are extremely valuable to an organization.
The three key skills a manager needs to perform these
functions are conceptual skills, technical skills,
and interpersonal skills. Although a single manager
might possess some of the skills described above, rarely
does one person excel in all types of managerial skills.
Every business needs a leader, but in today’s marketplace
things move too quickly, the need for specialization is
too great, and competition is too fierce for a one-person
show to survive.
Conceptual skills—seeing how it all fits together.
Conceptual skills allow a manager to see the “big picture”
and understand how the various parts of an organization
or idea can fit together. Conceptual skills provide the basis
for thorough analysis and effective decision making. For
example, Jim Whitehurst of Red Hat, a technology company, strongly believes in the advantage offered by conceptual thinkers. He believes that managers should solicit
creative ideas from all levels of the organization in order to
help them conceptualize clearly, which in turn helps them
make decisions that benefit the whole organization.
Technical skills—skills to perform a specific job.
Specific skills are needed to accomplish specialized activities. For example, the skills that engineers and machinists need to do their jobs are technical skills. Front-line
managers (and, to a lesser extent, middle managers) need
the technical skills relevant to the activities they manage.
Although these managers may not perform the technical
tasks themselves, they must be able to train employees,
answer questions, and otherwise provide guidance and
direction. In general, top managers do not rely on technical skills as heavily as managers at other levels. Still,
understanding the technical side of a business contributes to effective management at every level.
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Interpersonal skills—communicating and working
well with others. Interpersonal skills are the ability to deal
effectively with other people, both inside and outside an
organization. Examples of interpersonal skills are the ability
to relate to people, understand their needs and motives,
and show genuine compassion. It also involves effective
written and verbal communication. Howard Schultz,
founder of Starbucks, used his knowledge of interpersonal
communication to save the company during a downturn
in business several years ago. Schultz quickly shut down
800 poorly performing stores, laid off 4,000 employees,
retrained staff, modernized technology, and improved
operations. Despite these drastic changes, employees
remained loyal to the company and helped Starbucks
return to strong, profitable growth in the last few years.
6-7a
The Mix of Skills Required for
Effective Management
While all managers need conceptual, technical, and interpersonal skills to be effective, they do not need them in
the same amounts. The mix of skills required for top
management is different than it is for front-line managers.
The mix of skills required for effective management
is based on the level of the manager. Top managers such
as CEOs and VPs are responsible for creating the overall
goals for an organization and creating a strategic plan for
implementing them. This requires very strong conceptual
skills. Top managers must effectively communicate these
goals and plans to the rest of the organization, as well
as lead and motivate the organization. This also requires
very strong interpersonal skills. Since top management
does not perform most of the specific tasks for carrying
out the strategic plan, technical skills are not as important
for them. However, in order to create realistic goals and
plans, top managers need at least some knowledge of the
technical skills required in
their organization.
conceptual skills the
ability to see the “big picture” and
Middle
managers
understand how the various parts
must balance the needs
of an organization or idea can fit
of top management with
together
the needs of their first-line
technical skills specific skills
managers. Middle manneeded to accomplish a specialized
agers must understand
activity
the strategic plan handed
interpersonal skills dealing
down by top management
effectively with other people both
and create the appropriate
inside and outside an organization;
operational plans to exeexamples include the ability to
relate to people, understand their
cute the strategy. They
needs and motives, and show
then have to communicate
genuine compassion
these plans to their firstline managers and help
LESSON 6: Understanding the Management Process 95
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implement the plans. This requires a balanced mix of
conceptual, technical, and interpersonal skills.
First-line managers must lead and motivate their
employees to do the specific tasks required to meet the
needs of the operational plans. Since they are not as
involved in strategic and long-range planning, most firstline managers do not need to utilize as many conceptual
skills. Similar to all levels of management, their interpersonal skills must be strong if they hope to effectively
lead and motivate their teams. First-line managers must
have a high level of technical skill in order to assist their
employees, and sometimes they must also step in and
perform those technical tasks themselves.
6-8
control while directing employees to do what was asked.
The leader’s job was to inspire and motivate.
Leadership is intricately connected to management,
but they are not the same thing—leadership implies a
relationship between a leader and those who will follow
because they want real changes and outcomes that
reflect their shared purposes. Not all managers are good
leaders, but they can to learn to be. Gaining employee
commitment is critical to a company’s success. Therefore, to succeed, managers cannot be concerned solely
with managing the tasks (getting the job done); they
must also be concerned with leading people (gaining
commitment toward shared goals). Leadership requires
having a vision of the future and developing strategies
for producing the changes needed to reach that vision.
There are three primary styles of leadership: autocratic leadership, participative leadership, and
laissez-faire leadership. For many years, leadership
was viewed as a combination of personality traits, such
as self-confidence, concern for people, intelligence, and
dependability. Achieving a consensus on which traits
were most important was difficult, however, so attention
turned to styles of leadership behaviour. In recent years,
several styles of leadership have emerged, including
autocratic, participative, and laissez-faire. Some organizational leaders tend to use one style only, and some flex
their style based on the situation. Each leadership style
has advantages and disadvantages. The following table
provides descriptions of each style.
KEY TAKEAWAY
Three important skills required for effective management are conceptual, technical, and interpersonal skills.
The optimal mix of skills required depends on the level
of the manager.
6-9
STYLES OF LEADERSHIP
6-5 Explain the different leadership styles.
Leadership is the relationship between a leader and
the followers who want real changes, resulting in outcomes that reflect their shared purposes. Historically, it
was considered the manager’s job to plan, organize, and
Autocratic Leadership: Very task-oriented. Decisions are made confidently, with little concern about employee opinions. Employees are told exactly what is
expected and given specific guidelines, rules, and regulations.
Advantages:
Disadvantages:
●
Fast decisions (come from the top)
●
Risk of low morale (employees do not buy in to the company vision)
●
Unified and consistent vision (fewer people involved in setting the vision)
●
Can stifle creativity (team’s ideas not fully utilized)
Participative Leadership: Common in today’s organizations. Participative leaders consult workers before making decisions, helping workers understand which
goals are important and fostering a sense of ownership and commitment to reach those goals. Consultative leaders discuss issues with workers but retain final authority for
decision making. Consensus leaders seek input from almost all workers and make final decisions based on their support. Democratic leaders give final authority to the group,
collecting opinions and basing their decisions on the group’s vote. Communication is active upward and downward in participative organizations. Coaching, collaborating,
and negotiating are important skills.
Advantages:
Disadvantages:
●
Helps team understand goals (they participate in setting them)
●
●
Increased commitment from team (they feel accountable to the outcome)
●
Decisions take longer (more people involved)
Team may react poorly when input is not accepted (e.g., an urgent decision must be
made, or a struggling team needs direction)
Laissez-Faire Leadership: Hands-off approach. The leader provides a basic vision and necessary resources for the team, then mainly acts as an adviser. Fairly rare
for top management of larger organizations; more often found among project teams of highly skilled technicians. For example, a hospital administrator might empower the
design of a new surgery room to a team of doctors and nurses.
Advantages:
Disadvantages:
●
Uses the full talents of skilled technicians (lets them take ownership of project)
●
Leaders can lose control of the process (unable to detect when the team is off track)
●
Reduces number of managers (less time spent overseeing each team)
●
Morale can drop (if the team does not feel adequately supported by management)
96 LESSON 6:
Understanding the Management Process
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6-10
KEY TAKEAWAY
The three primary styles of leadership are autocratic,
participative, and laissez-faire. Each style has advantages
and disadvantages and should be chosen based on the
organization and situation.
6-11
ANAGERIAL DECISION
M
MAKING
6-6 List the four steps of the managerial
decision-making process.
Decision making is the act of choosing one alternative from a set of alternatives. The ability to evaluate
and make decisions is often related to a manager’s conceptual skills, which we identified earlier as one of the
key skills for management success. In ordinary situations, decisions are made casually and informally. We
encounter a problem, think it over, determine a solution, and go on. Managers, however, require a more
systematic method for solving complex problems.
Managerial decision making involves four steps (see
Figure 6.1).
Decision-making skills are necessary for managers
at all levels of an organization and are relevant to all
four management functions. For example, top managers
might need to decide between strategic alternatives
during the planning process. At the same time, a frontline manager might use decision-making skills to solve
a technical problem or resolve conflict within the team.
The following text describes the steps in the managerial
decision-making process.
First, an issue (problem or opportunity) must be
accurately identified. Sometimes managers’ preconceptions of the problem prevent them from seeing the true
problem, and they overlook significant issues by focusing
on less important matters. Also, managers may mistakenly analyze problems in terms of symptoms rather
than underlying causes.
Second, alternatives are generated. The more
important the decision, the more attention must be
FIGURE 6.1
6-11a
Making
Quality
Decisions
When facing important de­­
cisions, managers should
keep three objectives in
mind.
Correctly identify the
problem: Often, a symp­tom
can be misdiagnosed as a
problem. Declining production at a factory is a
symptom; a machine that
is working improperly
might be the problem.
Or understaffing of that
machine might be the
problem. A quality-control
between a leader and the followers
who want real changes, resulting in
outcomes that reflect their shared
purposes
autocratic leadership
a style of leadership where
the leader makes decisions and
the employees are expected to
execute the decisions exactly as
directed
participative leadership a
style of leadership where the
leader consults employees before
making decisions
laissez-faire leadership a
style of leadership where the leader
provides a basic vision and the
necessary resources for the team,
and then mainly acts as an adviser
decision making the act of
choosing one alternative from a set
of alternatives
THE FOUR STEPS IN THE DECISION-MAKING PROCESS
Identifying the problem
or opportunity
NEL
devoted to this stage. Techniques that can help generate creative alternatives include brainstorming and
trial and error. Final decisions are influenced by a
number of considerations, including financial constraints, human resources, time limits, legal obstacles,
and political factors.
Third, managers must select the alternative that will
be most effective and practical. Sometimes two or more
alternatives or some combination of alternatives will
be appropriate. When managers lack time or information, they might make decisions that satisfy, or are only
adequate rather than ideal.
Once a decision has been made and an alternative
selected, implementation requires time, planning, and
people to implement the plan and evaluate the results.
There are usually unforeseen consequences to deal
with even when managers have carefully considered the
alternatives. After a decision has been made, its effectiveness must be evaluated. In the case of a problem, if it still
exists, managers may decide to give the chosen alternative
more time to work, choose a different alternative, or start
the problem identification
leadership the relationship
process all over again.
Generating alternatives
Selecting an alternative
Implementing and
evaluating the solution
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technique used to find the root cause of an issue is called
the “5 whys” technique. Team members try to identify a
problem, then ask why that problem happened. They do
that five times, with the hope that they will arrive at the
true root cause.
It is also important to ensure that the entire team
has defined the problem in the same way before moving
to the next step of the decision-making process. This
issue is illustrated in a story told by creativity consultant
Roger Von Oech.4
Before generating alternative solutions, the team
must be sure they have properly identified the true
problem.
Use creativity: Several major business magazines such
as Forbes and Maclean’s publish an annual issue celebrating the world’s most innovative companies. A central theme of modern business strategy revolves around
coming up with the newest and best ideas. The same
is true for managerial decision making. A manager will
arrive at the best decision when he or she is open to
innovative solutions (as well as obvious answers) to a
problem. This requires creativity. A critical flaw in
the process of generating alternatives is either stifling new ideas or “satisficing,” which is to go with the
first alternative that meets the minimum threshold for
solving the problem. Doing so increases the possibility
that a much better solution was left unexamined. In a
particularly helpful brainstorming technique called
LESSON SUMMARY
LO 6-1
Summarize the four basic management
functions.
The four functions of management are:
●
●
●
●
Planning: establishing organizational goals and deciding how to
accomplish them
Organizing: grouping resources and activities to accomplish
some end result in an efficient and effective manner
Leading and motivating: influencing people to work toward a
common goal and providing reasons for people to work in the
best interests of an organization
Controlling: Monitoring and evaluating ongoing activities to
ensure that goals are achieved
98 LESSON 6:
Understanding the Management Process
nominal grouping, the problem is shared with team
members, who then are given time to individually write
down possible solutions. Each member shares his or her
ideas with the group. Finally, ideas are voted on and
ranked in order of preference. Nominal grouping typically generates more new ideas than traditional group
brainstorming techniques.
Use structured analysis to evaluate alternatives:
While some decisions may be small and have somewhat
obvious answers, more important decisions require careful
analysis. Final decisions are influenced by a number
of considerations, including financial constraints, time
limits, and resource availability. In cases where a manager
must evaluate several criteria when making a decision, it
can be useful to structure the decision by evaluating the
alternatives against each important criterion.
6-12
KEY TAKEAWAY
Managers often face complex problems that require
a systematic method for finding solutions. The steps
in the decision-making process are to identify the
problem, generate alternatives, select an alternative,
and implement the solution. During the decision process, managers should be sure to correctly identify the
problem, utilize creativity, and structure their selection
of alternatives.
Managers who perform these functions well are extremely valuable to an organization because they help the organization meet its
objectives effectively and efficiently.
LO 6-2
Discuss the strategic factors of an
organization and classify the factors using
SWOT analysis.
Part of the strategic planning process for top management is to
properly assess where the company is strongest and most capable,
and where it might be vulnerable. A great tool for this assessment
is SWOT analysis, the identification of strengths, weaknesses,
opportunities, and threats for the company.
LO 6-3 Identify the various levels of management.
As an organization grows it needs an increasing number of managers.
Those managers will need to be organized in a way that best helps the
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organization achieve the objectives identified in the planning stage.
Managers are traditionally classified by their level and the area of
specialization. The nature of a manager’s job will be directly related to
these classifications.
LO 6-4
Characterize how the required mix of
skills changes for managers at different levels.
Managers who can effectively plan, organize, lead, and control are
extremely valuable to an organization. The three key skills a manager
needs to perform these functions are:
●
Conceptual skills: seeing how it all fits together
●
Technical skills: skills to perform a specific job
●
Interpersonal skills: communicating and working well with others
The optimal mix of skills required depends on the level of the manager.
LO 6-5
Explain the different leadership styles.
Leadership is the ability to influence others to work toward a common
goal. Three common leadership styles are autocratic, participative, and
laissez-faire. Some organizational leaders tend to use one style only,
and some flex their style based on the situation. Each leadership style
has advantages and disadvantages.
LO 6-6
List the four steps of the managerial
decision-making process.
Managers often face complex problems that require a systematic
method for finding solutions. The steps in the decision-making process are to identify the problem or opportunity, generate alternatives,
select an alternative, and implement the solution. During the decision
process managers should be sure to correctly identify the problem, use
creativity, and structure their selection of alternatives.
3. Differentiate among leading, motivating, and directing.
4. Discuss the steps of the control function.
5. What is a SWOT analysis? What part of the analysis relates to the
internal environment? the external environment?
6. How are managers classified? What are the different levels of
management?
7. What are three key skills a manager must possess? Explain each.
8. Define leadership. How does it differ from management?
9. Describe the three primary styles of leadership.
10. What are the four steps in managerial decision making?
KEY TERMS
administrative manager, p. 93
autocratic leadership, p. 96
conceptual skills, p. 95
controlling, p. 91
core competencies, p. 92
decision making, p. 97
directing, p. 91
finance manager, p. 93
front-line manager, p. 93
human resources manager, p. 93
interpersonal skills, p. 95
EXERCISES
Use the Internet, magazines, newspapers, books,
and personal experiences to complete the following
exercises.
1. Choose a company and conduct research on its internal factors
(i.e., financial, operations, marketing, and human resources).
What are some of the strengths and weakness of each?
laissez-faire leadership, p. 96
leadership, p. 96
leading, p. 91
management, p. 89
marketing manager, p. 93
middle manager, p. 93
mission statement, p. 90
motivating, p. 91
2. Using the same company as in question #1, look at the external
environment (i.e., political, legal and regulatory, economic, social,
and technical). What are some of the opportunities and threats
that the external environment presents?
operations manager, p. 93
3. Look at various companies’ websites and study their vision and
mission statements. What do these tell you about the companies?
planning, p. 89
4. Think of a manager or leader you have interacted with in the past.
How would you describe their leadership style? Was it effective?
5. How would you describe your leadership style?
REVIEW QUESTIONS
organizing, p. 90
participative leadership, p. 96
strategic planning process, p. 90
SWOT analysis, p. 91
technical skills, p. 95
top managers, p. 93
vision statement, p. 89
1. List and describe the four functions of management.
2. What are the various types of plans an organization may
develop? Explain each.
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LESSON 6: Understanding the Management Process 99
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SWOT ARE YOU DOING?
Strengths are:
Internal
Weaknesses are:
Internal
Within control of the firm
Within control of the firm
Positive aspects of the firm
Negative aspects of the firm
Opportunities are:
External
Threats are:
External
Not directly within
control of the firm
Not directly within
control of the firm
External environment,
trends that could provide
an opportunity
External environment,
trends that could pose a
threat
NOT options for the
company
100 LESSON 6:
Understanding the Management Process
From GAUDET/BOIVIN. MindTap for Marketing, 1E. © 2018 Nelson Education Ltd. Reproduced by permission.
www.cengage.com/permissions
Four letters make up an acronym that often sends chills down the spine of
students in business education: SWOT. The acronym stands for strengths,
weaknesses, opportunities, and threats, and the SWOT analysis forms the
basis of most case analyses in business education.
The SWOT is credited (blamed?) to a management consultant named
Albert Humphrey, who created the SWOT analysis during his studies of
Fortune 500 companies during the 1960s. It was designed to help companies
assess their current situation, based both on internal and external factors.
Strengths and weaknesses are internal factors that are within the control
of an organization. They can relate to any business processes that a company
faces at a given time. This could include financial, accounting, marketing,
human resources, and operations, to name a few. Any actions taken by a company can be scrutinized as either a strength or a weakness.
Opportunities and threats are external to a business, and involve the
external environment surrounding the organization. These can be in the areas
of demographic, social, political, legal, economic, or myriad other factors that
exist in the external environment. In almost every SWOT analysis competition
is an external factor to be assessed, and it is important to look at the competitive factors that play a role in the industry of focus.
And while this analysis seems straightforward, there is a constant struggle for
students to apply the model properly. Students are often tasked with completing
a SWOT and create their 2×2 matrix, which would look something like this:
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It is not that students struggle with populating each of the four quadrants; rather, there often are misconceptions on how to properly apply the
SWOT. The biggest issue in a SWOT involves opportunities. Often students
will place into this quadrant the actions or activities a company could undertake in the external environment. However, this does not represent a proper
opportunity. Opportunities are external to a company’s control, external
trends and forces that any business in an industry will have to manage and
potentially take advantage of.
The applies to threats, where students will sometimes write in negative
factors specifically relating to a company. Threats and opportunities must
be written in a way that are entirely external, and not relating to any one
company.
The main reason for this relates to how the SWOT is correctly applied. A
SWOT analysis is a strategic and powerful business tool if properly completed
and used. Connections are sought between the internal and external factors in
a SWOT. For example, a company might be highly skilled at social media and
received numerous awards. This internal factor could match with an external
trend toward consumers seeking out reviews of products in an industry
through websites and social media. Matching these two factors, it is clear that
the company could take advantage of an opportunity with its own strength.
And, of course, other matches can be had in a SWOT analysis. A company’s weakness could be matched with a threat in the industry, thus giving
the company pause to carry forward in a particular area. The company
could also decide after such a result from a SWOT analysis to work toward
mitigating or minimizing that particular weakness given the external threat
that is present.
Matching can also be done with strengths and threats, and weaknesses
and opportunities. It will often depend on whether the internal or external
factor is stronger as to how a company should proceed. This process is often
referred to as a feasibility analysis and can be used in developing a strategic
direction for the business.
Given that you have already completed a SWOT analysis in class about
Apple (see your course notes), you can now apply the knowledge you
have from this case by going back to that SWOT and making any necessary
changes. Take the next step and perform a feasibility analysis on one internal
and one external factor that seem to match up. What does this process tell
you? Likely, that a SWOT is nothing to fear and something worth knowing
how to do well.
Case Sources: https://www.economist.com/node/14301503; Gaudet/Boivin, MindTap for Marketing, 1st edition;
https://www.lawyers.com/legal-info/business-law/business-planning/feasibility-study-and-swot-for-your-new
-business.html.
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LESSON 6: Understanding the Management Process 101
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7 Creating
a Flexible
Organization
LEARNING OBJECTIVES
Once you complete this lesson, you will be able to:
7-1 Summarize four objectives to consider when organizing
7-5 Identify the advantages and disadvantages of wide and
narrow spans of management.
7-2 Differentiate between efficiency and empowerment in job
design.
kevin brine/Shutterstock.com
a business.
7-6 Distinguish among different types of organization
structures.
7-3 Identify the common types of departmentalization in an
organization.
7-7 Explain the relationship between organization design and
an organization’s culture.
7-4 Understand how centralization and decentralization affect
efficiency, control, responsiveness, and empowerment.
I NTRODUCTION
To survive and grow, companies must constantly improve
their methods of doing business. The way a company is
organized influences its performance. In this lesson, we
will examine how businesses organize—and reorganize—
to achieve their goals and foster long-term customer
relationships.
7-1
O BJECTIVES TO CONSIDER
WHEN ORGANIZING A BUSINESS
7-1 Summarize four objectives to consider
when organizing a business.
From the moment a business opens its doors, it must
consider how best to organize itself. The organization’s
strategy and structure must be in line. Consider the
case of Procter & Gamble (P&G). P&G made changes
to its organizational structure to better reach its goal
of faster product innovation and increased flexibility
and response time. This goal came in reaction to today’s
rapidly changing business environment, which demands
that businesses act more quickly to meet both competitive threats and changing customer needs. Innovation,
102 LESSON 7:
Creating a Flexible Organization
we know, is a critical success factor, and P&G needed
to be a step ahead of the competition. To achieve this
goal, it shifted from a geographically based structure
to a structure based on products. It also introduced a
new compensation system to encourage innovation.
This example demonstrates how integrative strategy
and structure are. To meet its goals, a business needs
to have the structure to follow through on its plans. We
can see in this case that the strategic plan fits with the
environment, that the organizational structure fits with
the strategic plan, and that the tactical plan, for compensation in the case of P&G, was changed to fit with
the strategic plan as well.
When an organization is developing its structure,
it must identify what work needs to be done. Then
it must identify who is going to do that work. If an
organization has only two or three people, this can be
easy. However, as the organization grows, more work
needs to be done and more people need to be hired.
Now the owners must consider how to best group
their employees, and determine to whom they should
report, so that the organization can deliver products
customers want, when they want them. This process,
called organization design, has a direct impact on
how well a company can achieve its goals. An organization can be staffed with highly skilled and motivated
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professionals and still fail if it is poorly designed. This
lesson will examine a variety of different considerations for organization design, but we will start with four
common objectives companies evaluate when building
their organization:
●●
Efficiency
●●
Control
●●
Responsiveness
●●
Empowerment
would rather focus on empowering employees. Let us
take a closer look at each of these objectives.
7-1a
Efficiency is the ability to complete a task using the minimum amount of resources. Some organizations must be
efficient to keep costs low, but others have higher priorities such as safety or accuracy.
For example, at McDonald’s employees must
deliver orders quickly and with little waste. Wasted
time and materials eat away at profits—efficiency is
a high priority. In contrast, at a hospital efficiency is
not the highest priority, but safety and effectiveness
are. This is why multiple
staff oversee the process,
organization design
an organizational structure that
from surgery preparation
results from decisions regarding
to recovery.
Companies do not all have the same objectives.
Based on their industry or customer base, one company
might have a high need for efficiency, while another
Andrey_Popov/Shutterstock.com
7-1b
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Efficiency
Control
job design, departmentalization,
centralization of authority, and
span of management
Control is the ability
efficiency the ability to
to make decisions and
specify how those decisions will be carried out.
Some businesses require
that managers retain a
control the ability to make
complete a task using a minimum
amount of resources
decisions and specify how those
decisions will be carried out
LESSON 7: Creating a Flexible Organization
103
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7-1d
Different organizations prioritize control
differently. At accounting and auditing
company KPMG, employees must follow
strict and consistent standards when
working with clients—control is a high
priority. In contrast, because of its creative
and global nature, television network
MuchMusic allows its creative groups wide
latitude on how to best execute projects—
control is a low priority.
high level of control for quality or even legal reasons,
while other businesses find that high levels of control
can stifle creativity.
7-1c
Responsiveness
Responsiveness is the speed at which the organization can improve its products in response to customer
feedback, employee suggestions, or competitive pressures. This is not to be confused with good customer
service or delivery turnaround times. Responsiveness
involves the company’s overall ability to be flexible and
innovative in today’s market. Some companies depend
on constant innovation to create new products, which
retain customer loyalty, while others focus on producing the same products but at larger volumes, lower
costs, and higher quality. Whether a company puts
a priority on responsiveness usually depends on its
industry.
For example, Samsung
upgrades its phones multiple
responsiveness the speed
times per year to keep pace
at which an organization can
improve its products in response
with competition—responto customer feedback, employee
siveness is a high priority.
suggestions, or competitive
In contrast, C&H has been
pressures
refining and packaging the
empowerment the degree
same cane sugar products for
to which employees can make
almost 100 years—respondecisions on their own
siveness is a low priority.
104 LESSON 7:
Creating a Flexible Organization
Empowerment
Empowerment is the degree to which employees
can make decisions on their own. Empowering
employees, individually or as a team, has seen many
positive results. Some of the outcomes of empowerment are increased productivity, better quality,
and improved cost management, all very important
especially in an increasing global competitive
marketplace. 1
These decisions might be related to solving a
customer-service situation, refining a production
process, or hiring and releasing employees. Higher
levels of empowerment often result in higher
employee morale and a more creative work environment. On the other hand, high levels of empowerment
can create inefficiencies and reduce management
control.
One example is at Chrysler’s pickup truck
assembly plant in Saltillo, Mexico, where self-directed
work teams comprising 10 to 12 employees take on
a set of tasks and tools, including specified maintenance, quality control, and productivity and safety
jobs. Team members rotate among different tasks
every few hours and are encouraged to find ways to
cut time and wasted effort. Those whose jobs become
redundant as a result are reassigned. Production has
increased to about 38 vehicles an hour from 30, all
without additional hiring or overtime.2 An extreme
version of self-managing teams can be found at W.L.
Gore, the company that invented Gore-Tex fabric and
Glide dental floss. The three employees who invented
Elixir guitar strings contributed their spare time to
the effort and persuaded a handful of colleagues to
help them improve the design. After working for three
years entirely on their own—without asking for any
supervisory or top management permission or being
subjected to any kind of oversight—the team finally
sought the support of the larger company, which they
needed to take the strings to market. Today, W.L.
Gore’s Elixir has a 35 percent market share in acoustic
guitar strings.3
A company that understands its objectives is more
likely to make sound decisions when building the organization structure. Since it is not always possible to predict how fast or in what direction a company will grow,
rarely will an organization maintain a single design
forever. However, keeping in mind the objectives of
organization design can help managers organize in a
way that meets the company’s needs through various
stages of growth.
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Prioritizing the Objectives
of Organization Design
IDEO is an innovation and design company that
works for many of the world’s top brands. Its goals
are creativity and cutting-edge design, and the
organization employs more than 600 people from
a diverse array of disciplines such as branding,
industrial design, and environmental science.
These employees work in teams to assist clients
on a variety of ever-changing design or branding
challenges. IDEO has offices in 10 locations around
the world. Based on the example, how would IDEO
likely prioritize each of the four objectives?
7-2
KEY TAKEAWAY
Four objectives to consider for organization design
are efficiency, control, responsiveness, and empowerment. Each company prioritizes these objectives differently based on their industry and customer base.
Evaluating these objectives can lead to better organization design.
7-3
JOB DESIGN
7-2 Differentiate between efficiency and
empowerment in job design.
As a business grows, the number of activities required
to operate it grows as well—sometimes at an accelerated rate. The next set of decisions in creating a flexible
organization is job design, which involves structuring
the tasks and activities required to accomplish a business’s objectives into specific jobs in order to foster
productivity and employee satisfaction. Job design can
seem simple for a very small business. An entrepreneur
who is hiring general help often simply asks, “Which
tasks do I want to delegate to the new employee?” Or an
entrepreneur might hire someone with specific expertise such as accounting, in which case the new employee’s tasks will be clear.
In a larger organization, though, activities can be
divided in many ways. Employees could be given jobs
NEL
Exxon is the largest publicly traded petroleum
and petrochemical company in the world. The
goal for most of its 125-year history has essentially
remained the same: find, extract, refine, and sell
petroleum products. Exxon operates in almost
every country in the world and strives to maintain
strong financial results through careful investment
and tightly managed operations. Based on the
example, how would Exxon likely prioritize each of
the four objectives?
that have a huge variety of tasks involving all aspects
of the business. Or they could be given a very limited
set of tasks that represent a small slice of the activities
required to run the business. Job design influences an
organization’s performance and affects other decisions
about how to design the organization.
Job specialization is the separation of organizational activities into distinct tasks, and the assignment of these distinct tasks to different people. An
example would be a highly specialized assembly
line where each worker does one small part of the
assembly. Job design starts by considering the level
of specialization desired for each employee. Adam
Smith, the 18th-century economist whose theories
gave rise to capitalism, was the first to emphasize
the power of specialization in his book The Wealth of
Nations. According to Smith, the various tasks in a particular sewing pin factory were arranged so that one
worker drew the wire for the pins, another straightened the wire, a third cut
job design structuring the
it, a fourth ground the
tasks and activities required
point, and a fifth attached
to accomplish a business’s
the head. Smith claimed
objectives into specific jobs so
as to foster productivity and
that 10 men were able to
employee satisfaction
produce 48,000 pins per
day. Before specialization,
job specialization the
separation of all organizational
they could produce only
activities into distinct tasks and
200 pins per day because
the assignment of different tasks
each worker had to perto different people
form all five tasks.
LESSON 7: Creating a Flexible Organization
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Job Variety
Jobs with a high degree of variety can keep
employees engaged and empowered. Job variety
keeps employee morale high because employees
see the results of their work and often have a sense
of ownership over their work processes. But jobs
with a high degree of variety can be inefficient.
Making the job more specialized increases efficiency
for a variety of reasons. Specialized jobs:
Seeing as specialization clearly increases output,
it would make sense to create highly specialized
jobs and give each employee just one or two distinct
tasks to do all day. This is not always true. A manager
should consider the trade-offs between job design and
employee satisfaction when deciding on the degree of
job specialization.
Some production-oriented work environments
simply lend themselves to high levels of job specialization, especially in industries where controlling cost is the
highest priority. To resolve the problems associated with
job specialization, managers often turn to job rotation,
which is the systematic shifting of employees from one
job to another. For example, a worker may be assigned a
different job every week for a four-week period and then
return to the first job in the fifth week. Intel, for instance,
offers an internal database of short-term assignments for
employees. Job rotation provides a variety of tasks so
that workers are less likely to become bored and dissatisfied. It can also help avoid repetitive-use injuries that
are sometimes an issue in highly specialized production
environments. While job rotation does not necessarily
increase the sense of empowerment employees have
over their work, it can help them stay interested in their
jobs, develop new skills, and identify new roles where
they may prefer to focus.
In industries that do not rely so heavily on highly specialized and efficient processes, managers of operating
employees increasingly try to design jobs that balance
specialization and variety. A
job rotation systematic
balanced job will be specialshifting of employees from one job
ized enough to realize certo another
tain efficiencies, but contain
departmentalization the
enough variety to keep
process of grouping jobs into
employees engaged and
manageable units
empowered in their work.
106 LESSON 7:
Creating a Flexible Organization
●●
●●
●●
●●
Are more efficient because employees develop
specialized skills for completing the task.
Are more efficient because they eliminate
employee changeover time from one operation
to the next.
Make it easier to modify production processes
without needing to retrain an entire staff.
Make initial job training easier.
7-4
KEY TAKEAWAY
Job design is structuring the tasks and activities required
to accomplish a business’s objectives into specific jobs
so as to foster productivity and employee satisfaction.
A main component of job design is deciding how specialized each job should be. Highly specialized jobs can
be more efficient. However, they can lead to employee
boredom and dissatisfaction due to the low level of
empowerment associated with the job. Job rotation can
help keep employees engaged in their work.
7-5
TYPES OF DEPARTMENTALIZATION
7-3 Identify the common types of depart-
mentalization in an organization.
After jobs are designed, they must be grouped into manageable units, or departments. This process is called
departmentalization. Today, the most common criteria for organizing a business into effective departments
STUDY TOOLS
Visit MindTap to watch videos on how different organizations
can structure their businesses.
Go to nelson.com/student to access the digital resources.
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In most cases, companies that departmentalize by
product, location, or customer ultimately departmentalize those various divisions by function as well.
7-6
KEY TAKEAWAY
Departmentalization is the grouping of jobs into manageable units based on the needs and priorities of the
organization. The common types of departmentalization
are by function, by product, by location, and by customer.
7-7
C ENTRALIZATION
AND DECENTRALIZATION
OF AUTHORITY
7-4 Understand how centralization and
decentralization affect efficiency, control,
responsiveness, and empowerment.
As soon as an organization begins hiring employees and
grouping them into departments, it is faced with a key
question: Who should be allowed to make decisions?
Should the organization have centralized authority,
where decisions are concentrated at the upper levels of
management? Or should it have decentralized authority,
where management consciously attempts to spread
authority widely across the staff? To an entrepreneur
who just opened a sole proprietorship, the decision
is simple: They make all the decisions and do all the
work. But at some point the entrepreneur realizes she
cannot do all of the work, so she hires employees. And
that introduces the concept of delegation. Delegation
is when a manager assigns
delegation assigning part of
some of his or her work to
a manager’s work and power to
someone else. Delegation
other workers
follows a general process:
Manager
1
Assign responsibility
2
Grant authority
3
Assign accountability
Worker
© Cengage Learning
are by function, by product, by location, and by customer. The following paragraphs discuss why companies
might choose a form of departmentalization, and the
advantages and disadvantages of each.
Departmentalization by function groups employees
who perform the same organizational activity. Under
this method, all marketing employees are grouped
together in the marketing department, all production employees in the production department, and
so on. Most smaller and newer organizations departmentalize by function. Supervision is simplified
because everyone is involved in the same activities,
which makes coordination easy. The disadvantages
of this method are that it can lead to slow decision
making and can lead to “silos,” where employees tend
to emphasize the needs of the department over the
needs of the whole organization.
Departmentalization by product groups employees
who work with a particular good or service sold by the
business. Larger businesses that produce and sell a variety of products often use this approach. Each department handles its own marketing, production, financial
management, and human resources activities. Departmentalization by product makes decision making easier
and can improve responsiveness to market needs. However, it creates inefficiency because of duplication of
some specialized activities such as finance and human
resources.
Departmentalization by location groups employees
according to the geographic area they serve. Departmental areas may range from whole countries (for
international businesses) to regions within countries (for national businesses) to areas of several city
blocks (for police departments organized into districts). Departmentalization by location can improve
responsiveness to the unique demands or requirements of different locations. The more distinct the
needs of customers in the different geographies, the
more useful departmentalization by location can be.
At the same time, departmentalization by location
creates inefficiency because of duplication of certain
activities.
Departmentalization by customer groups employees
according to the needs of various customer populations. A
local car dealership, for example, may have one sales staff
to deal with individual consumers, and a different sales
staff to work with corporate fleet buyers. The obvious
advantage of this approach is that it allows the business
to deal effectively with unique customer groups. The
biggest drawback is that it can be difficult to coordinate
resource needs such as inventory or administrative staff.
LESSON 7: Creating a Flexible Organization
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108 LESSON 7:
Creating a Flexible Organization
do not have much authority to set their own objectives or
design their own work processes.
An organization such as McDonald’s operates very
well with centralized authority, because its priorities are
to be efficient and maintain a strong, consistent image
throughout the organization. An organization such as
the military also operates well with centralized authority;
since it operates in a high-risk environment, centralized decisions ensure that consistent action is taken to
achieve the strategic objective.
Decentralization spreads authority to make decisions
throughout the organization. A decentralized organization
is usually less efficient because there is less coordination
between its various parts. And by definition management
has less control in a decentralized organization.
Decentralized organizations are usually more innovative and responsive to customer needs, because managers throughout the organization have the ability to
respond to customer feedback and employee input to
make improvements. As a result, employees typically
feel more empowered and engaged, because of the
authority they have been given to help the organization
reach its objectives. Organizations like GE and Disney
succeed with decentralization because the nature of
their businesses requires various business units around
the world to be innovative and responsive to the needs
of their markets.
Every organization must assess its situation and
choose the level of centralization or decentralization
that will work best. However, a company’s needs might
change over time. Centralization may work during periods of high growth, to ensure that company strategy
is executed consistently and efficiently. However, once
gyn9037/Shutterstock.com
The industrialist Andrew Carnegie once said,
“No person will make a great business who wants to
do it all himself or get all the credit.” Delegating gives
employees different tasks to do, which can enrich and
enlarge their jobs. It also enables both employees
and their supervisors to learn new skills required for
higher-level positions.
Delegation goes beyond simply assigning tasks.
True delegation includes the delegation of some level of
authority. This could be delegation of simple authority,
such as allowing an employee to choose the method they
will use to reach a well-defined objective. Or it could
be delegation of much higher levels of authority, such
as how Bob Iger, CEO of Disney, provides the heads of
each major business unit a high level of autonomy over
how to run their unit.
The pattern of delegation throughout an organization determines the extent to which an organization
is decentralized or centralized. In a decentralized
organization, management consciously attempts
to spread authority widely across various organization
levels. (e.g., Hudson’s Bay and Manulife Financial) A
centralized organization, on the other hand, systematically works to concentrate authority at the upper
levels. (For example, to eliminate the silo perspective
due to acquisitions, Canadian Tire Corporation centralized the executive level.4)
In principle, neither decentralization nor centralization is right or wrong. Similar to most decisions about
organization design, decisions about the level of centralization will depend on the nature of the industry and the
objectives of the company. Let us evaluate how the level
of centralization will affect efficiency, control, responsiveness, and empowerment of the organization.
A high level of centralization concentrates decision making at the top of the organization. Centralization leads to greater management control because top
management makes most of the decisions. It also leads
to greater efficiency because fewer people are consulted
before decisions are made. However, centralization
inhibits responsiveness to
decentralized
customers, because top
organization an organization
managers do not typically
where management consciously
interact directly with cusattempts to spread authority
tomers, which sometimes
widely in the lower levels of the
organization
insulates top management from the needs of
centralized
organization an organization
the market. Centralization
that systematically works to
also decreases employee
concentrate authority at the upper
empowerment
because
levels of the organization
employees at lower levels
Dell has more than $60 billion in global
revenue from computers, cloud computing,
and other high-tech offerings.
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companies reach a certain size they sometimes find that
decentralizing is an important competitive strategy.
With more than $60 billion in global revenue from
computers, cloud computing, and other high-tech
offerings, Dell is hardly a scrappy start-up. To recapture market share and create the hot new products of
tomorrow, Dell is decentralizing to encourage speedier
innovation. For example, it maintains a separate research
and development group to identify, develop, and market
new offerings in networking and other technologies.
As an example, one of Dell’s business units located
just 12 km from headquarters comes up with its own
designs for data storage centres. The business acts similar to one founded in somebody’s garage, rather than
one of many units in a multinational corporation’s portfolio. In fact, one of its engineers actually built a piece of
equipment in his garage when the unit was young. The
head of this unit says “you need a crayon drawing on a
napkin,” not layers of bureaucracy and strict guidelines,
to fuel entrepreneurial innovation. In just five years this
unit has blossomed into a $1 billion business with 500
employees, and more growth is on the horizon.
Restructuring to nurture innovation does not guarantee a product hit, as Dell knows from its unsuccessful
first experience with a separate smartphone division.
Still, decentralization is giving Dell an opportunity to
recapture the nimble, innovative spirit of its early days.
7-8
KEY TAKEAWAY
Centralized authority is where decisions are concentrated at the upper levels of management. Decentralized
authority is where management consciously attempts to
spread authority widely across the organization. Similar
to most decisions about organization design, decisions
about the level of centralization depend on the nature of
the industry and the objectives of the company.
7-9
THE SPAN OF MANAGEMENT
7-5 Identify the advantages and disadvantages
of wide and narrow spans of management.
The fourth major step in organizing a business is establishing the span of management, which is the
number of workers who report directly to one manager.
Choosing the correct span is based on a simple consideration: How many employees can a manager supervise
and still remain effective as a manager? This is not the
same thing as deciding how centralized authority should
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be, but rather about making sure that a manager has
the “bandwidth” to plan, organize, lead, and control the
activities of his or her team. Span will be chosen based
on the goals of the company, the composition of the company’s workforce, and the nature of the industry. Companies are constantly searching for the ideal number of
employees for each manager to supervise.
A wide span of control means that a manager supervises
many subordinates. A narrow span exists when the manager has only a few subordinates. A wide span can lead to a
flatter organization, because fewer levels of management
are needed to supervise all of the company’s employees.
A narrow span can lead to a taller organization, because
more levels of management are needed. The number of
layers or levels of management in a business is called the
organizational height. If spans of management are
wider, fewer levels are needed, and the organization is
flat. If spans of management generally are narrow, more
levels are needed, and the resulting organization is tall.
How can a company decide the right span for a
manager? This can be a complicated decision, but there
are methods for approaching it. First, the company may
want to consider the composition of its workforce and
the nature of its business activity. At a clothing plant,
where hundreds of sewing machine operators work
from identical patterns, it would be easy for a manager
to supervise many employees because daily activities are
fairly standard. But if employees perform complex and
dissimilar tasks, a manager can effectively supervise only
a much smaller number. For instance, a supervisor in the
research and development area of a pharmaceutical company might oversee just a few research chemists, because
of the highly complex nature of their jobs. Or consider an
advertising agency, where new problems and opportunities arise every day and where teamwork is a constant
necessity. This agency may have a much narrower span
of management. In this case, it is wise for the manager
to have fewer employees because although the team is
highly skilled, they require the time and leadership of
the manager to meet the organization’s objectives.
Besides analyzing the composition of the workforce
and nature of its business activity, the company may want
to consider its objectives in terms of control, responsiveness, and empowerment. For example, flatter organizations
with a wide span tend to
span of management the
have better communication
number of workers who report
among employees because
directly to one manager
there are fewer departorganizational height the
ments and levels of managenumber of layers, or levels, of
ment for information to pass
management in a business
through.
LESSON 7: Creating a Flexible Organization
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SPAN OF MANAGEMENT
WIDE SPAN
NARROW SPAN
Good for organizations with either very standard activities or highly skilled staff
Good for organizations where high level of interaction required between managers and employees
Advantages
Advantages
More efficient and more empowerment
More management control and more interaction with management
Disadvantages
Disadvantages
Less management control and less interaction with management
Higher cost and less empowerment
Span of management is the number of workers who
report directly to one manager. A wide span exists when
a manager supervises many employees. A narrow span
exists when a manager supervises few employees. The
span of management affects the level of management
control and employee empowerment in an organization.
The ideal span of management must be determined
based on the goals of the company, the composition of its
workforce, and the nature of its business activity.
7-11 F ORMS OF ORGANIZATIONAL
STRUCTURE
7-6 Distinguish among different types
of organization structures.
Up to this point, we have focused our attention on the
major considerations for organization design:
●●
Company objectives for efficiency, control, responsiveness, and empowerment
organization chart a visual representation of the structured relationships among tasks, responsibilities,
and the people given the authority to
do those tasks.
FIGURE 7.1
line structure an organizational
structure in which the chain of command goes directly from person to
person throughout the organization
line-and-staff structure
LINE
AND
STAFF
an organizational structure that
includes both line and staff positions
matrix structure an organizational structure where individuals
work on teams and all areas are
represented so that conflicting
objectives can be balanced and overall
goals, rather than individual ones,
become the priority
110 LESSON 7:
Creating a Flexible Organization
MATRIX
LINE
●●
Level of job specialization
●●
Type of departmentalization
●●
Degree of centralization of authority
●●
Span of management
In many ways, this has been comparable to examining pieces of a jigsaw puzzle one by one. It is now time
to put the puzzle together by discussing organizational
structure. Organizational structure is the end result of
the organization design process. An organization
chart is a visual representation of the structured relationships among tasks, responsibilities, and the people
given the authority to do those tasks. Viewing an organization chart, you not only see the people in an organization, but also can interpret the height of the organization,
type of departmentalization, chain of command, and, to
a certain extent, the span of management. An organization chart does not directly communicate the company’s
objectives for organizational design, nor does it specify
the degree of centralization. However, the way an organization is structured provides strong hints about these
considerations.
Let us explore three basic forms of organizational
structure: line structure, line-and-staff structure,
and matrix structure (see Figure 7.1).
ORGANIZATIONAL
STRUCTURESSTRUCTURES
ORGANIZATIONAL
Provides line managers specialized managerial support but
can sometimes create conflicts between the two types of
managers.
Can lead to increased flexibility, collaboration, and innovation,
but results in employees having two supervisors.
Offers clear lines of communication and fast decision making
but can cause managers to feel isolated and lack resources they
need to achieve company goals.
© Cengage Learning
7-10 KEY TAKEAWAY
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
FIGURE 7.2
A LINE-AND-STAFF STRUCTURE
CEO (President)
CFO
(VP Finance)
COO
(VP Operations)
CIO
(VP Information)
VP Human
Resources
Legal Counsel
Source: From Althouse/Allan/Hartt. The Future of Business, 5E. © 2017 Nelson Education Ltd. Reproduced by permission. www.cengage.com/permissions.
The simplest and oldest form of organizational
structure is the line structure, in which the chain of command goes directly from person to person throughout
the organization. As a result, a straight line could be
drawn down through levels of management from the
chief executive to the lowest level in the organization.
In a small retail store, for example, an hourly employee
might report to an assistant manager, who reports to a
store manager, who reports to the owner. The advantages
of line structure are clear lines of communication and fast
decision making, because each manager reports to only
one person. The disadvantage is that in a line structure
managers can feel isolated and may lack resources they
need to achieve company goals. As a result, line structures are not very effective in medium- or large-sized
organizations but are very popular in small organizations.
FIGURE 7.3
A line-and-staff structure not only utilizes the chain of
command from a line structure, but also provides line managers with specialists called staff managers (see Figure 7.2).
Staff managers provide support, advice, and expertise to line
managers, thus eliminating the previous drawback of line
structures. Therefore, this structure works much better for
medium- and large-sized organizations than line management
alone. Staff managers are not part of the chain of command,
such as line managers are, but they do have authority over
the staff on their team. Frequently staff managers specialize
in areas such as human resources, legal affairs, and public
relations. Since these specialties support the needs of the
entire organization, staff managers in these areas often report
directly to a senior executive or the CEO (see Figure 7.3).
However, the use of staff managers to support line managers
can be found at almost any level of an organization. While the
LINE AND STAFF MANAGERS
A line manager has direct responsibility for achieving the company’s goals
and is in the direct chain of command. A staff manager supports
and advises the line managers.
LINE
President
STAFF
Director of legal services
Director of public affairs
Regional
sales manager
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Vice president,
finance
Regional
sales manager
Accounting
department
manager
© Cengage Learning
Vice president,
marketing
LESSON 7: Creating a Flexible Organization
111
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FIGURE 7.4
A MATRIX STRUCTURE
A matrix is usually the result of combining product departmentalization
with function departmentalization. It is a complex structure
in which employees have more than one supervisor.
CEO
Vice
president,
engineering
Vice
president,
production
Project
manager
A
Vice
president,
finance
Vice
president,
marketing
Employees
Project
manager
C
advantage of line-and-staff structure is that line managers
have specialized support from staff managers, a disadvantage is that this reporting structure can sometimes create
conflicts between the two types of managers.
Essentially, in the matrix structure, product departmentalization is superimposed on a functionally departmentalized organization by putting employees from various
functional areas on a cross-functional team (see Figure 7.4).
Matrix structure often is used for developing new products
or completing special projects. A cross-functional team is
supervised by a project manager, meaning that in a matrix
organization, authority flows both down and across. The
advantages of matrix structure are increased flexibility,
collaboration, and innovation. The disadvantage is that
employees have two supervisors: the manager of their
functional area and the project manager. This can blur
lines of communication and make conflicts harder to solve.
7-11a
Organization Design in Today’s Economy
Since each business has a specific set of needs and
priorities, there is no single best type of organizational
design. Companies have
cross-functional team a team
little in common when
of individuals with varying specialties,
it comes to organization
expertise, and skills that are brought
structure—even comtogether to achieve a common task
panies in the same
112 LESSON 7:
Creating a Flexible Organization
© Cengage Learning
Project
manager
B
industry. For example, 3M and Medtronic are both
makers of medical devices. 3M organizes by product
lines, while Medtronic uses a combination of functional
and product line organization.
Today, more companies are focusing on being
agile by maximizing collaboration between departments and product groups. One way to do this is
through ongoing use of matrix structure, where
cross-functional teams are assembled to develop
products or complete projects. A cross-functional
team comprises individuals with varying specialties, expertise, and skills that are brought together
to achieve a common task. At the conclusion of
these initiatives, these teams are often disbanded or
reconfigured in order to tackle the next initiative.
Cross-functional teams are common in software-development companies, where specialists in
areas such as marketing, programming, user-interface
design, and content development are brought
together to quickly develop new products. Another
example of matrix structure is found in the entertainment industry. A streaming service, such as Netflix,
is not primarily divided into functional departments
such as directors, actors, writers, set designers, and
so on. Instead, a cross-functional team from all of
these specialties is assembled to produce a particular
television show, such as Riverdale. When that show
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ceases production the team is disassembled, and its
members may be assigned to the production team for
a different show.
7-12 KEY TAKEAWAY
An organizational structure is the end result of the
organization design process. It represents the people
in the company, how they are grouped, and to whom
they report. The three primary types of organizational
structure are line structure, line-and-staff structure, and
matrix structure.
7-13 O RGANIZATION DESIGN
AND CORPORATE CULTURE
7-7 Explain the relationship between
organization design and an
organization’s culture.
Every organization has a culture, a shared set of values
and beliefs that employees associate with the business,
as well as an informal organization. An organization’s
corporate culture, which is the inner rites, rituals,
heroes, and values of a business, has a powerful influence
on how employees think and act. Corporate cultures
come in all varieties. For example, some corporate cultures are rigid and formal, while some are creative and
informal. Many factors contribute to corporate culture,
including company leadership, company history, the
industry, and even the physical workplace environment.
Organization design also has a tremendous impact
on corporate culture. When designing an organization to
either support or change a corporate culture, managers
must navigate a variety of considerations that often compete with each other.
Suppose a company builds an organization with
highly specialized jobs, centralized authority, narrow
span of management, and rigid departmental structures.
This company cannot then assume it will also have an
innovative, engaged, and creative corporate culture. As a
result, it must look for alternate ways to keep employees
motivated in order to achieve company goals. This could
include increasing opportunities for advancement, pay
bonuses, recognition, or other incentives.
On the other hand, a company that builds an organization with highly varied jobs, decentralized authority,
matrix departmentalization, and a wide span of management may indeed have a very engaged and creative
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corporate culture. But that company cannot necessarily
expect efficient, disciplined results in all areas. Instead
it has to carefully select where company policies or
changes to organization design will support the achievement of company goals without reducing responsiveness
or empowerment.
Choices about organization design affect corporate
culture. McDonald’s stores do not offer a highly creative
and empowering culture—and they are not meant to.
They are meant to represent the McDonald’s brand consistently and deliver products at low cost. Job design and
centralization of authority at McDonald’s reflect these
objectives and are reflected in the corporate culture.
The opposite is true at Google. Its objective is a corporate culture that is agile and innovative. If Google were
to design highly specialized jobs, such as at McDonald’s,
and implement highly centralized authority, it would
destroy the organization’s ability to cultivate a creative,
empowered culture.
While there may never be one type of organization
design that works for all businesses, companies structure
their organizations to facilitate achieving their overall
goals. Some companies are decentralizing operations,
giving departments or divisions more autonomy to
respond quickly to changes in the market or to be more
flexible in their response to customer demands. Many
companies are embracing new information technology
because it brings them closer to their customers faster
than was previously possible. Internet commerce is
benefiting consumers in a number of ways. When you
buy books at Amazon.ca or use eBay.ca to sell a used
bicycle, you are sending the message that the virtual
company is a structure you will patronize and support.
Increasing globalization and use of information technology will continue to alter the competitive landscape,
and the big winner should be the consumer—in terms of
increased choice, increased access, and reduced price.
All companies also have an informal organization,
which does not show up on any chart. This is the pattern
of behaviour and interaction that stems from personal
rather than professional relationships, and it includes
informal groups and the infamous grapevine. Informal
groups are created by the
group members themcorporate culture the inner
customs, traditions, and values of
selves to accomplish goals
an organization
that may or may not be relevant to the organization—
informal organization the
pattern of behaviour and
from meeting for lunch
interaction that stems from
to going bowling to forming
personal rather than professional
a union. Informal groups
relationships
can be powerful. They can
LESSON 7: Creating a Flexible Organization
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restrict output, or they can help managers through
tight spots. They can cause disagreement and conflict,
or they can help to boost morale and job satisfaction.
They can show new people how to contribute to the
organization, or they can help people get away with substandard performance. The grapevine is the informal
communications network within an organization. It is
completely separate from—and sometimes much faster
than—the organization’s formal channels of communication. Managers should recognize the grapevine’s
existence and respond promptly and professionally to
inaccurate information. It can be valuable when managers are able to receive
grapevine the informal
important communicacommunications network within an
tions from the informal
organization
organization.
LESSON SUMMARY
LO 7-1
Summarize four objectives to consider
when organizing a business.
Four objectives to consider for organization design are efficiency,
control, responsiveness, and empowerment. Each company prioritizes
these objectives differently based on their industry and customer
base. A company that understands its objectives is more likely to make
sound decisions when building the organization structure.
LO 7-2
Differentiate between efficiency and
empowerment in job design.
One of the first steps in organization design is job design, which is
deciding who will perform each of the tasks required to run the business. A component of job design is deciding how specialized each job
should be. While specialization can increase output due to increased
efficiency, it can often lead to employee dissatisfaction because of the
lack of empowerment associated with highly specialized tasks. While
some production-oriented environments lend themselves to high levels
of job specialization, managers can increase employee engagement
through job rotation. When possible, managers of operating employees
try to design jobs that have a balance of specialization and variety.
LO 7-3
Identify the common types of
departmentalization in an organization.
After jobs are designed, they must be grouped together into
“manageable units,” or departments. This process is called departmentalization. The most common criteria for organizing a business
into effective departments are by function, by product, by location,
and by customer. Each type of departmentalization has advantages
and disadvantages that businesses must consider when organizing
departments.
114 LESSON 7:
Creating a Flexible Organization
7-14 KEY TAKEAWAY
Decisions about organization design affect corporate
culture. Factors such as job design, centralization of
authority, and departmentalization all impact the level of
empowerment and engagement employees feel. These
factors can also determine the types of employees the
organization will attract. Informal groups are created
by group members to accomplish goals that may or
may not be relevant to the organization, and they can
be very powerful forces. The grapevine—the informal
communications network within an organization—can
be used to transmit information (important or gossip)
through an organization much faster than through the
formal communication network.
LO 7-4
Understand how centralization and
decentralization affect efficiency, control,
responsiveness, and empowerment.
As soon as an organization begins hiring employees and grouping
them into departments, they are faced with a key question: Who
should be allowed to make decisions? Delegating is when a manager
assigns some of his or her work to someone else. The pattern of delegation throughout an organization determines the extent to which
an organization is decentralized or centralized. Some organizations will
concentrate authority at the upper levels of management and others
will decentralize authority throughout the organization. Similar to
most decisions about organization design, decisions about the level of
centralization will depend on the nature of the industry and the objectives of the company.
LO 7-5
Identify the advantages and disadvantages
of wide and narrow spans of management.
The fourth major step in organizing a business is establishing the span
of management, which is the number of workers who report directly
to one manager. Choosing the correct span is based on a simple consideration: How many employees can a manager supervise and still
remain effective as a manager? A wide span of management exists
when a manager has a larger number of subordinates. A narrow span
exists when the manager has only a few subordinates. The ideal span
of management must be determined based on the goals of the company, the composition of its workforce, and the nature of its business
activity.
LO 7-6
Distinguish among different types of
organization structures.
All of the above considerations are brought together during the
organization design process to create the organizational structure.
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Organizational structure is presented in an organization chart, a diagram that represents the positions and relationships of people within
an organization. By viewing an organization chart, you not only see the
people in an organization but also interpret the type of departmentalization and, to a certain extent, the span of management. An organization chart does not directly communicate the company’s objectives for
organization design, nor does it specify the degree of centralization.
However, the way an organization is structured provides strong hints
about these considerations.
4. How does making the job more specialized increase efficiency?
LO 7-7
9. What are the three basic forms of organizational structure?
Define each.
Explain the relationship between
organization design and an organization’s culture.
Decisions about organization design affect corporate culture.
Factors such as job design, centralization of authority, and departmentalization all impact the level of empowerment and engagement employees feel. These factors can also determine the types of
employees the organization will attract. Informal groups are created
by group members to accomplish goals that may or may not be
relevant to the organization, and they can be very powerful forces.
The grapevine—the informal communications network within an
organization—can be used to transmit information (important or
gossip) through an organization much faster than through the formal
communication network.
5. What is departmentalization? Discuss the most common forms.
6. What is the key difference between a centralized and a decentralized organization? Which is more efficient? Which is more
empowering?
7. Define span of management. What are advantages and disadvantages of a wide span of management? a narrow span?
8. What is the difference between a tall and a flat organization?
10. What is corporate culture? What are the benefits of creating a
culture of trust in an organization?
KEY TERMS
centralized organization, p. 108
control, p. 103
corporate culture, p. 113
cross-functional team, p. 112
EXERCISES
Use the Internet, magazines, newspapers, books,
and personal experiences to complete the following
exercises.
1. Draw an organization chart of the company you work for, your
school, or a campus student organization. Show the lines of
authority and formal communication. Were you empowered to
make decisions? Describe the informal relationships that you
think are important for the success of the organization.
2. If you were the CEO of a large multinational corporation, what
would your organization’s structure look like? What type of
culture would you promote?
decentralized organization, p. 108
delegation, p. 107
departmentalization, p. 106
efficiency, p. 103
empowerment, p. 104
grapevine, p. 114
informal organization, p. 113
job design, p. 105
job rotation, p. 106
job specialization, p. 105
line structure, p. 110
line-and-staff structure, p. 110
3. Think of a company that has a reputation of having poor corporate culture. Conduct research to identify some of the core issues.
matrix structure, p. 110
4. A company evaluates four objectives when building its organization: efficiency, control, responsiveness, and empowerment.
Which do you believe is most important? Explain your answer.
organization design, p. 102
5. Browse available job postings on two different company websites. What do they tell you about the organization’s structure,
level of job specialization, and corporate culture?
organization chart, p. 110
organizational height, p. 109
responsiveness, p. 104
span of management, p. 109
REVIEW QUESTIONS
1. What is organization design?
2. What are four common objectives a company evaluates when
building its organization? Describe each.
3. Differentiate among job design, job specialization, and job
rotation.
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LESSON 7: Creating a Flexible Organization
115
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EGGED ON TO BE GREAT
When appealing to potential employees, companies often look toward creating a strong corporate culture. Along with clear expectations for job-related
attributes, companies also invest in providing perks and incentives including
everything from flexible work arrangements to break room ping-pong tables.
However, when we think of strong corporate cultures, we often refer to
the technology and high-tech sectors, with their open floor plans and relaxed
work attire. But there is a Canadian organization that has been singled out
for a very strong corporate culture that would not fit into our preconceived
notions. That entity? The Egg Farmers of Canada (EFC).
This Ottawa-based agricultural lobby group has just over 50 employees
but has been able to create a corporate culture that is being admired and
awarded. In both 2016 and 2017 the EFC was named one of Canada’s Most
Admired Corporate Cultures by search firm Waterstone Human Capital.
It would appear that goals of the organization are equal parts boldness
and humility. EFC’s vision, per its website, is “A world where everyone—
whether it be due to want or need—can enjoy the immeasurable benefits of
the humble egg.” The humble egg forms the basis of why EFC exists, but the
organization focuses intently on creating a workplace that helps it achieve its
lofty vision.
Tim Lambert, the CEO of the Egg Farmers of Canada, noted upon winning
the 2017 corporate culture award: “Our business is complex, and our industry
is dynamic and evolving. At the core of our success is a dedicated and passionate team, and a commitment to making a difference. As a result, we strive
to foster a culture of high-performance and create an environment that offers
our team the tools to grow and continuously improve.”
What is often telling about a company comes from not just what the
organization says about itself, but also what we hear from others who have
some relationship to the company but are not paid to say only nice things. As
with many aspects of business, there is an online source of information about
a business that offers insight into company culture that goes beyond what is
said on a company website or press release.
Glassdoor is a jobs and recruiting site, but a key feature of the site offers
reviews of companies based on a number of factors. The Egg Farmers of
Canada is featured on the Glassdoor site, and while there are only a few
reviews, the majority of feedback on EFC is positive. It would seem that there
is a good perception of the CEO, the job opportunities, and the overall culture.
One respondent on Glassdoor did mention a negative experience with the
interviewing process for a junior position.
And while reviews and awards are nice, the devil is often in the details.
A review of the EFC by a human resources industry journal provided some
more specifics. EFC offers on-site workout facilities, top-ups in pay for parental
116 LESSON 7:
Creating a Flexible Organization
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leave, and reduced work hours during the summer, when the Ottawa area is
relatively quiet.
EFC also provides awards itself, to its employees. Not surprisingly, there
are some egg puns attached to the awards: the Get Cracking plaudit is given
to the employee who shows engagement in volunteer work with the community, and the Good Egg award is given yearly to an employee who possesses qualities that fellow employees admire.
Upon winning the 2014 award for a Top Employer in the Capital Region,
CEO Lambert described the importance of employees to the organization’s
success. When discussing the various incentives for employees, he stated:
“Our employees are loyal to us, they stay with us for the long-term and they
contribute to the success of our organization. Their work deserves to be highlighted and I am very proud that we are able to support them and provide a
positive workplace environment.” *
As you know, many factors go into a strong corporate culture. Much of it
has to do with how a business is organized, type of departmentalization, job
design, and organizational structure. These factors will create the potential for
a strong corporate culture—and research shows that a solid corporate culture
helps drive business performance.
Given your knowledge of these elements of creating a flexible organization, you are assigned the task of creating a “Top 5” list of key factors for
successful corporate culture creation using the factors identified in the case.
You have been asked by the Egg Farmers of Canada to relate it to their organization. Your list will form part of an email campaign, so you will need to structure and write it in a way that is engaging and interesting to read. You know
what comes next … get cracking!
Case Sources: https://www.newswire.ca/news-releases/egg-farmers-of-canada-named-one-of-canadas-most
-admired-corporate-cultures-by-waterstone-human-capital-659515783.html; http://www.eggfarmers.ca/about
-us/; https://www.hrmonline.ca/hr-news/what-hr-needs-to-learn-from-egg-farmers-202731.aspx; http://www
.eggfarmers.ca/press/egg-farmers-of-canada-one-of-the-top-employers-in-ottawa/
*Egg Farmers of Canada, press release “Egg Farmers of Canada: One of the top employers in
Ottawa,” February 5, 2014, http://www.eggfarmers.ca/press/egg-farmers-of-canada-one-of-the
-top-employers-in-ottawa/. Reproduced by permission.
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LESSON 7: Creating a Flexible Organization
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8 Producing Quality
Goods and Services
LEARNING OBJECTIVES
Once you complete this lesson, you will be able to:
materials, labour, and other resources into finished goods
and services.
8-2 Discuss Canadian manufacturing in terms of costs,
employment levels, and response to global competition.
8-3 Contrast operations management for goods versus
services.
8-4 Summarize three key considerations for design
planning.
facility location.
8-6 Describe the different types of facility layouts.
8-7 Understand how supply chain management affects
production time, inventory levels, and customer
satisfaction.
8-8 Identify tasks on the critical path in a production
schedule.
8-9 Discuss potential benefits of quality improvements.
I NTRODUCTION
Have you ever wondered where an Apple iPhone comes
from? Or Nike shoes? Or a Bombardier airplane? These
products would not exist if it were not for the production
activities that convert a product idea into reality. Many
steps are required to create an extremely popular, but
seemingly simple product.
A cup of Starbucks coffee is a simple treat for many
coffee drinkers. A Starbucks barista can brew and serve
you a cup in only a few minutes, but what about all of
the production activities that came before you ordered
that cup? The journey of that cup of coffee goes back
many months and thousands of kilometres. It starts at
a coffee plantation in a place such as Guatemala, where
the coffee plant was first put into the ground. It can
take years before that plant is fully producing a harvest of red coffee cherries that are meticulously handpicked by workers, often in the hot sun. Those beans are
then washed and milled, a process that requires large
amounts of water. Then they are raked and allowed to
dry in the sun, before they are milled yet again. This is
118 LESSON 8:
8-5 List the four variables to consider when choosing
MikeDotta/Shutterstock.com
8-1 Outline how the production process transforms raw
Producing Quality Goods and Services
the process that turns the beans from red to green. Then,
the beans are packed up and loaded for transport to their
next destination. After a long journey on a truck, then a
boat, then another truck, the coffee beans arrive at one
of the Starbucks roasting facilities. There the beans are
washed, weighed, sorted, and stored all in preparation
for roasting. The roasting process unleashes the flavour
of the beans and is when the bean turns from green to
the familiar brown colour we associate with coffee beans.
The beans are then tested, packed, and shipped to any
one of the 19,000 Starbucks retail stores worldwide. On
average just three days later, your barista is grinding
and brewing those very beans so that you can enjoy this
simple treat.
This shows how many steps are involved in producing even a simple product, but those steps go beyond
the production process itself. A tremendous amount of
planning goes into creating a production process in the
first place; careful management is then required to build
schedules, coordinate the supply chain, and maintain
quality. We will discuss these activities in this lesson on
producing quality goods and services.
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8-1
WHAT IS PRODUCTION?
8-1 Outline how the production process
transforms raw materials, labour, and
other resources into finished goods
and services.
8-2 Discuss Canadian manufacturing in
terms of costs, employment levels, and
response to global competition.
Production, the conversion of ideas and resources
into useful goods and services, is an essential function
in every company. Production turns inputs—such as
natural resources, raw materials, human resources,
and capital—into outputs, which are goods and services. One of the primary goals is customer satisfaction,
which is closely linked to quality, also an important part
of effective production and operations. In the past, the
manufacturing function in most companies was focused
inward. Manufacturing had little contact with customers
and did not always understand their needs and desires.
Today, however, stronger links between marketing and
manufacturing have encouraged production managers
to be more outwardly focused and to consider decisions
in light of their effect on customer satisfaction. Service
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PRODUCTION INPUTS AND OUTPUTS
Production Inputs
●
Concept or idea for a new good or service
●
Human, financial, material, and informational resources
Conversion
●
Plan necessary production activities to create a good or service
●
Design the good or service
●
Execute the plan to produce the good or service
●
Evaluate the quality of the good or service
●
Improve the good or service based on evaluation
●
Redesign the good or service if necessary
Outputs
●
Completed good or service
companies have also found that making operating decisions with customer satisfaction in mind can be a competitive advantage.
How does this converproduction the
sion process actually take
conversion of ideas and
place? It happens through
resources into useful goods
production planning. Once
and services
a company has an idea
LESSON 8: Producing Quality Goods and Services 119
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for a product, the production planning process truly
begins. This process includes design planning, facilities
planning, and operational planning:
James MacDonald/Bloomberg/Getty Images
1. Design Planning. Design planning considers the strategic goals and resources of an organization to determine the best production methods.
2. Facilities Planning. Facilities planning identifies a site
where the good or service can be produced.
3. Operational Planning. Operational planning decides
on the amount of goods or services that will be produced within a specific time period.
8-1a
Manufacturing is a crucial part of a diverse
and stable economy.
How Canadian Manufacturers
Compete in the Global Marketplace
Production of physical goods and services is a crucial
element of any economy. After the Second World War,
productivity increased in North America. Eventually,
however, manufacturers in Japan, Germany, Taiwan,
Korea, Singapore, Sweden, and other industrialized
countries were becoming competitive with Canadian
companies. Today, the Chinese are manufacturing
everything from sophisticated electronic equipment and
automobiles to less expensive everyday items—often at a
lower cost than the same goods can be manufactured in
other countries. And yet, in the face of increasing competition, there is good news for Canadian manufacturers.
Manufacturing is a crucial part of a diverse and
stable economy. There is both good and bad news for
Canadian manufacturers. First, the bad news: The
number of Canadians employed in the manufacturing
sector has decreased. Currently, approximately 1.7 million Canadian workers are employed in manufacturing
jobs—down from approximately 2.3 million Canadians
in 2004.1 Many of the manufacturing jobs that were lost
were outsourced to low-wage workers in countries where
there are few labour and environmental regulations. As
a result, manufacturing accounts for only about 9.2%
of the current Canadian workforce. To make matters
worse, the number of unemployed factory workers
increased during the recent economic crisis because of
decreased consumer demand for manufactured goods.
Despite the bad news, there is also good news. Canada
remains one of the largest manufacturing countries in
the world. While some people would argue that “Made
in Canada” does not mean what it used to mean, consider the following2:
●●
●●
●●
●●
●●
STUDY TOOLS
Visit MindTap to watch videos on Canadian manufacturing in
today’s global economy.
120 LESSON 8:
Producing Quality Goods and Services
Every year, manufacturing contributes $174 billion to
the Canadian gross domestic product (GDP).
Manufacturing exports are nearly 68% of all Canadian
exports.
At one point, it cost more to manufacture goods in
Canada when compared to China and other industrialized countries. Now, the cost of Canadianmanufactured goods is decreasing.
And, most importantly, as money spent in manufacturing increases, additional revenue is generated in
the country’s economy because of purchases from
suppliers and businesses that support manufacturers.
As a result, the manufacturing sector is still a very
important part of the Canadian economy. And there is
even more good news for Canadian manufacturing:
●●
Go to nelson.com/student to access the digital resources.
Canadian manufacturers produce approximately 1%
of total global manufacturing output.
A contributing factor to the decrease in manufacturing employment has been an increase in productivity. Advances in technology and improvements in
manufacturing processes allow Canadian facilities to
be far more efficient than several decades ago.
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There have been examples of reshoring,
where Canadian manufacturers bring
manufacturing jobs back to Canada. The
primary reasons include increasing labour
costs in foreign countries, higher shipping
costs, significant quality and safety issues,
faster product development when goods are
produced in Canada, and federal and provincial subsidies to encourage manufacturers
to produce in Canada.
Although many challenges face Canadian
manufacturers, experts predict that there could
be a significant resurgence for manufacturers
that can meet current and future challenges.
These challenges will be met by managers who
focus on several strategies that we will discuss
in this lesson, including designing production
processes that:
●●
Allow design flexibility to meet customer
needs
●●
Improve productivity and reduce costs
●●
Provide for reliable delivery dates
●●
Maintain high quality
8-2
FIGURE 8.1
70
60
50
40
30
20
10
0
KEY TAKEAWAY
THE INCREASING IMPORTANCE
OF SERVICES
8-3 Contrast operations management
for goods versus services.
A product can be anything that a company offers to
satisfy customer needs and wants. Products do not
always come in physical form, though. A product may be
a good (a physical, tangible product that we can see and
touch; e.g., cell phone, car, furniture), or a service (an
intangible product that we experience or use; e.g., medical services, hotel stay, concert). Some products contain
NEL
1970–79
1980–89
1990–99
2000–09
2010–15
Source: RBC Economics Research, “The Decline in Manufacturing’s Share of Total Canadian Output —
A Source of Concern?” February 2017, online: http://www.rbc.com/economics/economic-reports/
pdf/other-reports/Manufacturing%20Trends-Feb2017.pdf
Production encompasses all the steps required to
take a product from idea to reality. Successful production involves the efforts of operations managers,
but also requires close coordination with marketing,
sales, finance, and other areas of the company. While
employment in the Canadian manufacturing sector has
decreased in recent years, it still remains a vital part of
the Canadian economy.
8-3
SERVICE SECTOR’S SHARE OF THE GDP IN CANADA
80
Average % of GDP per time period
●●
elements of both goods and services, such as when you
purchase a new car (good) and it has a warranty (service)
from defects.
While we often discuss production in terms of
manufactured goods, it is important to note that services
represent the majority of our economy (see Figure 8.1).
The Canadian economy is now characterized as a
service economy, one in which more effort is devoted
to the production of services than to the production
of goods.
8-3a
Planning Quality Services
Today, the managers of restaurants, real estate agencies, banks, movie theatres, airlines, and other service
providers have realized that they can benefit from the
experience of manufacturers. Both types of businesses
must complete many of the same activities to be successful. They both must:
1. Utilize production inputs such as human, material,
financial, and informational resources.
2. Convert those inputs into a finished product through
a careful planning and production process.
At the same time, the
production of services is
very different from the
production of manufactured goods in regard to
good a physical, tangible
product that we can see and touch
service an intangible product
that we experience or use
LESSON 8: Producing Quality Goods and Services 121
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DIFFERENCE 1: TYPES OF RESOURCES USED
PRODUCTION OF SERVICES:
Labour-intensive because people are the more
utilized resource.
hxdyl/Shutterstock.com
Gorodenkoff/Shutterstock.com
PRODUCTION OF GOODS:
Use labour and materials to create finished product.
LABOUR
+
Zynatis/Shutterstock.com
Minerva Studio/Shutterstock.com
LABOUR
+
MATERIALS
=
nd3000/Shutterstock.com
cobalt88/Shutterstock.com
MATERIALS
=
FINISHED PRODUCT
the type of resources used, when the product is consumed, and how quality is measured.
●●
●●
Difference 1: Types of Resources Used. The production of goods requires labour and materials to
create a finished product. The production of services
is more labour intensive because people are the most
utilized resource.
Difference 2: Timing of Product Consumption.
In the production of goods, there is delayed consumption. Goods are manufactured, shipped, stored,
bought, and then used by consumers. Services are
immediately enjoyed or consumed by the consumer.
122 LESSON 8:
Producing Quality Goods and Services
FINISHED PRODUCT
●●
Difference 3: Measuring Quality. In the production of goods, quality is measured by the number of
rejects or customer returns. In the production of services, quality is measured by the number of satisfied
customers.
8-4
KEY TAKEAWAY
The manufacturing of goods and delivery of services
require similar types of operational planning but differ in
the resources they use, the timing of product consumption, and the means for measuring quality.
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8-5
WHERE DO NEW PRODUCTS
COME FROM?
8-4 Summarize three key considerations
for design planning.
The following discussion provides insight into where new
products come from, including those that arise through
research and development (R&D).
No business can produce a product or service until
it has an idea. How did we get the Apple iPad or the
electric Ford Focus automobile? We got them as a result
of people working with new ideas that were developed
into useful products. One way these ideas come about
is through research and development (R&D). For our
purposes, R&D involves a set of activities intended to
identify new ideas that have the potential to result in
new goods and services. For many companies, R&D is
a very important part of their business operations. The
3M Company, for example, has always been known for
its R&D focus. Currently, 3M employs 8,400 researchers
worldwide and has invested more than $7.6 billion over
the last five years to develop new products designed to
make people’s lives easier and safer. In addition to an
R&D department, product ideas can also come from
market research or from observing competitors.
Another way new products come about is through
extension or refinement of existing products. When a
brand-new product is first marketed, its sales start at
zero and slowly increase from that point. If the product is
successful, annual sales increase more rapidly until they
reach a peak. Then, as time passes, annual sales begin to
decline, and they continue to decline until it is no longer
profitable to manufacture the product. This is called the
product life cycle. Often companies will decide to alter
existing products to increase the life of that product and
to respond to increased competition.
Only a few of the many ideas for new products,
extensions, or refinements ever reach the production
stage. For those ideas that do, the next step is planning
for production, which involves three different phases:
design planning, facilities planning, and operational
planning.
8-5a
What Is Design Planning?
As mentioned previously, design planning (sometimes referred to as production planning) is the development of a plan for converting an idea into an actual
product. The major decisions in design planning are to:
●●
Design a product line
●●
Estimate production capacity
●●
Evaluate production technology options
DESIGN A PRODUCT
LINE A product line is a
group of similar products
that differ only in relatively
minor characteristics. For
example, General Electric
makes refrigerators that
vary in size, colour, and
types of compartments.
An important issue in
deciding on the product
line is to balance customer
research and
development (R&D)
involves a set of activities intended
to identify new ideas that have the
potential to result in new goods
and services
design planning the
development of a plan for
converting an idea into an actual
good or service; includes decisions
related to product line design,
production capacity, and selection
of manufacturing technology
Planning for Production
Although no one can predict with 100% accuracy
what types of products and services will be available
in the next five years, it is safe to say that companies
will continue to introduce new products and services
that will change our everyday lives. New ideas that are
transformed into useful goods or services are the result
of a business’s research and development activities.
Before a business can produce a successful
good or service, it must create a plan. Design
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planning is the development of a plan for
converting an idea into an actual good or service.
Then, companies engage in facilities planning
to determine where a good or service will be
produced. The objective of operational planning is
to decide on the amount of products or services
each facility will produce during a specific
period of time.
LESSON 8: Producing Quality Goods and Services 123
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preferences with production requirements. For this
reason, marketing managers play an important role in
making product line decisions. Typically, marketing
employees want a “long” product line that offers customers many options. Because a long product line gives
customers more choice, it is easier to sell products that
meet the needs of individual customers. On the other
hand, production employees generally want a “short”
product line with fewer options because production of a
short line is easier to manage.
It is important for marketing and operations managers to agree on a balanced product assortment that
offers customers adequate choice while keeping production requirements reasonable. Too many variations in a
product line—if not managed well—can cause slower
delivery times, higher costs, and lower quality.
for the product. The accuracy of these sales projections
is critical because they will be used to make capacity
decisions—and those capacity decisions typically involve
large investments of money (see Exhibits 8.1 and 8.2).
Capacity means the same thing to service businesses. For example, the capacity of a restaurant such as
Cactus Club in Vancouver is the number of customers
it can serve at one time. As with the LG manufacturing
facility described earlier, if the restaurant is built with
too much capacity—too many tables and chairs—
valuable resources will be wasted that could have been
used in other ways. If the restaurant is too small, customers may have to wait for service; if the wait is too
long, they may leave and choose another restaurant.
Since decisions related to capacity are based on
marketing projections of demand for a business’s goods
or services, it may be necessary to change the amount
of goods or services that are produced in a specific time
period. For example, if actual sales of a new technology
product, such as Apple’s iPhone, exceed sales projections, then it may be necessary to increase production.
Unfortunately, the reverse is also true. If sales do not
meet expectations, adjustments may be necessary to
reduce the number of goods produced. Today, successful
businesses use a process called operational planning to
ESTIMATE PRODUCTION CAPACITY Capacity
is the amount of product that an organization can produce in a given period of time. For example, the capacity
of an LG assembly plant might be 1.3 million HDTVs
per year. Operations managers—again working with
the company’s marketing
capacity the amount of
managers—must determine
product that an organization can
the required capacity by
produce in a given period of time
analyzing sales projections
TOO LITTLE CAPACITY WASTES
OPPORTUNITY
TOO MUCH CAPACITY WASTES
MONEY
© Cengage Learning
EXHIBIT 8.2
© Cengage Learning
EXHIBIT 8.1
If the facility offers insufficient capacity, additional
capacity may have to be added later when it is much
more expensive.
124 LESSON 8:
Producing Quality Goods and Services
If a facility is built with too much capacity, valuable
resources (plant, equipment, and money) will sit idle.
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adjust the amount of goods or services that are produced
to meet current market demand.
EVALUATE PRODUCTION TECHNOLOGY
OPTIONS During the design planning stage—as well as
during ongoing operations—management must evaluate
the degree to which automation and technology will be
used in production. Here, there is a trade-off between:
●●
●●
High initial costs and low operating costs (for
automation)
Low initial costs and high operating costs (for human
labour)
●●
After exploring the capacity of existing factories,
management may decide to build a new production
facility. Building a new facility involves selecting a location for that facility and determining the best facility
layout.
In determining where to locate production facilities,
management must consider a number of variables:
●●
Production technology can range from traditional
production machines to more advanced options such as
robotics, computer-aided design (CAD), and computeraided manufacturing (CAM).
Example: A new apple orchard wants to sell its product
to SunRype for use in juices. Using manual labour to pick
apples would have low initial costs but high operating costs.
Using a tree-shaking machine to automate harvesting
would have high initial costs but low operating costs.
8-6
8-7
●●
KEY TAKEAWAY
Design planning is the first part of the process for converting an idea to reality. Design planning considerations include designing a product line, estimating
production capacity, and evaluating production technology options.
●●
SELECTING FACILITY LOCATION
AND LAYOUT
8-5 List the four variables to consider when
choosing facility location.
8-6 Describe the different types of facility
layouts.
8-7a
Choosing a Location
After the process of design planning, a business will
undergo facilities planning. Generally, a business will
choose to produce a new product in an existing factory
as long as:
●●
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The existing factory has enough capacity to handle
customer demand for both the new product and
established products.
The cost of refurbishing an existing factory is less than
the cost of building a new one.
●●
Proximity to major customers. Some products, such
as clothing, are small and light enough to be shipped
easily around the world. In these cases, the location
of the manufacturing facility is not tied to the location of customers. However, other products, such as
automobiles, are expensive to ship. This is why it is
common for car manufacturers to build factories near
major markets.
Availability and cost of labour. It is well known that
China has become a manufacturing hub, sometimes
being referred to as “the world’s factory.” This is
partly because the cost of labour in China is lower.
However, another factor contributing to the rise of
China’s manufacturing base is the sheer amount of
skilled labour available in that country. When Apple
decided to change the glass used on the iPhone just
one month before its initial launch, 8,000 workers
scrambled to overhaul the assembly line and begin
production. Within four days they were producing
10,000 iPhones a day.
Cost of construction and operation. This includes the
cost of land, availability of construction materials,
taxes, environmental regulations, and other costs
that could affect the profitability of the operation.
The glass used in Apple’s iPhone is called Gorilla
Glass and is produced by Corning in its Kentucky
factory—which Corning recently expanded to provide for additional capacity. The Kentucky factory
provides Corning access to the skilled labour it
needs, while providing relatively low construction
and operating costs.
Access to key resources. Besides the important
resource of labour, companies may also locate
facilities near other key resources. This could be
transportation infrastructure, such as ocean ports
or railroads, or it could be certain types of natural resources, such as lumber or coal. This also
includes the cost of land, availability of construction materials, taxes, environmental regulations,
and other costs that could affect the profitability of
LESSON 8: Producing Quality Goods and Services 125
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the operation. Companies may also locate facilities
close to major materials suppliers in order to cut
costs and delivery times.
8-7b
Determining a Facility Layout
After the site location decision has been made, the next
focus in design planning is the facility layout. Here, the
goal is to determine the most efficient and effective design
for the particular production process. A manufacturer
might opt for a U-shaped production line, for example,
rather than a long, straight one to allow products and
workers to move more quickly from one area to another.
Service organizations must also consider layout, but
they are more concerned with how it affects customer
behaviour. It might be more convenient for a hospital to
place its freight elevators in the centre of the building,
for example, but doing so might block the flow of
patients, visitors, and medical personnel between floors
and departments.
Three general types of facility layout are:
●●
Process layout
●●
Product layout
●●
Fixed-position layout
The process layout is used when different operations are required for creating small batches of different
products or working on different parts of a product. The
plant is arranged so that each operation is performed in
its own particular area. An auto repair facility at a local
automobile dealership provides an example of a process
layout. The various operations may be engine repair,
bodywork, wheel alignment, and safety inspection. If you
take your Lincoln Navigator for a wheel alignment, your
car “visits” only the area where alignments are performed.
PROCESS LAYOUT
●●
Separate stations for distinct tasks.
●●
Products move through in any sequence.
●●
For low-volume, customized products.
A product layout (sometimes referred to as an assembly
line) is used when all products undergo the same
facility layout the
operations in the same
arrangement of machinery,
equipment, and employees within
sequence. Workstations
a production facility
are arranged to match the
supply chain management
sequence of operations,
the coordination of members of
and work flows from stathe supply channel, with the goal
tion to station. An assembly
of reducing inefficiencies, costs,
line is the best example of a
and redundancies
product layout.
126 LESSON 8:
Producing Quality Goods and Services
PRODUCT LAYOUT
●●
Also called “assembly line.”
●●
All products undergo same operation in same sequence.
●●
For high-volume, standardized production runs.
A fixed-position layout is used when a very large
product is produced. Aircraft manufacturers and shipbuilders apply this method because of the difficulty of
moving a large product such as an airliner or a ship. The
product remains stationary, and people and machines
are moved as needed to assemble the product. Boeing,
for example, uses the fixed-position layout to build a
new jet aircraft.
FIXED-POSITION LAYOUT
●●
●●
●●
Product usually remains stationary.
People and machines move around as needed to
assemble the product.
Used for producing large products.
8-8
KEY TAKEAWAY
When management determines a need for a new factory,
they must consider four key variables for site selection:
proximity to customers, availability and cost of labour,
cost of construction and operation, and access to key
resources. When designing the facility, the most appropriate facility layout must be considered as well.
8-9
SUPPLY CHAIN MANAGEMENT
8-7 Understand how supply chain manage-
ment affects production time, inventory
levels, and customer satisfaction.
We have discussed the development of an idea for a
product and the planning for a facility. Now we are ready
for actual production. Successful production depends on
careful coordination and monitoring of three important
aspects of operations planning and control:
●●
Supply chain management
●●
Scheduling
●●
Quality control
Supply chain management is the coordination
of members of the supply channel—from raw materials
suppliers, to manufacturers, to distributors, and even
to retailers. The goal of supply chain management is
to create a fluid manufacturing and distribution system
that reduces inefficiencies, costs, and redundancies
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Syda Productions/Shutterstock.com
Supply chain management allows
businesses to implement just-in-time
inventory systems, where materials or
supplies arrive at a facility just when they
are needed so that inventory costs are
minimized.
while creating a competitive advantage and satisfying
customers. Companies such as Apple, Toyota, and
Walmart are considered leaders in supply chain management. The increased focus on supply chain management
in recent years has made it a very important profession
with excellent pay.3
Read the following paragraphs to learn how supply
chain management and innovations such as materials
requirement planning (MRP) and enterprise
resource planning (ERP) benefit manufacturers,
their suppliers, and their customers.
In past eras, manufacturers had transaction-based
relationships with suppliers of their raw materials and
component parts. When the manufacturer estimated a
need for materials, it simply entered an order with its
supplier and waited for the materials to arrive. In most
cases, the manufacturer would try to factor in the lead
time for receiving materials from the supplier, but this
could often vary sometimes leaving the manufacturer’s
production lines sitting idle while it waited for materials.
This could lead to delayed delivery times and unhappy
customers.
One solution to material shortages is to carry large
amounts of inventory so that the manufacturing line is
never waiting on materials. This improves delivery times
and keeps customers happy but can create huge costs.
The cost of purchasing and holding inventory requires
money that could be used elsewhere in the business,
such as for marketing or product development. It can
also lead to waste if product line modifications make that
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raw material inventory obsolete. In addition, if there are
multiple manufacturers involved in a supply chain, and
they all carry high amounts of inventory, the total dollar
value of inventory sitting idle in those various facilities
can be staggering and wasteful. In most cases, the additional costs for these inefficiencies eventually shows up
in the price customers pay for the product.
Supply chain management provides a better way.
When companies along the supply chain communicate
and coordinate with each other, they can better meet
each other’s needs. The first innovation that makes
supply chain management possible is the emergence of
materials requirement planning (MRP), which is a computerized system that integrates production planning and
inventory control. For a complex product such as an automobile with 4,000 or more individual parts, it is virtually
impossible for individual mangers to accurately estimate
when parts are needed. But MRP helps managers juggle
delivery schedules and lead times effectively, arranging
both order and delivery schedules so that materials,
parts, and supplies arrive when they are needed.
An extension of MRP is called enterprise resource
planning (ERP). ERP monitors not only inventory and
production schedules, but also quality statistics, sales
results, and more, all of which can be used to optimize
the ordering process for materials and supplies. The
magic of ERP systems is that they can help companies
in the supply chain monitor each other’s needs. If a
company down the supply chain (or closer to the final
customer) sees a spike in sales, a supplier upstream (or
suppliers closer to the beginning of the supply chain)
can find out immediately and adjust their own production schedule to meet the needs of their customer. In a
fully integrated supply chain, even a raw material supplier who may be several steps upstream will be alerted
of a sales spike downstream, so they know to have extra
materials ready for their customer.
The result of supply chain management is that
businesses can implement just-in-time inventory systems, where materials or supplies arrive at a facility just
when they are needed so
materials requirement
that inventory costs are
planning (MRP) a
minimized throughout the
computerized system that
supply chain. This accomintegrates production planning
and inventory control
plishes three key goals of
reducing production lead
enterprise resource
planning (ERP) a
times, minimizing invencomputerized
system that
tory costs, and keeping cusintegrates production planning,
tomers happy by providing
inventory control, quality statistics,
the products they want,
sales data, and more
when they want them.
LESSON 8: Producing Quality Goods and Services 127
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8-10
KEY TAKEAWAY
Supply chain management is the coordination of members of the supply channel—from raw materials suppliers, to manufacturers, to distributors, and even to
retailers. The key goals of supply chain management are
more reliable production lead times, lower inventory
levels, and higher customer satisfaction.
8-11
SCHEDULING
8-8 Identify tasks on the critical path in a
production schedule.
Scheduling is the process of specifying and controlling
time required for each step in the process to ensure that
materials and other resources are in the right place at
the right time.
Scheduling is important to both manufacturing and
service companies. The production manager in a factory
schedules material deliveries, work shifts, and production processes. Trucking companies schedule drivers,
clerks, and truck maintenance and repair with customer
transportation needs. Scheduling at a postsecondary education institution entails deciding when to offer which
courses, in which classrooms, with which instructors.
A museum must schedule its special exhibits, ship the
items to be displayed, market its services, and conduct
educational programs and tours.
Scheduling is an important part of operational
planning, because the right materials and resources are
needed to ensure a smooth production process. Assume
a furniture manufacturer is scheduling production of
a coffee table. Production managers route the needed
materials through a series
of individual workstations
scheduling the process of
along an assembly line.
specifying and controlling time
required for each step in the
At each workstation, a
process to ensure that materials
specific task is performed
and other resources are in the right
and the partially finished
place at the right time.
coffee table then moves
PERT (Program Evaluation
to the next workstation.
and Review Technique)
At one station the tabletop
chart graphic representation of
is cut. At another station
the PERT technique for scheduling
a complex project and maintaining
the table legs are milled.
control of the schedule
The tabletop and legs
then move to an assembly
Gantt chart a graphic
scheduling device that displays
station. Then the table is
the tasks to be performed on the
stained. After staining, it
vertical axis and the time required
must dry for several hours
for each task on the horizontal axis
before being packaged for
128 LESSON 8:
Producing Quality Goods and Services
shipment. This process must be carefully orchestrated.
If there is a bottleneck at any station due to lack of
labour or materials, the production process is disrupted.
For example, if this furniture plant ran out of stain, the
remaining steps in the manufacturing process would
come to a screeching halt. This lowers factory capacity
and reduces company profits. Production and operations managers are responsible for making sure that
machines, materials, and people are scheduled to be in
the right place, at the right time so that production can
run smoothly.
Scheduling is crucial for keeping a production facility
running smoothly, but it also forms the basis of supply
chain management. Without an accurate schedule, a company cannot accurately communicate materials needs to
its supply chain partners. To assist with scheduling, managers use a variety of tools, including PERT (Program
Evaluation and Review Technique) charts, which
are graphic representations of the PERT technique for
scheduling a complex project and maintaining control of
the schedule, and Gantt charts, which are a graphic
scheduling device that displays the tasks to be performed
on the vertical axis and the time required for each task on
the horizontal axis (see Exhibits 8.3 and 8.4). These tools
are similar in that they:
●●
Define the tasks or activities in a project or process
●●
Determine the time it takes to complete each task
●●
Lay out the order in which tasks must be completed
●●
Determine resources needed to complete each task
With that information in hand, a manager can monitor the progress of activities in a project or process to see
which ones need additional attention.
8-11a
Identify the Critical Path
With any project or production process, several activities usually happen simultaneously. For example,
building an automobile involves separate production
lines for making the car body, doors, engine, wheels,
transmission, and several other parts of the car. Each of
these activities takes a different amount of time to complete, but they are dependent on each other because
the car cannot be fully assembled until all of the parts
are available.
A key component to scheduling is the critical path.
The manager identifies all the activities required to complete the project, the relationships between these activities, and the order in which they need to be completed.
Then, he or she develops a diagram that uses arrows
to show how the tasks are dependent on each other
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GANTT CHART
© Cengage Learning
EXHIBIT 8.3
This GANTT chart details the job of building three dozen electric golf carts.
PERT CHART
© Cengage Learning
EXHIBIT 8.4
This is a simplified PERT diagram for producing a book. A PERT diagram identifies the activities necessary to complete
a given project and arranges the activities based on the total time required for each activity to become an event. The
activities on the critical path determine the minimum time required.
(the diagram may also identify any slack time, which is
the amount of time a task can be delayed without causing
another task to be delayed). The longest path through
these linked activities is called the critical path, which
determines the overall completion date. If the tasks on
the critical path are not completed on time, the entire
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project will take longer and
perhaps be completed late.
See Exhibit 8.5 for how
our car example might look.
A delay in the critical
path activities can delay an
critical path the sequence
of activities that take the longest
time from start to finish; a delay
in critical path activities will
delay completion of a project or
production process
LESSON 8: Producing Quality Goods and Services 129
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AUTO FACTORY’S CRITICAL PATH
© Cengage Learning
EXHIBIT 8.5
entire process, even if every other part of the process was
completed on schedule (or early).
Managers who detect that a critical path activity
might be delayed can sometimes reallocate workers or
machines from non-critical path activities to keep the
process on track.
130 LESSON 8:
Producing Quality Goods and Services
8-12
KEY TAKEAWAY
Scheduling is the process of specifying and controlling
time required for each step in the process to ensure that
materials and other resources are in the right place at the
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
right time. Accurate scheduling is required for a smooth
production process and to realize the benefits of supply
chain integration. Managers must be aware of critical
path tasks and allocate the resources needed to keep
production on schedule.
8-13
QUALITY CONTROL
8-9 Discuss potential benefits of quality
improvements.
Another important component of operations planning
and control is quality control. Successful businesses
recognize that quality and productivity must go together.
Quality goods and services meet customer expectations
by providing reliable performance either in the short
term (such as food service) or on an ongoing basis (such
as an automobile). Defective products waste materials
and time, increasing costs. Worse, poor quality causes
customer dissatisfaction, which usually means lost future
sales. Some companies, such as Mercedes-Benz, have
built their reputations on quality. Other companies
adopt a strategy of emphasizing lower prices along with
reasonable (but not particularly high) quality.
A consumer measures quality by how well a good
serves its purpose. From the company’s point of view,
quality is the degree to which a good conforms to a set of
predetermined standards. Quality control involves creating those quality standards, producing goods that meet
them, and measuring finished goods and services against
them. It takes more than just inspecting goods at the end
of the assembly line to ensure quality control, however.
Quality control requires a companywide dedication to
managing and working in a way that builds excellence
into every facet of operations.
Quality control goes far beyond simply catching
defective product at the end of the production line. Here
is why. Suppose a company makes athletic shoes that cost
$20 per pair to produce. Let us also suppose they make
1,000 pairs each day, because the production managers do
an excellent job of keeping the factory running at full capacity. Currently, this company has a skilled group of quality
inspectors at the end of the production line to ensure that
the shoes meet all design and quality specifications.
Not one bad shoe makes it past these inspectors,
which gives the production managers great pride. Great
shoes being produced efficiently, selling at a good profit,
to customers who can always rely on receiving a highquality product. What’s not to like?
Well, what is being overlooked is that every shoe
that gets rejected costs the company money. Let us suppose the company had a reject rate of 5%. That is just
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50 pairs per day. However, by the time defects were
found in those shoes, $20 had been spent producing
each pair. That is $1,000 per day in rejected shoes
because 1,000 pairs produced each day times 5% reject
rate equals 50 rejected pairs per day. Fifty pairs of shoes
times the $20 production cost per pair equals $1,000 per
day. That is $365,000 per year! And that is just taking
into account the cost of product—and we are not even
counting the profit that could have been made if those
rejected shoes could have been sold at full price.
That is $1,000 per day in costs that could potentially
be avoided if the shoe company spent more time implementing quality procedures along the entire production
line, not just placing inspectors at the end. By focusing
more on overall quality, problems can be caught earlier
or avoided altogether, which can lead to lower defect
rates and extra profits. For example, if this shoe company were to cut their defect rate in half, they could put
at least $500 per day back in their pocket.
This example shows how a simple reduction in defect
rates can save money that would be wasted on faulty products—but that is just the most obvious of savings. The
benefits of quality improvement can also lead to better
utilization of materials, fewer production delays, better
utilization of labour resources, and many more benefits. While installing new quality programs does require
investment, the benefits typically far outweigh the costs.
Large companies often find that quality improvement of
even .1% can increase profits by millions of dollars.
Over the years, more managers have realized that
quality is an essential ingredient of producing goods and
services. Programs to improve quality include the following.
Total quality management (TQM): TQM is the
coordination of efforts directed at:
●●
●●
●●
●●
Continuous quality improvement through the
ongoing creation of quality-improvement initiatives
and projects.
Improving customer satisfaction with higher quality
products and more responsive methods of customer
feedback.
quality control the process
Increasing employee
of ensuring that goods and services
participation in deciare produced in accordance with
design specifications
sion making, policymaking, and process
total quality management
design.
(TQM) coordinated efforts
Strengthening supplier
partnerships through
increased communications and tighter integration of operations.
directed at improving customer
satisfaction, increasing employee
participation, strengthening supplier
relationships, and facilitating an
organizational atmosphere of
continuous quality improvement
LESSON 8: Producing Quality Goods and Services 131
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Statistical process control (SPC) and Six Sigma:
These methods entail a disciplined approach that relies
on statistical data and improved methods to eliminate
defects. For example, statistics based on a random sample
of products at every stage of the production process can
be used to determine how each sample conforms to
quality specifications. Any variations are noted and proactively addressed at the source of the defect. Specifically, Six Sigma is a companywide process that focuses on
measuring the number of defects that occur and systematically eliminating them to get as close to zero defects
as possible. In fact, Six Sigma quality aims to have every
process produce no more than 3.4 defects per million. Six
Sigma focuses on designing products that not only have
fewer defects but also satisfy customer needs. A key process of Six Sigma is called DMAIC; this stands for define,
measure, analyze, improve, and control. Employees at
all levels define what needs to be done to ensure quality,
then measure and analyze production results by using
statistics to see if the stanSix Sigma a disciplined
dards are met. They are
approach that relies on statistical
also charged with finding
data and improved methods to
ways of improving and coneliminate defects
trolling quality.
LESSON SUMMARY
LO 8-1
Outline how the production process
transforms raw materials, labour, and other
resources into finished goods and services.
Production encompasses all the steps required to take a good or
service from idea to reality. Successful production involves the efforts
of operations managers, but also requires close coordination with
marketing, sales, finance, and other areas of the company.
LO 8-2
Discuss Canadian manufacturing in
terms of costs, employment levels, and response to
global competition.
Production of goods and services is a crucial element of any economy.
While employment in the Canadian manufacturing sector has decreased
in recent years, it still remains a vital part of the Canadian economy.
LO 8-3
Contrast operations management for
goods versus services.
The manufacturing of goods and delivery of services require similar
types of operational planning but differ in the resources they use,
the timing of product consumption, and the means for measuring
132 LESSON 8:
Producing Quality Goods and Services
ISO certification: The International Organization for
Standardization (ISO) certifies that companies meet a
set of standards for quality control procedures, production processes, and product testing. While companies
can pursue a variety of ISO certifications, the two most
common certifications are ISO 9001, which addresses
quality management standards, and ISO 14001, which
addresses environmental management systems. One
benefit of ISO certification is that it can prompt a
company to make a coordinated effort to meet and
document its quality standards. Another benefit is that
certification communicates a commitment to quality
and environmental management, which can help win
new customers and also increase a business’s bottom-line profit amount.
8-14
KEY TAKEAWAY
Quality control is more than inspecting finished product
for defects. A well-rounded quality program can
reduce the cause of defects and better utilize a company’s resources. The benefits of investments in quality
improvement typically far outweigh the costs.
quality. Managers of service companies have found they can benefit
from the experience of manufacturers when designing and running
production processes.
LO 8-4
Summarize three key considerations for
design planning.
Once a new idea for a product has been identified, planning
for production involves three different phases: design planning,
facilities planning, and operational planning. Design planning is the
development of a plan for converting an idea into an actual good
or service. The major decisions in design planning are to design a
product line, estimate production capacity, and evaluate production
technology options.
LO 8-5
List the four variables to consider when
choosing facility location.
After the process of design planning, a business will undergo
facilities planning. After exploring the capacity of existing factories,
management may decide to build a new production facility. In
determining where to locate a production facility, management must
consider a number of variables including proximity to customers,
availability and cost of labour, cost of construction and operation, and
access to key resources.
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LO 8-6
Describe the different types of facility
layouts.
The next part of facilities planning is to determine facility layout, which
is the arrangement of machinery, equipment, and employees within
a production facility. Three general types of facility layouts are process
layout, product layout, and fixed-position layout.
LO 8-7
REVIEW QUESTIONS
1. What is production? What are the three steps involved in this
process?
2. What are the two activities crucial to the production of both
goods and services?
Understand how supply chain
management affects production time, inventory
levels, and customer satisfaction.
Supply chain management is the coordination of members of the
supply channel—from raw materials suppliers, to manufacturers,
to distributors, and even to retailers. The key goals of supply chain
management are more reliable production lead times, lower inventory
levels, and higher customer satisfaction.
3. What are the key differences between the production of goods
and services?
LO 8-8
7. What are the four variables to consider when selecting a facility
layout? What are the three types of layouts available and when
should each be used?
Identify tasks on the critical path in a
production schedule.
Once an idea is developed, the design planning is done, and the
facilities are ready, it is time for actual production. The success of
the production process will depend on careful coordination and
monitoring of supply chain management, scheduling, and quality
control. The goal of these three activities is to provide the quality
goods and services that customers want, when they want them. It is
also to reduce costs by eliminating inefficiencies and redundancies,
both on the production line and in the supply chain.
LO 8-9
Discuss potential benefits of quality
improvements.
Quality control is more than inspecting finished product for defects.
A well-rounded quality program can reduce the cause of defects and
better utilize a company’s resources. The benefits of investments in
quality improvement typically far outweigh the costs.
4. What is research and development (R&D)? Why is it important?
5. What are the major decisions involved in design planning?
Explain each.
6. What is the trade-off involved in making decisions about the use
of automation in production?
8. What is supply chain management? What are the key goals of
supply chain management?
9. Why is scheduling an important part of operational planning?
What are some tools available to assist with scheduling?
10. What is quality control? Discuss programs available to assist
businesses with improvements in quality.
KEY TERMS
capacity, p. 124
critical path, p. 129
design planning, p. 123
EXERCISES
Use the Internet, magazines, newspapers, books,
and personal experiences to complete the following
exercises.
1. Research the current number of jobs in Canada’s manufacturing
industry. How does this compare to 10 years ago? 20 years ago?
enterprise resource planning (ERP), p. 127
facility layout, p. 126
Gantt chart, p. 128
good, p. 121
materials requirement planning (MRP), p. 127
PERT (Program Evaluation and Review Technique)
chart, p. 128
2. Complete the same activity as in question #1 but for Canada’s
service industry. How do both industries compare?
production, p. 119
3. Choose two manufacturers that specialize in similar products
(e.g., appliances, electronics). What are the similarities and differences between their product lines?
research and development (R&D), p. 123
4. Think of a product that is traditionally manufactured through
manual labour. Imagine an advancement in technology allows
for this process to be automated. What are the potential advantages and disadvantages?
5. Measuring quality is a key component in the production of both
goods and services. In the production of services, what are common methods used by businesses to measure quality? Which do
you believe is most effective?
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quality control, p. 131
scheduling, p. 128
service, p. 121
Six Sigma, p. 132
supply chain management, p. 126
total quality management (TQM), p. 131
LESSON 8: Producing Quality Goods and Services 133
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WAY OFF TARGET
The saga of Target coming to Canada will fill the pages of business publications for decades to come. It is an intriguing case because there are so many
lessons, so many examples of “what not to do” when it comes to entering into
a new market.
And while these missteps by the U.S.-based retail giant can be identified
in numerous areas of business, the most egregious mistakes were made in
the supply chain management space. When the government of Canada calls
Target’s Canada foray “the greatest supply chain disaster in Canadian history,”
you can be sure there are many stories to tell about what went wrong.
But let us first back up and provide some context and history. Target is
a well-known and successful retailer in the United States. Its stores are clean
and fully stocked, and its staff are well trained and engaged. At the time of its
entry in the Canadian market in early 2013, Target was a force to be reckoned
with in the U.S. market, with more than $70 billion in sales.
It seemed it would be relatively straightforward to enter the market to
the north, and so in 2011 Target bought out the leases of all Zellers stores
in Canada (Zellers, a Canadian discount retailer owned by The Bay, was in a
death spiral at the time). Plans were to have more than 120 stores open in
Canada by the end of 2013.
While this was an ambitious plan, it was one devoid of an understanding
of basic geography. Canada is a vast place, with large distances between
major markets. It is a nine-hour drive between Calgary and Regina, and thousands of kilometres lay between most major metropolitan areas in Canada. It
would be very challenging to have as many distribution centres as one would
in a more crowded geographic market.
Whispers of empty shelves began almost as soon as Target stores began
opening in 2013. At first Target’s Canadian expansion was run mostly by
American expatriates, who tried to claim that demand was so great they
were struggling to keep up. But what Target was really struggling with was
managing a supply chain system that had no real way of succeeding in the
Canadian market.
The first sign of trouble came with Target’s decision for warehouse and
distribution management software. Instead of using the established software
from the U.S. operations, Target decided to use an off-the-shelf solution. But
since no one had used the software before, Target management and staff
became bogged down with details and ignoring what was happening in the
supply chain that was leaving those shelves empty.
Contrary to popular belief, Target had the merchandise. But it was
mostly left in its newly built distribution centres spread across Canada. The
warehouse management software problems were creating a bottleneck,
one that Target Canada could not effectively deal with. Consumers started
complaining about empty shelves, and the media caught on to this story and
would not let go. As Target Canada was opening stores across the country
134 LESSON 8:
Producing Quality Goods and Services
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shoppers took to social media to voice their frustration, asking the company
to stock the shelves with products. Target tried to explain the situation as not
anticipating the demand, and that it was working on improving deliveries to
the stores. In reality, Target was having problems with data quality and simply
did not have time to solve the issue before the openings.
Without proper data to fill its supply chain, Target Canada was stuck with
gluts of products in warehouses and stores. Some stores had too many of
some products, other stores had few to none. The lack of communication of
proper data created scenarios where inventory numbers at Target headquarters were different than at the distribution and centres. Even at the stores,
point of sale systems that managed the checkouts were encountering issues
as basic as not being able to make change properly.
In early 2014, before all the Canadian stores had opened, Target
announced losses in Canada for 2013 to be close to $1 billion. This staggering
loss, followed by more losses in early 2014, necessitated a cleaning out of
management staff at Target Canada. But the losses continued to pile up
through the rest of 2014. Unwilling to change its ways, be it closing stores or
changing inventory management software, Target continued to suffer losses.
And these losses were not just financial, as Canadian customers were left with
a bad first impression and stayed away from Target stores in droves.
By early 2015 Target made the announcement that it was leaving the
Canadian market, closing down all stores and distribution centres by spring
2015. Target had spent $7 billion on the Canadian expansion, and would
not even come close to making money for another six years. Thousands of
Canadians lost their jobs, and Target spent the last few months liquidating
stores at minimal reductions in price. Another final few nails in the Target
Canada coffin.
Working through this case involves the use of a time machine. Go back to
2012, where you are sitting in a room with Target executives in the company’s
Minneapolis, Minnesota, headquarters. You understand the importance of
coordinating the supply chain, and the necessary inclusion of scheduling and
quality control. You are asked to create a guide for Target that helps better
manage its supply chain in anticipation of its entry into the Canadian market.
Without this help, it is clear that Target will suffer the same fate it did upon
entering Canada. Your job is to help prevent such a disastrous misfire.
Case Sources: https://supplychaingamechanger.com/serve-protect-brand-target-canada-story
-role-supply-chain/; http://www.canadianbusiness.com/the-last-days-of-target-canada/; http://
tradecommissioner.gc.ca/canadexport/155736.aspx?lang=eng; http://business.financialpost.com/
news/retail-marketing/target-corp-a-timeline-of-the-retailers-failed-canadian-experiment;
http://www.argentus.com/6-supply-chain-lessons-from-targets-canadian-misadventure/.
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LESSON 8: Producing Quality Goods and Services 135
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9 Attracting and
Retaining the Best
Employees
LEARNING OBJECTIVES
9-1 Identify the phases of human resources management.
9-6 Distinguish between orientation and training.
9-2 Distinguish among job analysis, job description, and job
9-7 List four types of methods for training.
specification.
9-3 Summarize the three advantages of workplace diversity.
9-4 Discuss the six steps of the recruiting process.
StockLite/Shutterstock.com
Once you complete this lesson, you will be able to:
9-8 Understand performance appraisals.
9-9 List some of the laws that protect Canadian workers.
9-5 Compare different compensation schemes.
We begin our study of human resources management
(HRM) with an overview of how businesses acquire,
maintain, and develop their human resources. After
listing the steps by which companies match their
human resources needs with the supply available, we
explore several dimensions of cultural diversity. Then
we examine the concept of job analysis. Next, we focus
on a company’s recruiting, selection, and orientation
procedures as the means of acquiring employees. We
also describe forms of employee compensation that
motivate employees to remain with a company and to
work effectively. Then we discuss methods of employee
training, management development, and performance
appraisal. Finally, we consider legislation that affects
HRM practices.
Were you surprised by which job-hunting techniques work better than others? Finding a great job can
be hard, but we increase our chances of success when
focusing our time on the techniques that work best.
Learning about and implementing those techniques can
maximize your career potential.
You might be surprised to find that companies are in
the same situation as you are. Finding and keeping great
employees is hard. They too must use the techniques that
136 LESSON 9:
Attracting and Retaining the Best Employees
will give them the greatest chance at success. Without
great employees, a company will never reach its potential.
As a result, managers must have a solid understanding of how to acquire, maintain, and develop an
organization’s human resources—its people. We will
discuss these issues in this lesson about attracting and
retaining the best employees.
EXHIBIT 9.1
ATTRACTING AND RETAINING THE
BEST EMPLOYEES
© Cengage Learning
I NTRODUCTION
How to Launch Your Career and Land Your First Job
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A N OVERVIEW OF HUMAN
RESOURCES MANAGEMENT
9-1 Identify the phases of human resources
management.
Human resources—the people in an organization—are
a unique and valuable resource. For example, a company
that needs a certain type of machine can usually acquire the
machine without too much trouble. Once that machine is
acquired, it will stay at the company indefinitely. However,
acquiring the right people to work at your company can be
quite a competitive process, especially for certain professions. And keeping those people takes consistent management, because human resources are the only business
resource that can leave the organization of their own accord.
Human resources management (HRM)—all
of the activities involved in acquiring, maintaining, and
developing an organization’s human resources—generally consists of three phases:
The scope of human resources management is best
appreciated when viewed from the perspective of an
organization that is growing
human resources
or changing rapidly. Read
management (HRM) all
the following to become
the activities involved in acquiring,
familiar with the array of
maintaining, and developing an
organization’s human resources
activities involved in HRM.
ASDF_MEDIA/Shutterstock.com
9-1
1. Acquisition: recruiting and hiring new employees.
2. Maintenance: encouraging employees to remain with
the organization and work effectively.
3. Development: improving employee skills and expanding
their capabilities.
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Human resources management, or HRM,
consists of three phases: acquisition,
maintenance, and development.
LESSON 9: Attracting and Retaining the Best Employees 137
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Human resources management, or HRM, consists
of three phases: acquisition, maintenance, and development. To see the types of activities involved in these
phases, let us look an example of a company in a rapid
growth situation.
Since 1955, Disneyland had been a single resort
with one hotel. Although the Walt Disney Company
began a $1.4-billion upgrade to its resort area in 1998,
what was once mainly a parking area would now become
California Adventure Theme Park and the Grand Californian Hotel and Spa, both of which opened in 2001.
As you can imagine, just the construction phase of this
project was a massive undertaking. But what happens
when the project is done? You have a shiny new park that
can fit 7 million visitors per year. You have a beautiful
hotel with over 1,000 rooms, four restaurants, and multiple pools. And you have millions of potential customers
clamouring to get in. What does Disney do next?
That is where human resources management comes in.
While the construction project was still underway, managers
at Disney were busy working on the first phase of HRM—
acquisition. Acquisition involves five separate activities:
1. Planning: How many people will we need?
2. Job Analysis: What does each person need to do?
3. Recruiting: How do we find qualified candidates for
these jobs?
4. Selection: Whom should we hire for these jobs?
5. Orientation: How do we get our new employees comfortable in their new jobs?
Given that staffing the new park and hotel required
thousands of employees, this first phase of HRM was no
small task. But the next phase of HRM—maintenance—
required a significant amount of work as well.
Maintenance involves:
●●
Employee relations: How do we track and maintain
good employee relations?
●●
●●
Compensation: How much money should employees
be paid?
Benefits: What non-monetary compensation should
we provide to employees for their efforts?
Maintenance is important because companies that
are known to have good employee relations and overall
compensation have an easier time attracting and keeping
good people.
The third phase of HRM—development—includes:
●●
●●
Training and development: How do we teach
employees new skills, and how do we prepare them
for advancement opportunities in the organization?
Performance appraisal: How do we assess
employee performance and potential? Without
human resources management, the new theme
park and hotel would have remained empty. But
through the coordinated effort of line managers
and HRM specialists, a successful grand opening
was possible.
9-1a
The Shared Responsibility of HRM
HRM takes place in an organization, whether that
organization has a formal human resources department
or not. Most managers spend a significant amount of
their time acquiring, maintaining, and developing
employees. In very small organizations with no human
resources (HR) department, these line managers or
the owners handle most HRM duties. As an organization grows in size, a human resources manager is
hired to oversee HRM activities. An HR department
then shares the responsibility for HRM activities with
the managers in the organization. In companies as
large as Royal Bank, HRM activities tend to be highly
specialized. Separate groups deal with compensation,
benefits, training and development, and other staff
activities.
HRM ACTIVITIES
Acquisition
Development
Maintenance
Planning: How many people will we need?
Training and development: How do we
teach employees new skills and prepare them for
advancement opportunities?
Employee relations: How do we track and
maintain good employee relations?
Job analysis: What does each person need to do?
Recruiting: How do we find qualified candidates?
Selection: Whom should we hire?
Performance appraisal: How do we assess
employee performance and potential?
Orientation: How do we get new employees up
and running?
138 LESSON 9:
Attracting and Retaining the Best Employees
Compensation: How much money should
employees be paid?
Benefits: What non-monetary compensation should
we provide?
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KEY TAKEAWAY
Human resources management (HRM) consists of all the
activities involved in acquiring, maintaining, and developing an organization’s human resources. The people
in an organization are a unique and valuable resource,
which makes the efforts dedicated to HRM a worthy
investment.
9-3
P LANNING HUMAN RESOURCE
NEEDS
9-2 Distinguish among job analysis, job
description, and job specification.
The first step in the acquisition phase of HRM is planning. Managers must determine future human resource
needs so that they can plan to meet those needs. Planners
should base forecasts of the demand for human resources
on as much relevant information as they can assemble.
For example, organizational growth expectations, retirement of present employees, turnover, and so on.
The company’s overall strategic plan will provide
information about future business ventures, new products, and projected expansions. Information on past
staffing levels or the existing number of employees in
each department can also be helpful. Planners also
stay aware of industry and economic trends: changes in
management practices, advances in technology, growth
prospects, and competition for talent.
HRM managers use this information to determine
both the number of employees required and their
desired qualifications. Planners use a wide range of
methods to forecast specific staffing requirements. For
example, with one simple method, staffing requirements
are projected to increase or decrease in the same proportion as sales revenue. If a 30% increase in sales revenue is projected over the next two years, then up to a
30% increase in staffing requirements may be expected
for the same period. At the other extreme are elaborate,
computer-based human resource planning models used
by large companies such as Air Canada.
Two useful techniques for forecasting human
resources supply are the replacement chart and the
skills inventory. A replacement chart is a list of
key employees and their possible replacements within
a company. It is important to maintain this chart to
ensure that top management positions can be filled
quickly in the event of an unexpected death, resignation, or retirement. Some organizations provide
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additional training for employees who might eventually replace top managers.
A skills inventory is a searchable database containing information on the skills and experience of all
present employees, which can be mined to find candidates to fill available positions. For a special project,
a manager may be seeking a current employee with
specific information technology skills, at least six years
of experience, and fluency in French. The skills inventory can quickly identify qualified employees. Skill-assessment tests, which provide the information in a skills
inventory, can be administered internally or by outside vendors. Some companies, such as Halogen Software, offer customizable skills assessment and training
software that allows companies to examine skills more
expertly without contracting with an outside provider.
9-3a
Job Analysis
The initial part of human
resource planning involves
projecting the overall
number of new people
needed by the company.
But employers also need
to know the nature of a job
before they can find the
right person to do it.
Job analysis is a
systematic approach that
identifies and determines
replacement chart a list of
key employees and their possible
replacements within a company
skills inventory a computerized database containing information on the skills and experience of
all current employees
job analysis a systematic
approach that identifies and
determines the job duties and
requirements and their importance
to the organization.
Muellek Josef/Shutterstock.com
9-2
Have employees in existing or similar jobs
document their responsibilities and tasks,
observe the responsibilities and tasks of
employees in existing or similar jobs, and
specify objectives for the job, then define
the responsibilities required to meet those
objectives.
LESSON 9: Attracting and Retaining the Best Employees 139
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the job duties and requirements and their importance to
the organization. Consider the position of a support staff.
In a large corporation there may be 50 different support
staff positions. They all may be called “support staff,” but
each position may differ from the others in the activities
performed, the level of proficiency required for each
activity, and the particular qualifications that the position
demands. A variety of methods can help managers perform accurate job analysis.
The goal of job analysis is to create a job description
and a job specification.
●●
Job description: A list of the tasks and responsibilities for a particular job.
●●
Job specification: A list of the qualifications
required to perform a particular job. This includes
any skills, knowledge, abilities, and experience that
candidates must have in order to be considered.
The job description and job specification form the
basis of the job posting that a company publishes on its
website and on job boards when recruiting potential
employees.
The job analysis not only is the basis for recruiting
and selecting new employees but also is used in other
areas of HRM, including evaluation and the determination of equitable compensation levels. Once an
organization accumulates a comprehensive list of job
descriptions and specifications, it can often reuse those
when replacing employees for existing positions. However, a variety of factors can require that a new job
analysis be done, including:
●●
●●
●●
Reorganization of departments that may expand or
contract objectives for a particular position
Expansion of the business into new segments or geographies that may change objectives for a particular
position
Industry or technology changes that alter the desired
qualifications for a particular position
job description a list of the
tasks and responsibilities for a
particular job
job specification a list of the
qualifications required to perform
a particular job
cultural (or workplace)
diversity the differences
among people in the workforce in
terms of ethnicity, gender, religion,
age, and physical or learning
abilities
140 LESSON 9:
9-4 KEY
TAKEAWAY
The first step in the acquisition phase of HRM is
planning, where managers project how many
employees are required to
meet future needs. Connected to the planning
Attracting and Retaining the Best Employees
process is job analysis, a systematic procedure for
studying jobs to determine their various elements and
requirements. Together, these activities prepare the
organization for the recruiting process.
C ULTURAL DIVERSITY IN
HUMAN RESOURCES
9-5
9-3 Summarize the three advantages
of workplace diversity.
As an organization plans for future needs or is recruiting
for open positions, it must consider the topic of cultural diversity. Cultural (or workplace) diversity
refers to the differences among people in the workforce,
including differences in terms of:
●●
Ethnicity
●●
Gender
●●
Religion
●●
Age
●●
Physical or learning abilities
The Canadian workforce continues to become more
diverse. For example, women make up approximately
48% of the Canadian workforce. Approximately 19% of
our workforce was over the age of 54. About 31% of the
Canadian workforce has university credentials.1
This increase in cultural diversity is an important
consideration for today’s managers for three reasons.
1. Increased diversity requires managers to successfully
integrate employees with a broader range of value
systems and working styles.
2. Canadian companies operate in global markets and
must integrate cultural differences when staffing and
marketing in these markets.
3. Global competition has increased, both for talent and
for customers. Companies must expand the scope
of their staffing and marketing strategies in order to
compete.
9-5a
Benefits of Diversity
In Canada, businesses have the opportunity to benefit
from a very diverse population. Canada is a very
multicultural nation—this began with Indigenous
(First Nations, Inuit, and Métis) peoples, increasingly became even more culturally diverse as people
began to immigrate in the early 17th century, and
continues today. While managing a diverse workforce
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Sean Pavone/Shutterstock.com
9-6
A key strength of McDonald’s is its ability
to adapt to local tastes. In the Middle East,
it sells McArabia pita sandwiches filled
with grilled chicken or spiced beef.
does present challenges, it also presents tremendous
opportunities. Read on to learn three key benefits of a
diverse workforce.
KEY TAKEAWAY
Cultural (or workplace) diversity refers to the differences among people in the workforce. Cultural diversity
is an important consideration in terms of recruiting and
management because a diverse workforce can provide
an organization a marketing edge, increase creativity and
innovation, and help it attract top talent.
STUDY TOOLS
Visit the MindTap to watch videos on key functions of human
resource departments within organizations.
Go to nelson.com/student to access the digital resources.
The Three Key Benefits of
a Diverse Workforce
The first benefit of a diverse workforce is that
it provides businesses a marketing edge.
Employees with roots in other countries bring
insight, cultural knowledge, and even language
skills that can improve marketing programs in
those countries. For example, a key strength of
McDonald’s is its ability to adapt to local tastes. In
Japan, McDonald’s sells Cheese Katsu sandwiches,
featuring fried pork and cheese. In the Middle
East, it sells McArabia pita sandwiches filled with
grilled chicken or spiced beef. And in India it
sells vegetarian McAloo Tikki burgers. And the
same benefit applies when marketing to diverse
populations Canada.
The second benefit of a diverse workforce
is that it drives creativity and innovation.
Organizations that hire a diverse group of
employees can benefit from their different skills
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and life experiences. These different points of
view can help a company find new opportunities
and ways of doing things. Research conducted by
professors at Stanford and Northwest universities
suggests that “the mere presence of social diversity
makes people with independent points of view
more willing to voice those points of view, and
others more willing to listen.”
The third benefit of a diverse workforce is that
it attracts top talent. Companies that develop the
best reputations for managing diversity can fare
better in the competition for the best employees.
Companies that limit the scope of their
recruiting efforts will have a tough time keeping
up with companies that embrace diversity.
Management must learn to overcome any
obstacles and capitalize on the benefits associated
with culturally diverse human resources.
LESSON 9: Attracting and Retaining the Best Employees 141
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9-7
RECRUITING AND HIRING
EMPLOYEES
9-4 Discuss the six steps of the recruiting
process.
Once an organization has planned its HRM needs and
identified jobs that need to be filled, the HR department
needs to recruit employees for these jobs. Recruiting
is the process of attracting qualified job applicants.
Because the cost of hiring and training a new employee
can be considerable, recruiting is best conducted as a
systematic process. The six steps are:
1. Attract a candidate pool.
2. Screen candidates.
3. Interview candidates.
4. Compare candidates.
5. Check references.
6. Make a job offer.
Today Canadian organizations use a variety of recruitment strategies. Traditionally organizations used printed
newspaper, radio, and even television advertisements. Later
on job fairs became popular, and in some industries they
still are. Today some of the more common recruiting strategies organizations are using include networking events
and the Internet. Online recruitment can be used to draw
potential applicants directly to an organization’s website or
to recruiting sites such as LinkedIn Recruiter. Social media
platforms are increasingly being used to attract applicants,
especially when organizations are trying to attract younger
generations. Another innovative recruiting strategy, used
by companies such as WestJet Airlines, encourages existing
employees to recommend people they know who would
be a good fit with the WestJet culture.
Read through the six steps in the recruitment process to learn some important details about each step.
1. Attract a candidate pool. The first step is to attract a
strong pool of candidates. One method for this is to
re­cruit internally through company memos or job
postings. The advantage of internal recruiting is that
the knowledge, skills, and abilities of the candidates
are already known. The downside is that promoting a current employee leaves another position to
be filled. In some situations it may be impossible to
recruit internally, such as when no current employee
is qualified or the company
recruiting the process of
is growing rapidly. That is
attracting qualified job applicants
why companies will also
142 LESSON 9:
Attracting and Retaining the Best Employees
recruit externally through methods such as advertised job postings, job fairs, post-secondary career
centres, professional networking, and websites such
as Indeed.com and LinkedIn.
2. Screen candidates. The second step is to screen candidates, initially by reviewing résumés and cover letters
to eliminate candidates who do not meet minimum
qualifications. Next, candidates are usually ranked
according to their qualifications and perhaps contacted for preliminary interviews.
3. Interview candidates. The third step is to interview the top candidates selected during the screening
process. Interviews may be with a single manager or
a hiring committee. Candidates for higher-level jobs
may also meet with a department head or vice president over the course of several interviews.
4. Compare candidates. The fourth step is to compare candidates and select the top two or three. Managers must
consider which candidates have the best qualifications
and will be able to contribute the most to their team.
5. Check references. Once the top few candidates are
chosen, the fifth step is to check references. This
includes speaking with former employers of the candidates, and (for some types of jobs) may involve criminal
background checks and drug tests. Companies typically
select two or three candidates for this stage because of
the possibility their top candidate could be eliminated
if reference checks uncover negative information.
6. Make a job offer. The sixth and final step of the
recruiting process is to make a job offer to the top
candidate. This is usually the stage where the candidate and the company discuss compensation. Once
agreement is reached on those items, the candidate
accepts the offer, and the job is filled.
9-8
KEY TAKEAWAY
Recruiting is the process of attracting qualified job applicants. Because the costs of hiring and training a new
employee can be considerable, recruiting is best conducted as a systematic process. The six steps are:
1. Attract a candidate pool.
2. Screen candidates.
3. Interview candidates.
4. Compare candidates.
5. Check references.
6. Make a job offer.
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9-9
EMPLOYEE COMPENSATION
STRATEGIES
9-5 Compare different compensation schemes.
Compensation, or the payment employees receive in
return for their labour, is an important component of human
resources management. Compensation plans must be:
Competitive enough to attract new talent
●●
Fair enough to keep existing talent from leaving the
company
●●
Reasonable enough so that the company can still
make a profit
●●
Building effective compensation plans is generally
considered part of the maintenance phase of HRM,
because while attracting new talent is important, existing
employees represent the largest share of the company.
Keeping them engaged and motivated is crucial for
meeting organizational objectives.
HRM professionals must take into account several
factors when building a compensation package. The following paragraphs explain some of these factors.
One factor HRM professionals must take into
account when building compensation packages is the
industry. Managers in the legal industry usually are
better compensated than are managers in the fast food
industry. To attract and maintain talent, HRM professionals must build compensation plans that are comparable or better than their competitors in the industry.
Another factor is the level of the job. A division head
is likely compensated at a much higher level than a dataentry clerk. At the same time, one data-entry clerk might
be better compensated than another data-entry clerk
based on years of experience or level of responsibility.
Decisions about these compensation levels are usually
based on a job evaluation that determines the relative
worth of various jobs within the company.
One goal of job evaluation is to design compensation
so that jobs in the organization that require similar levels
of experience and qualifications will have similar levels
of compensation.
A third factor in compensation design is the supply
of candidates. If there is a shortage of candidates for a
certain position in an industry, then companies will often
increase the compensation package for the position to
attract and retain talent.
For example, certain types of computer programmers are in extremely high demand because of the
explosion of mobile technology. This has led to higher
pay for these particular programmers.
In addition to these three factors, HRM professionals also take into account the nature of the position,
the organizational culture, and the individual employee’s
preferences when designing a compensation package.
9-9a
Types of Compensation
Suppose you have just interviewed for two jobs. The
companies are very similar, and you would love to work
at either of them. The job responsibilities for each job
are the same, and the opportunities for advancement are
the same. Which job would you take? Does your opinion
of a job offer change as you learn about other forms of
compensation? As you can see, an effective compensation plan typically encompasses more than salary alone.
There are three primary forms of compensation, each
offering a variety of options
compensation the payment
for companies to consider
employees receive in return for
when building attractive
their labour
compensation plans. The folfringe benefits forms of
indirect compensation including
lowing are the most common
pensions, health insurance, and
types of compensation and
vacation
fringe benefits:
THREE FORMS OF COMPENSATION
Salaries and Wages Incentives
Hourly wages: These
will vary depending on the
positions and job market.
Each province and territory
in Canada sets a minimum
hourly wage.
Salaries: Managerial
and professional employees
are usually paid an annual
salary on either a biweekly,
bimonthly, or monthly basis.
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Piecework and commission: Some employees
are paid according to how much they produce or sell. A car
salesperson might be paid $600 for each car sold or a 3%
commission on the car’s sale price.
Accelerated commission schedule: To
encourage sales, a salesperson could be paid a commission
rate of 3% on the first $50,000 of sales per month, 4% on
the next $30,000, and 5% on any sales beyond $80,000.
Bonus: A bonus is a payment for reaching a specific
goal; it may be paid monthly, quarterly, or annually.
Profit sharing: A company that offers profit sharing
pays employees a portion of the profits over a preset level.
Benefits
Fringe benefits are forms of indirect compensation and may include:
– Health insurance
– Retirement and financial benefits: pension plans, RRSPs, employee
stock-ownership plans, stock options
– Paid vacation and sick leave
– Other employee benefits: tuition reimbursement, child care, wellness
programs, free food and drinks, flexible work arrangements, paid time for
volunteer work, etc.
Some fringe benefits are required by law—for example, paid vacations and
holidays, employment insurance (EI), and Canada or Quebec Pension Plan
(CPP/QPP); EI and CPP/QPP are paid at least in part by the employer.
LESSON 9: Attracting and Retaining the Best Employees 143
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9-10
KEY TAKEAWAY
Compensation is an important component of human
resources management. Compensation plans must be
competitive, fair, and reasonable to attract and retain
top talent. The three types of compensation are salaries
and wages, incentives, and fringe benefits. HRM professionals must take into account a variety of factors when
assembling and managing compensation plans they hope
will be attractive to new and current employees.
9-11
ORIENTATION AND TRAINING
9-6 Distinguish between orientation and
training.
elwynn\Shutterstock.com
Salaries, wages, and incentives typically need to be
competitive within an industry regardless of the other
benefits that are offered. However, if companies rely only
on offering the highest monetary pay they risk getting into
bidding wars over talent, which can drive employment
costs to unsustainable levels. This is a common problem
in highly competitive industries such as software development. The solution is to offer competitive monetary pay
with an attractive array of other, non-monetary benefits.
Efforts to supplement monetary pay can go beyond
the fringe benefits listed in the table on the previous page.
Some of the more common compensation enhancements
are child care, opportunities for personal growth (e.g., company sponsorship for further education), flexibility in the
work schedule, opportunities for advancement, and so on.
Companies use non-monetary benefits for two reasons. First, these benefits can increase employee commitment and productivity. Second, they can provide a
competitive advantage for a company by making it a
more attractive place to work. Each year, Fortune magazine ranks the “100 Best Companies to Work For” and
makes note of the unique benefits today’s companies use
to attract and retain employees. For example, tech giant
Google, which routinely ranks first on Fortune’s list, offers
many traditional non-monetary benefits, such as free food
and fitness classes, as well as extra perks such as free haircuts and laundry services, adoption assistance, concierge
services, and even discounted tickets to special events.2
the team, you are shown the location of your desk and
phone. Maybe you are given a policy manual to read
for a few hours. Next thing you know, after a long and
boring day, you still do not know what you are supposed
to be doing.
This is a common scenario for new employees. Two
important but sometimes overlooked aspects of human
resources management are orientation and training.
First, we will discuss orientation.
Orientation is the process of acquainting new
employees with an organization. It is the last step in
the acquisition phase of human resource management.
Orientation provides information about company policies, salary and benefits, and in some cases other seemingly trivial matters such as parking. Although this
information is very helpful, the more important orientation is about job assignments, work rules, equipment,
and performance expectations provided by the new
employee’s supervisor and co-workers. The orientation
itself may consist of a short, informal presentation by the
employee’s manager, or it may be a more formal, elaborate program involving dozens of people, lasting several
days or weeks. A thorough orientation program will meet
three key objectives:
1. Complete hiring paperwork. Health insurance options,
confidentiality agreements, information for payroll.
2. Learn administrative details. Use of computer and
phone networks, locations of key departments and
equipment.
3. Employee introductions. Meet work team and other
key contacts in the organization.
9-7 List four types of methods for training.
orientation the process of
acquainting new employees with
an organization
144 LESSON 9:
Imagine showing up for
the first day of work at a
new job. Once you are
introduced to the rest of
Attracting and Retaining the Best Employees
The importance of orientation programs can be
underestimated, or the orientation process can be too
informal. This is especially true in smaller companies,
which might not have the resources to build formalized
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9-11a
Training and Development
Training is aimed at improving an employee’s skills and
abilities and to keep these current. Job-related training
teaches new employees how to do their jobs, or teaches
existing employees how to do their jobs more effectively.
For example, a production worker at Honda might be
trained in methods for completing assembly work faster,
or a software developer at Adobe might be trained on
how to use the company’s project-management system
for tracking tasks. Training that is on-the-job, either at
the job site or workstation, tends to be directly related
to the job. Off-the-job training is often used to update
industry policies, new legislation, and so on, and is often
conducted in a classroom setting or seminar format.
Development, which is the process of preparing
employees to assume increased responsibility in both
present and future positions, teaches employees various
professional and personal skills such as time management, creativity, negotiation, delegation, and even positive thinking. Development is often aimed at preparing
employees for advancement in the organization. For
example, a talented marketer might need to learn additional time-management and conflict-management skills
before he or she is ready for a promotion within the
public relations department.
In the past, employers mainly focused on training
that related to the requirements of a particular job task.
Today, however, employers see how investments in overall
employee development can increase the productivity and
engagement of their workforce. Because job and development training are necessary for personal and professional
growth, companies that hope to stay competitive typically
make considerable commitments to these activities.
The following is a description of some different
methods of training and development.
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Pavel L Photo and Video/Shutterstock.com
orientation programs. Because so much energy is
devoted to recruiting and selecting the right people, it is
sometimes assumed that new employees will know what
they are supposed to do as soon as they walk through
the door. But that is not usually the case. A thorough
orientation can help employees get comfortable in
their new work environment, and this can shorten the
amount of time it takes for them to become productive
team members.
While orientation acquaints new employees with
the organization, training teaches employees how to do
their job—or how to do it more effectively. Training is
considered part of the development phase of human
resources management, and it is important for both new
and existing employees.
Physical or computerized simulations
provide practical training without
disrupting daily operations but can be
expensive to administer.
1. On-the-job training. The trainee learns by doing
the work under the supervision of an experienced
employee or peer mentor. In some industries, this
is called apprenticeship and is the primary form
of training for new workers. The advantages of
on-the-job training are that it is inexpensive, easy to
implement, and provides real-world immersion for
the trainee. The disadvantage is that it can distract
the trainer from their primary job duties.
2. Simulations. These can be physical or computerized
simulations, or the use of role-playing scenarios. The
advantage of simulations is that they provide practical
training without disrupting daily operations. The disadvantage is that they can be expensive to administer.
3. Classroom teaching. You probably already know these
methods quite well. The advantages of classroom
teaching are that it can accommodate many trainees
at once and provides personal interaction for trainees.
The disadvantage is that retention is lower with this
teaching format.
4. Online training. Online training is a flexible
option because it can incorporate several modes of
teaching. For example, an online training course
can provide videos of
training the process of
classroom teaching,
teaching new employees how to
require trainees to
do their jobs, or teaching existing
take online quizzes to
employees how to do their jobs
validate their learning
more effectively and efficiently
from those videos,
development the process of
and allow trainees to
preparing employees to assume
participate in online
increased responsibility in both
present and future positions
simulations.
LESSON 9: Attracting and Retaining the Best Employees 145
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9-12
The three main objectives of performance
appraisals are to evaluate an employee’s
performance against standards, to make
employee decisions, and to assess human
resource practices to look for areas to improve.
KEY TAKEAWAY
Orientation and training are important but sometimes
overlooked aspects of human resources management.
Orientation is acquainting new employees with the
organization, helping them become comfortable and
productive in their new work environment. Training is
improving an employee’s skills and abilities. Job-related
training teaches new employees how to do their jobs, or
teaches existing employees how to do their jobs more
effectively. Development teaches employees various professional and personal skills such as time management,
creativity, negotiation, delegation, and positive thinking.
9-13
Wavebreak Media ltd / Alamy Stock Photo
The advantage of online training is that it can be an
inexpensive way to consistently train a large number of
employees. The disadvantage is that the trainee often
lacks personal interaction with the trainers.
Training and development methods often vary
depending on the size of the company. Smaller companies
commonly use informal methods such as on-the-job
training, while larger companies commonly use formal
methods such as classroom teaching and online training.
For example, in a recent year, Disney offered almost two
million trainings, and employees participated in over
4.5 million hours of training using a variety of methods.3
E MPLOYEE PERFORMANCE
APPRAISAL
and during the course of the term give you an indication
of how you are doing. They provide a boost of confidence
in the areas where you are performing well, and call
attention to areas that need improvement. These grades
are also important to your instructors and your school.
By evaluating your performance, instructors find out how
to better assist you, and your school knows whether you
have met the prerequisites needed in order to register
for more advanced classes. These are the same reasons
organizations use performance appraisals, which evaluate
how well an employee is performing his or her job. There
are three main objectives for performance appraisals:
●●
9-8 Understand performance appraisals.
Performance appraisal is the evaluation of
employees’ current and potential levels of performance
to allow managers to make objective human resources
decisions. It typically involves a meeting between the
employee and their direct supervisor to discuss job performance over a predetermined time period. Depending
on the job, performance appraisals are often completed
every 3, 6, or 12 months. The following explains three
important objectives of performance appraisal.
What would it be like if you did not get grades at
the end of each term? What if you had to wait until
the end of your years at university, then simply be told
whether you got your degree or not? That would be
difficult and perhaps
performance appraisal the
very disappointing.
evaluation of employees’ current and
The reason this
potential levels of performance to allow
does not work is that
managers to make objective human
the grades you receive
resources decisions
at the end of each term
146 LESSON 9:
Attracting and Retaining the Best Employees
●●
●●
Evaluate performance against standards. Performance appraisals let employees know how well they
are doing compared to standards that have been
established for their particular job. For this to work
properly, employees must be informed up front as to
what those standards are. The evaluation provides an
opportunity for managers to coach employees on how
they can do better in the future.
Make employee decisions. Managers use performance
appraisals to decide on potential promotions, pay
raises, or the need for possible corrective action.
Assess HRM practices. Performance appraisals help
managers evaluate areas where the organization
can improve employee recruitment, training, and
development activities.
The performance appraisal process usually includes a
written document that employees can review and keep for
their records. The written appraisal in many ways serves
as a report card, but more importantly it should include
suggestions for improvement and a set of goals that are
mutually agreed upon by both employee and manager.
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Managers should discuss the performance appraisal
with the employee to explain the basis for the evaluation,
share any decisions they have made about pay raises or
promotions, and coach the employee on areas that need
improvement. The goal for any manager should be to
help employees reach their potential. When approached
in this manner, employees are often grateful for feedback about their performance.
Performance appraisals and feedback can help
employees advance in an organization. An organization
usually evaluates its employees on an annual basis, but
sometimes the evaluation is more frequent. Performance reviews that gather feedback about an employee
from their peers, the people they supervise, and their
supervisors (called 360-degree evaluation) can help the
employee receive a more balanced and realistic view of
their strengths and weaknesses.
9-13a
1. Evaluate performance against standards. Managers
must clearly establish and communicate standards to
employees before those employees can be evaluated
against those standards. Managers should meet with
the employee to explain the evaluation and advise on
opportunities for involvement.
2. Make employee decisions. Managers and HR staff
should use performance appraisal results as a basis
for distributing rewards or taking corrective action.
Actions that are inconsistent with the results of performance appraisals can demotivate employees.
3. Assess HRM practices. Managers and HR staff
should review the cumulative results of performance
appraisals to determine opportunities for improvement in recruiting and training.
Purpose
Protecting the rights
of employees
Promoting job
safety
Eliminating
discrimination
KEY TAKEAWAY
Performance appraisal is the evaluation of employees’
current and potential levels of performance to allow
managers to make objective human resources decisions. The objectives of a performance appraisal are
to evaluate performance against standards, make
employee decisions, and assess HRM practices. A consistent and properly conducted performance appraisal
process benefits employees by giving them a realistic
view of their strengths and weaknesses, as well as a plan
for improvement. The process also benefits companies,
which can use the process to maximize the potential of
their talent pool.
9-15
Avoiding Appraisal Errors
It is important to remember the three main objectives
of the performance appraisal process. Managers must
stay focused on these objectives so that they do not make
common mistakes.
NEL
9-14
T HE LEGAL ENVIRONMENT
OF HRM
9-9 List some of the laws that protect
Canadian workers.
Legislation affecting HRM practices are generally
aimed at:
●●
Protecting the rights of employees
●●
Promoting job safety
●●
Eliminating discrimination on the basis of race,
gender, age, and other characteristics
Employers are responsible for knowing and following these laws, and they can be punished or sued
for violations. Maintaining compliance with legal
requirements is typically the responsibility of HR staff
and comes into play during all phases of HRM. HR
staff play an important role in advising and training
line managers on how to comply with legal requirements as well.
Some major legislation affecting HRM is listed
below.
Law
The Charter of Rights and Freedoms (contained in the Constitution Act of 1982) provides the right to live and seek
employment anywhere in Canada
●● Human rights legislation provides equal opportunity for members of protected groups in areas such as accommodation,
contracts, provision of goods and services, and employment
●●
The Occupational Health and Safety Act is designed to protect the health and safety of workers by minimizing
work-related accidents and illness
●● WHMIS (Workplace Hazardous Materials Information System) is designed to protect workers by providing
information about hazardous materials in the workplace
●●
●●
●●
The Canadian Human Rights Act (1977) prohibits discrimination on a number of grounds
The Employment Equity Act (amended in 1996) attempts to remove employment barriers and promote equality for the
members of four designated groups: women, visible minorities, Aboriginal people, and persons with disabilities
LESSON 9: Attracting and Retaining the Best Employees 147
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9-16
KEY TAKEAWAY
protecting the rights of employees, promoting job safety,
and eliminating discrimination.
Employers are responsible for knowing and following
all laws related to HRM. These include laws aimed at
LESSON SUMMARY
LO 9-1
Identify the phases of human resources
management.
Human resources are the people in an organization—and people
are a unique and valuable resource. Human resources management
(HRM) consists of three phases that encompass all activities involved
in acquiring, maintaining, and developing an organization’s human
resources. In general, HRM is a shared responsibility of line managers
and staff HRM specialists.
LO 9-2
Distinguish among job analysis, job
description, and job specification.
The first step in the acquisition phase of HRM is planning. Managers
must determine future human resource needs so that they can prepare to meet those needs. Connected to the planning process is job
analysis, a systematic procedure for studying jobs to determine their
various elements and requirements. The job analysis results in a job
description and job specification, which are used to publicize the
employment opportunity. Together, planning and job analysis prepare
the organization for the recruiting process.
LO 9-3
Summarize the three advantages of
workplace diversity.
As organizations plan for future needs and recruit new employees,
they must consider the topic of cultural diversity. Cultural (or workplace) diversity refers to the differences among people in the workforce. A diverse workforce can provide an organization a marketing
edge, increase creativity and innovation, and help it attract top talent.
LO 9-4
Discuss the six steps of the recruiting process.
Once an organization has planned its HRM needs and identified jobs
that need to be filled, the HRM staff recruit employees for these jobs.
Recruiting is the process of attracting qualified job applicants and
selecting the ones that are the best match for the position. Because
the cost of hiring and training a new employee can be considerable,
recruiting is best conducted as a systematic process.
LO 9-5
Compare different compensation schemes.
Compensation is an important component of human resources management. Compensation must be competitive enough to attract new
talent, fair enough to keep existing talent from leaving the company,
and reasonable enough so that the company can still make a profit.
The three types of compensation are salaries and wages, incentives,
and benefits. Monetary compensation is often blended with an attractive mix of non-monetary benefits to create a competitive compensation package.
148 LESSON 9:
Attracting and Retaining the Best Employees
LO 9-6
Distinguish between orientation
and training.
New employees usually go through an orientation process that
acquaints them with the organization. A thorough orientation can
help new employees get comfortable in their new work environment,
which can ultimately help them make a faster and more meaningful
contribution to the company. Training is the process of teaching new
employees how to do their jobs, or teaching existing employees how
to do their jobs more effectively or efficiently. Development is the
process of preparing managers and other professionals to assume
increased responsibility in both present and future positions.
LO 9-7
List four types of methods for training.
Four types of training and development methods include on-the-job
training, simulations, classroom teaching, and online learning.
LO 9-8
Understand performance appraisals.
Another tool for maximizing the capabilities and potential of an
organization’s workforce is performance appraisals, which are formal
evaluations of how well an employee is performing his or her job.
Performance appraisals can be used to evaluate employees against the
standards for their position; make decisions about pay raises, promotions, or corrective action; and help managers assess HRM policies in
regard to recruiting, selection, and training of employees.
LO 9-9
List some of the laws that protect
Canadian workers.
While HRM professionals conduct the activities required to acquire,
maintain, and develop the company’s workforce, they must also know
and follow a variety of laws related to HRM, including laws aimed at
protecting the rights of employees, promoting job safety, and eliminating discrimination.
EXERCISES
Use the Internet, magazines, newspapers, books,
and personal experiences to complete the following
exercises.
1. As a corporate recruiter, you must know how to screen prospective employees. What are the skills prospective employers are
looking for today?
2. List three or four of the employee benefits you would desire
when you begin a career. Do you foresee this list changing
in 10 years?
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3. Your 250-employee company is considering outsourcing some
of its HR functions because it wants to offer a wider range of services. What is the benefit of outsourcing HR functions for small to
medium-sized companies? Conduct research on why companies
outsource this important function and list the advantages and
disadvantages of doing so.
4. What are some of the current trends in online training? Discuss
the pros and cons of utilizing this method of training in a large
corporation.
5. Think of a time when you were required to work on a diverse
team (e.g., at school or work). How did the diversity of the team
impact performance?
KEY TERMS
compensation, p. 143
cultural (or workplace) diversity, p. 140
development, p. 145
fringe benefits, p. 143
human resources management (HRM), p. 137
job analysis, p. 139
job description, p. 140
job specification, p. 140
orientation, p. 144
REVIEW QUESTIONS
performance appraisal, p. 146
recruiting, p. 142
1. Why is human resource management in today’s organization
instrumental in driving an organization toward its goals?
2. What is the human resource management process?
3. What is recruitment? What does the recruitment process involve?
replacement chart, p. 139
skills inventory, p. 139
training, p. 145
4. What are the advantages of workplace diversity?
5. Differentiate between training and development.
6. What are different methods of training?
7. Describe the performance appraisal process.
8. What is compensation? How is it determined?
9. Discuss the various types of compensation.
10. List some of the laws that protect Canadian workers.
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LESSON 9: Attracting and Retaining the Best Employees 149
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ATTRACTING AND
RETAINING THE
BEST EMPLOYEES
Employees, or human resources, are a key factor in the profitability and success of any business. Businesses of any size can face challenges to recruit
and retain high-quality employees, although small- to medium-sized enterprises (SMEs) can find it difficult to compete with large companies. An SME
is defined as a business with 1 to 499 paid employees. SMEs account for the
vast majority of businesses in Canada. Being able to attract and retain the best
employees is so important to all companies, and smaller companies are not
always able to compete in terms of monetary compensation.
Manitobah Mukluks is an Indigenous-owned company headquartered in
Winnipeg. It manufactures moccasins, mukluks, accessories, and more. The
company was founded in 1997 and has grown into a global brand that has
production facilities in Winnipeg and Asia. Between 2008 and 2013, the company grew by over 300% and had to hire more employees to keep pace with
its growth rate. It can be difficult to attract quality employees, and being a
relatively small company makes this even more challenging.
Sean McCormick, the Métis owner and chief executive officer of
Manitobah Mukluks, says, “We see ourselves as contributing to an economic
renaissance in the indigenous community. It’s an integral part of how we
run our business.” His company has hired many of its employees through the
Centre for Aboriginal Human Resource Development (CAHRD) in Winnipeg.
Manitobah Mukluks also provides a bursary, in partnership with CAHRD,
to help Indigenous students attend college or university. By doing this,
Manitobah Mukluks is contributing to the good of society as a whole.
It can be difficult to keep up with human resource demands, particularly
at the executive level. The majority of Manitobah Mukluks administration is
Indigenous, and the company has a policy to preferentially hire Indigenous
workers. More Indigenous people are pursuing post-secondary education,
which will increase the pool of qualified applicants for future positions.
Success for the company is not only about profitability, but also about
making a difference in Indigenous communities by supporting Indigenous
artisans and keeping traditions alive. McCormick says, “This is a company that
really is from the community. I really am a Métis man growing up wearing
mukluks; that’s not an invented story. The product is unbelievable. These
are the best winter boots in the world. There isn’t a more Canadian piece
of footwear than the mukluk.” This is reflected in the company’s vision “to
build a vibrant, global brand that makes a significant impact in Indigenous
communities.”
150 LESSON 9:
Attracting and Retaining the Best Employees
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The recruitment process starts with attracting qualified applicants. Like
many companies, Manitobah Mukluks uses its website and social media to
post job vacancies. Using social media allows the company to communicate that it is an authentic, vibrant brand. Once employees are hired, the
focus shifts to keeping them with the company through maintenance and
development.
In 2017, Manitobah Mukluks was named to Interbrand’s list of 150 Iconic
Canadian Brands. The most important dimensions used to prepare this list are
clarity, engagement, and authenticity. For a brand to resonate with people,
it needs to have a clear message and invite customers to engage with it.
Manitobah Mukluks does this through social media, by encouraging customers to post experiences interacting with their products.
Due to planned expansion into new markets, Manitobah Mukluks is
anticipating the need for 30 new employees at all levels. The company has
hired you to come up with some strategies to attract and retain employees,
particularly young Indigenous employees. Your job is to establish strategies
that will allow the company to be competitive while staying true to its vision.
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LESSON 9: Attracting and Retaining the Best Employees 151
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10 Motivating Employees
and Teams
LEARNING OBJECTIVES
Once you complete this lesson, you will be able to:
and Mayo’s Hawthorne studies.
10-2 Distinguish between maintenance factors and motivation
factors.
10-6 Describe how goal-setting strategies can help motivate
Bernhard Staehli/Shutterstock.com
10-1 Differentiate Taylor’s principles of scientific management
employees.
10-7 Explore how flexible scheduling strategies can be used
to increase employee motivation.
10-3 Differentiate among the four forms of reinforcement.
10-4 Understand how equity theory affects motivation.
10-8 Identify the advantages and common pitfalls of
teamwork.
10-5 Explain expectancy theory in terms of employee
expectations.
I NTRODUCTION
If you have not already, read through the sidebar “What
Advice Would You Give This Business Owner?” that is
on the next page.
Based on what this manager has told you, what
advice would you give him?
●●
●●
●●
●●
Fire everyone and start fresh. They are lucky to have
the opportunities you have given them.
Do nothing. You have the right incentives in place,
so employees who are not team players need to move
on anyway.
Increase the size of the bonus for meeting the production goal. Money talks, you just did not offer
enough of it.
Gather the team to discuss the production goals. Collaborate on a tough but achievable production goal.
Then tie a smaller bonus to that.
152 LESSON 10:
Motivating Employees and Teams
As we saw in Lesson 7, organizational structures
are designed to support the accomplishment of the
overall goals of the company. But these plans cannot be
accomplished—appropriate structure or not—if the individuals responsible for their implementation are not committed to the outcome. To achieve its goals, an organization
must have motivated employees. Motivating employees is,
therefore, perhaps our most important management function. Unfortunately, it is also one of the most difficult. We
are dealing with human beings, not machines; therefore,
it is extremely important that managers understand their
employees and treat them in a way that recognizes how
important they are to the organization’s success. To some
extent, strong employee motivation results from effective
management practices. But what exactly should managers
do to motivate employees? In this lesson, we will look at several perspectives and theories that have influenced management practices over the years. Some of these have proven
to be limited. Fortunately, others have provided managers
effective ideas for motivating and satisfying employees.
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What Advice Would You Give This
Business Owner?
Our company makes scented candles that sell in
grocery stores and drugstores all over the nation.
Sales are really strong; the problem is that production is not keeping up. I was brought in three
months ago to turn things around. Worker morale
was low, and it seemed like people were quitting
every week. I have tried to improve the situation
in several ways.
First, I worked hard to get to know everyone
and invested in some improvements to their workspace, such as brighter lighting and more comfortable workstations. I even gave the whole production
line a small raise. This seemed to really work. There
were more smiles and fewer people leaving the
company. But that only lasted a few weeks, then the
improvements in productivity seemed to fade.
Next, I created a bonus system and an award
for the teams that had the highest output. This
made the best-performing teams really happy and
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seemed to get some of the other teams a bit more
engaged in their work. That seemed like a “win.”
But here’s the kicker. About three weeks ago
it seemed morale had stabilized quite a bit, but
output had only increased 10%. I’m under a lot of
pressure from top management to increase output
by 50%—which honestly does not seem possible to
me. But I decided to be bold. I announced that if we
increased output by 50% in the next 90 days there
would be a huge bonus for the entire production
team, but if we did not there would be mandatory
overtime to increase output. A few employees were
excited and wanted the big bonus. All the rest basically revolted. Now the attitudes around here might
be worse than when I walked through the door.
I do not get it. Should I be treating the employees
differently? Is the bonus pay we’re offering not
enough? Do I just need to fire everyone and get a
new crew? What do I do to turn this around?
LESSON 10: Motivating Employees and Teams 153
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10-1
E ARLY PERSPECTIVES
ON MOTIVATION
10-1 Differentiate Taylor’s principles of
scientific management and Mayo’s
Hawthorne studies.
Before the Industrial Revolution, most people worked
in small businesses or on farms. At this time, ideas
about effective management were fairly primitive. Then
the Industrial Revolution led to the rapid growth of
factories and other production-related work environments that sprung up to support the fast-growing
Canadian economy. This brought large groups of people
together for the first time, and these people needed
to be managed in some
scientific management
way. Of course, one key
the application of scientific
to a successful production
principles to management of work
business is high producand workers
tivity. But perspectives on
Frederick Taylor, who is called the father of scientific
management, believed that scientific principles
could be applied to work and workers. He believed
that after a job was broken into separate tasks,
management should scientifically determine the
best way to do each task. This led to a system of
time-motion studies where workers performed jobs
with slightly different methods, and their results were
measured. The goal was to find the precise physical
motions that were most productive for each task.
Time-motion studies allowed managers to calculate the expected maximum output for a task, then
select the best workers to perform that particular task.
The next step was to provide proper incentives,
and Taylor developed the idea that most people
work only to earn money. So he reasoned that pay
should be tied directly to output. The more a person
produced, the more he or she should be paid. This
is called the piece-rate system, where workers are
assigned an output quota. Those exceeding the
quota are paid a higher per-unit rate for each unit
produced over the quota, allowing the most productive workers to make considerably more money.
When Taylor’s system was put into practice at
Bethlehem Steel, average earnings per day for steel
154 LESSON 10:
Motivating Employees and Teams
exactly how to increase productivity were much different in the past than they are today. In fact, today’s
more balanced perspectives on employee productivity
came about almost by accident.
10-1a
Taylor’s Scientific Management
Because factories and other industrial work environments were still a fairly recent invention at the end of
the 19th century, managers were constantly looking for
the best ways to make their factories more productive.
One of these managers, Frederick W. Taylor, a manager at Bethlehem Steel, suggested the revolutionary
idea that scientific principles should be applied to the
management of work and workers. First, Taylor proposed that each job should be broken into separate
tasks, which is called job specialization. While the idea
of job specialization was not new, Taylor’s principles of
scientific management, which is the application of
scientific principles to management of work and workers,
advanced this idea considerably.
handers rose by 60%, and the average amount of
steel handled per day increased from 16 to 57 tons.
Taylor’s revolutionary ideas had a profound impact
on management practices and helped the industry
become a dominant global force in the early 20th
century. These principles are still relevant today.
When you see food being prepared at McDonald’s,
firefighters arriving at a scene to put out a fire, or
a package being delivered by UPS, you are seeing
Taylor’s principles of scientific management at work.
For example, UPS delivery drivers utilize specific
methods for selecting, lifting, and delivering packages that are designed to save seconds per delivery.
This may not seem like much, but multiplied by over
16 million daily deliveries these efficiencies save UPS
millions of dollars each year.
But there was a problem: Taylor’s methods
addressed productivity but did not address motivation of workers. The benefits of scientific management
do increase productivity to a point, but eventually
those increases stop—or even decline, because
highly mechanized work can make employees miserable. People generally do not like to be treated like
machines, and for this reason Taylor’s methods were
soon recognized as overly simplistic and narrow.
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The Hawthorne Studies
Between 1927 and 1932, Elton Mayo conducted two
experiments at the Hawthorne plant of Western Electric Company in Chicago. The results were unexpected.
The first study was to determine the effects
of the work environment on employee productivity. Workers were divided into two groups.
The lighting in the workplace was varied for
workers in one group, but left the same for the
second group. Then productivity of both groups
was measured.
To the amazement of the researchers, productivity increased for both groups!
Read the boxed feature on the previous page for
insight into Taylor’s scientific management and ideas
including the piece-rate system.
10-1b
The Hawthorne Studies
A century ago, most businesses in Canada were not
overly concerned about employee satisfaction. They
were concerned with finding ways to increase employee
productivity, usually by changing variables within the
job, the incentive system, or the work environment. One
study on employee productivity led to an interesting
breakthrough.
The insights from the Hawthorne studies propelled
management thought beyond the narrow scope of
Taylor’s scientific management. What we see in today’s
successful companies is a careful combination of scientific management principles and motivation techniques
that encourage employees to perform their best.
From these and other studies, the human relations
movement in management was born. The premise is
simple: Pay is only one motivator, but there are many
others. Employees who are happy and satisfied with their
work are motivated to perform better, which can also
increase productivity. This breakthrough led to a flood
of new theories about how to best motivate employees.
10-2
KEY TAKEAWAY
Taylor’s system of scientific management applied scientific principles to work and workers. These principles
led to increases in productivity that are still in use today.
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The second experiment tested the effectiveness of the piece-rate system on increasing output.
Again, the results were not as expected. Output
remained the same, no matter what output quota
was set by management. What was going on here?
They had discovered what later became known as
the Hawthorne effect: Employees work harder when
they receive more attention. Researchers had given
these employees a sense of involvement in their jobs
merely by asking them to participate in the research.
These workers—perhaps for the first time—felt as
though they were an important part of the organization.
However, this view of “motivation” is now regarded as
narrow because it treats workers somewhat like machines.
The Hawthorne studies led to a revolution in theories
about motivation because they revealed the human side
of productivity improvement. Employees who are happy
and satisfied with their work are motivated to perform
better, which in turn increases productivity.
10-3
T HE EMERGENCE OF
MOTIVATION THEORIES
10-2 Distinguish between maintenance
factors and motivation factors.
The surprising findings from the Hawthorne studies
helped set off a human relations movement that led to a
variety of theories about what motivates people.
One of the most popular early theories is Maslow’s
Hierarchy of Needs, which is a motivation theory that
sequences human needs in the order of their importance from physiological
piece-rate system a
needs to self-actualization
compensation system under which
needs and was proposed
employees are paid a certain
by American psycholoamount for each unit of output
they produce
gist Abraham Maslow in
1943. Maslow assumed
Maslow’s Hierarchy of
that humans are “wanting”
Needs a motivation theory
that sequences human needs in
beings who seek to fulfill a
the order of their importance,
variety of needs. He sugfrom physiological needs to selfgested that people work
actualization needs
to satisfy their needs in a
LESSON 10: Motivating Employees and Teams 155
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the lowest level. Once needs at that level
are satisfied, people pursue needs at the
next higher level. However, needs at one
level do not have to be 100% satisfied
before needs at the next level come into
play. For example, if the majority of a person’s physiological and safety needs are
satisfied, that person will be motivated primarily by social needs. Maslow’s Hierarchy
of Needs provides a useful way of viewing
employee motivation, and can serve as a
basic guide for explaining behaviour. However, research has not been able to verify the
details of this theory but it is useful starting
point. Some of the concerns about this
theory are that each need must be mostly
satisfied before moving to the next level (satisfactionprogression model), the theory does not fully address the
opportunity to move down to another level, and the theory
does not consider cultural differences (e.g., some cultures
put social needs before all the others).
The concepts of Theory X and Theory Y were
advanced by business professor Douglas McGregor in his
book The Human Side of Enterprise in 1967. They represent opposing sets of assumptions that underlie management’s attitudes and beliefs regarding workers’ behaviour.
Theory X is a concept of employee motivation
generally consistent with Taylor’s ideas about scientific management. Theory X is based on the following
assumptions:
© Cengage Learning
EXHIBIT 10.1 MASLOW’S HIERARCHY OF NEEDS
particular order: physiological needs first, then safety
needs, and so on up the “needs ladder.”
1. Self-actualization needs: The need to grow, develop,
and become all that we are capable of being; the most
difficult needs to satisfy, and can be accomplished
in different ways for different individuals; could be
learning a new skill, devoting time to helping others,
or starting a new career after retirement.
2. Esteem needs: Respect and recognition from others
and a sense of our own accomplishments and selfesteem. These may be satisfied through personal
accomplishment, promotions at work, honours and
awards, and other forms of recognition.
3. Social needs: The human requirements for love, affection, and a sense of belonging. These can be satisfied through relationships in the work environment,
informal organizations, and social networks such as
your family and friends.
4. Safety needs: The things we require for physical
and emotional security. These may be job security,
health insurance, penTheory X a concept of employee
sion plans, and safe
motivation generally consistent
working conditions.
with Taylor’s scientific management;
assumes that employees dislike
work and will function only in a
highly controlled work environment
Theory Y a concept of employee
motivation generally consistent with
the ideas of the human relations
movement; assumes responsibility
and work toward organizational
goals, and by doing so, personal
rewards are also achieved
156 LESSON 10:
5. Physiological needs: The
most basic needs; these
are the things we need
to survive, such as food,
water, clothing, shelter,
and sleep.
Maslow theorized that
people are motivated to
pursue unfulfilled needs at
Motivating Employees and Teams
1. People dislike work and try to avoid it.
2. Because people dislike work, managers must coerce,
control, and frequently threaten employees to achieve
organizational goals.
3. People generally must be led because they have little
ambition and will not seek responsibility; they are
concerned mainly about security.
The logical outcome of such assumptions will be a
highly controlled, autocratic work environment—one in
which managers make all the decisions and employees
take all the orders.
On the other hand, Theory Y is a concept of
employee motivation generally consistent with the ideas
of the human relations movement. Theory Y is based on
the following assumptions:
1. People do not naturally dislike work. In fact, work is
an important part of all of our lives.
2. People will work toward goals to which they are
committed.
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3. People become committed to goals
when it is clear that accomplishing the
goals will bring personal rewards.
FIGURE 10.1
ERG THEORY
4. People often seek out and willingly
accept responsibility.
5. Employees have the potential to help
accomplish organizational goals.
6. Organizations generally do not make full
use of their human resources.
Existence
Needs
Relatedness
Needs
Growth
Needs
Obviously, Theory Y is much more
positive than Theory X. McGregor argued
Satisfaction—Progression
Frustration—Regression
that most managers behave in accordance
with Theory X, but he maintained that
Theory Y is more appropriate and effective
as a guide for managerial action.
The human relations movement and Theories X
10-3b Herzberg’s Two-Factor Theory
and Y increased managers’ awareness of the importance
While Maslow’s theory provided a fairly generic frameof social factors in the workplace during the second
work for what motivates people, later theories would prohalf of the 20th century. However, human motivation
vide more specific and actionable guidance for managers.
is a complex and dynamic process to which there is no
In the late 1950s, Frederick Herzberg interviewed
simple key. It is clear from decades of research that
approximately
200 accountants and engineers in Pittsneither money nor social factors alone can provide
burgh. He asked them to think of a time when they had
the answer.
felt especially good about their jobs and their work. Then
he asked them to describe the factor or factors that had
10-3a ERG Theory
caused them to feel that way. Next, he did the same
To align Maslow’s theory mostly closely to empirical
regarding a time when they had felt especially bad about
research, Clayton Alderfer developed the ERG theory
their work. He was surprised to find that feeling good and
(existence, relatedness, growth).1 Existence relates
feeling bad resulted from entirely different sets of factors.
to the concern with basic material existent motivBefore Herzberg’s interviews, the general assumpators. Relatedness concerns interpersonal relations.
tion was that employee satisfaction and dissatisfaction
Growth relates to personal growth. (See Figure 10.1.)
lay at opposite ends of the same scale. People felt
The existence needs are similar to Maslow’s physiosatisfied, dissatisfied, or
ERG theory a theory of
logical and safety needs. The relatedness needs are
somewhere in between.
motivation developed by Clayton
similar to social and external esteem needs in Maslow’s
(see Figure 10.2)
Alderfer that better supports
theory. The growth stage is comparable to Maslow’s
However, Herzberg’s
empirical research than Maslow’s
self-actualization and internal esteem needs. The differHierarchy of Needs theory; three
interviews convinced him
components of the model are
ences between the two theories include the following:
that satisfaction and disexistence, relatedness, and growth
●●
satisfaction may be difAlderfer recognizes that these needs can overlap.
existence the concern for basic
ferent scales altogether.
●●
Maslow allows for only one need to be primarily purmaterial existent motivators
Herzberg’s Two-Factor
sued at one time; Alderfer allows for different levels
relatedness the concern for
Theory (also known
being pursued simultaneously.
interpersonal relations
as
Motivation-Hygiene
●●
ERG theory accounts for differences in cultures and
growth the concern for
Theory) is a motivation
better explains that different people have different
personal growth
theory that suggests satisneed orders.
faction and dissatisfaction
Herzberg’s Two-Factor
Theory a motivation theory
●●
are separate and distinct
Alderfer acknowledges that if a higher-order need
that suggests that satisfaction and
dimensions. According to
is not met and the person becomes frustrated, the
dissatisfaction are separate and
Two-Factor Theory there is
person will want to increase satisfaction by moving to
distinct dimensions
one set of job factors called
a lower-order need (frustration-regression model).2
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LESSON 10: Motivating Employees and Teams 157
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SPECTRUM OF SATISFACTION TO
DISSATISFACTION
FIGURE 10.3
Satisfied
Satisfied
Not satisfied
Not dissatisfied
Dissatisfied
© Cengage Learning
Dissatisfied
maintenance factors, such as job security, pay, and
working conditions, that when present reduce dissatisfaction to an acceptable degree but do not necessarily result in
high levels of motivation. The absence of these particular
factors creates dissatisfaction; their presence does not
actually motivate employees, but merely prevents them
from being dissatisfied. Two-Factor Theory also posits
there is another set of job factors called motivation
factors, such as recognition, responsibility, and opportunities for advancement, that increase motivation although
their absence does not necessarily result in dissatisfaction.
The presence of motivation factors increases satisfaction;
their absence does not necessarily result in dissatisfaction
but rather a lack of satisfacmaintenance factors
tion. (see Figure 10.3)
according to Two-Factor Theory,
The advantage of the
job factors such as job security,
Two-Factor Theory is that
pay, and working conditions
that reduce dissatisfaction when
it specifies which specific
present to an acceptable degree,
job factors are important
but do not necessarily result in
for eliminating dissatisfachigh levels of motivation
tion, and which are useful
motivation factors
for actively motivating
according to Two-Factor Theory,
employees.
job factors such as recognition,
Herzberg’s theory takes
responsibility, and opportunities
for advancement that increase
into account that there are
motivation, although their absence
different dimensions to job
does not necessarily result in
satisfaction and dissatisfacdissatisfaction
tion and that these factors
158 LESSON 10:
Motivating Employees and Teams
HERZBERG’S TWO-FACTORY THEORY
MOTIVATION FACTORS
Achievement
Recognition
Responsibility
Advancement
Growth
The work itself
MAINTENANCE FACTORS
Supervision
Working conditions
Interpersonal relationships
Pay
Job security
Company policies and
administration
© Cengage Learning
FIGURE 10.2
do not overlap. Factors such as supervision, working conditions, interpersonal relationships, pay, job security, and company policies and administration are called maintenance
factors. Their presence reduces dissatisfaction but does
not necessarily result in higher levels of motivation. Factors
such as achievement, recognition, responsibility, advancement, growth, and the work itself are referred to as motivation factors because their presence increases motivation.
According to Herzberg, managers must first ensure
that pay and other maintenance factors are adequate, so
that employees are not dissatisfied with their job. Managers should then focus on providing motivation factors,
which will presumably enhance satisfaction over the long
term. Like many psychological theories, the Two-Factor
Theory has limitations. For example, employee pay is
interpreted differently depending on the organization. It
may be a maintenance factor in most work environments,
but in some companies pay constitutes a form of recognition and reward for achievement—and recognition and
achievement are motivation factors. The effect of pay may
depend on how it is distributed. If a pay increase does not
depend on performance (as in across-the-board raises), it
may not motivate people. However, if pay is increased as
a form of recognition (such as bonuses or incentives), it
may play a powerful role in employee performance.
With that said, the most important contribution of
the Two-Factor Theory is that it raises awareness among
managers that non-monetary forms of motivation such as
recognition, advancement, and opportunities for growth
make important contributions to employee performance—
oftentimes more important than pay alone.
We see the influence of the Two-Factor Theory in
many businesses today. Mediacorp Canada Inc. (Canada’s
largest publisher of employment periodicals3) compiles
an annual list of “Canada’s Top Employers” that is based
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on eight criteria including employee job satisfaction.4
Companies where employees have a high level of satisfaction typically have a variety of important perks that
are unrelated to pay. Examples from the Mediacorp list
include the following:
●●
Physical workspace
●●
Performance management
●●
Community involvement
●●
Work atmosphere and social elements
10-4
KEY TAKEAWAY
The surprising findings from the Hawthorne studies
helped set off a human relations movement that led
to a variety of theories about what motivates people.
One of most popular early theories is Maslow’s Hierarchy of Needs, which suggested that people work to
satisfy different types of needs in a particular order.
Herzberg’s Two-Factor Theory provided a more
specific model that suggests that the presence of
maintenance factors will only eliminate dissatisfaction, while the presence of motivation factors will actively motivate employees.
10-5
REINFORCEMENT THEORY
10-3 Differentiate among the four forms
of reinforcement.
Classical theories of motivation such as Maslow’s Hierarchy of Needs and Herzberg’s Two-Factor Theory
give managers a framework for what might motivate
Reinforcement Theory
Reinforcement theory is based on the premise that
behaviour that is rewarded is likely to be repeated,
while behaviour that is punished will occur less
often. There are four methods of reinforcement.
Positive reinforcement and negative reinforcement are both used to encourage the desired
behaviour; they just encourage it in different ways.
Positive reinforcement encourages the desired
behaviour by adding a reward for the behaviour, such
as when a retail sales manager praises an employee
for meeting a sales goal. Positive reinforcement can
involve rewards as simple as saying, “great job,” or
more formal rewards such as a promotion or pay raise.
Negative reinforcement encourages the desired
behaviour by removing something unpleasant. For
example, the retail sales manager might have a policy
where the highest performing sales reps do not have
to stay late to complete inventory each night. Sales
reps will be motivated because performing well
allows them to avoid an unpleasant task.
Punishment and extinction are both used to discourage undesirable behaviour; they just discourage
it in different ways.
Punishment—just like it sounds—discourages
undesirable behaviour by adding something
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unpleasant, such as when a retail sales manager
reprimands or fires sales reps who do not meet their
sales goals. Punishment often does more harm than
good because it tends to create an environment of
hostility and resentment.
Extinction discourages behaviour by withholding a reward for the behaviour. Extinction can be
hard to manage, because it can create unintended
consequences. Suppose the retail sales manager
found that one of her top sales reps was using
high-pressure sales tactics to achieve his sales goals.
Extinction would suggest that the manager not
provide praise or any other type of reward, expecting
that the high-pressure sales tactics would become
extinct. However, the employee might misinterpret
this lack of recognition as a sign that the sales goals
are not important, causing his sales results to fall.
Generally, positive reinforcement is considered
the most effective motivator and is recommended
when a manager has a choice. At the start, it may be
necessary to reinforce the desired behaviour every
time it occurs, but then occasional reinforcement
seems to be more effective because employees who
receive constant rewards can begin to view those
awards as normal and expected.
LESSON 10: Motivating Employees and Teams 159
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employees. Reinforcement theory, which is a
means of modifying behaviour based on the premise
that behaviour that is rewarded is likely to be repeated,
while behaviour that is punished will occur less often,
takes a different approach. Instead of understanding
what motivates employees, reinforcement theory suggests that managers only need to know how to modify
employee behaviour. Using this approach, behaviour
modification, a systematic program of reinforcement
to encourage desirable behaviour, is achieved through
the systematic use of punishment and rewards. You will
probably recognize the four methods of reinforcement,
because they are so commonly used today by managers,
coaches, parents, and instructors.
10-5a
ractical Application: Reinforcement
P
Theory Plus Two-Factor Theory
How are companies today increasing performance by
combining positive reinforcement techniques with motivation factors such as recognition and responsibility?
Gamification, which is the idea of adapting elements
of video games to challenge and reward employees, is
changing the way businesses motivate employees. Target,
for example, lets cashiers compete against each other
for bragging rights about who delivers the speediest
checkout service. Employees at LiveOps, which provides
call-centre software, earn badges and other intangible
rewards playing an ongoing virtual game that encourages
friendly competition while sharpening work skills. The
game is so popular that 75% of LiveOps employees play
at least twice a month, and employee performance has
improved as well.
IBM has created a number of games that only
employees can play, some directly related to work
situations and others indirectly related. In one game,
employees try to improve
reinforcement theory
the efficiency of systems
a means of modifying behaviour
that keep a virtual city
based on the premise that
running. Chuck Hamilton,
rewarded behaviour is likely to
who leads IBM’s virtual
be repeated, while punished
behaviour is less likely to recur
learning department, says
these games help widely
behaviour modification
dispersed employees feel
a systematic program of
reinforcement to encourage
more connected to each
desirable behaviour
other and the company.
The U.K. Department of
equity theory a motivation
theory based on the premise that
Works and Pensions has a
people are motivated to obtain
Web-browser game called
and preserve equitable treatment
Idea Street that rewards
for themselves
employees for submitting
160 LESSON 10:
Motivating Employees and Teams
and fine-tuning ideas for higher effectiveness and efficiency. Employees earn points when they send in an
idea, comment on ideas submitted by others, or sign up
to implement someone else’s idea. A leader board tracks
the highest ranked players, and the department expects
to save $30 million by implementing the top ideas.
10-6
KEY TAKEAWAY
Reinforcement theory gives managers a framework for
how to modify the behaviour of their employees through
the systematic use of punishment and rewards. The four
methods of reinforcement are positive reinforcement,
negative reinforcement, punishment, and extinction.
10-7
EQUITY THEORY
10-4 Understand how equity theory affects
motivation.
10-5 Explain expectancy theory in terms
of employee expectations.
The theories we have discussed so far are often called
the classical motivation theories. They concentrate
mainly on what motivates employees and how to modify
employee behaviour. The combination of these theories
serves as a great foundational resource for managers
hoping to create a positive working environment. However, these theories all have a weakness in that they do
not explain why employees are motivated over time,
and what factors could lead to a sudden drop in motivation. In recent years, managers have begun to explore
models that take a more dynamic view of motivation.
The equity theory of motivation is based on the
premise that people are motivated to obtain and preserve equitable treatment for themselves. As used here,
equity is the distribution of rewards in direct proportion to each employee’s contribution to the organization. Everyone need not receive the same rewards, but
the rewards should be in accordance with individual
contributions.
According to equity theory, we tend to implement
the idea of equity in the following way. First, we develop
our own input-to-outcome ratio. Inputs are the time,
effort, skills, and so on that we contribute to the organization. Outcomes are the rewards we get from the organization such as pay, recognition, and promotions. We will
call this the reward ratio because it measures the value of
our rewards relative to our contribution.
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© Cengage Learning
Next, we compare our reward ratio with what we
perceive as the ratio for some other person (our comparison other), usually a work colleague. Note that our
perception of this person’s reward ratio may be correct
or completely wrong. However, we believe that it is correct, and that drives our response. If we perceive equity
between our reward ratio and someone else’s, we feel the
organization is treating us fairly and we are motivated to
leave things as they are.
However, if we feel under-rewarded we may be
motivated to make changes in order to restore equity.
For example, we may decrease our own effort by not
working as hard, we may try to increase our rewards by
asking for a pay raise or promotion, or we may even quit
the job.
Equity theory is most relevant to pay as a reward.
Because pay is a very real measure of a person’s worth
to an organization, comparisons involving pay are a
natural part of organizational life. However, it can also
apply to the distribution of recognition, promotions,
and even job titles. Managers can avoid problems
arising from inequity by making sure that rewards
are distributed on the basis of performance, and
that everyone clearly understands the basis for these
rewards.
Equity theory is often seen in professional sports,
where even highly paid athletes become dissatisfied when they perceive inequity. For example, Aaron
Donald, defensive tackle for the Los Angeles Rams,
refused to report to training camp unless his contract
was renegotiated to be comparable with the contracts
of other top defensive tackles in the NFL. Though
Donald expected to earn $3 million playing in the 2017
season, other defensive tackles in the NFL earned far
more. Arguably the best defensive tackle in the NFL,
he perceived inequity—which demotivated him so much
that he was willing to sit out the entire preseason and to
accept substantial fines while waiting for a new contract
agreement.5
Equity theory is also commonly seen among students. Have you ever compared term paper grades with
your classmates? If you worked really hard on a term
paper but received a lower grade than a student who
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you believe did not work as hard, you might feel unfairly
compensated for your efforts.
But what happens when we make a comparison to
someone else and find that our reward ratio is higher
than theirs? Often we will either increase our efforts to
justify our rewards, or we will rationalize that we simply
deserve the higher level of rewards.
10-7a
ractical Application: Classical
P
Motivation Theories Plus
Equity Theory
Equity theory adds another piece to the motivation
puzzle. Imagine that you are a manager who has some
unhappy employees. You review the motivation techniques you have been using and feel like you have done
three things by the book.
1. You have carefully constructed a combination of job
factors that satisfy the basic needs of your employees.
In other words, you have satisfied lower levels of
Maslow’s hierarchy and the maintenance factors of
Herzberg’s theory.
2. You provide employees advancement opportunities
and interesting job variety to appeal to their higher-level motivations.
3. You use a system of positive reinforcement that
rewards employees with additional pay, recognition,
and extra days off for great performance.
It seems like you have done everything correctly—
so why are some employees still unhappy? Equity theory
might provide an explanation. If you distributed rewards
in a way that seemed inequitable to certain employees,
it could reduce their morale regardless of how well their
other needs had been met. The solution?
●●
●●
Ensure that distribution of rewards is equitable.
Those with the most inputs should receive proportionally better outcomes.
Ensure that you have communicated the basis of the
rewards to the team. Sometimes perceived inequity
exists because an employee simply does not understand
why someone else received a reward while he did not.
10-7b
Expectancy
Theory
Expectancy
theory,
which is a motivation theory
based on the assumption
that motivation depends
expectancy theory a
motivation theory based on the
assumption that motivation
depends on how much we want
something and how likely we think
we are to get it
LESSON 10: Motivating Employees and Teams 161
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STUDY TOOLS
Visit the MindTap to watch videos on motivating employees
and improving employee performance.
Go to nelson.com/student to access the digital resources.
on how much we want something and how likely we
think we are to get it, provides an additional tool for
managers to understand why an employee may or may
not be motivated by a particular outcome. Read the following discussion to learn about this simple, but powerful
insight into employee motivation.
According to expectancy theory, motivation depends
on how much we want something and how likely we
think we are to get it. For example, let us say you were
offered a job travelling the world selling distribution
rights for independent films. The job pays commission
only, but if you meet sales targets, you will make over
$100,000 per year.
Applying expectancy theory, you would first decide
whether this job is an outcome that you even want. Let us
say that you actually do not like travelling (which is one
of the outcomes of accepting the job). In that case, you
would not be motivated to take the job. While you may
FIGURE 10.4
value the possibility of that salary (which is another possible outcome of the job), it is unlikely that you will earn
that much because the job itself does not motivate you.
However, what if you loved to travel? In that case,
you would indeed be interested in the job but would
need to evaluate the likelihood of achieving the sales
targets. If you have no contacts in the industry and are
extremely shy about sales, you might conclude that it is
unlikely you will reach those sales goals—meaning you
could actually make no money at all. In that case, you
would not be motivated to take the job. You do want the
outcome of travelling and would love to make that much
money, but you do not think you can achieve the targets,
so in your mind it is not worth pursuing.
But if you love to travel and are highly confident that
the sales targets can be achieved, you will be motivated
and will likely take the job. You like what is associated
with taking the job, and you are confident you can do the
job well, meaning you are confident you will receive that
great reward. According to the expectancy theory, that is
a winning combination.
10-7c
ractical Application: Adding
P
Expectancy Theory to the
Motivation Mix
When managers consider the implication of expectancy
theory, certain employee behaviours can suddenly make
more sense (see Figure 10.4). For example, suppose
you were a manager and offered a wonderful promotion
to an employee. The new job involves travel to exotic
places, a prestigious job title, and a huge pay increase. To
your surprise, the employee turns the job down. Why?
EXPECTANCY THEORY GUIDELINES FOR MANAGERS
162 LESSON 10:
Get to know your
employees
Create achievable
outcomes
Actively assist employees
in achieving outcomes
Employees work
for a variety of reasons
besides pay; when
managers get to
know their employees,
they can better discern
what motivates them and
offer outcomes
employees value.
You may be offering
a wonderful outcome
or reward, but if
employees feel like there’s
no way they’ll achieve it
they won’t be motivated
to even try.
For example, if a complex
task is intimidating an
employee, provide the
employee training on
how to complete it. If
you increase their
confidence about
performing the task, they
will usually be more
motivated.
Motivating Employees and Teams
© Cengage Learning
Expectancy theory provides three useful guidelines for managers:
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From your perspective as a recent university graduate,
you are thinking this is a great offer. Do you need to offer
more pay? Does the title need to be more prestigious?
It turns out that none of those are right. After speaking
with the employee, you find out he just got married and
is not willing to spend less time with his new family. In
addition, his spouse makes a high income, so the raise is
not an interesting reward. And finally, the job involves
working with industry sectors where the employee has
no experience, so he lacks confidence in his ability to
achieve the organization’s objectives. In light of expectancy theory, this employee’s lack of motivation about the
job offer makes more sense.
Several components make goal setting effective:
▸ Employee participation in goal setting creates
“ownership” and commitment.
▸ Rewards can be tailored to employee needs.
▸ The collaboration and support of manager provides
further motivation.
But why is goal setting so effective? One possibility
is that it singlehandedly incorporates much of what we
have learned about motivation over the last century.
Employee participation in goal setting creates
“ownership” and commitment.
▸ Maslow’s Hierarchy: satisfies higher-level needs
10-8
KEY TAKEAWAY
Contemporary motivation theories such as equity
theory and expectancy theory provide managers additional insights for understanding employee motivation.
According to equity theory, if employees do not feel like
their ratio of inputs to outcomes is equitable with others,
they may reduce their efforts, demand a raise, or quit
the job. According to expectancy theory, employees must
want an outcome and must believe it can be achieved in
order to be motivated.
10-9
PUTTING THEORY INTO ACTION
10-6 Describe how goal-setting strategies
can help motivate employees.
10-7 Explore how flexible scheduling
strategies can be used to increase
employee motivation.
By learning about these various theories, we have built
a foundation for understanding employee motivation.
Now we can truly see these theories in action by discussing specific management techniques for boosting
employee motivation. As we discuss these techniques,
try to identify how they reflect what we have learned
from the various theories covered in this lesson.
10-9a
Goal-Setting Motivation Techniques
There are several motivation strategies that managers
can apply to boost employee cooperation, productivity,
and morale. These include goal setting, management by
objectives, and behaviour modification.
Goal-setting theory suggests that employees are
motivated to achieve goals that they and their managers
establish together. While it is called a “theory,” in reality
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▸ Two-Factor Theory: provides motivation factors such
as achievement and growth
▸ Expectancy Theory: ensures goals are realistic and
desired by employee
Rewards can be tailored to employee needs.
▸ Two-Factor Theory: selection of rewards that actively
motivate employee
▸ Reinforcement Theory: provides positive reinforcement for achievement of goals
▸ Equity Theory: employee values outcomes, less likely
to perceive inequities
The collaboration and support of manager provides
further motivation.
▸ Hawthorne Studies: involvement from management
motivates employees
▸ Maslow’s Hierarchy: satisfies social and self-esteem
needs
▸ Two-Factor Theory: provides motivation factors such
as recognition and interesting work
goal setting has been demonstrated as one of the most
effective and measurable management practices of the
last several decades. There are several components that
make goal setting effective.
10-9b
Management
by Objectives
A related topic to goal
setting is the organized
approach to management
called
management
by objectives (MBO).
First outlined by Peter
Drucker in 1954, it allows
goal-setting theory
suggests that employees are
motivated to achieve goals
that they and their managers
establish together
management by
objectives (MBO) a
motivation technique in which
managers and employees
collaborate in setting goals
LESSON 10: Motivating Employees and Teams 163
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management to focus on achievable goals to realize the
best possible results with the resources available. One
of the primary principles of MBO is that the focus is on
the results, not the activities. For MBO to work, clearly
defined objectives are agreed to by both management
and employees as well as the performance evaluation.
It is important that everyone in the organization understands the objectives and goals of the organization and
their roles and responsibilities to achieve them. It is
important that performance reviews are conducted
periodically to ensure that individuals are achieving the
objectives and goals.
MBO consists of a series of the following four steps.
1. Set goals. Top management sets organization goals.
Goals then filter down through the organization; managers and employees at various levels meet to jointly
set their goals for performance.
2. Develop action plan. Manager meets with employee
to determine how goals will be accomplished. Manager and employee also decide what resources the
employee will need to accomplish their goals.
3. Implement action plan. Manager and employees meet
periodically to review progress. Manager remains
active and looks for opportunities to coach and assist
the employee.
4. Review performance. Manager meets with the
employee to determine whether the goals were
achieved and to provide an appraisal of overall performance. The manager then rewards the employee
for his or her results.
Two keys to MBO are the collaborative setting of
difficult but achievable goals and consistent support
from management. If a manager dictates an impossible goal, offers an undesirable reward, and leaves it
to the employee to reach the goal in isolation, MBO
will fail. You can see why. This violates what we have
learned from many of the motivation theories discussed so far.
MBO first became
popular as a formal manageflextime a system in which
ment process in the 1960s
employees set their own work
and 1970s, but in many ways
hours within employerit has become embedded in
determined limits
today’s management pracjob sharing an arrangement
tices. Today, goal setting and
whereby two people share one
management collaboration
full-time position
on action plans is common;
telecommuting working at
many effective managers
home all the time or for a portion
use MBO, whether they
of the work week
realize it or not.
164 LESSON 10:
Motivating Employees and Teams
10-9c
Using Flexibility to Motivate
Today’s diverse workforce requires greater flexibility
to attract, motivate, and satisfy employees of different
backgrounds and needs. In response, employers are
increasingly looking to alternative scheduling strategies to meet their needs: flextime, job sharing, and
telecommuting.
The needs and lifestyles of today’s workforce are
changing. Dual-income families make up a greater share
of the workforce than ever before. In addition, more
employees are responsible for the care of elderly relatives as well as children. Many employers are choosing
to offer flexible work schedules that not only help
employees to manage their time better but also increase
employee motivation and job satisfaction.
One strategy is flextime, a system that allows
employees to decide what their work hours will be.
Employees are generally expected to work a certain
number of hours per week but have some discretion as
to when they arrive at work and when they leave for the
day. This allows employees to schedule their work during
the times that are best for them.
Typically, the company establishes two bands of time:
the core time, when all employees must be at work, and
the flexible time, when employees may choose whether
to be at work. The only condition is that every employee
must work a total of eight hours each day. For example,
the hours between 9 a.m. and 11 a.m. and 1 p.m. and
3 p.m. might be core times, and the hours between 6 a.m.
and 9 a.m., 11 a.m. and 1 p.m., and 3 p.m. and 6 p.m.
might be flexible times. This would give employees the
option of coming in early and getting off early, coming in
later and leaving later, or taking a long lunch break. But
flextime also ensures that everyone is present at certain
times, when conferences with supervisors and department meetings can be scheduled.
Another type of flextime allows employees to work a
40-hour work week in four days instead of five. Workers
who put in ten hours a day instead of eight get an extra
day off each week. Offering flextime can be a low-cost
way for a company to show an employee that it cares
about his or her well-being through offering a better
work–life balance.
Another strategy is job sharing, sometimes referred
to as work sharing, where two people share one full-time
position. One job sharer may work from 8 a.m. to noon
and the other may work from 1 p.m. to 5 p.m., or they
may alternate workdays. Job sharing is different from
part-time work because two people share one single position, which is generally more skilled than a part-time
position would be. Job sharing can be challenging to
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
establish but may contribute to greater job satisfaction
and ease in creating work–life balance. Job sharing can
actually lead people to be more productive, as they know
that their time at work is limited and that someone else
is directly dependent on the quality of their work. This
arrangement may be especially appealing to parents
who wish to maintain a professional position while also
making time for children.
Job sharing combines the security of a full-time
position with the flexibility of a part-time job. For companies, job sharing provides a unique opportunity to
attract highly skilled employees who might not be available on a full-time basis. In addition, companies can save
on expenses by reducing the cost of benefits and avoiding
the disruptions of employee turnover. For employees,
opting for the flexibility of job sharing may mean giving
up some of the benefits received for full-time work. In
addition, job sharing is difficult if tasks are not easily
divisible or if two people do not work or communicate
well with one another.
People who are planning to retire in the near future
can use job sharing as a means to ease into retirement.
This allows the company to retain talent and the person
to prepare for his or her retirement years.
A growing number of companies allow
telecommuting—working at home all the time or for
a portion of the work week. Email, cloud computing,
smartphones, laptops, tablets, video conferencing, and
overnight couriers all facilitate the work-at-home trend.
Working at home means that individuals can set their own
hours and have more time with their families. Companies
that allow telecommuting experience several benefits,
including increased productivity, lower real estate and
travel costs, reduced employee absenteeism and turnover,
increased work–life balance, improved morale, and access
to additional labour pools. Telecommuting also helps
improve the community by decreasing air pollutants,
reducing traffic congestion, and lowering consumption of
fossil fuels, which can give a company a green factor.
Flexible schedules are becoming much more common
as improvements in technology allow people to stay connected, no matter where they are or what time it is.
However, some industries are more likely to offer
their workers flexible schedules than others. Medical
and health, education and training, administrative jobs,
and accounting are all likely to offer flexible schedule
options. For example, many high-pressure accounting
firms, such as Ernst & Young, have implemented flextime as a reward for working in an intense industry that
requires some long hours during busy times. To offset
the 60- or 70-hour work weeks during tax season, some
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accounting firms allow their employees to work three-day
weeks or take extended breaks during the summer.
Flex policies such as this help reduce employee
burnout and keep turnover low in what can be a stressful
industry.
10-9d
Job Enrichment and Empowerment
It is no secret: Doing the same, simple task over and over
at your job is boring. Being able to do a variety of tasks
helps somewhat. Having more responsibility over how
you do your job helps even more. That is the thinking
behind job enrichment, a method for motivating
employees by providing them with increased variety,
responsibility, and control over their jobs.
In many ways, job enrichment is the exact opposite
of Taylor’s principles of scientific management, which
broke jobs down into small tasks and tightly optimized
how those tasks were performed. As discussed earlier,
Taylor’s principles do increase productivity to a large
degree. However, at a certain point the mechanized
nature of the tasks can decrease employee motivation, or
lead to high turnover among employees. Because hiring
and training new employees is expensive, managers try
to find a balance between the efficiency of specialized
jobs and the high productivity associated with a stable,
motivated workforce.
Jobs can be enriched in a number of ways. See
the following activity for examples including job
enlargement, job redesign, and job rotation.
Suppose you worked in a finance department doing
data entry of sales reports. Your job is part of a larger process, where data are also entered about expenses; then
financial reports are assembled, and finally they are
job enrichment a method
for motivating employees by
presented to management.
providing them with increased
One form of job enrichvariety, responsibility, and control
ment, called job enlargeover their jobs
ment, would give you
job enlargement a form
additional but similar tasks
of job enrichment where an
to complete. In this case,
employee is given additional but
you might also take over the
similar tasks to complete
entry of the expense data.
job redesign a form of job
While this does provide
enrichment where employees
some variety, it is basically
are assigned entirely new tasks
that fit their skill sets and the
the same type of work, so
organization’s needs
this type of job enrichment
job rotation a form of job
may not be effective.
enrichment
where an employee is
Another form of job
moved between various jobs for
enrichment is job redesign,
specific periods of time
where you are assigned
LESSON 10: Motivating Employees and Teams 165
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Jelena Danilovic/Shutterstock.com
Job enrichment can take a variety of forms.
entirely new tasks that fit your skill set and the organization’s needs. Perhaps you are allowed to do some data
entry, some assembly, and even part of the report presentation. This increases the variety and level of responsibility associated with your job.
A final form of job enrichment is job rotation, where
you are moved from one job to another for specific periods of time. Perhaps you spend one week doing each
piece of the financial reporting process. While this
requires significant training, it can dramatically increase
the variety of tasks you get to do and can better prepare
you for greater levels of responsibility. By providing a
variety of tasks and added responsibility, you may find
your work more interesting and perhaps gain a broader
perspective about the important contribution you make
to the organization.
Job rotation can be used as a motivation tactic, but
also as an effective training tool. For example, GE’s
leadership training program for marketing and sales consists of three 8-month rotational assignments. Management candidates perform different sales and marketing
functions while receiving extensive training over the
course of a two-year period. Candidates then move on to
leadership positions within the company.6
Many companies are increasing employee motivation and satisfaction through the use of empowerment.
Empowerment means involving employees more in
their jobs and in the operempowerment making
ations of the organization
employees more involved in
by increasing their particitheir jobs by increasing their
pation in decision making.
participation in decision making
With empowerment, conemployee ownership a
trol no longer flows exclusituation in which employees own
sively from the top level of
the company they work for by
the organization downward.
virtue of being shareholders
Empowered
employees
166 LESSON 10:
Motivating Employees and Teams
have a voice in what they do and how and when they do
it. In some organizations, employees’ input is restricted to
individual choices, such as when to take breaks. In other
companies, their responsibilities may encompass more
far-reaching issues. Successful companies tend to treat
their employees like assets. Rather than forcing everyone
to conform to an assigned role, empowered employees
feel fully utilized and their responsibilities shift with
the company’s needs. Technology clearly plays a role in
empowering employees, but so does creating an open
and safe workplace where employees feel like they can
speak up and be heard.
Some organizations are taking empowerment even
further through employee ownership—a situation
in which employees own the company they work for by
virtue of being shareholders. Employee-owned businesses
directly reward employees for success, making it a highly
effective method for motivating employees. When the
company enjoys increased sales or lower costs, employees
benefit directly. The National Center for Employee
Ownership, an organization that studies employee-owned
businesses, reports that employee share ownership plans
(ESOPs) provide considerable employee incentive and
increase employee involvement and commitment.7
10-9e
ractical Application: Remembering
P
Motivation Theories When Using
Job Enrichment
Providing job enrichment and empowerment is an
example of a motivation factor, as noted in Two-Factor
Theory. If an employee feels like a job is a good match for
his skills and provides reasonable variety, the work itself
can actively motivate the employee. Of course, not all
workers respond positively to job-enrichment programs.
●●
●●
First, any increase in responsibility may need to be
accompanied by an increase in rewards. Those could
be monetary rewards such as higher pay, or nonmonetary rewards such as a new job title or simply
some recognition from the team. Equity theory suggests that not providing increased rewards for the
employee’s additional responsibilities could cause the
employee to perceive inequity.
Second, employees should be properly trained in
any new jobs to which they will be assigned. Expectancy theory suggests that if employees do not feel
adequately prepared to accomplish their new tasks,
they will not be motivated.
Managers must address these two areas in order
realize the increased level of employee motivation that
can result from job enrichment.
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10-10
KEY TAKEAWAY
to increase employee productivity and creativity, because
team members are working on specific goals and are
given greater autonomy.
There are four basic types of teams: functional,
cross-functional, self-managed, and virtual.
Virtual teams are the fastest-emerging trend in
teamwork, mainly because of advances in technology.
Email, cloud computing, smartphones, laptops, tablets,
and video conferencing all facilitate the trend toward
virtual teams. In addition, the use of virtual teams
allows for collaboration between colleagues all over
the globe, bringing together highly specialized team
members. Cisco, for example, is an industry leader at
providing a virtual work environment. Approximately
85% of the company’s workforce connects to the company remotely on a regular basis. Cisco’s employees use
many of the company’s own products, including WebEx
and TelePresence, which allow employees to attend
meetings, complete training, and hold video conferences online. Cisco’s telecommuting program has
boosted employee satisfaction, reduced turnover, and
earned the company numerous sustainability awards.
Telecommuting has saved the company over $277 million and lowered employees’ fuel costs by an estimated
$10 million annually.
Goal setting effectively motivates employees by providing
them specific and moderately challenging goals. Flexible
scheduling strategies such as flextime, job sharing, and
telecommuting can help organizations acquire, motivate,
and satisfy employees of diverse backgrounds and needs.
Job enrichment is another management technique for
increasing motivation and involves providing employees
increased variety, responsibility and control in their jobs.
Job empowerment involves employees more in their
jobs and in the company’s operations by increasing their
participation in decision making. Employee ownership
takes that a step further, making employees shareholders
of the company.
10-11
TEAMS AND TEAMWORK
10-8 Identify the advantages and common
pitfalls of teamwork.
The concept of teamwork may be most commonly associated with sports, but teamwork is also integral to business.
In an organization, a team is two or more workers operating as a coordinated unit to accomplish a specific task or
goal. A team may be assigned any number of tasks or goals,
from development of a new product to selling that product.
This organizational structure is popular because
it encourages employees to participate more fully in
business decisions. The growing number of companies
organizing their workforces into teams reflects an effort
10-11a
The Nature of Teamwork
Why not just work alone
and consult others only
when you have a question
or encounter a problem?
virtual team a type of team
where members are geographically
dispersed but communicate
electronically
FOUR BASIC TYPES OF TEAMS
Cross-Functional
Self-Managed
Virtual
Art © Cengage Learning
Functional
●
●
Members of this team belong to the
same functional department such as
marketing, production, etc.
Supervised and led by the manager
for that functional area
●
●
●
●
NEL
Members of this team are from different
functional departments (also referred to
as matrix departmentalization)
Team members are led both by their
functional manager and the team
manager—usually a project or program
manager
Used often for projects and new product
development
●
●
●
Group of employees with skills and the
ability to manage themselves – Team
is monitored, but not actively led, by
managers
The leadership role is shared or rotated
within the team
●
●
Members are geographically dispersed
but communicate electronically
Can be structured like functional,
cross-functional, or self-managed
teams depending on the skills and
authority of the members
Team members held mutually responsible for meeting objectives
Often temporary in nature
LESSON 10: Motivating Employees and Teams 167
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Because teamwork provides a number of advantages
when compared to working alone.
●●
●●
●●
●●
Synergy. Cooperation between members can often
lead to faster and more thorough results when compared to working alone.
Creativity. Different perspectives and ideas can help
solve tough problems and lead to innovation.
Satisfaction of needs. Provides for social and selfesteem needs, which can often increase job satisfaction.
Accuracy. Errors can be avoided because members
can check each other’s work.
There are potential disadvantages to teamwork,
mainly due to the complexities of human behaviour.
Managing these complexities is important for managers
and members of teams. Read on to learn about potential
disadvantages of teamwork and how to overcome them.
While teamwork provides advantages such as synergy, creativity, satisfaction of social needs, and increased
accuracy, there are common pitfalls that teams should
be careful to address.
The first potential pitfall is team conflict. Developing a team unit from a diverse group of personalities,
specialties, and work styles can be challenging and complicated. In a cohesive team, members get along and are
able to accomplish their tasks effectively. When conflicts
do arise, members must work to reach a compromise
before resentments build up and destroy team cohesion.
The second potential pitfall is social loafing, which
is when a team member does not perform his or her
LESSON SUMMARY
LO 10-1
Differentiate Taylor’s principles of scientific management and Mayo’s Hawthorne studies.
As a result of the Industrial Revolution, managers and owners of
factories and other production-related work environments were
constantly looking for ways to increase productivity. One of the first
breakthroughs was Frederick Taylor’s scientific management, which
applied scientific principles to the management of work and workers.
While these principles led to huge increases in industry productivity,
they did not address employee motivation. The Hawthorne studies led
to a revolution in theories about motivation because they revealed the
human side of productivity improvement. Employees who are happy
and satisfied with their work are motivated to perform better, which in
turn increases productivity.
168 LESSON 10:
Motivating Employees and Teams
share of the work. To avoid social loafing, team members
must hold each other accountable for results and team
responsibilities must be clearly defined.
The third potential pitfall is groupthink, which happens when members of a highly cohesive group tend to
reject contrary opinions. Soon a team culture can develop
that does not accept dissent, stifles creativity, and damages team morale. To avoid groupthink, teams can utilize
a variety of brainstorming and decision-making techniques in order to maximize the number of ideas that
are considered.
A team that can minimize these common pitfalls
and stay focused on its objectives can often achieve
results that are superior when compared to those same
employees working in isolation. Teamwork within a company can help reduce employee turnover, and increase
production, quality, and customer service. There is also
evidence that working in teams leads to higher levels
of job satisfaction among employees and a harmonious
work environment.
10-12
KEY TAKEAWAY
A team is two or more workers operating as a coordinated unit to accomplish a specific task or goal. The advantages of a team are that it can create synergy, increase
creativity, satisfy social needs, and increase accuracy.
However, common pitfalls of teamwork include conflict,
social loafing, and groupthink.
LO 10-2 Distinguish between maintenance
factors and motivation factors.
One of the most popular early theories is Maslow’s Hierarchy of Needs,
which suggested that people work to satisfy needs in a particular order.
Herzberg’s Two-Factor Theory provided a more specific model that suggests that the presence of maintenance factors will only eliminate dissatisfaction, while the presence of motivation factors will actively motivate
employees. The most important contribution of Two-Factor Theory is
that it raises awareness among managers that non-monetary forms of
motivation such as recognition, advancement, and opportunities for
growth make important contributions to employee performance.
LO 10-3 Differentiate among the four forms
of reinforcement.
The classical theories of motivation, such as Maslow’s Hierarchy of
Needs and Herzberg’s Two-Factor Theory, give managers a framework
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for what might motivate employees. Reinforcement theory takes a different approach. Instead of understanding what motivates employees,
reinforcement theory suggests that managers only need to know
how to modify employee behaviour. Using this approach, behaviour
modification is achieved through the systematic use of punishment
and rewards, including positive reinforcement, negative reinforcement,
punishment, and extinction.
LO 10-4
Understand how equity theory affects
motivation.
The classical theories of motivation mainly concentrate on what
motivates employees and how to change their behaviour, but these
theories have limitations. In recent years, managers have begun to
explore theories that help explain why employees are motivated, or
not motivated. Two of these theories are equity theory and expectancy
theory. According to equity theory, if employees do not feel like their
ratio of inputs to outcomes is equitable with that of others, they may
reduce their efforts, demand a raise, or quit the job.
LO 10-5
Explain expectancy theory in terms
of employee expectations.
According to expectancy theory, employees must want an outcome
and believe it can be achieved in order to be motivated.
LO 10-6 Describe how goal-setting strategies
can help motivate employees.
Management techniques commonly used today reflect what we
have learned from these various motivation theories. Goal-setting
strategies such as goal-setting theory and management by objectives
motivate employees by allowing them to set in collaboration with
managers.
LO 10-7 Explore how flexible scheduling
strategies can be used to increase employee
motivation.
Flexible scheduling strategies such as flextime, job sharing, and
telecommuting can help organizations acquire, motivate, and satisfy employees of diverse backgrounds and needs. Job enrichment,
another management technique for increasing motivation, involves
providing employees increased variety, responsibility, and control in
their jobs. Job empowerment involves employees in their jobs and
in the company’s operations more by increasing their participation
in decision making. Employee ownership takes that a step further,
making employees shareholders of the company.
LO 10-8 Identify the advantages and common
pitfalls of teamwork.
The concepts of teams and teamwork may be most commonly
associated with sports, but they are also integral parts of business
organizations. The advantages of a team are that it can provide
synergy, increase creativity, satisfy social needs, and increase accuracy. However, common pitfalls of teamwork include conflict, social
loafing, and groupthink. Teamwork within a company can help
reduce employee turnover, and increase production, quality, and
customer service. There is also evidence that working in teams leads
to higher levels of job satisfaction among employees and a harmonious work environment.
NEL
EXERCISES
Use the Internet, magazines, newspapers, books,
and personal experiences to complete the following
exercises.
1. How are job satisfaction and employee morale linked to job
performance? Do you work harder when you are satisfied with
your job? Explain your answer.
2. Review the assumptions of Theory X and Theory Y. Under which
set of assumptions would you prefer to work? Is your current or
former supervisor a Theory X or Theory Y manager? Explain by
describing the person’s behaviour.
3. Using expectancy theory, analyze how you have made and will
make personal choices such as a major area of study, a career to
pursue, or job interviews to seek.
4. Both individual motivation and group participation are essential
to accomplish certain goals. Describe a situation you are familiar
with in which cooperation achieved a goal that individual action
could not. Describe one in which group action slowed progress
and individual action would have been better.
5. What motivates you? Write down your goals for the next year
and the next five years, and the ways that you will be able to
achieve these goals.
REVIEW QUESTIONS
1. Summarize the following:
a. Frederick Taylor’s scientific management
b. the Hawthorne studies
c. Maslow’s Hierarchy of Needs
d. McGregor’s Theory X and Theory Y
e. Herzberg’s Two-Factor Theory
2. How can the use of goal-setting theory lead to motivation?
3. Explain how the following affect employee motivation:
education and training opportunities and employee
ownership.
4. Explain how employers are using flexibility to attract, motivate,
and satisfy employees.
5. Explain job enlargement, job enrichment, and job rotation.
6. Identify four different types of teams.
7. What advantages does teamwork provide when compared to
working alone?
8. What are the common pitfalls of teamwork?
LESSON 10: Motivating Employees and Teams 169
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KEY TERMS
job redesign, p. 165
behaviour modification, p. 160
job sharing, p. 164
employee ownership, p. 166
maintenance factors, p. 158
empowerment, p. 166
management by objectives (MBO), p. 163
equity theory, p. 160
Maslow’s Hierarchy of Needs, p. 155
ERG theory, p. 157
motivation factors, p. 158
existence, p. 157
piece-rate system, p. 155
expectancy theory, p. 161
reinforcement theory, p. 160
flextime, p. 164
relatedness, p. 157
goal-setting theory, p. 163
scientific management, p. 154
growth, p. 157
telecommuting, p. 164
Herzberg’s Two-Factor Theory, p. 157
Theory X, p. 156
job enlargement, p. 165
Theory Y, p. 156
job enrichment, p. 165
virtual team, p. 167
170 LESSON 10:
job rotation, p. 165
Motivating Employees and Teams
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BUFFER THE DISTANCE
SLAYER
Most people who have worked in an office setting have daydreamed about
working from home and setting their own hours. Their thoughts drift toward
sleeping late, constant snack breaks, and the occasional nap. With no one
looking in, this must be every employee’s dream, right?
Well, the above description is exactly that—a dream. Working remotely is
a growing trend, but not in the way many of those who are stuck in cubicles,
offices, and break rooms would imagine. And the variety of situations are
matched only by the variety of reasons to work remotely.
The most recent numbers in Canada show that 1.7 million Canadians
work from home. This number may not appear to be that impressive, but
two things should be noted. First, these numbers are from 2008, the most
recent data in Canada—and in the last decade there has been much technological advancement that would facilitate working remotely. Second, these
numbers do not include people working for themselves, meaning that close
to 2 million people were gainfully employed, but not required to work under
the same roof as their co-workers.
The move toward remote working is due not only to technology, but also
to the need for a change in where people work. Many of those in Generations X
and Y were not as interested in the corner office as their parents had been
and sought out situations where they could create variety in both the work
they do and where they do it. In recent years, companies started offering
more open-concept work environments, with no doors or offices, and social
meeting areas that included kitchens, beanbag chairs, and ping-pong tables.
But for some this was not enough. For a variety of reasons, people continued to seek out opportunities to make open-concept even more open.
And companies began to see the benefit for them: lower cost. In 2015, social
media company Buffer shuttered all of its offices. Along with cost savings,
the company achieved a new approach to work that allowed employees to
be productive on their own schedule. This often gave employees a feeling of
empowerment, knowing that their company trusted them to get their work
done without looking over their shoulder.
Without an office, Buffer had to determine a model that would still allow
managers to keep in touch with remote employees. The solution was the
creation of a fully distributed team, where every member of a team or company works in a different geographic location. A Canadian employee of Buffer,
Hailley Griffis, was interviewed in 2017 and asked about how the Buffer team
works for her and the company. She noted a real motivation to work for Buffer
was to be close to family in Canada. The article goes on to describe how Buffer
manages its team: “Griffis meets with Buffer’s marketing team in person once
every six months and flies to a different city each year for a company-wide
retreat—this year it was in Madrid. Other than that, she works online from
her bachelor apartment in downtown Toronto and communicates through
video conferencing and online messages.”
NEL
LESSON 10: Motivating Employees and Teams 171
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Some downsides to remote working scenarios do exist. For one, isolation
can be an issue, as some employees may feel disconnected to the goals of
the company or simply need to have human interaction in order to best complete their job tasks. Early in the growth of remote work in 2013, media giant
Yahoo banned telecommuting for its employees. The company preferred to
have “face time” with its people, also citing the need to show off their talent to
customers at physical offices. The company has softened some aspects of this
ban, but much of the policy remains.
Likely the most famous push back against remote work was IBM’s decision in 2017 that required employees to find a physical IBM office location
from which to work. Known as the “move or leave” directive, it was met with
derision from media and workplace culture experts, who say the policy was
heavy handed and not reflective of the changing needs of today’s workforce.
Moves from IBM and Yahoo may in the end be fruitless, as the trends
continue to show an interest in remote work. A study in the Harvard Business
Review in 2014 showed that remote workers were more productive and loyal
than employees who worked on-site. Other studies show that remote workers
are happier, less stressed, and more engaged with their teams than those who
commute to an office and sit at a desk. And it seems ironic that companies
like Yahoo and IBM, which created technology solutions to ease communication over distances, would be so against remote working situations. There are
now multiple job sites online that specialize in offering and finding work that
is remote. Larger job sites like Indeed have dedicated areas for remote work
opportunities.
It would seem resistance is futile; some element of remote work seems
to be here to stay. And you are now faced with a challenge. You have been
offered a position with a large company in a city a far distance away from
where you live. Management has given you the option of working remotely,
but they want you to make the case for a remote working situation. But they
are not looking for generic reasons; they want to know the concepts behind
motivating employees and teams. You agree to send them a detailed email
with your reasons for working remotely based on motivation concepts. You
hunt for your notes on this topic and prepare your email. You really want to
make this flexible arrangement work—and if you communicate convincingly
there is not even a remote chance it will not!
Case Sources: http://www.cbc.ca/news/business/virtual-companies-online-office-1.4223267; https://open
.buffer.com/no-office/; http://www.cbc.ca/news/business/telecommuting-growing-as-companies-look-to
-save-money-respond-to-employees-1.3596420; http://www.cbc.ca/news/business/yahoo-bans-working-from
-home-1.1300497; https://weworkremotely.com; https://www.fastcompany.com/40423083/ibms-remote-work
-reversal-is-a-losing-battle-against-the-new-normal.
172 LESSON 10:
Motivating Employees and Teams
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11 Enhancing Employee–
Management Relations
LEARNING OBJECTIVES
Once you complete this lesson, you will be able to:
with efforts to unionize.
11-2 Summarize the four major objectives of unionization.
11-3 Summarize the key goals of labour–management
legislation.
11-4 List the steps for forming a union.
I NTRODUCTION
What happens when management and employees have
disagreements about fundamental workplace issues such
as safety, pay, and job security? We would like to believe
that all managers and business owners are fair to their
employees, but that is not always the case. When employees
are faced with this dilemma, one possible response is to
form a labour union. In this lesson, we will explain what
a labour union is and discuss the sometimes delicate relationship between employees and management.
11-1 THE INDUSTRIAL REVOLUTION
AND POOR WORKING
CONDITIONS
11-1 Characterize working conditions histor-
ically associated with efforts to unionize.
11-2 Summarize the four major objectives of
unionization.
174 LESSON 11:
Enhancing Employee–Management Relations
11-5 List the activities involved in the collective bargaining
process.
Pressmaster/Shutterstock.com
11-1 Characterize working conditions historically associated
11-6 Explain the bargaining tools available to labour or
management during a negotiation process.
11-7 Discuss how union membership levels affect labour–
management relations in the business environment.
In past eras, the Canadian workplace was very different
than it is today. A brief glimpse of the work environment
in these early years can help us understand why some
employees decided to organize and demand change.
In the late 1700s, the invention of the steam engine
propelled Canada’s shift from an extractive and agricultural economy to one that engaged in manufacturing.1 The
Industrial Revolution introduced the factory system of
manufacturing, in which all the materials, machinery, and
workers required to manufacture a product are assembled
in one place. This is when we first saw widespread use of
job specialization, as the manufacturing process was separated into distinct tasks that were assigned to different
individuals. Job specialization led to huge increases in productivity when compared to older production methods.
The 1800s and early 1900s were a golden age of
invention and innovation in machinery. At the same
time, improved transportation systems—including the
railroad—opened new markets for manufactured goods.
As a result, the Canadian industry began to grow, which
fuelled demand for more workers. But there were downsides associated with all of this rapid growth. The following paragraphs describe the working conditions many
NEL
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
workers faced, and why they felt compelled to do something about it.
The Industrial Revolution is associated with rapid
advances in machinery, transportation, and agriculture.
But it is also associated with working conditions that
were crowded, unpleasant, unsafe, and in some cases,
lethal. How could such working conditions become possible? First, a fast-growing Canadian population gave
industrial business owners a large labour pool to choose
from. While there was indeed high demand for labour
to fuel rapid industrial growth, there was an even larger
labour supply. Second, the invention of highly specialized assembly-line jobs meant unskilled workers could
fill these jobs. That made these workers easily replaceable. Add these factors together, and business owners
could largely dictate working conditions.
●●
●●
●●
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These working conditions included 10- to 12-hour
days doing repetitive and sometimes physically
demanding tasks, usually for low pay.
Many factories were crowded, with workers packed
tightly around an assembly line or at production stations, often in dimly lit and poorly ventilated rooms.
There was widespread use of child labour because
children could be paid less than adults.
●●
There was little concern for the impact of poor-quality
air or hazardous chemicals.
While harsh working conditions existed long before
the Industrial Revolution, these problems became more
visible with so many workers gathered in one place. As
a result, workers began exploring the power of banding
together to make their voices heard.
11-1a
T he Beginning of the Labour
Movement
Until the middle of the 19th century, there was very
little organization of labour in this country. Then, as
poor working conditions persisted, more workers began
demanding improvements. The result was the labour
union. In Canada the union movement not only included
fair pay but also advocated for workers’ rights. Some of the
rights workers see today can be attributed to the union
movement. For example, to be able to refuse unsafe
work and working condilabour union an organization
tions, to be treated fairly
that
represents workers in dealing
without discrimination, and
with management over issues
to benefit from legislation
involving wages, hours, and working
following the Workmen’s
conditions
Compensation Act.
LESSON 11: Enhancing Employee–Management Relations 175
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How a Union Works
Unions are organizations that are made up of a
group of workers who have either the same specialization (think about plumbers’ unions) or who all
work in the same industry. Think about the United
Auto Workers, for example. What these groups of
workers are trying to do is to create a monopoly in
the selling of an input, the input being their labour.
An interesting problem that unions face is
that they have to decide whether to try to maximize employment or maximize the wages and
earnings of their workers. Sometimes that can
be a difficult trade-off for unions to decide. What
unions are going to do is offer their members
collective bargaining. With collective bargaining,
the union as a group goes out and negotiates with
the employer. The union in collective bargaining is
going to negotiate for wages, employment levels,
benefits, health insurance, and better working conditions for the workers. So the union is going to,
in collective bargaining, negotiate as a group with
the employer. The idea is that individual workers
are not going to have a whole lot of negotiation
power, but as a group in collective bargaining, the
union will have a lot more negotiation power. That
is why unions, these organizations of groups of
workers, exist.
Some of the first major unions were:
●●
●●
Knights of Labour: A North American industrial
union that arrived in Canada in 1881; in its early years
it was most active in Ontario, Quebec, and BC. The
Knights organized over 450 assemblies with more
than 20,000 workers across the country and aimed to
promote economic and social democracy.
Canadian Labour Union (CLU): Formed in 1873,
the CLU was the first attempt at a national federation by an organized labour group. Support was provided for striking members who were unsuccessful
with arbitration.2
Trades and Labour Congress of Canada (TLC):
Formed in 1883, the TLC was the second organized
labour group to exist in Canada on a national scale. As
a successor to the CLU and largely controlled by the
Knights of Labour, the TLC brought together trade
unionists across the country.3
In the early 1900s, both business and government
attempted to keep labour unions from growing. This
period was plagued by strikes and violent confrontations between management and unions. In steelworks,
garment factories, and auto plants, clashes took place
in which striking union
strikes temporary work
members fought bitterly
stoppages by employees,
against non-union workers,
calculated to add force to their
police, and private security
demands
guards.
176 LESSON 11:
Enhancing Employee–Management Relations
Library of Congress Prints & Photographs Division
[ LC-USZ62-30519]
●●
Following the Second World War, the workplace
environment began to evolve. Technology was having a
growing impact and women were beginning to enter the
workforce at an increased rate, prompting discussions
about maternity rights and equal pay. In addition, the
public service sector was experiencing rapid growth.4 It
became evident that a universal labour code, applicable
to all industries, was necessary in the post-war years.
In 1948, the federal Industrial Relations and Disputes
Investigations Act was passed, leading most provinces to
pass and adopt their own versions of this act. Today, the
activities of unions are regulated by federal and provincial legislation and require the unions to be democratic
and financially accountable to the members they represent. Many professionals will be responsible for managing staff that belong to a union, and therefore it is
important to understand the unionized environment.
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Lynn Pelham/ The LIFE Images Collection/ Getty Images
In Canada, a decline in unionization rates is ob­
served. Less than 30% of the Canadian workforce belong
to unions.5 Union membership is concentrated in a few
industries and job categories. Within these industries,
though, unions wield considerable power.
Three of the largest union organizations in Canada
today are:
Canadian Union of Public Employees (CUPE):
Canada’s largest union, representing over 650,000
members across Canada in various sectors such as
health care and education.6
●●
Unifor: Canada’s largest private-sector union, representing over 300,000 workers across the country in a
wide array of sectors.7
●●
National Union of Public and General Employees
(NUPGE): Represents over 390,000 individuals
working to deliver public services. NUPGE has
11 component and 3 affiliate unions.8
●●
11-1b
The Objectives of Unionization
When workers choose to form or join a union, they
are typically pursuing one or more of the following
objectives:
1. Improved work rules and working conditions:
Unions negotiate specific work rules such as the
number of required workdays, break and meal times,
number of paid holiday and vacation days, overtime
rules, and workplace safety standards.
2. Increased job security: Unions negotiate policies
related to seniority rights, layoff procedures, and
other job protections.
3. Defined grievance procedures: Unions negotiate
policies related to employee discipline, employee
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grievances, and procedures for mediating or arbitrating disputes between labour and management.
4. Power through solidarity: The power of a union
to negotiate effectively with management is derived
from the collective unity of its members, which
provides much more leverage than a single
employee negotiating alone.
Specific policies related to each objective are spelled
out in a labour contract, a written agreement between
labour and management that is in force for a set period
of time. Labour contracts typically address compensation, work rules and conditions, job security, grievance
procedures, or a formally established course of action
for resolving employee complaints against management,
and more.
To increase solidarity, many labour contracts specify
that the union is the exclusive bargaining representative for the workers. This effectively prevents individual
workers from negotiating their own contracts, which
would dilute the power of the union.
Union representation and a union contract provide
workers with protections and predictability that otherwise might not exist.
When workers at non-unionized companies become
unhappy with working conditions or would like increased
protections, they sometimes attempt to organize a union.
For example, pilots at WestJet Airlines voted in May 2017
to unionize and they joined the Air Line Pilots Association,
International.9 This is the first union to represent employees
at WestJet Airlines since it began flying in 1996.10
11-2
KEY TAKEAWAY
The Industrial Revolution is associated with rapid
advances in machinery, transportation, and agriculture.
But it is also associated with working conditions that were
crowded, unpleasant, unsafe, and in some cases lethal.
This led to the rise of unions, which are organizations
of workers acting together
to negotiate their wages
labour contract a written
and working conditions.
agreement between labour and
Key objectives of unionmanagement that is in force for a
ization include improved
set period of time
work rules and working
grievance procedures a
conditions, increased job
formally established course of
security, defined grievance
action for resolving employee
procedures, and power
complaints against management
through solidarity.
LESSON 11: Enhancing Employee–Management Relations 177
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11-3 L ABOUR–MANAGEMENT
LEGISLATION
11-3 Summarize the key goals of labour–
management legislation.
Early efforts to organize labour were strongly opposed
by many business owners, for obvious reasons. If workers
had increased leverage, these businesses would have to
invest in higher pay, better working conditions, and more
generous work rules. For a while the federal government
generally supported anti-union efforts through the court
system. Gradually, Parliament became more receptive to
the concerns of labour. What transpired was somewhat of
a tug of war between the interests of unions, their members, and the concerns of management. Initially, prounion legislation was passed that led to explosive growth
in union membership. This culminated in the creation
of the Canada Industrial Relations Board (CIRB),
a federal agency that interprets and administers provisions of labour law, to oversee unionization efforts and
improve labour–management relations. However, the
struggle to balance the interests of labour and management continues today.
11-4
KEY TAKEAWAY
Efforts to unionize were strongly opposed by businesses,
which used court orders to ban strikes, picketing, and
union membership drives. Eventually, federal and provincial legislation was passed that provided more power
to unions and led to growth in union membership. However, subsequent legislation was required to curb some
of this union power and to correct union abuses. The
CIRB remains an active force in labour relations.
11-5
THE UNIONIZATION PROCESS
11-4 List the steps for forming a union.
11-5
List the activities involved in the collective
bargaining process.
Canada Industrial
Relations Board (CIRB)
a federal agency that interprets
and administers provisions of
labour law to support constructive
labour–management relations
178 LESSON 11:
Before a union can be
formed at a particular
company, some employees
of the company must be
interested in being represented by a union. Why
would they be interested?
Enhancing Employee–Management Relations
Many of the extreme conditions that existed in regard
to pay and workplace safety have been resolved in the
last several decades. Yet there are still a variety of reasons why employees would want to be represented by
a union:
●●
●●
●●
●●
●●
In some professions union membership is mandatory.
In some industries union membership is so prevalent
that new employees feel compelled to join.
Some employees may feel alienated, especially if they
work in repetitive and relatively low-paying jobs.
Joining a union could increase job security.
Employees may be unhappy with their working conditions, pay, or benefits, and may look to a union to
correct the perceived deficiencies.
Employees from all walks of life may form or join
unions for the reasons above, and others. For example,
even highly paid athletes in the Canadian Football
League (CFL) and the National Hockey League (NHL)
are represented by unions.
In Canada, each province is exclusively responsible for managing its own labour relations. The federal
government has limited jurisdiction over employment
matters, dealing primarily with federally regulated
businesses such as interprovincial transportation and
the Canadian postal service. In these instances, the
CIRB is engaged as a quasi-judicial tribunal, responsible for interpreting and administering certain parts of
the Canada Labour Code. The CIRB aims to promote
effective labour–management relations for issues under
federal jurisdiction and accomplishes this by providing
dispute resolution services, such as mediation assistance and adjudication of certain matters. Nonetheless,
the majority of labour relations matters are regulated
by provincial statutes, which outline a province-specific
unionization process and provide details on a variety of
other employment-related issues.11 Employment laws
and the unionization process, however, are very similar
from province to province.
Once employees at a non-unionized company decide
they are interested in forming a union, they must take a
number of steps to formally move forward. A certification application must be filed with the province’s Labour
Relations Board. Provided the application is consistent
with the requirements of the provincial statute governing
labour relations, a representation vote is held. To receive
certification, the majority of employees in the proposed
bargaining unit must vote in favour of the union. Once
the certification application is successful, a formal “certificate” is issued by the Board that establishes the union as
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the exclusive agent for every employee in the bargaining
unit, regardless of their union membership.12 This means
that employees within the bargaining unit, including those
who do not belong to the union, maintain the right to vote
on contracts, such as the collective agreement, which outlines the working conditions, benefits, and wages of the
employees. After certification, the union may now begin
negotiating this agreement with the employer.
Reaching an agreement can be a lengthy process,
involving bargaining between management and the
union. For the bargaining process to be effective, both
sides must be willing to compromise. If both sides are
unable to negotiate a collective agreement, the union
may choose to strike (after going through conciliation
with the provincial Labour Relations Board). Strikes
are rare during a union’s first contract negotiation, but
are more likely when the bargaining process involves
renegotiating an expiring contract.
It should be noted that unions represent specific
groups of employees, and these groups must be defined
during the organizing process. For example, one union
in a large company might be organizing on behalf of
hourly workers, and another might be organizing on
behalf of salaried workers. Or unions may be formed to
represent specialists such as electricians or welders. It
is not uncommon for management in a large company
negotiate with multiple unions that each represent a distinct group of employees.
11-5a
Negotiating the Labour Contract
A new union’s first task is to establish its identity and
structure. It immediately signs up as many members as
possible. Then, in an internal election, members choose
officers and representatives. A negotiating committee
is also chosen to begin collective bargaining, which
is the process of negotiating a labour contract with
management.
There are generally four steps to the collective-bargaining process. Read the boxed feature “Four Steps in
the Collective-Bargaining Process” to learn what happens in each step, and what can go wrong. The ultimate
goal of collective bargaining is the ratification of a
labour contract agreeable to all parties.
As previously mentioned, most labour contracts
cover the agreement between the union and employer
regarding employee compensation, working hours and
conditions, job security, management rights, and grievance procedures. With regard to compensation, the contract will spell out wages and a schedule for pay increases
(and for which employees), as well as benefits such as
health insurance, paid vacations, and sick leave.
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STUDY TOOLS
Visit the MindTap to watch videos on labour–management
relations.
Go to nelson.com/student to access the digital resources.
Every labour contract has an expiration date, which
means the collective-bargaining process starts all over at
that time. While many labour contracts are in the range of
three years, an emerging trend is to negotiate contracts for
longer time periods in order to avoid the tension that can
result from the bargaining process. In 2017, the National
Basketball Association agreed to a seven-year contract
with the National Basketball Players Association.13
11-6
KEY TAKEAWAY
Once employees at a non-unionized company decide
they are interested in forming a union they must take
a number of steps to formally declare their desire for a
union, which ultimately leads to ratification of the contract. Once the union has been certified by the province’s
Labour Relations Board, the union can begin the collective-bargaining process to reach a labour contract with
management.
11-7 U NION AND MANAGEMENT
NEGOTIATION TACTICS
11-6 Explain the bargaining tools available
to labour or management during a
negotiation process.
The ideal scenario for the
negotiation process is that
both sides make their proposal, discussion takes
place, each side gives a
little in the spirit of compromise, and an agreement
is reached. Unfortunately,
collective bargaining the
process of negotiating labour
agreements that provide for
compensation and working
arrangements mutually acceptable
to the union and to management
ratification approval of a labour
contract by a vote of the union
LESSON 11: Enhancing Employee–Management Relations 179
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Four Steps in the CollectiveBargaining Process
The first step in the collective bargaining process
is to prepare for negotiations. In the time leading
up to meetings with management, the union
negotiating committee will determine issues most
important to members, prioritize those issues,
and define the union’s proposal on each issue.
For example, union members might define pay
increases as a pressing concern. Once that is identified, the negotiating committee needs to define
how big of a pay increase they will propose.
The second step is a meeting between labour
and management. Negotiations often take place at
an offsite location such as a local hotel or conference centre. The union typically presents its contract
proposal first. Management then responds with a
counterproposal. The bargaining process may move
back and forth, from proposal to counterproposal,
over the course of several meetings. Throughout the
process, union representatives keep their members
informed of the status of negotiations.
The third step is reaching an agreement.
Often, this takes compromise on both sides. It
labour–management negotiations often do not turn out
this way. Both sides usually have an interest in avoiding
conflict, so why do negotiations so often break down?
To begin with, labour and management do not
always have the same goals. Labour would like to
secure for its members the highest-paying, most
secure jobs possible. Management would like to have
a quality workforce but needs to control costs and
retain flexibility in order to remain competitive in
the marketplace. Based on these divergent goals, it
becomes obvious why the initial proposals from each
side might be miles apart. In addition, tensions can
build between labour and management over time,
which can interfere with negotiations. Sometimes
these tensions carry over from the negotiations that
took place on the previous
picketing marching back
contract, even though
and forth in front of a place of
that may have taken place
employment with signs
years earlier.
180 LESSON 11:
Enhancing Employee–Management Relations
could involve meeting in the middle on a particular demand, or accepting one demand in full
in exchange for dropping another. If agreement
cannot be reached, the bargaining process can
break down and the union may strike. Strikes are
rare during a union’s first contract negotiation,
but are more likely when the bargaining process
involves renegotiating an expiring contract.
The fourth step is voting and ratification of the
agreement. Assuming an agreement was reached
between management and the union negotiating
team, the workers in the bargaining unit must still
vote on the agreement. That is why keeping the
bargaining unit informed during negotiations is
important. If union negotiators reach an agreement
with management that is then voted down by the bargaining unit, it can severely damage the bargaining
process. For one, it is an embarrassment to the union’s
leaders. In addition, it creates confusion for management on how to solve the impasse. But, assuming the
workers in the bargaining unit approve the agreement, the contract is ratified and goes into effect.
Whatever the reasons, each side has a set of negotiating tactics they can use before and during the bargaining process.
11-7a
Labour’s Negotiating Tactics
The decision to use any of these tactics will depend on
how well negotiations are going. It is fairly common for
both sides to utilize publicity during, and even before,
negotiations. This is done through the use of press
releases or by speaking with the media. Other tactics
usually come into play only if negotiations are beginning
to break down.
On the union side, members may resort to strikes, but
there are other, milder techniques that are more likely to
be used. Typically, fewer than 200 work stoppages occur
across all jurisdictions over the course of one year.14
Employees are more likely to engage in picketing,
which is marching back and forth in front of a place
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of employment with signs; slowdowns, a technique
whereby workers report to their jobs but work at a slower
pace than normal; or boycotts, which are a refusal to
do business with a particular company.
The four major negotiating tactics used by labour
are identified in the table below:
Tactic
Goal
Publicity
Gain public support by publicizing the organization’s
position.
Replace workers
Put pressure on the union by hiring non-union replacement workers in the event of a strike or by threatening to
move production to another facility in the event a contract
is not reached.
Goal
Publicity
Gain public support by publicizing the union’s position
or conducting informational picketing outside the
workplace.
Lockouts
Work slowdowns
and boycotts
Put financial pressure on the organization by working at a
slower pace and by encouraging union members and the
public to not purchase the organization’s products.
Put financial pressure on employees by refusing to allow
them to enter the workplace. This is essentially management’s version of a strike.
Court injunctions
Strikes
Inflict financial damage on the organization through a
work stoppage. Some services that are seen to be critical
do not have the option of a strike.
Limit the union’s options by requesting a court order that
specifies what tactics they can and cannot use during
negotiations
Court injunctions
Limit management’s options by requesting a court order
that specifies what tactics they can and cannot use during
negotiations.
11-7b
© Cengage Learning
Tactic
Management’s Negotiating Tactics
On the management side the most potent tool is the
lockout, or a business’s refusal to allow union employees
to enter the workplace. In the event of a strike, a company may try to bring in replacement workers—
non-union employees who perform the jobs of striking
union members—or seek an injunction, a court order
requiring a person or group either to perform some act
or to refrain from performing some act. Unions also may
employ injunctions.
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The decision to use any of these tactics will depend
on how well negotiations are going. It is fairly common
for both sides to use publicity during, and even before,
negotiations. This is done through the use of press
releases or by speaking with the media. Other tactics
usually come into play only if negotiations are beginning
to break down. If strikes, lockouts, and court injunctions
come into play, it is a sign that the negotiation process
is stalled and may require outside intervention, such as
mediation or arbitration.
●●
Atomazul/Shutterstock.com
A strike usually involves picketing outside
the workplace to gain public sympathy and
discourage the public from patronizing the
organization.
© Cengage Learning
Management’s negotiating tactics are identified in
the table below:
●●
Mediation: a process
where a neutral third
party, designated as a
mediator, holds talks
with union and management negotiators at
separate meetings and
at joint sessions. The
objective of the mediator is to promote a
compromise between
both parties. Mediators
cannot issue binding
decisions or impose a
settlement on the disputing parties. Their
only tools are communication and persuasion.
Arbitration: a process
where an impartial
third party, mutually
chosen by labour and
management, conducts
a formal hearing on an
slowdowns a technique
whereby workers report to their
jobs but work at a slower pace than
normal
boycotts refusals to do
business with a particular company
lockout a business’s refusal to
allow union employees to enter
the workplace
replacement workers nonunion workers hired by management
to replace striking union workers.
injunction a court order
requiring a person or group either
to perform some act or to refrain
from performing some act
mediation the process of
settling issues in which the parties
present their case to a neutral
mediator
arbitration the use of a neutral
third party who conducts a formal
hearing on an unresolved dispute
and then decides on a solution
LESSON 11: Enhancing Employee–Management Relations 181
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Ultimately, the goal for both sides is to resolve any
disputes that arise during the negotiation process so that
everyone can get back to work. Ideally, the new contract
will leave both employer and employees satisfied with
the outcome.
11-8
KEY TAKEAWAY
A variety of tactics can be used before and during negotiations for a labour contract. Labour can utilize publicity, work slowdowns, boycotts, and court injunctions.
Management can utilize publicity, threats to replace
union workers with replacement workers, lockouts, and
court injunctions. However, before a strike or lockout
may proceed, the parties must utilize a neutral third
party (mediator) as a last attempt to reach an agreement.
While the mediator does not have the authority to make
final decisions, they can assist both sides in clarifying their
positions to reach a compromise.15 The tactics that each
side chooses will depend on the status of contract negotiations. Ultimately, the goal for both sides is to resolve any
disputes that arise during the negotiation process so that
everyone can get back to work. Ideally, the new contract
will leave both employer and employees satisfied with
the outcome.
We have seen tremendous improvement in compensation and working conditions for the average Canadian
worker in the last 100 years, and organized labour had a
significant role in these improvements. At the same time,
unionization rates are rapidly declining. Why is this the
case? What might this mean for the future of labour–
management relations?
11-9a
Where do labour–management relations go from here?
What role will unions play? While it is unlikely we will
see a sharp reversal in the decline of union membership,
the relationship between labour and management will
continue to be an important topic. We still live in a world
where some organizations may overlook the needs of
their employees—whether it is intentional or an honest
oversight. This means that labour’s voice will always
be an important one. It is hard to say how the future
of labour management will play out, but some possible
trends to look for follow.
●●
●●
11-9 T RENDS IN UNION
MEMBERSHIP
11-7 Discuss how union membership levels
affect labour–management relations in
the business environment.
The life of the average Canadian worker is far different
than it was 100 years ago.
T he Future of Labour–Management
Relations
●●
Pressure on Public-Sector Unions: Unions will
continue to play a large role for certain public-sector
jobs such as teachers, firefighters, and other government employees. But economic conditions and falling
public approval may impact their negotiating leverage.
Increased Partnership Between Employers and
Private-Sector Unions: Private-sector unions in
traditionally unionized industries will continue to
work to protect and improve jobs, pay, and working
conditions for their members. But a weak economy
and increased global competition may prompt unions
to more often seek partnership than confrontation.
Increased Responsiveness of Management:
Manage­ment at an increasing number of companies
seeks to balance profits with social responsibility, particularly in regard to the welfare of their employees.
However, public pressure and the threat of unionization remain a relevant force for keeping management
accountable for their actions.
The Worker Then
The Worker Now
Often worked in harsh production environments such as factories or mills
Often works in offices, retail, and other service-related businesses
Often worked 10–12 hours per day, with few days off
40-hour work week is standard
Often worked in cramped environments that could be hazardous to their health
Protected by a number of health and safety laws and regulations
Often paid very low wages
Protected by federal minimum-wage laws, with more than 95% of all hourly
workers making more than minimum wage
Often worked under management that resisted making improvements to pay or
working conditions
Work in a time where companies boast about being one of the best places to work
182 LESSON 11:
Enhancing Employee–Management Relations
© Cengage Learning
unresolved dispute and determines a solution. Arbitration may be binding or non-binding. If binding,
the union and employer must adhere to the final
decision.
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Many post-secondary institution graduates will
belong to a professional association, such as Chartered
Professional Accountants Canada (for accountants),
Chartered Financial Analyst (for finance majors), Association of Professional Engineers and Geoscientists (for
professional engineers), or a Bar Association (for legal
professionals). Unlike labour unions, these associations
are the governing bodies that regulate ethical standards
and encourage career and professional development of
the membership.
11-10 KEY TAKEAWAY
LESSON SUMMARY
represented by the union. If the certification application is successful, a
formal “certificate” is issued by the Board that establishes the union as
the exclusive agent for every employee in the bargaining unit, regardless of their union membership.
LO 11-1 Characterize working conditions
historically associated with efforts to unionize.
The Industrial Revolution is associated with rapid advances in
machinery, transportation, and agriculture. But it is also associated
with working conditions that were crowded, unpleasant, unsafe,
and in some cases lethal. This led to the rise of unions, which are
organizations of workers acting together to negotiate their wages
and working conditions.
LO 11-2 Summarize the four major objectives
of unionization.
Key objectives of unionization include improved work rules and
working conditions, increased job security, defined grievance procedures, and power through solidarity.
LO 11-3 Summarize the key goals of labour–
management legislation.
Early efforts to organize labour were strongly opposed by many business owners, for obvious reasons. If workers had increased leverage,
these businesses would have had to invest in higher pay, better
working conditions, and fairer rules. Over time, federal and provincial
legislation was passed that provided more power to unions and led to
an explosive growth in union membership. Eventually, legislation was
passed to curb some of this union power and correct union abuses.
The net result during that time was a significant improvement in
workers’ rights and working conditions in Canada.
LO 11-4 List the steps for forming a union.
Before a union can be formed at a particular business, some
employees must be interested in being represented by a union. Once
employees at a non-unionized business decide they are interested
in forming a union, they must take a number of steps to formally
move forward. A certification application must be filed with the
Labour Relations Board of the province and an employee vote is held.
To receive certification, the majority of employees must vote to be
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During the 20th century, unions grew in membership
and power. With that growth came significant improvement in working conditions and pay for the average Canadian worker. But in recent years, union membership has
declined to its lowest levels in almost 100 years, and public
approval of unions has declined with it. While it is hard
to predict the role of labour unions in the future, enhancing labour–management relations will continue to be an
important issue for union and non-union employees.
LO 11-5 List the activities involved in the
collective bargaining process.
Once certified by the province’s Labour Relations Board, the union can
begin the collective-bargaining process to reach a labour contract with
management. The first step in the collective-bargaining process is to
prepare for negotiations. The second step is a meeting between labour
and management. The bargaining process may move back and forth,
from proposal to counterproposal, over the course of several meetings.
The third step is reaching an agreement. Often, this takes compromise
on both sides. If agreement cannot be reached, the bargaining process
can break down and the union may strike after going through conciliation with the provincial Labour Relations Board. The fourth step is
voting and ratification of the agreement. Assuming an agreement was
reached between management and the union negotiating team, the
workers in the bargaining unit must still vote on the agreement.
LO 11-6 Explain the bargaining tools available
to labour or management during a negotiation
process.
The ideal scenario for the bargaining process is that both sides make
their proposal, discussion takes place, each side gives a little in the spirit
of compromise, and an agreement is reached. Unfortunately, labour–
management negotiations often do not turn out this way. As a result,
each side may employ certain tactics before and during negotiations
for a labour contract. Labour can utilize publicity, work slowdowns,
boycotts, strikes, and court injunctions. Management can utilize publicity, threats to replace union workers with non-unionized employees,
lockouts, and court injunctions. The tactics that each side chooses will
depend on the status of contract negotiations. Ultimately, the goal for
both sides is to resolve any disputes that arise during the negotiation
process so that everyone can get back to work. Ideally, the new contract
will leave both employer and employees satisfied with the outcome.
LESSON 11: Enhancing Employee–Management Relations 183
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LO 11-7 Discuss how union membership
levels affect labour–management relations in the
business environment.
During the 20th century, unions grew in membership and power. With
that growth came significant improvement in working conditions and
pay for the average Canadian worker. But in recent years, union membership has declined to its lowest levels in almost 100 years. Regardless
of the size or influence of unions in the future, enhancing labour–
management relations will continue to be an important workplace issue.
KEY TERMS
arbitration, p. 181
boycotts, p. 181
Canada Industrial Relations Board (CIRB), p. 178
collective bargaining, p. 179
grievance procedures, p. 177
injunction, p. 181
labour contract, p. 177
EXERCISES
labour union, p. 175
Use the Internet, magazines, newspapers, books,
and personal experiences to complete the
following exercises.
1. Research one piece of labour–management legislation in
Canada. Summarize key points of the legislation.
2. When workers at non-unionized companies become unhappy
or would like more control regarding working conditions (such
as increased protection), they sometimes attempt to organize a
union. Find an example of this occurring in recent history.
lockout, p. 181
mediation, p. 181
picketing, p. 180
ratification, p. 179
replacement workers, p. 181
slowdowns, p. 181
strikes, p. 176
3. Provide an example of a large union in Canada. Who does
the union represent? How is it structured? What are the goals
of the union?
4. Find an example in recent history of a labour dispute (strike or
lockout). Describe the reasons why employees were striking or
management locked out the employees. What was the outcome?
5. Increased responsiveness of management is identified as a trend
in mitigating the formation of unions. In what ways did your
past place of employment demonstrate care and concern for the
welfare of its employees?
REVIEW QUESTIONS
1. What is a labour union?
2. How did the Industrial Revolution influence the rise of labour
unions?
3. List the primary objectives of labour unions.
4. What are the main reasons why an employee would want to be
represented by a union?
5. How are labour agreements negotiated?
6. What are the negotiation tactics available to management?
7. What is the difference between mediation and arbitration?
8. How have compensation and working conditions for the average
Canadian worker improved in the last 100 years?
9. What are the primary laws that affect human resource
management?
10. What are current trends in labour–management relations?
184 LESSON 11:
Enhancing Employee–Management Relations
NEL
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AN OWNER’S UNION
Imagine a scenario where there is labour strife in a company. On one side of
the table are the company owners. And on the other side of the table are …
owners as well. How is this possible? Read on.
This scenario happened, albeit not in exactly the same way, to WestJet
over a span of a few months in 2017 and 2018. And while in reality owners
were not on both sides of the table, the Canadian-based airline did have to
reconcile its business aspirations with its employee relations.
For years, WestJet had used the “owners” moniker to describe its
employees. In 2012, the company stated proudly in a blog post: “WestJet
Employees Are Owners Too!” This statement was meant to show that the
company wanted its employees to feel as though they have a stake in the
performance and operation of the company. The airline offered employees a
share purchase plan, where employees could purchase shares in the company
that amounted up to 20% of their gross salary.
WestJet was a staple in the rankings for best companies to work for
and prided itself on the “owner” identifier with its employees. Any update
to the WestJet branding would incorporate the owner angle, with “Owners
Care” as the most recent use of the close bond between the company and its
employees.
But there began to be cracks in this bond starting in 2014. WestJet flight
attendants began a campaign around this time to form a union. WestJet
fought these efforts, claiming that the employee associations it set up were
an equivalent to (and replacement for) official unions. These groups even had
an official name—PACT, which stands for Proactive Communication Teams. A
labour expert from the University of Manitoba questioned the use of PACTs in
2016: “(A PACT) provides some figment of an organization for workers … but
it serves as an obstacle to them actually forming a union. It actually doesn’t
give workers any power at all.”
Under the PACT system, WestJetters (another term for WestJet
employees) are not allowed to strike and are not protected by any labour
legislation. Clearly, if unionization was going to take place at WestJet, it would
come from the “owners” who made up the thousands of employees.
And unionization eventually did come to WestJet, but it took time. In
2015, WestJet pilots rejected, by a slim margin, the formation of a union. The
WestJet CEO at the time, Gregg Saretsky, was pleased with this decision: “Our
model of co-operation and employee representation through the WestJet
Pilots’ Association has allowed for the continued success of our pilots and our
airline. Despite the positive outcome, there is continued work that needs to
take place to better understand some of the issues for our pilot group and we
can now turn our efforts to that goal.”*
*“WestJet CEO Gregg Saretsky ‘Pleased’ Pilots Rejected Unionization,” The Canadian Press,
August 5, 2015, online: https://www.huffingtonpost.ca/2015/08/05/westjet-pilots_n_7938880
.html?utm_hp_ref=ca-westjet-union
NEL
LESSON 11: Enhancing Employee–Management Relations 185
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But it would seem those efforts were not enough, as WestJet pilots voted
in late 2017 to form a union. All of a sudden, the small airline that could was
having growing pains. Much of what happened between 2015 and 2017 had
to do with WestJet’s aggressive growth plan. It wanted to compete in the
luxury travel space, and it made overtures and actual purchases that made it
clear it was leaving behind its reputation of a discount airline with “owners” as
employees.
This growth led to the decision for WestJet to create a new entity, Swoop,
to take over its discount airlines position in the market. But in doing so, it
would have to figure out how to cut costs to make Swoop a viable option. It
began by changing some of the pay structures for flight attendants, essentially only compensating them for time spent in the air. The decision caused
speculation that unionization would be coming for flight attendants as well.
WestJet’s battle with unionization came to a head in May 2017, when
WestJet pilots threatened to strike when WestJet hinted that it would hire
outside pilots to fly Swoop routes. And while there was a new CEO at WestJet,
Ed Sims, the same labour problems would not seem to go away. While the
strike was averted and moved to mediation, the storm clouds for WestJet and
unionization were starting to hover over the former upstart airline.
And this is where you enter the scene in June 2018. You have just been
hired by WestJet to help with communications and business strategy. You
have been following the recent events for WestJet, and you realize the company needs to do a better job at how it communicates about union issues. You
have just found out that WestJet flight attendants are going to try to form a
union. Instead of following the previous approach toward unionization, you
decide it is important to provide information and facts on unions. You have
been asked to speak at a company event where both management and staff
will be present. Outline the presentation you will give to this audience. Using
the course material you recall on employee–management relations, start
working on your slide presentation. Be sure to apply content and theory to
real-life situations at WestJet. Your goal is to ensure that no WestJet “owner”
flies the coop.
Case Sources: https://www.huffingtonpost.ca/news/westjet-union/; https://thetyee.ca/News/2016/04/08/
WestJet-Union-Model/; https://www.huffingtonpost.ca/2015/08/05/westjet-pilots_n_7938880.html?utm
_hp_ref=ca-westjet-union; https://globalnews.ca/news/4088770/westjet-union-drive-flight-attendants
-labour/; http://www.timescolonist.com/westjet-hiring-of-pilots-for-swoop-hampering-contract-efforts
-says-union-1.23275388; http://calgaryherald.com/business/local-business/strike-averted-as-westjet
-pilots-union-agree-to-settlement-process
186 LESSON 11:
Enhancing Employee–Management Relations
NEL
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12 Building Customer
Relationships through
Effective Marketing
LEARNING OBJECTIVES
Once you complete this lesson, you will be able to:
orientation and customer orientation.
12-2 Summarize the ways that marketing activities provide
value to customers.
12-3 Identify the four components of a marketing mix.
12-4 Discuss the five major steps involved in a consumer
purchase decision.
I NTRODUCTION
When we think of marketing we often think of famous
brand names, such as Coca-Cola and Google. But what
is a brand? Branding encompasses many things, but at
its core branding is the relationship between a company
and its customers that is built on trust.
Branding is big business. The total value of Interbrand’s top 100 global brands was over $1.5 trillion. That
is not the value of their factories or stores—that is the
value of the company brands alone. These brands are so
powerful that a famous company like Lego only comes in
at number 67 on the list, with a brand value of $7 billion.
Further up the list is Nike at number 18, with a brand
value of $27 billion. And at the top? Of course it is Apple,
with a brand value of $184 billion. The top 100 brands
can be found in all industries and are distributed all over
the world.
But that is only part of the story. Interbrand has a
specific method of calculating the value of big global
brands. But a company does not have to be famous to
have brand value. Even tiny companies have it. Do
you have a favourite restaurant? If so, your preference
for that restaurant represents brand value. There are
188 LESSON 12:
12-5 List the three influences on the consumer decision
Sergei Bachlakov/Shutterstock.com
12-1 Explain the key differences between production
process.
12-6 Identify common dimensions used for market
segmentation.
12-7 Differentiate between product preferences of different
target markets.
12-8 List the four steps of the marketing research process.
many independent restaurants in Canada, each with
its own set of loyal customers. That is a huge amount
of accumulated brand value that does not show up
in Interbrand’s calculations. And that is just talking
about favourite restaurants. What about your go-to
place to buy groceries, or get a haircut, or work out?
Your preference for these companies represents brand
value as well. Add the value of your preferences to the
preferences of hundreds of millions of other people,
and the overall global value of branding exceeds
$1.5 trillion.
Exactly how does a company build brand value? We
will explain in this lesson on building customer relationships through effective marketing.
12-1
WHAT IS MARKETING?
12-1 Explain the key differences between
production orientation and customer
orientation.
What do you think of when you hear the word
“marketing”? See Exhibit 12.1 for some common
responses.
Building Customer Relationships through Effective Marketing
NEL
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
What these responses have in common is that
they relate mainly to advertising. And for good reason:
Advertising is a highly visible marketing activity that we
almost cannot avoid. Whether it is watching TV, listening
to the radio, or playing a game on our phone, we are
bombarded with ads. Procter & Gamble, the company
behind brands such as Gillette, Olay, and Tide, spends
more than $5 billion on advertising.1
© Cengage Learning
EXHIBIT 12.1 WHAT IS MARKETING?
NEL
LESSON 12: Building Customer Relationships through Effective Marketing 189
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
increased output and production efficiency. Marketing was limited to taking orders and distrib2016 Canadian Ad
uting finished goods.
2016 Rank Company
Spending ($ billion)
In the 1920s, production caught up with and
1
Procter & Gamble
$7.2
began to exceed demand. Now producers had to
2
General Motors
$4,312
direct their efforts toward selling goods rather
3
Bell Canada
$3,769
than just producing them. This new sales orien4
Restaurant Brands International
$3,601
tation was characterized by increased advertising, enlarged sales forces, and, occasionally,
5
Provincial Government Lotteries
$2,754
high-pressure selling techniques. Manufacturers
6
Rogers
$2,744
produced the goods they expected consumers to
7
Chrysler Consolidated Local Dealerships
$2,743
want, and marketing consisted primarily of pro8
Ford
$2,637
moting products through personal selling and
9
George Weston
$2,342
advertising, taking orders, and delivering goods.
10
Ford Dealers Association
$2,233
This era coincided with the widespread adopSource: https://www.adbrands.net/ca/top-advertisers-in-canada.htm
tion of technologies such as radio and television.
These media provided manufacturers an excellent way to spread the word about their products.
Advertising is indeed an important aspect of marDuring the 1950s, however, businesses started to
keting, but it is just one piece of a much larger picture.
recognize that even enormous advertising expenditures
Marketing is the entire process of creating relationand the most thoroughly proven sales techniques were
ships with customers by offering goods, services, and
not enough. Something else was needed if products
experiences that they value. This process includes crewere to sell as well as expected. It was then that business
ating products, pricing them, deciding where to sell
managers recognized that they were not primarily prothem, and more.
ducers or sellers, but rather were in the business of satisIn many ways, everything a company does begins
fying customer needs. Marketers realized that the best
and ends with marketing—with a lot of marketing
approach was to adopt a customer orientation—in
in between. This is not to minimize the critical roles
other words, the organization had to first determine what
played by other functional areas of a business; it is just
customers needed and then carefully develop products
a reminder that in today’s economy, building customer
to fill those needs. This required expanding their marrelationships through effective marketing is what sets
keting efforts to include teams of market researchers,
companies apart from their competition. But it was not
product managers, brand managers, and a variety of
always this way.
other marketing specialists who collaborated to effectively meet customer needs.
TOP CANADIAN ADVERTISERS
T he Evolution of the Marketing
Concept
marketing the entire process of
creating relationships with customers
by offering goods, services, and
experiences that they value
production orientation
A past era in marketing that
placed emphasis on increased
output and production
efficiency.
customer orientation
The current era in marketing where
an organization first determines
what customers need and then
develop products to fill those needs.
190 LESSON 12:
From the start of the
Industrial Revolution until
the early 20th century,
businesses were focused
on the mass production of
goods. Consumer demand
for manufactured products
was so great that manufacturers could almost bank
on selling everything they
produced. Business had
a strong production
orientation, in which
emphasis was placed on
EVOLUTION OF THE MARKETING CONCEPT
Production
Era
Sales Era
Production orientation: Sales orientation:
●
Take orders
●
●
Mass produce
●
●
Distribute goods
●
Increase advertising
Focus on product
benefits
Intensify sales
techniques
Customer
Relationship Era
Customer orientation:
●
Determine customer needs
●
Satisfy those needs
●
Use customer feedback
to continually refine and
improve product offerings
© Cengage Learning
12-1a
The need to move from a production orientation to a
customer orientation was partially driven by falling production costs and increased global trade, which created
more competition in the marketplace. Now that consumers had more choices, they could be more particular
about choosing only the products that fit their needs.
Building Customer Relationships through Effective Marketing
NEL
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
In the last 15 years, consumers have gained access to
technology that allows them to compare prices and read
reviews online. Because of this, the need to determine
and satisfy customer needs has only increased.
Organizations with a customer orientation essentially adopt the marketing concept—a philosophy
that a business should provide goods and services that
satisfy customers’ needs through a coordinated set of
activities that allow the business to achieve its objectives.
To implement the marketing concept, a business first
must obtain information about its present and potential
customers. It must identify not only what customers’
needs are but also how well these needs are being satisfied by products currently in the market—by both its own
products and those of competitors. It must assess how
its products might be improved and what opinions customers have about the business and its marketing efforts.
The business then must use this information to pinpoint
the specific needs and potential customers toward which
it will direct its marketing activities and resources. Next,
the business must mobilize its marketing resources to
1. provide a product that will satisfy its customers,
2. price the product at a level that is acceptable to buyers
and that will yield an acceptable profit,
3. promote the product so that potential customers will
be aware of its existence and its ability to satisfy their
needs, and
4. ensure that the product is distributed so that it is
available to customers where and when needed.
Finally, the business must again obtain marketing
information—this time regarding the effectiveness of its
efforts. The business must be ready to modify any or all
of its marketing activities based on information about its
customers and competitors.
The move from a production orientation to a customer orientation was partially driven by falling production costs and increased global trade, which created
more competition in the marketplace. Now that consumers had more choices, they could be more particular
about choosing only the products that fit their needs.
In the last 15 years, consumers have gained access to
technology that allows them to compare prices and read
reviews online. Because of this, the need to determine
and satisfy customer needs has only increased.
12-1b
Customer Relationship Management
To build long-term customer relationships, marketers
are increasingly turning to marketing research and
information technology. Customer relationship
NEL
management (CRM) focuses on using information
about customers to create marketing strategies that
develop and sustain desirable customer relationships.
By increasing customer value over time, organizations
try to retain and increase long-term profitability through
customer loyalty. Successful marketers respond to customers’ needs and strive to continually increase value to
buyers over time. Eventually, this interaction becomes a
solid relationship that allows for cooperation and mutual
trust. The Internet has expanded and improved relationship marketing options for many businesses by making
targeted communication faster, cheaper, and easier. New
digital technologies allow businesses to connect to consumers and have a dialogue with them in real time. This
not only improves the speed at which businesses can
innovate, but it also gives consumers a feeling that they
are being listened to.
That brings us back to the concept of branding.
In technical terms, a brand is a name, term, symbol, or
design—or any combination of these—that identifies
a seller’s products. This includes brand names such as
Disney and BMW, and also trademarks such as the Nike
swoosh or McDonald’s golden arches. However, the key
to branding is not the actual name or the symbol, it is
what the name or symbol means in the consumer’s mind.
Does it mean quality? Prestige? Value? As a company, the
core benefits you promote to consumers are referred to
as the brand promise. If customers experience the benefits you promised, they will begin to trust your brand, and
even insist upon your brand over any other. Brand loyalty
that is based on trust actually represents brand value for
the business. The more loyal and satisfied customers
your company has, the higher your brand value. We will
explain more about branding throughout this lesson.
12-2KEY
TAKEAWAY
Marketing is the entire
process of creating relationships with customers
by offering goods, services,
and experiences that they
value. But it was not always
this way. In previous eras,
companies focused more
on production, without
a mind toward customer
needs. However, increased
competition has created
marketing concept a
philosophy that a business should
provide goods and services that
satisfy customers’ needs through
a coordinated set of activities that
allow the business to achieve its
objectives
customer relationship
management (CRM) track
and organize information about
current and prospective customers
to create marketing strategies
that develop and sustain desirable
customer relationships
branding the relationship
between a company and its
customers that is built on trust
LESSON 12: Building Customer Relationships through Effective Marketing 191
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an environment where companies actively seek to
determine and satisfy customer needs, with the goal of
building long-term customer relationships. Over time,
that has elevated the importance of branding.
or Mercedes-Benz luxury car—or even new services offered
by Loblaw Companies (e.g., Superstore, Dominion, etc.),
such as home delivery—all satisfy human needs. Thus, each
possesses utility. There are four kinds of utility:
●●
12-3THE VALUE ADDED BY
MARKETING
12-2 Summarize the ways that marketing
●●
activities provide value to customers.
12-3 Identify the four components of a
marketing mix.
As the marketing concept moved from a production
orientation to a customer orientation, the scope of marketing activities expanded dramatically. No longer is it
sufficient to simply come up with product ideas, ramp
up production, and set a price. Satisfying a customer
requires giving them:
●●
The right product
●●
In the right place
●●
At the right price
●●
At the right time
In today’s world, it is commonplace to get the right
product, in the right place, at the right price and time.
So commonplace that we often forget how much goes
into making this happen. But imagine if this were not the
case—what would life be like if marketers did not try to
accomplish these goals?
While it is still possible to encounter companies
stuck in a production or sales orientation, luckily that is
not what we experience much of the time. To remain
competitive, most companies choose to adopt a customer orientation in their marketing approach. This provides value in four ways:
●●
●●
●●
●●
●●
●●
Form utility is created by converting production inputs
into finished products. Marketing efforts may influence form utility indirectly because the data gathered
as part of marketing research are frequently used to
determine the size, shape, and features of a product.
Place utility is created by making a product available
at a location where customers wish to purchase it. A
pair of shoes is given place utility when it is shipped
from a factory to a department store.
Time utility is created by making a product available
when customers wish to purchase it. For example,
Halloween costumes may be manufactured in April
but not displayed until late September, when consumers start buying them. By storing the costumes
until they are wanted, the manufacturer or retailer
provides time utility.
Possession utility is created by transferring title (or
ownership) of a product to a buyer. This may be as
simple as a sales slip or receipt for a pair of shoes or as
complex as a title transfer for automobiles and homes.
Along with the title to its products, the seller transfers
the right to use that product to satisfy a need.
Marketing directly creates place, time, and possession utility. Place, time, and possession utility add real
value in terms of both money and convenience. This
value is created and added to goods and services through
a wide variety of marketing activities—from research
indicating what customers want to product warranties
ensuring that customers get what they pay for. Thus,
delivering value to customers is an ambitious undertaking that involves the successful execution of many
business activities.
Right product: Customers have a choice of product
options that satisfy their needs and wants.
Right place: Customers are able to acquire a product
in a convenient manner.
Right price: Customers are able to pay a price that
reflects the fair market value of that product.
Right time: Customers are able to acquire that
product when they need it.
Most companies provide value or utility, the ability
of a good or service to satisfy
utility the ability of a product to
a human need. The latest
satisfy a human need.
iPhone, Nike running shoes,
192 LESSON 12:
STUDY TOOLS
Visit the MindTap to watch videos on building customer
relationships.
Go to nelson.com/student to access the digital resources.
Building Customer Relationships through Effective Marketing
NEL
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Marketing now includes many new activities such as
marketing research, customer relationship management,
social media management, and more. In addition, the success of marketing and production activities requires the
functions of accounting, finance, and human resources. For
that reason, it is fair to say that everyone in a business plays
a role in a successful marketing strategy. The challenge
for top management is to tightly coordinate all of these
functional areas in order to provide value to customers.
It should be noted that attempts to provide customers all
four types of utility do not always work out perfectly, such
as when sales far outpace production capabilities. However, a company dedicated to providing value is constantly
working to overcome these challenges—and that is how it
builds durable customer relationships in the long run.
The Marketing Mix
ELEMENTS OF THE MARKETING MIX
Examples from McDonald’s Marketing Mix
Placement
Product
Price
(Distribution) Promotion
A company’s marketing activities deliver customers four
types of value discussed in the previous section. The
combination of those marketing activities is called the
marketing mix. Typically, the marketing mix is divided
into four elements (see Figure 12.1).
These elements, traditionally called the “4 P’s of
marketing” represent the framework for building a marketing strategy. The activities of the marketing mix are
designed to satisfy customers, which is why the target
customer is at the centre of the marketing mix.
The product element of the marketing mix
includes decisions about the product’s design, features,
brand name, packaging, warranties, etc.
The pricing element is concerned with setting
prices that achieve particular goals. For example, sometimes pricing is intended to maximize profit; but sometimes it is intended to increase market share, even if that
means sacrificing profit.
FIGURE 12.1
●
●
NEL
Placement
(also called
distribution)
© Cengage Learning
Promotion
●
Traditionally
low price,
with many
items around
$1
●
●
Expanding
into premium pricing
with items
higher than
$10
Distributes to
approximately
1400 restaurants in
Canada
85% of McDonald’s
Canadian
restaurants are
franchises; the
remainder are
company-owned
or licensed stores*
●
●
Roughly
$532 million
spent per year
on marketingrelated expenses,
such as radio and
television
advertisements**
In-store promotions such as the
annual Monopoly
game
**http://corporate.mcdonalds.com/corpmcd/investors-relations/financial-information/annual-reports.html
THE MARKETING MIX
Customer
Premium items
such as egg
white breakfast
sandwiches
and McCafé
coffees and
smoothies
●
*https://www.mcdonalds.com/ca/en-ca/about-us/our-history.html
Product
Price
Fast-food items
such as hamburgers, fries,
wraps, salads,
and shakes
© Cengage Learning
12-3a
The placement (or distribution) element
involves transportation, storage, and the selection of
intermediaries. Intermediaries are wholesale distributors and retail stores that make the products available
to customers. Some companies sell products through
their own stores, some companies sell products through
a series of intermediaries, and some do both.
The promotion element focuses on providing
information to target markets. The major forms of promotion are advertising, personal selling, sales promotion,
and public relations.
These four elements together form a marketing
mix. A company may have one marketing mix for all
customers, or may create a series of marketing mixes in
order to target distinct customer groups.
You can see how the
activities of a company’s
marketing mix enable it to
provide the four types of
marketing value: the right
product, at the right price,
at the right place, at the
right time. But if the first 3
P’s align with all four types
of value, what value does
promotion have?
Promotion is how
companies communicate
their value to you. Without
promotion, many customers would never know
about the various goods
and services that can satisfy
their needs and wants.
marketing mix the combination
of marketing activities that deliver
value to customers; typically divided
into four elements: product, price,
placement, and promotion
product an element of the
marketing mix that includes
decisions about a product’s design,
features, brand name, packaging,
warranties, and so on
pricing setting a price based on
the demand and cost for a good or
service
placement (or distribution)
creating the means by which
products flow from the producer to
the consumer
promotion an element of the
marketing mix that focuses on
providing information to target
markets
LESSON 12: Building Customer Relationships through Effective Marketing 193
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Looked at this way, promotion itself provides value to
customers as well.
A marketing strategy is a plan that will enable an
organization to make the best use of its resources and
advantages to meet its objectives. A marketing strategy
consists of
1. the selection and analysis of a target market, a group
of individuals or organizations for which a business
develops a specific marketing mix suitable for the
specific needs and preferences of that group, and
2. the creation and maintenance of an appropriate marketing mix, or the combination of marketing activities—
product, price, distribution, and promotion—that
satisfy customer needs and preferences.
12-3b
E valuating Marketing Strategy
Using the 4 P’s
The 4 P’s provide a simple framework for categorizing
the marketing mix a company uses to reach target customers. While it is not necessarily an analysis tool, it
can be used to make some basic observations about
whether a marketing strategy is complete or properly
integrated.
To have a successful marketing strategy, the four
elements of the marketing mix must be thoroughly considered and well-coordinated. A weakness in any one
area could hamper the success of even a groundbreaking
and innovative product.
12-3c
The 4 P’s and the Brand Promise
The 4 P’s are an important foundation of branding for
two reasons:
●●
●●
The marketing mix must be complete and integrated
if it is going to satisfy target customers.
The marketing mix for a given product must remain
consistent in order for consumers to trust that they
will receive the same benefits from that product in
the future.
Relationships are built when consumers understand the value they are getting, are content with the
value they are getting, and
can expect to receive that
marketing strategy a plan
that will enable an organization to
same value time after time.
make the best use of its resources
When a company—no
and advantages to meet its
matter how big or small—
objectives
can deliver that experience
target market a group of
to customers, a true cusindividuals for which a business
tomer relationship begins
develops a specific marketing mix
to emerge.
194 LESSON 12:
12-4
KEY TAKEAWAY
Marketing provides value to consumers by giving them the
right product, at the right price, at the right place, and the
right time. Providing value to customers requires a variety
of marketing activities that are collectively referred to as
the marketing mix. The four elements of the marketing
mix are product, price, placement, and promotion. A marketing strategy is a plan that will enable an organization to
make the best use of its resources and advantages to meet
its objectives. A marketing strategy consists of
1. the selection and analysis of a target market, and
2. the creation and maintenance of an appropriate marketing mix.
A target market is a group of individuals for which
a business develops a specific marketing mix. The marketing mix is optimized to meet the specific needs and
preferences of carefully chosen target market segments.
12-5THE CONSUMER DECISION
PROCESS
12-4 Discuss the five major steps involved in
a consumer purchase decision.
12-5 List the three influences on the
consumer decision process.
What goes through your mind when making a purchase
decision? And how much effort are you willing to expend
on that decision? For a pack of gum, you probably do not
expend much effort or thought at all, which is why we
call it an impulse purchase.
But as purchase decisions become more expensive,
we typically go through a decision process that involves
multiple steps and is influenced by a variety of factors.
By learning about our decision process, we can actually
make smarter purchase decisions.
The five steps in the consumer decision process are
shown in Figure 12.2.
Where can we get an app like the one in this scenario? Well, you already have one—your brain. Once you
have recognized a need or an opportunity, such as the
need for a pair of running shoes or an opportunity to
take advantage of a sale, your brain begins searching for
information and evaluating alternatives. Sometimes that
information can be hard to find and the array of alternatives can be overwhelming. As a result, we utilize certain
criteria to narrow our list of alternatives to a few choices.
Then we merge our list of alternatives with a variety of
Building Customer Relationships through Effective Marketing
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FIGURE 12.2
THE CONSUMER BUYING DECISION PROCESS
Recognize
problem/
opportunity
Search for
information
Evaluate
alternatives
influences that affect most of our decisions. These influences are laid out in Figure 12.3.
When you have a solid understanding of your purchase criteria and are aware of the influences on your
purchase behaviour, it is possible to make more satisfying purchases and more accurately evaluate them
when making future purchases of the same product.
12-5a
ow Branding Makes Purchasing
H
Easier
FIGURE 12.3
Evaluate
after
purchase
that brand that is most important. Brands can first establish a connection with consumers in a variety of ways:
●●
●●
●●
●●
But, what if you are making buying decisions for your
business or non-profit organization? Do business
buyers have a different decision process? Actually,
organizational buyers go through the same steps in the
buying decision process, though their process is likely
to be more complex. Business buyers are usually better
informed than consumers about products and generally buy in larger quantities. In a business, a committee
or a group of people, rather than just one person,
decides on purchases. Committee members must consider the organization’s objectives, purchasing policies,
resources, and employees. Business buying occurs
through description, inspection, sampling, or negotiation. Because business transactions can be more complicated and orders tend to be larger, information on
buyers and sellers is important.
Finally, the buying decision process is facilitated by
branding. As discussed earlier, a brand name might help
you identify the seller’s product, but it is the meaning of
Purchase
© Cengage Learning
CONSUMER BUYING DECISION PROCESS
We buy the product and have a good experience with it.
Someone in our social circle buys the product and has
a good experience with it.
We read about the positive experience of others such
as when we look at customer reviews.
We are influenced by promotional messages from the
business.
The most powerful factor in establishing a brand
connection is personal experience. We may take a risk
when buying a new product, but if the product delivers
on its brand promise then we begin to trust that brand.
It is why owners of certain cars buy that same type of
car for life. And why most people either use Windows or
Mac, but rarely switch between the two.
How does this make purchasing easier? Imagine if
every purchase decision was similar to the shoe purchase
we experienced earlier. If there were no brands, we would
have no frame of reference for evaluating alternatives. In
that world, grocery shopping would be nearly impossible,
with tens of thousands of items lined up before our eyes.
But over time, we accumulate information about various
brands based on a set of preferences and experiences. This
in turn allows us to fast track the purchase decision process because we can filter out the vast array of products
and zero in on the ones most likely to satisfy our needs
(see Figure 12.4).
INFLUENCES ON THE BUYING DECISION
Situational influences
Physical surroundings
Social surroundings
Time
Purchase reason
Buyer’s mood and condition
NEL
Psychological influences
Perception
Motives
Learning
Attitudes
Personality
Lifestyles
Social influences
Family
Roles
Peer groups
Social class
Culture and subcultures
© Cengage Learning
POSSIBLE INFLUENCES ON THE DECISION PROCESS
LESSON 12: Building Customer Relationships through Effective Marketing 195
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FIGURE 12.4
BRAND INFLUENCE ON THE CONSUMER BUYING DECISION PROCESS
Recognize
problem/
opportunity
Search for
information
Evaluate
alternatives
Branding makes our purchase decisions simpler and
less risky, which is why we are sometimes willing to pay
a premium for the brands we prefer. It is also valuable to
the company, because it makes the selling process more
efficient. In addition, brand loyalty can be utilized when
introducing new products. For example, the strength of
the Tim Hortons brand leads the company to believe it
will be successful selling bottled coffee drinks in grocery
stores. The hope is that customers who have had the
products at a Tim Hortons location will try the bottled
coffee drinks from the store because their experience
with the brand has been positive.
12-6
KEY TAKEAWAY
The five steps in the decision process are to recognize a
problem or opportunity, search for information, evaluate
alternatives, purchase, and evaluate after purchase. The
larger and more expensive the purchase, the more likely
we are to follow this process. Purchase decisions are also
influenced by situational, psychological, and social factors.
When you have a solid understanding of your purchase
criteria and are aware of influences on your purchase
behaviour, it is possible to make more satisfying purchases.
12-7
TARGET MARKET SELECTION
Purchase
© Cengage Learning
CONSUMER BUYING DECISION PROCESS
Evaluate
after
purchase
products to every consumer—or the wrong consumer—
is wasting significant resources. Imagine if you opened
the magazines below and saw these ads.
These are just hypothetical examples; these companies did not actually run ads in these magazines. But if
they had, you can see what a waste it would have been.
While it is possible a few readers might have found the
ads interesting, the vast majority would not. Even worse,
consumers who might have found one of these products
valuable would have missed out, because the ads did not
appear in the magazines they read.
This example illustrates the importance of target
marketing. As noted previously in this lesson, a target
market is a group of individuals for whom a business will
develop a specific marketing mix of the product, price,
promotion, and distribution elements. That marketing
mix is configured to be suitable for the specific needs
and preferences of that group.
Example #1: The Nissan Cube has features designed
to attract teenagers and early 20-somethings, and the
company ensured that the Cube’s promotion, price, and
distribution were appropriate for this target market (see
Figure 12.5).
FIGURE 12.5
THE ELEMENTS OF MARKETING FOR A
NISSAN CUBE CAR
12-6 Identify common dimensions used for
market segmentation.
Nissan
ences of different target markets.
Consumers making a purchase typically use a decision
process that allows them to gather information, evaluate
alternatives, and choose a product that best fits their
needs. Did you know companies actually go through
a similar process to select customers? How could that
be? Do companies not want any customer that will buy
from them? Technically, yes. But the reality is that some
consumers are more likely to buy certain products than
are other consumers. A company that tries to market its
196 LESSON 12:
Building Customer Relationships through Effective Marketing
© Cengage Learning; photo: kylesmith/Shutterstock.com
12-7 Differentiate between product preferWide
distribution
through
Nissan’s
many dealers
Affordable
price
Communicate
value and fun
NEL
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Selecting distribution channels where the target
group shops
●●
Building promotions strategies that will reach the
target group efficiently and speak to that group’s
needs and motivations
●●
© Cengage Learning; photo: sippakorn/Shutterstock.com
Rolls-Royce
Market segmentation also allows companies to
better serve the needs of various target groups by utilizing specific marketing mixes for each of them. For
example, while automobile owners may share many
characteristics, it is still possible to divide them into different market segments. One segment was targeted with
the feature-rich, higher-priced Mercedes-Benz, and the
other segment was targeted with the more standard,
lower-priced Toyota.
There are three common dimensions for market
segmentation:
Exclusive
distribution
through
Rolls-Royce
dealers
Luxury price
Communicate
prestige
and luxury
Example #2: Rolls-Royce targets its automobiles
toward a small, very exclusive market: wealthy people
who want the ultimate in prestige in an automobile (see
Figure 12.6).
12-7a
Market Segmentation
Companies may subdivide target markets through
market segmentation, which is the process of
breaking down the overall market into smaller groups
of people who share common characteristics and needs.
These smaller clusters are called market segments.
Market segmentation is more art than science. We
are all individuals and cannot necessarily be categorized
into groups with other consumers, even if those other
consumers seem to share many characteristics with us.
With that said, market segmentation is one of the most
powerful marketing and branding strategies available.
Watch any episode of the hit TV show Dragons’ Den, or
meet with a certified business adviser at a Small Business
Development Centre, and you will almost surely hear
the question, “Who is your target customer?”
The goal of market segmentation is to allow a
company to better understand the needs and motivations of customer groups that might find their products
attractive. By selecting appropriate target groups, then
studying those groups, companies can optimize their
marketing mix by:
●●
●●
NEL
Developing products that better meet the needs of
the target group
Charging prices that are reasonable for the target
group
COMMON DIMENSIONS OF MARKET SEGMENTATION
Demographic
Geographic
Lifestyle* and
Behaviour
●
Age
●
Urban, suburban, rural
●
Values
●
Gender
●
City size
●
Attitudes and beliefs
●
Ethnicity
●
Region/country
●
Personality attributes
●
Income and social class
●
Climate
●
Media usage
●
Education
●
Product usage
●
Family size
●
Brand loyalty
●
Religion
●
Price sensitivity
© Cengage Learning
FIGURE 12.6
THE ELEMENTS OF MARKETING FOR A
ROLLS-ROYCE CAR
*Lifestyle characteristics are also commonly called psychographics.
The characteristics of each dimension can be combined and grouped in any number of ways. Technically, if
you can find two people who share a set of characteristics,
you could define them as a market segment. But obviously
a cluster of two people is not a big enough “market” to
pursue, so companies must carefully combine variables
that form a well-defined customer group while ensuring
that the market segment is big enough to pursue.
Large companies often perform market segmentation studies, but this can be expensive. Many market
research companies study various consumer markets and
create predefined market segmentations based on their
data. One such company, Nielsen, is one of the largest and
most respected market research companies in the world.
For example, Nielsen N.V. provides its clients in over
100 countries with the most
complete understanding of
marketing segmentation
the process of separating,
what consumers watch on
identifying, and evaluating the
television and what they
layers of a market to identify a
purchase. This provides
target market.
usable information and
LESSON 12: Building Customer Relationships through Effective Marketing 197
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“
NIELSON’S MARKET SEGMENTATION SYSTEMS
●
●
●
PRIZM—Uncover rich and comprehensive insights about consumer behaviours, shopping patterns, and
media preferences
P$YCLE—Identify unique consumer financial and investment behaviours with a better understanding of a
household’s wealth
ConneXions—Discover a household’s likelihood to adopt new technology using their video, voice, and
”
data purchasing preferences
practical tools to help Nielsen’s clients make strategic
decisions in a very dynamic environment.2 In addition to
being the most important provider of television ratings
data, Nielsen has a number of market segmentation systems (see Figure 12.7).
For example, PRIZM organizes every Canadian
household into 68 different segments using various
combinations of demographic, geographic, and lifestyle
traits. These segments are basically portraits of various
customer groups that share a set of characteristics and
behaviours. Businesses can use these data to find out
who their best customers are, what those customers are
like, and where they can find those customers.
12-7b
arketing Strategy: Creating
M
the Right Marketing Mix for Your
Target Market
The essence of marketing strategy, then, is to select your
target group and create a marketing mix that satisfies
their needs. For example, some products are marketed
specifically to Indigenous peoples, women, or men.
Among the many methods for ensuring a match between
a target group and a marketing mix, companies can ask
themselves these questions:
●●
Does our product fit the values, attitudes, and motivations of the target group?
●●
Is our product used where our target group lives?
●●
Is our pricing appropriate for this target group?
●●
Companies can commit a grave marketing error
when they select a target group, then build a marketing
mix that does not match the needs of that group. A prime
example occurred when McDonald’s tried to create a
line of “grown-up” burgers called Arch Deluxe. After
spending millions on research and advertising, McDonald’s found that its customers were simply uninterested
in this new and more expensive version of its existing
hamburgers.
The marketing mix consists of elements that a business controls and uses to reach its target market. Identifying a target market helps a company focus marketing
efforts on those customers most likely to buy its products. The unique features of the product that appeal to
the target group and are seen by that group as superior
to competitive offerings are the company’s competitive
advantage. Additionally, a business has control over
such organizational resources as finances and information. However, the business’s marketing activities are
also affected by a number of external—and generally
uncontrollable—forces.
12-7c
marketing plan a written
document that specifies an
organization’s resources,
objectives, marketing strategy, and
implementation and control efforts
to be used in marketing a specific
product or product group.
198 LESSON 12:
●●
ave we chosen proH
motions strategies that
allow our message to
reach this target group?
o the messages in our
D
promotional campaigns
speak to this target group’s
needs and motivations?
T he Forces of the Marketing
Environment
These forces include:
●●
●●
Have we chosen distribution channels that will get
our product to this target group?
●●
© Cengage Learning
FIGURE 12.7
●●
●●
Economic forces—the effects of economic conditions
on customers’ ability and willingness to buy
Sociocultural forces—influences in a society and its
culture that result in changes in attitudes, beliefs,
norms, customs, and lifestyles
Political forces—influences that arise through the
actions of elected and appointed officials
Competitive forces—the actions of competitors,
who are in the process of implementing their own
marketing plans
●●
Legal and regulatory forces—laws that protect consumers and competition and government regulations
that affect marketing
Building Customer Relationships through Effective Marketing
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●●
Technological forces—technological changes that can
create new marketing opportunities or cause products
to become obsolete almost overnight
12-8
KEY TAKEAWAY
A target market is a group of individuals for which a
business develops a specific marketing mix. The marketing mix is optimized to meet the specific needs
and preferences of that group. Companies identify
target markets through market segmentation, which is
the process of breaking down the overall market into
smaller groups of people who share common characteristics and needs.
Marketing activities are affected by a number of
external forces that make up the marketing environment. These forces include economic forces, sociocultural forces, political forces, competitive forces, legal
and regulatory forces, and technological forces.
12-9THE MARKETING RESEARCH
PROCESS
12-8 List the four steps of the marketing
research process.
Identifying and understanding your target market is one
of the keys to marketing strategy, and marketing research
is how you find information about those target groups.
Marketing research is the process of systematically
gathering and analyzing data concerning a particular
marketing program.
Market segmentation is one example of information
that results from extensive market research. Besides
market segmentation, there are many other applications
for marketing research such as:
●●
●●
●●
●●
Assessing the business environment to identify opportunities
Understanding your position in relation to competitors
Learning the preferences and usage patterns of your
existing customers
Evaluating the likely success of a new product
A lot is riding on the marketing decisions that managers make. That is why those managers need accurate
information to make those decisions. There are four
NEL
steps to the market research process. Failure to perform
these steps properly can lead to bad information—which
in turn can lead to bad marketing decisions. Read the
following discussion to learn about the market research
process, including methods for secondary research
and primary research, as well as some key pitfalls to
avoid during the process.
Market research involves four primary steps. The
first step is to define the research goal. This is critical,
as market research can be expensive and time consuming. Money and time spent on researching the
wrong things can lead to a very pretty market research
report that is absolutely worthless. Managers must
define the problem they want to solve or the information gap they want to fill by asking themselves, “What
should we be able to accomplish with this new information?”
Once the research project has clear objectives, it
can move to the next step, which is to gather information. This is typically the longest portion of any research
project and requires the most resources. The great news
in today’s economy is that there are more methods and
sources for collecting research information than at any
time in history. The bad news is that information overload can quickly set in and lead to research quicksand.
Keeping the research goal in mind can help researchers
navigate all of the information available to them and stay
on track.
Some of the information will come from others
who have already gathered and published research
results. This is called secondary research. Other information will need to be collected using primary research
methods such as surveys, focus groups, and customer
interviews.
Once all of the information is gathered, the
third step in the market research process is to
interpret the information.
Inter­preting information
marketing research the
includes important conprocess of systematically gathering
and analyzing data concerning a
siderations such as: What
particular marketing program
data are the most reliable
and valid? What patterns
secondary research market
research information that has
do we see? How do we
already been gathered and
assemble and represent
published by someone outside the
these data so that they will
company
actually make sense to the
primary research market
decision makers?
research information that is
The final step is to
collected by the company using
use the data to make
methods such as surveys, focus
groups, and customer interviews
marketing decisions. If
the data cannot be used
LESSON 12: Building Customer Relationships through Effective Marketing 199
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BigTunaOnline/Shutterstock.com
12-10
to make decisions, the research project was a failure.
But if the data are actionable and provide some new—
possibly even brilliant—insights the company did not
have before, then managers have the ability to make
decisions that will make them heroes to their customers
and leave the competition in the dust.
Canada Business Network, a department of
the federal government, offers advice for how to
conduct market research and design questionnaires
that will improve your results, both locally and
internationally.3
Social media has transformed market research.
More marketing dollars are moving to social media and
other digital marketing initiatives (as opposed to print
and radio advertising). Customers are spending more
time online, and this is true for most demographics.
This gives companies an opportunity not only to market
to their customers but also to find new ones since the
audience is so large.
Social media has given customers a platform to voice
their opinions and companies are realizing its importance and the need to actively monitor it, especially concerning the public’s impression of the company. Social
media also allows researchers to be much more targeted
and quickly get real-time feedback.
Mobile marketing has become a considerable presence. With numerous apps for advertising, branding,
and more, technically
demographics a dimension
savvy customers will conof market segmentation that
tinue to expect more apps
includes measurable characteristics
that are very specific and
such as age, gender, income,
education level, and so on
usable.
200 LESSON 12:
KEY TAKEAWAY
Marketing research is the process of systematically
gathering and analyzing data concerning a particular
marketing program. It can be used for purposes such
as market segmentation, analysis of the business
environment, and evaluation of new products. The
four steps in the marketing research process are to
define the research goal, gather information, interpret
the information, and make marketing decisions based
on the information. Good marketing decisions require
good information, making the accuracy of marketing
research critical.
B UILDING BRAND VALUE
We started this lesson by discussing the brand value
of top companies. Throughout this lesson, we have
learned various aspects of how brand value is built
through marketing activities. It all starts with two fundamental ideas:
●●
●●
Consumers hope to find products that satisfy their
needs.
Companies hope to sell products that satisfy customer
needs.
Both sides must do some work for their hopes to
come true. Consumers use a purchase decision process
that sorts and filters their alternatives until they find one
that is a good fit. Companies use a marketing process that
sorts and filters alternative target groups to find a good
fit; then they optimize their marketing mix to satisfy that
group’s needs.
When consumers and companies find each other
this way, a relationship is built that makes life easier for
both sides. The consumer has an easier time choosing
what to buy, and the company acquires a loyal customer
base. As that loyal customer base grows, the value of
the brand grows. Eventually, the company name or logo
might carry tremendous value in the market because the
brand is almost universally recognized and preferred by
consumers. But getting to this point always starts with a
first step. That first step is when companies commit to
building long-term customer relationships by satisfying
customer needs. That starting point is a viable goal for
even the smallest business.
Building Customer Relationships through Effective Marketing
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LESSON SUMMARY
LO 12-1 Explain the key differences between
production orientation and customer orientation.
Marketing is the process of creating, pricing, distributing, and promoting goods, services, and ideas to facilitate satisfying relationships
with customers and to develop and maintain favourable relationships
with stakeholders in a dynamic environment. But it was not always this
way. In previous eras, companies focused more on production, without
a mind toward customer needs. However, increased competition has
created an environment where companies actively seek to determine
and satisfy customer needs, with the goal of building long-term customer relationships. Over time, that has elevated the importance of
branding.
LO 12-2 Summarize the ways that marketing
activities provide value to customers.
Marketing activities provide value in four ways: the right product, in
the right price, at the right price, and at the right time. They provide
form, place, time, and possession utility.
A marketing strategy is a plan that will enable an organization to
make the best use of its resources and advantages to meet its objectives. A marketing strategy consists of
1. the selection and analysis of a target market, and
2. the creation and maintenance of an appropriate marketing mix.
A company that tries to market its products to every consumer—
or the wrong consumer—is wasting significant resources. A target
market is a group of individuals or organizations for which a business
develops a specific marketing mix suitable for the specific needs and
preferences of that group. Companies identify target markets through
market segmentation, which is the process of breaking down the
overall market into smaller segments of people who share common
characteristics and needs. Market segmentation also allows companies
to better serve the needs of various target groups by utilizing specific
marketing mixes for each of them.
LO 12-3 Identify the four components of a
marketing mix.
The combination of the marketing activities that deliver this value is
called the marketing mix. Typically the marketing mix is divided into
four elements: product, price, distribution (placement), and promotion. Together, these elements are traditionally referred to as the 4 P’s
of marketing. To have a successful marketing strategy, the four elements of the marketing mix must be thoroughly considered and wellcoordinated. A weakness in any one area could hamper the success of
even a groundbreaking product.
LO 12-4 Discuss the five major steps involved in
a consumer purchase decision.
For managers to make good marketing decisions, they must understand how their customers make purchase decisions. Both consumers and organizations typically go through a decision process
that involves multiple steps and is influenced by a variety of factors.
As consumers, we can actually make smarter purchase decisions by
learning about our decision process. The five steps of the purchase
decision process are to recognize a problem or opportunity, search
for information, evaluate alternatives, purchase, and evaluate after
purchase.
NEL
LO 12-5 List the three influences on the
consumer decision process.
Purchase decisions are influenced by situational, psychological, and
social factors. Understanding purchase criteria and being aware of
influences on purchase behaviour leads to more satisfying purchases.
LO 12-6 Identify common dimensions used for
market segmentation.
In the same way that consumers filter out alternatives when making a
purchase decision, companies must filter out alternatives when deciding
what groups to target with their marketing. A company that tries to
market its products to every consumer—or the wrong consumer—is
wasting significant resources. A target market is a group of individuals for
which a business develops a specific marketing mix. Companies identify
target markets through market segmentation, which is the process of
breaking down the overall market into smaller groups of people who
share common characteristics and needs. These smaller clusters are called
market segments. Market segmentation also allows companies to better
serve the needs of various target groups by utilizing specific marketing
mixes for each of them. The essence of marketing strategy is to select your
target customer and create a marketing mix that satisfies their needs.
LO 12-7
Differentiate between product preferences of different target markets.
Identifying a target market helps a company focus marketing efforts
on those customers most likely to buy its products. The unique features of the product that appeal to the target group and are seen by
that group as superior to competitive offerings are the company’s
competitive advantage. Product preferences may be influenced
by economic forces, sociocultural forces, political forces, competitive forces, legal and regulatory forces, and technological forces. For
example, the product preferences of a middle-aged family with a large
disposable income living on the outskirts of the city will be different
from those of a young adult living in a metropolitan area.
LO 12-8 List the four steps of the marketing
research process.
Marketing research is the process of systematically gathering and
analyzing data concerning a particular marketing program. It can be
used for purposes such as market segmentation, analysis of the business environment, and evaluation of new products. The four steps in
the marketing research process are to define the research goal, gather
information, interpret the information, and make marketing decisions
based on the information. Good marketing decisions require good
information, making the accuracy of marketing research critical.
A brand is a relationship between a company and its customers
that is built on trust that the brand promise will be delivered. Brand
relationships make purchase decisions simpler for the customer and
provide brand value for the company.
EXERCISES
Use the Internet, magazines, newspapers, books,
and personal experiences to complete the following
exercises.
1. As the number of people online continues to grow, more people
are buying products online versus in-store. Which do you prefer?
LESSON 12: Building Customer Relationships through Effective Marketing 201
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Prepare a list of the advantages and disadvantages of shopping
online.
9. What is market segmentation? What are the basic dimensions of
consumer market segmentation?
2. Select any industry and discuss how you would develop a
marketing strategy for a business in that industry. Indicate how
you will conduct market research, and provide reasoning for your
chosen target market.
10. What is market research, and what are the steps in the market
research process?
3. Select any organization and perform an analysis of the organization’s marketing mix. Create a pie chart to categorize the marketing activities of the business based on price, product, placement,
and promotion.
KEY TERMS
4. Reflect on a large dollar purchase you have made in the past.
What steps did you take to arrive at your purchase decision?
What factors influenced your decision?
customer orientation, p. 190
5. Think of two companies with well-recognized brands (e.g., Apple,
Tim Hortons). How do the branding efforts of each company
differ? How does each company establish a connection with the
customer through branding?
branding, p. 191
customer relationship management (CRM), p. 191
demographics, p. 200
market segmentation, 197
marketing, p. 190
marketing concept, p. 191
marketing mix, p. 193
REVIEW QUESTIONS
marketing plan, p. 198
marketing research, p. 199
1. What is marketing?
marketing strategy, p. 194
2. How did the marketing concept evolve over time?
placement (or distribution), p. 193
3. What is the purpose of customer relationship management
(CRM)?
pricing, p. 193
4. What are the four elements in the marketing mix?
5. What are the steps involved in a consumer purchase decision?
What else influences this process?
primary research, p. 199
product, p. 193
production orientation, p. 190
6. How can a brand establish a connection with the customer?
promotion, p. 193
7. What is a target market?
secondary research, p. 199
8. Why is it important for marketers to understand the external
environment? What are the six general categories of the environment that marketers must evaluate?
target market, p. 194
202 LESSON 12:
utility, p. 192
Building Customer Relationships through Effective Marketing
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STALE COFFEE
In any ranking system, a fall from fourth place to 50th in one year is a disastrous result. This precipitous decline is exactly what happened to one of
Canada’s iconic brands: Tim Hortons. And, typical of any sort of fall, a significant portion of it was self-inflicted.
The above ranking is from a brand reputation survey of Canadians administered by marketing research firm Leger. Tim Hortons had been a mainstay
in the top 10 of this ranking for over a decade. After this announcement in
April 2018, yet another ranking survey came out with similar results—another
decline for Tim Hortons, with a fall from 13th place to 67th place. While you
can always question surveys and accuracy, you cannot deny that Canada’s
coffee giant’s reputation is suffering.
But it was not always this way. Tim Hortons opened its first location in
Hamilton in 1964, selling 25¢ coffee and 69¢ donuts. These were humble
beginnings, and the company was simply another coffee chain for much of
the next 10 years. In 1974, one of the company founders and the namesake
of the chain, Tim Horton, died in a car accident. The company’s first franchisee, Ron Joyce, took over operations when he bought out Tim Horton’s
wife in 1978.
It was around this time that Tim Hortons began to expand its product line
by introducing the iconic Timbit—a “donut hole” that is bite sized and accompanies coffees nicely. Canadian expansion carried strongly into the 1980s,
and the first international outlet of Tim Hortons opened in New York in 1984.
The 1990s saw the introduction of the incredibility popular sales promotion
“RRRoll Up the Rim to Win.”
By the mid 1990s, Tim Hortons was becoming a big deal. It caught the
attention of US fast-food giant Wendy’s, which purchased Tim Hortons for
$400 million. A decade later, Wendy’s sold part of Tim Hortons as part of an
initial public offering, eventually being spun off as a separate entity after
raising $700 million. In 2009, the company became “Canadian” again, registering as a Canadian corporation. But five years later, the iconic Canadian
brand was taken south of the border. This time it was Burger King that purchased Tim Hortons, for $12.5 billion.
Today Tim Hortons has thousands of locations around the world, with
the majority in Canada. And over time, Tim Hortons has become part of
Canadiana. “There is no icon in Canadian business more universally revered
than Tim Hortons. For millions in this country, ‘Tim’s’ long ago transcended
the world of doughnuts and a decent cup of coffee. It is now a part of
the national identity—one of those rare brands by which people identify
themselves.”
And it is likely this transcendence to almost cult status that has made
this current decline in reputation so shocking to Tim Hortons. Much of the
reason for this damaged reputation comes from decisions made regarding
franchisees.
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LESSON 12: Building Customer Relationships through Effective Marketing 203
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In 2017, the Tim Hortons parent company began fighting with franchisees over cost sharing, advertising, and improvements to stores. But the
real damage came when the Ontario government announced a raise to the
minimum wage starting in 2018. It was this precise increase behind a letter
sent to employees from a Tim Hortons franchise in early 2018 stating that
the store will no longer provide paid breaks and other perks that previously
were part of the employee benefits. The letter was written by none other than
Ron Joyce’s son, and stated in part: “These changes are due to the increase of
wages to $14.00 minimum wage on January 1, 2018, then $15.00 per hour on
January 1, 2019, as well as the lack of assistance and financial help from our
Head Office and from the Government.”*
This decision did not sit well with consumers who felt they were watching
their iconic Canadian brand take advantage of working Canadians. As well,
much of the marketing talent that helped build the business has left, and
internal corporate culture is said to be stifling under the numerous cost-cutting measures put out by the company since the 2014 merger.
With competitors like McDonald’s stepping up their coffee game, and
Starbucks continuing its foray into breakfast foods, plenty of dark clouds loom
on the horizon. Which is why, in light of plummeting in the rankings, Tim
Hortons is embarking on a new campaign to try to win consumers back.
The campaign is called “Winning Together” and pledges to renovate
stores and reinvigorate franchisees and employees. Food and coffee will be
improved, and media and public relations will be a key focus to re-engage the
public.
In reading this case, you know all about what Tim Hortons is suffering
from—poor marketing. You realize from your classes that marketing is much
more than just advertising, and you can see how important marketing will be
to the success of the Winning Together strategy.
Create your own Winning Together blueprint, complete with five key
areas of focus as applied to customer relationships and marketing. Time is
running out, and you are asked not to let Tim Hortons fall further down any
lists. So get working—on the double (double).
Case Sources: https://www.theglobeandmail.com/business/article-tim-hortons-slides-from-top-10-in
-brand-reputation-survey/; https://www.ctvnews.ca/business/tim-hortons-timeline-from-humble-beginnings
-to-4-000-plus-locations-1.1974939; http://www.cbc.ca/news/business/tim-horton-s-tims-timmies-doubledouble
-minimum-wage-ontario-kathleen-wynne-labour-1.4470215; http://nationalpost.com/life/food/why-do-we
-continue-to-allow-as-mediocre-a-coffee-chain-as-tim-hortons-define-canada; https://www.macleans.ca/
archives/how-tim-hortons-was-founded-on-greed-and-betrayal/; http://business.financialpost.com/news/
retail-marketing/tim-hortons-falls-to-67th-in-reputation-rankings-by-reputation-institute; https://www.macleans
.ca/economy/business/the-tim-hortons-brand-is-badly-broken-heres-how-to-fix-it/
*Aaron Saltzman, “Tim Hortons heirs cut paid breaks and worker benefits after minimum wage
hike, employees say,” CBC News, January 3, 2018: http://www.cbc.ca/news/business/tim-horton
-s-tims-timmies-doubledouble-minimum-wage-ontario-kathleen-wynne-labour-1.4470215.
Reproduced by permission of CBC Licensing
204 LESSON 12:
Building Customer Relationships through Effective Marketing
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Copyright 2020 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content
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13 Developing
and Managing
Products
LEARNING OBJECTIVES
13-1 Discuss how different forms of a product can bring value to
a customer.
13-6 Identify different marketing strategies for each stage of the
product life cycle.
13-2 Differentiate between different types of product innovation.
13-7 Explain reasons for changing the product mix.
13-3 Summarize the four phases of the product development
13-8 Summarize the three main benefits of organizing products
process.
into product lines.
13-4 Identify three examples of activities that occur during the
13-9 Discuss different functions of product packaging.
product development process.
Image Source / Alamy Stock Photo
Once you complete this lesson, you will be able to:
13-5 Explain the four stages of the product life cycle in terms of
revenue and profit.
I NTRODUCTION
Read through this list of items:
●●
DVD players
●●
Snapchat
●●
iPhones
●●
Smartphones
●●
Spotify
●●
Social media
●●
Pinterest
●●
Podcasts
●●
Netflix
●●
Crowdfunding
●●
Airbnb
●●
Yelp
●●
YouTube
●●
WiFi
●●
Google Maps
206 LESSON 13:
Developing and Managing Products
These are all relatively recent innovations, and
they have all improved our overall quality of life in
one way or another. But the companies that brought
these innovations to market have benefited as well. By
consistently serving customers with improved goods
and services, companies are able to maximize profits.
Marketers make decisions about what products to
bring to market in conjunction with the overall strategic direction of the company. Then they work with
operations to design those products and allocate the
resources needed to provide them—whether that is
production facilities or alliances with other companies
if it is a good, or layouts and procedures to follow if it
is a service.
What would our lives be like if these innovations
had not been introduced? Why and how are new products created? Also, whatever happened to products
that were commonly used in the not-so-distant past,
such as stand-alone GPS devices and point-and-shoot
cameras? Why do we not see those on the shelves
where we typically shop? We will explore these types
of questions in this unit on developing and managing
products.
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13-1
WHAT IS A PRODUCT?
13-1 Discuss how different forms of a product
can bring value to a customer.
A product can be anything that a company offers to
satisfy customer needs and wants. When Pizza Pizza sells
a pizza, it is not just selling food. It is satisfying a customer’s hunger. When Apple sells an iPhone it is selling
not only a communication device, but also a product that
has the ability to take pictures. These pictures capture a
special moment and create memories. Products do not
always come in physical form, though. A product may be
a good or a service:
●●
●●
Good: a physical, tangible product that we can see
and touch—Examples: smartphones, vehicles, paper
and pens
Service: an intangible product that we experience
or use—Examples: financial advising, office cleaning,
warranties
Usually, goods can be mass-produced and stored.
Services cannot be stored and usually need more customization than goods (e.g., a haircut).
Products are often a blend of goods and services. For
example, a Honda Civic (a good) would have less value
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without Honda’s maintenance agreement (a service)
(Figure 13.1). Although Tim Hortons sells such goods
as sandwiches and coffee, customers expect quality service as well, including quick food preparation and cleanliness. When developing a product, an organization must
consider how the combination of goods and services will
provide value to the customer.
Canadian company Booster Juice offers freshsqueezed juices and healthy food options in more than
350 locations worldwide (Figure 13.2).1 The process
of producing these goods is the service. By providing
quality products, customers may be more likely to purchase from a company such as Booster Juice.
Another example is the building of a new house.
Many trades are involved
in building a new house
product everything one
receives in an exchange,
(Figure 13.3). Each trade
including all tangible and
(e.g., electrician, plumber,
intangible attributes and
roofer, tiler, and painter)
expected benefits; it may be a
uses its expertise to build
good, a service, or an idea
the new house (the service)
good a physical, tangible
by using goods (e.g., wiring,
product that we can see and
plumbing, shingles, tiles, and
touch
paint). And each trade relies
service an intangible product
on its reputation to gain new
that we experience or use
contracts for future work.
LESSON 13: Developing and Managing Products 207
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PRODUCTS ARE SOMETIMES A BLEND OF GOODS AND SERVICES
FIGURE 13.2
THE PROCESS OF PRODUCING A GOOD CAN BE THE SERVICE
FIGURE 13.3
TRADES USE THEIR EXPERTISE TO BUILD BY USING GOODS
(l) franco lucato/Shutterstock.com; (r) ervstock/Shutterstock.com
(l) JHVEPhoto/Shutterstock.com; (r) Lee Brown / Alamy Stock Photo
(l) Zoran Karapancev/Shutterstock.com; (r) Guy Shapira/
Shutterstock.com
FIGURE 13.1
208 LESSON 13:
Developing and Managing Products
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It is useful to recognize that different classes of products are directed at particular target markets. A product’s
classification largely determines what kinds of distribution, promotion, and pricing are appropriate in marketing
the product. Products can be grouped into two general
categories: consumer and business (the latter are also
called business-to-business or industrial products). A
product purchased to satisfy personal and family needs is a
consumer product. A product bought for resale, for
making other products, or for use in a business’s operations
is a business product. The buyer’s use of the product
determines the classification of an item. Note that a single
item can be both a consumer and a business product. Light
bulbs are a consumer product when you use them in your
home, but the same light bulbs are a business product if
you purchase them for use in a business.
13-1a
products. These groupings are based primarily on characteristics of buyers’ purchasing behaviour.
●●
items that require little shopping effort—soft drinks,
candy bars, milk, bread, tissues, and toiletries such
as toothpaste. We buy them routinely without much
planning. This does not mean that such products are
unimportant or obscure. In fact, many are recognizable by their brand names, such as Tim Hortons,
Boston Pizza, and Canada Post.
●●
roducts Bring Value to Customers in
P
a Variety of Ways
Why is this important? Because once you identify what
customers value, you can find a variety of ways to satisfy
their needs, whether it is through a good, a service, or a
blend of the two.
13-1b
●●
Consumer Product Classifications
KPG_Payless/Shutterstock.com
Consumer products are traditionally classified as one of
three categories: convenience, shopping, and specialty
Personal computers are shopping products.
We probably would replace them every
few years and when we do, we compare
options and prices.
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Convenience products are relatively inexpensive
A shopping product is an item for which buyers
are willing to expend considerable effort on planning and making the purchase. Buyers allow
ample time for comparing stores and brands with
respect to prices, product features, qualities, services, and perhaps warranties. Video game systems,
mattresses, personal grooming products, and cell
phones are examples of shopping products. These
products are expected to last for a fairly long time
and thus are purchased less frequently than convenience items.
A specialty product possesses one or more unique
characteristics for which a group of buyers is willing to
expend considerable purchasing effort. Buyers actually
plan the purchase of a specialty product; they know
exactly what they want and will not accept a substitute.
While searching for specialty products, purchasers do
not compare alternaconsumer product a
tives. Examples include
product purchased to satisfy
sports and movie mempersonal and family needs
orabilia, accessories such
business product a product
as high-end purses or
bought for resale, for making other
shoes, or vintage wines.
products, or for use in a business’s
Another
consumer
product classification that
is usually associated as a
shopping or a specialty
product is an unsought
product. People generally do not seek out
unsought products until a
significant event happens.
For example, most people
do not actively seek to
purchase life insurance.
This may change when
a person has a child and
life insurance becomes an
important aspect of personal financial planning.
operations
convenience product a
relatively inexpensive, frequently
purchased item for which buyers
want to exert only minimal effort
shopping product an item
for which buyers are willing to
expend considerable effort on
planning and making the purchase
specialty product an
item that possesses one or more
unique characteristics for which
a significant group of buyers is
willing to spend considerable
purchasing effort
unsought product a product
that is not actively sought out until
a significant event occurs
LESSON 13: Developing and Managing Products 209
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13-1c
Learning to Classify Products
Products can be classified as goods, services, or both.
Understanding whether a product offering is mostly
a good or mostly a service helps managers understand
what resources are required to deliver that product. For
example:
●●
●●
●●
or recycled solid wastes. Raw materials are usually
bought and sold according to grades and specifications.
●●
machines used for production purposes. Examples
of major equipment are lathes, cranes, and stamping
machines. Some major equipment is custom-made
for a particular organization, but other items are standardized products that perform one or several tasks
for many types of organizations.
Goods are typically produced, while a person typically
delivers services.
Goods can be mass-produced, which can increase
efficiency and lower the cost of delivering them
to customers. However, it is hard to create the
same kind of efficiencies when delivering services,
because they are delivered one by one and cannot
be stored.
Managing quality is also different depending on
whether you are producing goods or delivering
services.
While it is usually easy to identify pure goods or
pure services, an increasing number of products today
are a mix of both. For example, your cell phone is a
good, but you also pay for
raw material a basic material
voice and data service so
that actually becomes part of a
that you can actually use
physical product; it usually comes
the phone. Your mobile
from mines, forests, oceans, or
provider probably sold you
recycled solid wastes
the device and the service
major equipment large
contract at the same time.
tools and machines used for
In many cases, the way in
production purposes
which companies blend
accessory equipment
goods and services can difstandardized equipment used in
a business’s production or office
ferentiate them from the
activities
competition.
Similar to consumer
component part an
item that becomes part of a
products, business prodphysical product and is either a
ucts can be classified based
finished item ready for assembly
on their characteristics
or a product that needs little
and intended uses. These
processing before assembly
categories include raw
process material a material
materials, major equipthat is used directly in the
ment, accessory equipproduction of another product
but not readily identifiable in the
ment, component parts,
finished product
process materials, supplies,
and services.
supply an item that facilitates
production and operations but
does not become part of a finished
product
business service an
intangible product that an
organization uses in its operations
210 LESSON 13:
●
A raw material is
a basic material that
actually becomes part
of a physical product.
It usually comes from
mines, forests, oceans,
Developing and Managing Products
Major equipment includes large tools and
●●
●●
●●
●●
●●
Accessory equipment is standardized equipment
used in a business’s production or office activities. Examples include hand tools, fax machines, fractional horsepower motors, and calculators. Compared with major
equipment, accessory items are usually much less expensive and are purchased routinely with less negotiation.
A component part becomes part of a physical
product and is either a finished item ready for
assembly or a product that needs little processing
before assembly. Although it becomes part of a larger
product, a component part can often be identified
easily. Clocks, tires, computer chips, and switches are
examples of component parts.
A process material is used directly in the production of another product. Unlike a component part,
however, a process material is not readily identifiable
in the finished product. Similar to component parts,
process materials are purchased according to industry
standards or to the specifications of the individual
purchaser. Examples include industrial glue and food
preservatives.
A supply facilitates production and operations but
does not become part of a finished product. Paper,
pencils, oils, and cleaning agents are examples.
A business service is an intangible product that an
organization uses in its operations. Examples include
financial, legal, online, janitorial, and marketing
research services. Purchasers must decide whether to
provide their own services internally or to hire them
from outside the organization.
13-2
KEY TAKEAWAY
A product can be a physical good, a service, or a combination of the two. A product can also be a consumer
product, a business product, or both. Understanding
the different forms a product can take helps companies
find creative ways to offer products that bring value and
satisfy customer needs.
NEL
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13-3
THE BENEFITS OF INNOVATION
13-2 Differentiate between different types of
product innovation.
Innovation is any product improvement that customers value over existing choices. This includes entirely
new products that did not previously exist, or adaptations
to existing products. In Canada there are many initiatives to encourage innovation, such as the Nova Scotia
Innovation Hub. This initiative focuses on renewable
resources, which will provide an opportunity for longterm economic health and sustainability.2
But why do companies innovate? And how do those
innovations benefit us? Read the boxed feature below for
insight into these questions.
13-3a
The Pace of Innovation
For centuries, entrepreneurs and innovators have pursued ways to make life better for all of us. From the
creation of paper to the creation of touchscreens, innovation has been constant. But the pace of innovation has
changed over time.
EXAMPLES OF ACCELERATING INNOVATION
As you can see, the pace of innovation continues to
accelerate. Many products and services we use today
did not exist 50—or even 20—years ago. Select the different products and services in the following graph to
see just how fast innovations become commonplace in
our lives.
13-3b
Benefits of Innovation
Innovations can enhance existing products, or lead to
entirely new ones. Sometimes innovations are simple
and offer incremental improvements, such as when
Microsoft updates its Windows operating system.
Sometimes innovations are revolutionary and can disrupt entire industries, such as when Apple launched
the iPad and essentially created a huge new electronics category. Many restaurants are responding
to customers’ expectations by offering more healthy
food options.
Innovation is not limited to goods; we see many
improvements in services as well. For example, companies such as Supper
Works allow customers
innovation any product
to skip the supermarket
improvement that customers
and order fresh, prevalue over existing choices,
which includes entirely new
measured, and pre-cut
products that did not previously
ingredients
with
the
exist and adaptations to existing
recipe to cook balanced
products
meals at home.
Why Do Companies Continually
Innovate?
Why do companies continually innovate? Because
products can become obsolete or unprofitable as:
●●
●●
●●
●●
More competitors offer products similar to yours
Competitors introduce innovations of their own
Customers need change
Technology changes
To remain competitive, companies must be
responsive to changes in their industry and in the
business environment. But the best companies do
not just respond to change; they create change
by dreaming up new ideas and investing in the
research and development required to bring those
ideas to life. As innovation takes place, not only
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do companies find new sources of profits, but
our quality of life also improves as we get access
to products that provide improved function and
quality, lower prices, and new experiences.
For example, think of how communicating with
someone on the other side of the country (or even
the world) has improved in the last 100 years or so.
We once had to wait weeks or months to get a written
letter. Soon we could talk using landlines. Then came
mobile phones. And now video calls are common.
This monumental change in how we communicate
happened over a relatively short period of time, and as
a result of these innovations our lives are better.
LESSON 13: Developing and Managing Products 211
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Often, product innovations are related to:
▸ Improving function or quality—Example: A new
computer runs faster than previous versions.
▸ Lowering cost of production—Example: A new
production process cuts waste by 20%, allowing the
manufacturer to either lower prices or increase profits.
▸ Offering customers new experiences not previously
available—Example: A theme park offers a new ride.
13-4
KEY TAKEAWAY
The pace of innovation is accelerating, and companies
that innovate can better serve customers and increase
profits. Product innovations often improve our quality of
life by providing improved function and quality, lower
prices, and new experiences.
13-5
T HE PHASES OF PRODUCT
DEVELOPMENT
13-3 Summarize the four phases of the
product development process.
13-4 Identify three examples of activities that
occur during the product development
process.
idea generation the first
phase of the product development
process, when marketers generate
as many ideas as possible
product analysis the second
phase of the product development
process, when marketers screen
ideas to select the best one
development and
testing the third phase of the
product development process,
when marketers build prototypes
or small production runs of the
product to test on a small scale
commercialization the final
phase of the product development
process, when marketers take
all they have learned from
previous phases and make final
improvements to the product
before launching it to the market
212 LESSON 13:
While innovation is necessary, developing and introducing new products is
frequently time consuming,
expensive, and risky. Thousands of new products are
introduced annually. The
overall failure rate for new
products is around 50%,
although the failure rate
in some industries can be
much higher. Although
developing new products
is risky, failing to introduce new products can be
just as hazardous because
older products can become
obsolete or unprofitable.
As a company, how do you
manage this dilemma?
Developing and Managing Products
FOUR KEY PHASES OF PRODUCT DEVELOPMENT
The product development process includes four key
phases:
Phase 1: Idea generation, when you generate as many
ideas as possible
Phase 2: Product analysis, when you screen ideas to
select the best one
Phase 3: Product development and testing, when you
build prototypes or small production runs of the product
so that you can test it on a small scale
Phase 4: Commercialization, when you take all you have
learned in the first three phases, make final improvements to the product, and launch it to the market.
Through a systematic process of product development
that is designed to maximize the chance of creating a
winning product. The boxed feature above introduces
the four phases of the product development process: idea generation, product analysis, product
development and testing, and commercialization.
13-5a
ctivities of Each Product
A
Development Phase
A company performs a variety of specific activities
in each phase of the product development process.
Each stage requires management to “greenlight” ideas
before moving forward. This is important to ensure
that the company does not waste resources on marginal
concepts.
1. Idea Generation: Get ideas from customers and competitors, conduct brainstorm sessions.
2. Product Analysis: Weed out ideas that do not fit the
product mix, are too expensive, or are not feasible
for some other reason. Present idea to potential customers for feedback. Create estimates of possible
costs and profitability of launching the new product.
3. Product Development and Testing: Create detailed
specification of product features to evaluate production cost and feasibility. Develop and evaluate prototypes if possible. (Prototypes are samples that the
company or consumers can actually test. The results
help refine the concept.) Launch product on smaller
scale to evaluate consumer response.
4. Commercialization: Based on results from previous
stages, make product changes or improvements.
Plan for full-scale manufacturing, distribution, and
marketing. Launch product to general market. An
alternative to traditional commercialization is to
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
license your product or idea to
another company, which launches
the product and pays you a portion
of the sales revenue.
KEY TAKEAWAY
Product development is especially
important in today’s competitive
environment. A systematic and intentional approach to product development can maximize the chance of
launching a winning product. The
four phases of product development
are idea generation, product analysis,
product development and testing,
and commercialization. Each stage
requires management to “greenlight”
ideas before moving forward. This is important to
ensure that the company does not waste resources on
marginal concepts.
13-7
PRODUCT LIFE CYCLE
13-5 Explain the four stages of the product
life cycle in terms of revenue and profit.
13-6 Identify different marketing strategies
for each stage of the product life cycle.
13-7a
The Stages of the Product Life Cycle
When marketers introduce a new product, they hope it
will last forever, generating sales and profits for years to
come. But every product progresses through a product
life cycle (PLC), a series of stages in which a product’s
sales revenue and profit increase, reach a peak, and then
decline. The PLC refers to an entire product category,
not just an individual product. Marketers who understand the cycle concept are better able to forecast future
sales and plan new marketing strategies. The product life
cycle generally consists of four stages: the introduction
stage, the growth stage, the maturity stage, and
the decline stage; read on to learn why marketers
must pay attention to it.
The product life cycle generally consists of four
stages: introduction, growth, maturity, and decline. This
life cycle can look dramatically different depending on
the product category. But most product categories move
through these four distinct stages. Each stage typically
NEL
© Cengage Learning
13-6
EXHIBIT 13.1 THE STAGES OF THE PRODUCT LIFE CYCLE
follows a pattern in terms of the overall sales and profits
for products in that category. By understanding the
product life cycle (also called the PLC), marketing managers can plan effective strategies for maximizing the
profitability of their products over time. If they ignore
the PLC, they could end up wasting money by utilizing
the wrong marketing strategies.
In recent years, the pace of innovation has shortened product life cycles in many categories, because
new products are introduced that make older ones
obsolete. For example,
introduction stage the first
VHS players used to be the
only way to watch movies
in your home. The introduction of DVD players
quickly made VHS obsolete as a product category.
New innovations, such
as 4K video streaming,
are expected to decrease
demand for DVD players.
The increasing rate of
innovation has increased
the need for marketers to
understand the impact of
the product life cycle.
●●
●●
Introduction stage: New
product category, few
competitors, sales low,
profits low
Growth stage: Customers begin to adopt
stage of the product life cycle,
when there are few competitors.
Sales and profits are typically low
in this stage
growth stage the second
stage of the product life cycle,
when sales and profits increase,
and competitors take notice
and decide to enter the product
category
maturity stage the third stage
of the product life cycle, when
sales peak and profits decline as
the market becomes saturated and
price competition increases
decline stage the fourth
stage of the product life cycle,
when sales and profits decline
as consumer needs move away
from product category. Ability
to produce at low cost usually
determines which competitors
remain in market
LESSON 13: Developing and Managing Products 213
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product, sales and profits increase, competitors take
notice and enter the product category
●●
●●
STUDY TOOLS
Maturity stage: Sales peak; profits decline as market
becomes saturated and competitors lower prices
Decline stage: Declining sales and profits as consumers’
needs change; ability to produce at low cost usually
determines which competitors remain in market
13-7b
arketing Strategies for Stages
M
of the Product Life Cycle
Familiarity with the product life cycle helps marketers
maximize profitability of their products over time. This
is done by identifying a product’s stage in the PLC, then
executing specific strategies for products in that stage.
During the introduction phase of the product life
cycle, heavy promotion is typically required to build
awareness and generate interest. When a product category is new, a company is typically trying to appeal to
what are called “early adopters,” consumers who embrace
new products and technologies before others do.
During the growth phase, marketers will often build
their brand position through advertising, increased distribution, and possibly lower prices to deal with new
competitors. At this point, the product category has
grown beyond early adopters and now appeals to a wider
audience.
During the maturity phase, marketers may add new
features or styles, target competitors in their promotion,
and further cut prices.
During the decline phase, marketers will reduce
marketing costs, minimize production costs, and possibly
eliminate the product. By that time, hopefully the company has introduced a variety of products in other categories that are at earlier stages in the product life cycle.
13-8
Visit the MindTap to watch videos on products are developed
and evolve to meet customer needs.
KEY TAKEAWAY
Every product progresses through a product life cycle
(PLC), a series of stages in which a product’s sales revenue and profit increase, reach a peak, and then decline.
The four phases of the PLC are introduction, growth,
maturity, and decline. Familiarity with the product life
cycle helps marketers maxiproduct mix the collection of
mize profitability of their
all the company’s products
products over time. This is
product line a group of
done by identifying a prodsimilar products that are related to
uct’s stage in the PLC, then
each other in the way they work or
executing specific strategies
the audience they target
for products in that stage.
214 LESSON 13:
Developing and Managing Products
Go to nelson.com/student to access the digital resources.
13-9
PRODUCT MIX
13-7 Explain reasons for changing the
product mix.
13-8 Summarize the three main benefits of
organizing products into product lines.
Most companies offer a number of products in order to
serve a wide range of customer needs and markets. For
example, General Mills has a wide product mix consisting
of many cereals, cake mixes, pasta products, and more.
The collection of all the company’s products is called
the product mix. Seldom can the same product mix be
effective for long. Marketing managers at the company
must actively manage the product mix by modifying,
adding, or removing products as needed to maximize
sales revenue and profits.
Decisions about product mix changes may be based on:
●●
●●
●●
●●
Changes in customer preferences—Example: Customers may prefer new flavours, colours, or styles.
Challenges from competitors—Example: Competitors may offer better features or technologies in their
products.
Stage of product life cycle—Example: Company may
decide to discontinue a product that is in the “decline”
stage of the product life cycle.
Simplify product mix—Example: Company may
decide to produce fewer colours or styles of a product
in order to streamline manufacturing processes and
offer customers clearer choices between products.
13-9a
Grouping Products into Product Lines
A product line is a group of similar products that
are related to each other in the way they work or the
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
audience they target. When products are in different
categories, they are typically considered different
lines. Best Buy, for example, sells the Maytag line of
household appliances. However, many companies also
have multiple lines of products within the same category. These products can be marketed with names
that distinguish the lines from each other. For example,
Gatorade has a variety of lines in the sports drink category, including G Series, G Series Pro, and G Natural.
Product lines in the same category can also be marketed
using separate brand names, as General Mills does with
their cereal products.
General Mills makes products in several categories
such as cereals, cake mixes, dinner mixes, and more.
Within a cereal category, General Mills has families of
products that are similar in the way they are produced or
marketed. These families of products are called product
lines and are often marketed under separate brands. For
example, the Cheerios line of cereal has several products
that are all similar in that they are O-shaped cereals that
are made from whole-grain oats. They are also typically
marketed as a healthy choice of cereal.
Why group products into product lines? Grouping
by product line provides three main benefits:
●●
●●
●●
Organizing by product lines can create clarity for consumers as they evaluate product choices. For example,
a mom who is shopping for a generally healthy cereal
does not need to evaluate all of General Mill’s cereals.
She can focus on options within the Cheerios line and
ignore options in the Lucky Charms line.
Organizing by product line may result in better
management of the company’s product mix. General
Mills might have one product manager for Cheerios
(which is targeted at more health-conscious customers) and another for Lucky Charms (which is
targeted at children). Each product manager must
identify how to best serve customers for their line and
respond to competition within their market segment.
Organizing by product line can help simplify
branding decisions. For example, when General
Mills wants to offer a new cereal, instead of creating
a new brand they can launch a new flavour under
the Cheerios line and have instant brand recognition for the new product.
13-10
KEY TAKEAWAY
The collection of all the company’s products is called
the product mix. Seldom can the same product mix be
effective for long. Marketing managers at the company
NEL
must actively manage the product mix by modifying,
adding, or discontinuing products as needed to maximize sales revenue and profits. A product line is a group
of similar products that are related to each other in the
way they work or the audience they target. Grouping
by product lines provides three main benefits: more
effective product management, clarity for consumers,
and simplified branding.
13-11 T HE FUNCTIONS
OF PACKAGING
13-9 Discuss different functions of product
packaging.
Packaging consists of all the activities involved in developing and providing a container with graphics for a
product. The package is a vital part of the product. It can
make the product more versatile, safer, or easier to use.
Through its shape, appearance, and printed message, a
package can influence purchase decisions.
13-12
KEY TAKEAWAY
Product packaging and labelling can enhance products in a variety of ways that influence customer
purchase decisions. Functions of packaging include
protecting the product, attracting buyer attention,
providing product information, improving the design
or function of the product, and better serving customer needs.
PRIMARY FUNCTIONS OF PACKAGING
▸ Protect the product—Examples: choice of materials,
construction of packaging
▸ Attract buyer attention—Examples: colours,
pictures, large brand or product names
▸ Provide product information—Examples: key
features or ingredients, explanation of contents,
instructions for use
▸ Improve design or function—Examples:
innovative shapes, improved pour spouts,
re-sealable cartons
▸ Better serve customer needs—Examples: travel-size
version of product, product bundles
LESSON 13: Developing and Managing Products 215
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LESSON SUMMARY
LO 13-1 Discuss how different forms of a product can bring value to a customer.
A product can be anything that a company offers to satisfy customer
needs and wants. Products do not always come in physical form: A
product may be a physical good, a service, or contain components of
both. A product may be a consumer product or a business product,
or it may be both. Understanding the different forms a product can
take helps companies find creative ways to offer products that satisfy
customer needs.
LO 13-2 Differentiate between different types of
product innovation.
Innovation is any product improvement that customers value over
existing choices. This includes entirely new products that did not
previously exist and adaptations to existing products. As innovation
takes place, not only do companies find new sources of profits, but
also our quality of life improves as we get access to products that
provide better quality, lower prices, improved functionality, and
new experiences. While innovation is necessary, developing and
introducing new products is frequently time consuming, expensive, and risky. Companies must take a systematic and intentional
approach to product innovation and product differentiation, especially in today’s competitive global environment. Companies that
do not innovate often lose their edge in the marketplace and get
left behind.
LO 13-3 Summarize the four phases of the product development process.
LO 13-4 Identify three examples of activities
that occur during the product development process.
Product development is especially important in today’s competitive
environment. A systematic and intentional approach to product development can maximize the chance of launching a winning product.
The four phases of product development are idea generation, product
analysis, product development and testing, and commercialization.
Each stage requires management to “greenlight” ideas before moving
forward. This is important to ensure that the company does not waste
resources on marginal concepts.
LO 13-5
Explain the four stages of the product
life cycle in terms of revenue and profit.
LO 13-6 Identify different marketing strategies
for each stage of the product life cycle.
The product life cycle (PLC) generally consists of four stages: the introduction stage, the growth stage, the maturity stage, and the decline
stage. Familiarity with the product life cycle helps marketers maximize
profitability of their products over time. This is done by identifying
a product’s stage in the PLC, then executing specific strategies for
products in that stage.
LO 13-7
Explain reasons for changing the
product mix.
Most companies offer a number of products in order to serve a wide
range of customer needs and markets. The collection of all the company’s products is called the product mix. Seldom can the same product
mix be effective for long. Marketing managers at the company must
actively manage the product mix by modifying, adding, or deleting
products as needed to maximize sales revenue and profits.
216 LESSON 13:
Developing and Managing Products
LO 13-8 Summarize the three main benefits of
organizing products into product lines.
A product line is a group of similar products that are related to each
other in the way they work or the audience they target. Grouping
products by line can provide clarity for consumers, enable better
management of the company’s product mix, and simplify branding
decisions for the company.
LO 13-9 Discuss different functions of product
packaging.
Packaging consists of all the activities involved in developing and
providing a container with graphics for a product. The package is a
vital part of the product. When designing packaging, marketers must
weigh many factors to ensure that their package is both highly functional and economical. This is especially important in today’s competitive retail environment because effective packaging can influence
consumer purchase decisions.
EXERCISES
Use the Internet, magazines, newspapers, books,
and personal experiences to complete the following
exercises.
1. Provide an example of a convenience product and a shopping
product you have purchased recently. Describe your purchase
process for these items. Have you purchased any specialty products in your lifetime? If yes, describe how your purchasing effort
changed for this product.
2. Select any company and provide an example of how this company blends goods and services.
3. Choose a product you own (e.g., cell phone, TV) and identify the
innovations this product has undergone in recent years.
4. Think of an idea for a new product. Based on your product idea,
generate a list of activities you would perform at each product
development phase prior to launching the product in
the market.
5. Choose one of your favourite food items. Research the manufacturer of this item and identify other products available in this
product line. Are there any surprises? Next, identify products
manufactured by the same company that would fall outside
of this product line.
REVIEW QUESTIONS
1. What is the difference between a good and a service?
2. What is a product?
3. What are the three classifications of consumer products? Briefly
explain each.
4. How are business products classified?
5. What are the benefits of innovation?
6. What are the four phases of product development? List the
activities that occur at each phase.
7. Discuss the key characteristics of each stage of the product life cycle.
NEL
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
8. List the factors that influence changes to the product mix.
growth stage, p. 213
9. What are the three main benefits to grouping and managing
products by product line?
idea generation, p. 212
10. List the primary functions of product packaging.
innovation, p. 211
introduction stage, p. 213
major equipment, p. 210
KEY TERMS
maturity stage, p. 213
accessory equipment, p. 210
product, p. 207
business product, p. 209
product analysis, p. 212
business service, p. 210
product line, p. 214
commercialization, p. 212
product mix, p. 214
component part, p. 210
raw material, p. 210
consumer product, p. 209
service, p. 207
convenience product, p. 209
shopping product, p. 209
decline stage, p. 213
specialty product, p. 209
development and testing, p. 212
supply, p. 210
good, p. 207
unsought product, p. 209
NEL
process material, p. 210
LESSON 13: Developing and Managing Products 217
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TUMBLEWEEDS
When seeking out information about a company’s purpose, people often
head to the “About Us” page on the company’s website. Many organizations
use this space to post mission and vision statements that provide visitors with
an idea of what the company is looking to do and become.
For Maple Leaf Foods (MLF), there is no need to click on anything—the
information is front and centre. Placed prominently on the company’s main
Web page is the vision for Maple Leaf: “To Be the Most Sustainable Protein
Company on Earth.” This clear view to the future has placed Maple Leaf Foods
in the forefront of food companies tackling the huge challenges facing the
sustainability of the world’s food supply.
MLF provides some alarming facts. Specifically, the company notes
the 70% gap between calories that are currently available and the caloric
demands expected in 2050 with an ever-growing world population. And
while the company pledges healthier ingredients and a diverse workforce,
it gives a key number that presents a huge challenge: 50%. The company
pledges that by 2025 it will reduce its environmental impact by half.
What this means for the company most significantly is a radical change in
its products and product mix. To fall in line with the company vision, all Maple
Leaf products will contain “no artificial flavours, colours or sweeteners.” This
means the re-introduction of existing products and the introduction of new
products that were not previously available.
And while it is easy to find information on MLF’s website about the new
vision and direction for the company, it takes a few more clicks to find the
products. The site names the brands in the MLF family of products, which
include Maple Leaf, Schneiders, and Swift (to name only a few), and to find
those lists of products visitors must visit the individual brands’ sites.
The Maple Leaf brand website lists various products including hot dogs,
ham, sausages, and cold cuts. The Schneiders brand website splits up its products,
which are similar to the types of products found on the Maple Leaf brand website, into different categories. One thing that is easily found on any MLF site is the
listing of ingredients. In the past products like cured meats had unpronounceable
ingredients in lists that took up several paragraphs, but that is not the case today.
This focus on health and sustainability began back in 2017, when the
company announced its vision to the world. In early 2018, the company
shared positive profit numbers and an increased dividend. In announcing this
financial good news, MLF CEO Michael McCain stated: “We have great confidence our brand strategy will support continued growth for years to come.” So
when the brand changes were announced in May 2018, it seemed as though
Maple Leaf Foods was placing its success into its brand revision.
During this time MLF conducted some consumer-based marketing
research. It looked at consumer decision making and demand to better
understand what consumers want. This research allowed MLF to differentiate
among its different brand families and create unique segments that identify
needs and wants in these unique groups.
218 LESSON 13:
Developing and Managing Products
NEL
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
For example, the Maple Leaf brand targets the “responsible parent” segment. As CEO McCain observed: “These consumers are looking for natural
food with nothing artificial. They’re looking for clean and simple ingredients,
real food and they want family-friendly flavours.”*
Other parts of the market include consumers looking for high quality
foods (Schneiders) and segments that look for quick-fix meals (Lunchmates).
One announcement in 2018 did not receive quite the same fanfare as the
brand changes and financial results. In early April, Entomo Farms announced
it had received significant financial backing from Maple Leaf Foods. At first
glance there seems to be nothing unique about such an announcement,
especially in the midst of the new strategy Maple Leaf Foods is unveiling to
the market. It becomes interesting when you discover more about Entomo
Farms. The company refers to itself as “North America’s largest insect farm for
human consumption.” Its product lines are a little different from what exists
within the Maple Leaf family of products: cricket and mealworm powder and
whole roasted insects.
CEO Michael McCain was quick to provide some context to this deal: “Our
minority venture investment in Entomo is consistent with our vision to be the
most sustainable protein company on earth. Entomo Farms and Maple Leaf’s
products will be separate, but we are excited to help foster their continued
leadership in insect protein and aspiration to become the largest insect protein supplier in the world. We see a long-term role in this form of sustainable
protein delivery, both for animal and human consumption, as it is elsewhere
in the world.Ӡ
This means we are not going to see Maple Leaf Crickets as a new product
line—yet. What it does mean is that MLF is looking at all options for meeting
challenges and achieving its lofty goals. And speaking of challenges, this is
yours: Lay out a course for Maple Leaf Foods to begin incorporating insect
ingredients and products into its product lines. Use your notes and materials
from Lesson 13 to make this happen. Even though doing this might bug you
a little, you are enthusiastic about helping Maple Leaf Foods become truly
sustainable.
Case Sources: https://www.mapleleaffoods.com/news/maple-leaf-introduces-sweeping-changes-to-iconic
-brand/; http://business.financialpost.com/pmn/commodities-business-pmn/agriculture-commodities-business
-pmn/maple-leaf-foods-reports-59-1m-q4-profit-raises-quarterly-dividend; http://www.mapleleaf.ca/product/
maple-leaf-original-natural-bacon/; http://www.schneiders.ca/our-wieners/; https://www.facebook.com/
Lunchmate; http://entomofarms.com/entomo-farms-raises-series-funding-maple-leaf-foods-expansion-cricket
-farm/
*Aleksandra Sagan, “Maple Leaf Foods to launch rebrand of packaged meat lines this year,” The
Canadian Press, February 21, 2018: http://business.financialpost.com/pmn/commodities-business
-pmn/agriculture-commodities-business-pmn/maple-leaf-foods-reports-59-1m-q4-profit-raises
-quarterly-dividend
†
Entomo Farms, “Entomo Farms Raises Series A Funding from Maple Leaf Foods for Expansion
of Cricket Farm,” http://entomofarms.com/entomo-farms-raises-series-funding-maple-leaf-foods
-expansion-cricket-farm/
NEL
LESSON 13: Developing and Managing Products 219
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14 Managing Distribution
and Pricing
LEARNING OBJECTIVES
Once you complete this lesson, you will be able to:
producer to customer.
14-2 Explain the four ways that intermediaries provide value for
channel partners.
14-3 Discuss the four features that differentiate retailers.
14-4 Understand the goals of different distribution functions.
I NTRODUCTION
The prices we set can sometimes lead to surprising results.
Often when we study marketing, much of the attention is
focused on the product and promotion elements of the
marketing mix. However, the often-overlooked elements
of distribution and pricing have a profound effect on the
success of a business. As you can see from the example,
the right price can lead to high profits—and the wrong
price can result in almost no profit. However, the memo
from the CEO also demonstrated that profit is not the
only consideration in pricing.
In this lesson, we will discuss how companies try to
optimize profits and satisfy customers by managing distribution and pricing.
14-1
CHANNELS OF DISTRIBUTION
14-1 Identify the primary channels for delivering
products from producer to customer.
14-2 Explain the four ways that intermediaries
provide value for channel partners.
220 LESSON 14:
Managing Distribution and Pricing
14-5 List three key considerations when determining prices.
14-6 Understand how to calculate the break-even point based
Brostock/Shutterstock.com
14-1 Identify the primary channels for delivering products from
on fixed and variable costs.
14-7 List five common pricing objectives.
14-8 Differentiate among different pricing strategies.
Distribution is a critical part of marketing strategy, but its
importance is often overlooked because it is seen as an operations function. How is it possible that we could underestimate such an important part of the marketing mix? Probably
because many of the activities and decisions related to distribution happen behind the scenes. For example, when
you order a product online, the company will send you
the product through some delivery service such as Canada
Post. So much happens that consumers do not see. Online
retailers use sophisticated tracking systems, whether for
tracking where the product is stored at their facilities or for
tracking the product until it arrives at your doorstep.
So what does this have to do with marketing? Companies use the same basic process to distribute their
products to customers as you did to get the gift card to
your friend. They identify a customer they hope to reach,
and then they use a variety of distribution tactics to get
their product to that customer.
Companies use a variety of distribution channels to
sell their products. In some cases companies sell directly
to customers, and in other cases companies partner with
marketing intermediaries—including retailers and
wholesalers—that often operate behind the scenes to
help distribute the product to customers. Four common
NEL
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Canada Post transports the gift card
Your friend receives the gift card
(l) Mike Flippo/Shutterstock.com;
(c) mikecphoto/Shutterstock.com; (r)
sonya etchison/Shutterstock.com
You send a gift card to a friend
Distributing the mail across Canada—a massive undertaking
Over 64,000 employees
13,000-vehicle fleet
6,200 retail post offices, with delivery to over 15 million addresses
Source: https://www.canadapost.ca/cpo/mc/assets/pdf/aboutus/16140%20InfoSource%202016-e.pdf
distribution channels are direct channel, producer
to retailer to customer channel, producer to
wholesaler to retailer to customer channel,
and producer to agent to wholesaler to retailer
to customer channel. Read on to learn about these
channels and to see an example of how one company
might use multiple channels to grow its business.
There are four commonly used channels of distribution. The first is direct channel (also called customerdirect), which is when the producer of a product
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sells directly to customers.
For example, premiumclothing brand Burberry
sells directly to customers
through its company-owned
retail stores. Clothing
manufacturer Roots sells
directly to customers
through its retail stores and
website.
marketing
intermediaries organizations
that help move products from
producers to customers
retailers businesses that specialize
in selling products to the end user
wholesalers companies that
sell products to other businesses,
such as retail stores, instead of
selling to customers
LESSON 14: Managing Distribution and Pricing 221
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The second commonly used distribution channel is
the producer to retailer channel, where the producer sells
to a retail store, which then sells to customers. Retailers,
which are businesses that specialize in selling products
to the end user, represent the largest and most common
type of marketing intermediary for producers. The retail
channel should not be confused with producers selling
through their own retail stores, but rather it is when producers partner with retail stores other than their own.
Even companies that sell to customers directly through
their own stores may also utilize the retail channel, such
as when Burberry sells to department store Winners,
which in turn sells Burberry products to customers.
The third is the producer to wholesaler to retailer to
customer channel (also called the two-step distribution
channel), where goods are first sold to wholesalers, which
then sell the product to retailers. Wholesalers are companies that sell products to other businesses, such as retail
stores, instead of selling to customers. Often a producer
will use a wholesaler when its products are carried by so
many retailers that the producer cannot deal with all of
them. For example, Coca-Cola sells to wholesale distributors, which then sell and deliver Coca-Cola products to a
number of retail customers such as Circle K and Safeway.
The fourth commonly used distribution channel
is the agent to wholesaler to retailer channel. While
this may seem like lots of steps in a single distribution channel, agents are
direct channel a distribution
independent sales profeschannel where the producer sells
sionals who bring buyers
directly to the customer, with
and sellers together, and
no marketing intermediaries in
are often used by produbetween (sometimes referred to as
customer-direct)
cers that do not have their
own salesforces. Agents
producer to retailer to
earn a commission on the
customer channel a
distribution channel where the
sale of product to wholeproducer sells to a retail store,
salers. Without agents,
which then sells to customers
many smaller or foreign
producer to wholesaler
manufacturers would have
to retailer to customer
no way to get their foot in
channel a distribution channel
the door at major wholewhere goods are first sold to
salers or retailers. For
wholesalers, and then to retailers
(sometimes referred to as twoexample, a small factory
step)
in China that makes teddy
bears may want to sell
producer to agent to
wholesaler to retailer
into Canadian toy stores.
to customer channel a
Their first step is often to
distribution channel similar to the
hire an agent to represent
producer to wholesaler to retailer
their business. That agent
channel, but with the addition of
sales agents who help connect
makes sales calls to wholebuyers and sellers
salers and retailers in the
222 LESSON 14:
Managing Distribution and Pricing
toy industry in the hope they will be willing to carry that
factory’s products.
A distribution channel is often referred to as being
shorter or longer based on the number of marketing
intermediaries used in that channel. For example, customer-direct is the shortest distribution channel. A producer may choose to utilize just one of these distribution
channels, or it may decide to utilize all of them at the
same time. Often companies will develop different channels over time based on their goals for a product or the
brand. For example, for most of its history Nike utilized the retail and two-step distribution channels. But
as the brand grew, they chose to open their own Nike
stores and sell customer-direct. This strategy was not so
much to increase sales volume as it was to create a retail
experience that would reflect Nike’s brand. In addition,
the growth of e-commerce allowed Nike to expand its
customer-direct sales through its website, including
allowing buyers to customize their shoes online.
STUDY TOOLS
Visit the MindTap to watch videos on product distribution.
Go to nelson.com/student to access the digital resources.
14-1a
The Benefits of Intermediaries
When producers sell direct to customers, they keep all of
the profit and get to maintain a direct relationship with
the customer. They can also control all aspects of the
customer shopping experience, which is why big brands
such as Nike and Apple maintain their own retail stores
even while they use other distribution channels.
So why do all producers not mainly use the direct
channel? Is it not better to maintain that customer
relationship and avoid splitting profits with any other
partners? Not necessarily. The fact is that marketing
intermediaries can often perform distribution functions cheaper, faster, and better than producers can. In
addition, intermediaries provide benefits for customers.
While intermediaries can be replaced or eliminated, the
functions they perform cannot. Producers that carefully
select intermediaries to perform certain tasks often make
more profit, not less.
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Marketing Intermediaries:
Wholesalers
Wholesalers may be the most misunderstood of
marketing intermediaries. Customers sometimes
believe they will get lower prices by bypassing them
and dealing directly with retailers or producers. Yet
wholesalers provide a variety of essential services,
and their functions cannot be eliminated. These
functions must be performed by other channel
members or by customers. Eliminating a wholesaler
may or may not cut distribution costs.
Moreover, all manufacturers operating without
wholesalers would have to keep extensive records
and employ enough staff to deal with a multitude of
retailers individually. Even with direct distribution,
products might be considerably more expensive
The following examples describe four important
benefits of marketing intermediaries, and how overlooking these benefits can limit customer choice and
affect a company’s opportunity to grow.
A company such as LG specializes in the design and
production of electronics. That is its expertise. On the
other hand, selling and distributing those products to customers is not LG’s expertise. What should LG do? This
is a common situation for many manufacturers, whether
they make electronics, food, or other products. And that
is where marketing intermediaries come in. There are
four major benefits of marketing intermediaries.
First, they provide efficiency and assortment.
Imagine a world with no marketing intermediaries, just
producers. If you wanted to do something simple, such
as make spaghetti and meatballs for dinner, you would
have to locate the producer of the noodles, the sauce,
the beef, the cheese, and the spices. That does not make
much sense. Worse yet, each of those food producers
would need to transact business with every person who
wanted to make the same type of dinner, taking them
away from their expertise—which is making food.
Luckily, marketing intermediaries such as grocery
stores buy food from each of these producers and stock it
on their shelves. Now we can choose from a large assortment of goods that are located in one place. This is much
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because prices would reflect the costs of producers’
inefficiencies. Consider the situation of removing the
wholesaler when discussing produce. For example,
if all the farmers that produced carrots had to each
go to all retailers, this would be time consuming and
costly. Wholesalers minimize the time for the farmers
and retailers at a lesser cost.
There are three categories of wholesalers:
merchant wholesalers; commission merchants, agents, and brokers; and manufacturers’
sales branches and sales offices. Of these, merchant
wholesalers account for about four-fifths of all
wholesale establishments and employees.
more efficient than driving to the various manufacturing
facilities across the country to pick up these products
yourself.
Second, marketing intermediaries break bulk for
producers by buying large shipments, then breaking
them down into smaller quantities. A clothing factory in
Mexico that produces coats by the truckload cannot afford
to sell them one by one to
customers in Canada. Howmerchant wholesaler a
marketing intermediary that
ever, a Canadian wholepurchases goods in large quantities
saler can buy that truckload
and then sells them to other
of coats and break it into
wholesalers or retailers and to
smaller shipments for disinstitutional, farm, government,
professional, or industrial users
tribution to retail customers. Then customers
commission merchant an
can visit those retail stores
intermediary that usually carries
merchandise and negotiates sales
and buy coats one by one.
for manufacturers
Third, intermediaries
provide valuable market
agent an independent sales
professional who brings buyers
information such as data
and sellers together
on customer demand for
broker an intermediary
various products, new
that
specializes in a particular
developments within the
commodity, represents either a
industry, and insights
buyer or a seller, and is likely to be
into the activities and
hired on a temporary basis
prices of competitors. A
LESSON 14: Managing Distribution and Pricing 223
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
manufacturer selling only customer-direct might be
missing out on valuable industry trends.
Fourth and possibly most important is that marketing
intermediaries provide an instant sales infrastructure for
the producer. Building a robust sales infrastructure is
expensive and difficult for the typical manufacturer.
Wholesalers typically have large salesforces who call
on retail stores to promote new products. And, of course,
retailers specialize in selling products to customers. They
have existing retail stores, an army of trained sales professionals, expertise in how to best display and promote
products, and an established flow of customers visiting
their stores.
14-2
are millions of physical retail establishments across the
country. In addition, the top 10 largest retailers ranked
according to revenues are all major companies.
TOP 10 LARGEST RETAILERS IN CANADA
Rank
KEY TAKEAWAY
Distribution is a critical part of marketing strategy, but its
importance is often overlooked. Producers can utilize a variety of distribution channels, including direct (customerdirect), producer to retailer to customer, producer to
wholesaler to retailer to customer (two-step), and producer to agent to wholesaler to retailer to customer. The
advantage of utilizing marketing intermediaries such as
retailers and wholesalers is that they provide efficiency
and assortment of goods, break bulk, provide valuable
market information, and offer an instant sales infrastructure. Producers that carefully select marketing
intermediaries can often expand farther and faster than
if the producers tried to accomplish all of the functions
of distribution by themselves.
14-3 T HE IMPORTANCE
OF RETAILERS
Managing Distribution and Pricing
Loblaw Companies Ltd.
2,000
2
Alimentation Couche-Tard Inc.
2,200
3
Empire Company Ltd. (Sobeys)
1,500
4
Metro Inc.
1,250
5
Shoppers Drug Mart Corp.
1,253
6
Canadian Tire Corp., Ltd.
504
7
Katz Group Inc.
8
RONA Inc.
9
Hudson’s Bay Company
Liquor Control Board Ontario
1,800
496
90
660
Source: https://www.thebalancesmb.com/biggest-canadian-retail-chains-2892266,
accessed May 23, 2018.
While all of these retailers still have physical store
locations, online sales are becoming more significant.
Additionally, many entrepreneurs have been successful
after retailers agree to carry their products. For example,
business partners Wendy Johannson and Claudia Harvey
created a gardening glove to protect women’s manicured
hands.1 Today you can get their gloves at many retailers
such as Canadian Tire and Home Depot.
The challenge—and opportunity—when securing
physical retail distribution is to find retail partners that
offer an appropriate fit for your company’s products, customers, and brand. Not all retail distribution is created
equal. The following four common features differentiate
various physical retailers:
●●
differentiate retailers.
224 LESSON 14:
Number of Stores
1
10
14-3 Discuss the four features that
With the exception of the customer-direct channel, you
will notice that the other channels of distribution have
something in common: Retailers are the final link between
producers and customers. Whether retailers buy directly
from the producer or buy
distribution intensity the
from a wholesaler, they are
level of market coverage for a
a critical component of disproduct, usually measured by
tribution strategy for many
the number of outlets where it is
sold—in intensive distribution all
companies.
available outlets are used, and in
Part of this is due to
selective distribution only a few
the
sheer
scale of retailing
outlets are used
in Canada. In Canada, there
Company
●●
●●
Number of product categories—some retailers sell
products in only one or two product categories, while
others sell a wide assortment of products. Roots, for
example, sells clothing and related accessories, while
Hudson’s Bay sells clothing, housewares, and many
more categories of products (Figure 14.1).
Pricing—some retailers sell at a discount while others
sell at a premium. Price will often relate to the level of
customer service available as well. A store selling luxury
items is more likely to have a highly attentive, highly
trained sales staff than is a discount store (Figure 14.2).
The price and the level of service in a store can affect
how customers perceive the brands sold in those stores.
Distribution intensity—the level of market coverage
for a product is called distribution intensity, and
is usually measured by the number of outlets where
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
DIFFERENTIATION BASED ON NUMBER OF PRODUCT CATEGORIES
FIGURE 14.2
DIFFERENTIATION BASED ON PRODUCT PRICING
the product is sold. Many people think of outlets as
physical stores, though it also refers to other types
of distribution—online retailing, for example. Some
retailers offer intensive distribution by having many
outlets, while some choose more selective—or even
highly exclusive—distribution by having fewer outlets
(Figure 14.3). Convenience goods generally would
use intensive distribution, shopping goods would
most likely use either intensive or selective distribution, and specialty and unsought products would use
exclusive distribution.
Size and selection—some retailers choose to have
a small physical footprint and to carry a limited
number of items, while others choose to have huge
warehouse stores with an exhaustive selection of
items (Figure 14.4).
●●
© Cengage Learning; photos: JHVEPhoto/
Shutterstock.com, Brian B. Bettencourt/
Toronto Star/Getty Image
© Cengage Learning; photos:
JHVEPhoto/Shutterstock.com
FIGURE 14.1
Different types of retail store formats go by a variety
of names, including the following:
●●
●●
●●
Department stores: Retail stores that employ 25 or
more staff and sell home furnishings, appliances, family
apparel, and household linens and dry goods, each in
a different part of the store. Example: Hudson’s Bay.
Discount stores: Self-service general merchandise
outlets that sell products at lower-than-usual prices.
Example: Giant Tiger.
Warehouse showrooms: Retail facilities with five basic
characteristics:
1. a large, low-cost building;
2. warehouse materials-handling technology;
3. vertical merchandise displays;
DIFFERENTIATION BASED ON DISTRIBUTION DENSITY
FIGURE 14.4
DIFFERENTIATION BASED ON SIZE OF THE FACILITY AND NUMBER OF ITEMS OFFERED FOR SALE
Brian B. Bettencourt/Toronto Star/
Getty Images
© Cengage Learning; photos: ValeStock/
Shutterstock.com, JHVEPhoto/
Shutterstock.com
FIGURE 14.3
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LESSON 14: Managing Distribution and Pricing 225
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
4. a large on-premises inventory; and
offering low prices and an enormous number of products. Example: PetSmart.
5. minimal service.
Example: IKEA.
●●
●●
●●
●●
●●
●●
●●
Convenience stores: Small food stores that sell a limited variety of products but remain open well beyond
normal business hours. Example: 7-Eleven.
Supermarkets: Large self-service stores that sell primarily food and household products. Example: Real
Canadian Superstore.
Superstores: Large retail stores that carry not only
food and nonfood products ordinarily found in
supermarkets but also additional product lines—
housewares, hardware, small appliances, clothing,
personal-care products, garden products, and automotive merchandise. Example: Walmart Supercentre.
Warehouse clubs: Large-scale members-only establishments that combine features of cash-and-carry
wholesaling with discount retailing. Example: Costco.
Traditional specialty stores: Stores that carry a narrow
product mix with deep product lines. Example: Globo
Shoes.
Off-price retailers: Stores that buy manufacturers’
seconds, overruns, returns, and off-season merchandise at below-wholesale prices and sell them to customers at deep discounts. Example: HomeSense.
Category killers: Very large specialty stores that concentrate on a single product line and compete by
What separates these different types of stores is the
nature of their offerings in terms of categories, pricing,
distribution intensity, and size.
The distinctions among different types of retailers
are important because not all retailers are a good fit for
all products. For example, a premium suit is not a good
fit for a discount-clothing store. A producer seeking
high volume, such as Red Bull, is not going to reach that
volume if selling through only a select number of retail
outlets. But perhaps the most important consideration
for selecting retail partners is determining whether the
target customer is likely to shop at that store.
To choose the right retail partner, producers should
evaluate questions such as:
●●
●●
●●
●●
What types of stores do our target customers shop at?
Are we looking for intensive, selective, or exclusive
distribution?
Do we prefer high volume at a lower profit margin, or
low volume at a higher profit margin?
Is the retail environment a fit for our brand?
14-3a
The Growth of Online Retailing
Today, online retail sales in Canada amount to over
$1.8 billion (CDN) and represent approximately 7% of
all retail sales.2 This has changed the retail landscape considerably. For example, even though Amazon.com sells
Retailer Type Examples
Home Hardware Stores Ltd. is Canada’s largest home improvement retailer, able to dominate a particular product category by
selling on a large scale that smaller stores cannot compete with. Home Hardware has more than 1,000 locations throughout
Canada. Store inventory consists of many different kinds of building materials, hand and power tools, home improvement supplies,
automotive and farm supplies, and lawn and garden products.
Loblaws is a supermarket chain that sells a variety of grocery products, as well as pet food, kitchen and bath supplies, vitamins,
and other types of products. Loblaws is one of the largest food and drug retailers in Canada, with over 2,000 stores. Loblaws has
competitive prices, offers discounts to PC Optimum members, and has weekly sales.
Williams-Sonoma is a specialty retailer with six locations in Canada. The company is the premier specialty retailer of home
furnishings and gourmet cookware in the United States. Williams-Sonoma offers high-quality, stylish products for every room in
the house: from the kitchen to the living room, bedroom, home office, and even the hall closet.
Costco sells food and merchandise out of large warehouse stores. Costco provides a wide selection of merchandise, plus the
convenience of specialty departments and exclusive member services, all designed to provide a comprehensive shopping
experience. Costco’s goal is to keep costs down and pass the savings on to members. It has just under 100 stores nationwide, far
fewer than most large retailers’ chains.
226 LESSON 14:
Managing Distribution and Pricing
Features
●
Limited product categories
●
Discount prices
●
Intensive distribution
●
Large scale
●
Assortment of product categories
●
Discount prices
●
Intensive distribution
●
Large scale
●
Limited product categories
●
Premium prices
●
Exclusive distribution
●
Large scale
●
Assortment of product categories
●
Discount prices
●
Exclusive distribution
●
Large scale
NEL
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
only online, it is now one of the largest retailers in North
America, ahead of large physical retailers such as Lowe’s
and Best Buy. And all of the top 10 retailers earn at least
some portion of their revenue through online sales.
So where does online sales fit into the four types of
distribution channels? Is it an entirely separate distribution channel? Not necessarily. For example, when a
producer sells directly to customers, it may be on their
website or in a physical store. Either way, they are utilizing the direct distribution channel.
And when that producer partners with a retailer
to distribute the product it is still using the retail sales
channel, whether the retail partner ultimately sells the
product through its website or a physical store.
While online sales offer a different format for selling
products, the product is still travelling through one of
the four existing types of distribution channels.
When selecting retail partners who sell all or partly
online, producers consider many of the same considerations they do for physical retail:
●●
Do my customers shop at this site?
●●
Is this retailer’s pricing strategy a fit for our brand?
●●
Is the online shopping experience a fit for our brand?
●●
Does this site’s Web traffic and delivery capability
serve the needs of our company?
14-3b
●●
●●
●●
●●
Non-store Retailing
Although you probably think of a store when you
hear the word retailing, increasingly that is not the case.
Non-store retailing is selling that does not take place
in conventional store facilities; customers purchase
products without visiting a store. Non-store retailers use
direct selling, direct marketing, and vending machines.
Direct selling is the marketing of products to
customers through face-to-face sales presentations at
home or in the workplace. Although it has its origins
in the door-to-door peddlers of a century ago, direct
sellers such as Arbonne, Tupperware, Pampered Chef,
and Avon now identify customers by mail, telephone,
the Internet, or at shopping malls and then set up
appointments. Direct selling sometimes involves the
“party plan,” which can take place in the customer’s
home or workplace. One customer will act as a host and
invite friends and co-workers to view merchandise in a
group setting where the salesperson demonstrates the
products.
Direct marketing is the use of the telephone,
Internet, and non-personal media to communicate
product and organizational information to customers,
who can then purchase products via mail, telephone, or
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the Internet. Direct marketing is one type of non-store
retailing. Direct marketing can occur through catalogue
marketing, direct-response marketing, telemarketing,
television home shopping, and online marketing.
●●
In catalogue marketing, an organization provides a
catalogue from which customers make selections
and place orders by mail, telephone, or the Internet.
Some organizations offer a broad array of products
spread over multiple product lines, while others offer
considerable depth in one major line of products.
Direct-response marketing occurs when a seller advertises a product and makes it available, usually for a
short time period, through mail, telephone, or online
orders. This marketing method has resulted in some
products gaining widespread popularity. Most people
have probably heard of the Shake Weight, Snuggie,
and Magic Bullet—which all became popular because
of direct-response television marketing campaigns.
Telemarketing is the performance of marketingrelated activities by telephone. Telemarketing can
help generate sales leads, improve customer service,
speed up payments on past-due accounts, and raise
funds for non-profit organizations.
Television home shopping presents products to television viewers, encouraging them to order through tollfree numbers and pay with credit cards. Television
home shopping typically sells products such as jewellery, the highest-selling product category, clothing,
housewares, and electronics.
Online retailing makes products available to buyers
through the Internet. Although you probably think of
Amazon when you think
of online retailing, in
non-store retailing selling
that does not take place in
reality most traditional
conventional store facilities;
retailers have websites
customers purchase products
to sell products, provide
without visiting a store
information about their
direct selling the marketing
company, or distribute
of products to customers through
coupons. Online retailing
face-to-face sales presentations at
also includes auction
home or in the workplace
sales and streaming
direct marketing the use
through sites such as
of the telephone, the Internet,
Netflix, as well as finanand non-personal media to
communicate product and
cial activities conducted
organizational information to
online such as trading.
Finally, automatic
vending is the use of
machines to dispense products. It accounts for less
than 2% of all retail sales.
customers, who can then purchase
products via mail, telephone, or
the Internet
automatic vending the use
of machines to dispense products
LESSON 14: Managing Distribution and Pricing 227
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It is appropriate for small, standardized, routinely purchased products (e.g., chewing gum, candy, newspapers,
cigarettes, soft drinks, and coffee) because customers
usually buy them at the nearest available location.
14-4
KEY TAKEAWAY
The challenge—and opportunity—when securing retail
distribution is to find retail partners that offer an appropriate fit for your company’s products, customers, and
brand. Four common features differentiate various
physical retailers: number of product categories, pricing,
distribution intensity, and size. Non-store retailing, especially direct marketing and online retailing, has been
growing dramatically.
14-5 M ANAGING PHYSICAL
DISTRIBUTION
14-4 Understand the goals of different distri-
bution functions.
Regardless of which distribution channels a company
utilizes, it is important that products move efficiently
from producer to customer. Three primary functions of
physical distribution are:
●●
Inventory management
●●
Warehousing
●●
Transportation
inventory the supply of
goods that a company holds for
use in production or for sale to
customers.
inventory
management involves
deciding how much of each type of
inventory to keep on hand and the
ordering, receiving, storing, and
tracking of it.
warehousing the function of
physical distribution that involves
receiving and storing goods, then
preparing them for shipment
transportation the function
of physical distribution that
involves the shipment of products
through the distribution channel to
the customer
228 LESSON 14:
Not too long ago,
these were considered
operations-oriented functions that existed simply
as an extension of the production process. The factory made the goods, and
the distribution department got those goods out
the door. That attitude has
shifted to a more customeroriented approach. Companies now see that
efficient, effective distribution is a strategic
marketing tool. It is considered to be the process
to ensure that the right
Managing Distribution and Pricing
products are available at the right place and at a reasonable price. All of these factors lead to higher customer
satisfaction.
A company’s inventory is the supply of goods it
holds for use in production or for sale to customers.
Deciding how much inventory to keep on hand is one
of the biggest challenges facing operations managers.
With large inventories, the company can meet most
production and customer demands. Buying in large
quantities can also allow a company to take advantage
of quantity discounts. On the other hand, large inventories can tie up the company’s money, are expensive to
store, and can become obsolete or spoil. With too little
inventory the company can risk creating a stock-out,
which is a situation where there is not enough supply
to satisfy demand.
All members of a distribution channel play a
role in physical distribution. In fact, it is not only the
producers who are driving improvement in physical
distribution practices. Several large retailers such
as Real Canadian Superstore, Home Hardware, and
Winners not only have implemented their own distribution improvements but also have pushed those
improvements all the way through their supply chain
of distributors, producers, and even raw-materials
suppliers.
Read the boxed feature on the next page to learn
more about the three primary functions of physical
distribution—namely, inventory management,
warehousing, and transportation—and the key
objectives for each of these functions.
It is important to distinguish between channels
of distribution and modes of distribution. Channel of
distribution means the mix of marketing intermediaries a producer uses to move products to customers.
Mode of distribution refers to the actual type of transportation for moving physical goods from one point
to another. There are five major modes of transportation: railroads, trucks, pipelines, waterways, and
airplanes.
When choosing a mode, the cost is obviously
important to marketers. However, at times marketers
choose higher-cost modes of transportation because
of the benefits they provide. Speed is measured by
the total time that a carrier possesses the products,
including time required for pickup and delivery, handling, and movement between point of origin and destination. There is usually a direct relationship between
cost and speed; that is, faster modes of transportation
are more expensive.
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Primary Functions of Physical
Distribution
The three primary functions of physical distribution are inventory management, warehousing, and
transportation. Inventory management involves
deciding how much of each type of inventory to
keep on hand and the ordering, receiving, storing,
and tracking of it. Too much inventory increases
storage costs and means that a lot of money is tied
up in goods that are just sitting in a warehouse.
Too little inventory can cause stock-outs, meaning
lost sales and dissatisfied customers. A common
goal of inventory management is to maintain low
inventory levels while avoiding stock-outs. This
requires a high level of coordination along the entire
supply chain, from retailers, to their distributors,
and back to the producer. Since retailers have an
inventory-intensive business to begin with, they
have led the charge for more efficient supply chains.
Companies such as Walmart minimize inventory
costs and boost customer satisfaction by influencing
the inventory-management practices of its suppliers.
Since Walmart is such a large and valuable retail
partner, even major manufacturing companies have
streamlined and integrated their operations to meet
Walmart’s stringent supplier requirements.
Warehousing involves receiving and storing
goods, and then preparing them for shipment.
Amazon.com is an example of how efficient warehousing is not some boring operational function
anymore. It is a key business strategy. First, Amazon
optimizes the design of its giant warehouses to
maximize storage space and minimize the time
required to pick and pack goods. In addition,
Amazon has been on a building spree to strategically place its warehouses near customers. Two
examples are Amazon’s facilities in Ottawa and near
Calgary that open in 2018. As a result, they now have
the ability to reach many Canadian customers with
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same-day delivery. This demonstrates two key goals
of warehousing: efficient handling of the goods
within a warehouse and efficient distribution of
those goods to customers.
Transportation is the shipment of products
through the distribution channel to the customer.
For most consumer products such as food, electronics, and clothes, the primary modes of transportation for consumer goods are trains, planes,
ships, and trucks. The goal for transportation managers is to choose the mode that provides the best
trade-off of speed and cost for the particular shipping situation. This depends on the nature of the
product and the size of the shipment. For example,
Vizio sells large-screen TVs to Costco. When Vizio
is shipping TVs from its factories in Asia, it usually
sends them on container ships that take several
weeks to get to Canada. Shipping them via airfreight would cut transit time by about 95%—but it
would cost many times more, perhaps eliminating
much of the profit for each TV. Once the containers
arrive in Canada, they likely move by train or semitruck to storage warehouses around the country.
From there, they are transported in smaller delivery
trucks to each store. However, other products might
travel differently. For instance, diamonds shipping
from a cutter in Europe would likely fly airfreight
to the jeweller in Canada, and then via overnight
air to the customer. This is because diamonds are
light, and the cost of airfreight adds very little to
the overall cost of the product. Roses from Ecuador
are airfreighted because of the perishable nature of
the product. A final example is industrial products,
such as coal, oil, and natural gas. These often ship
via railroads or pipelines because these modes of
transportation can move high volumes of product
at a very low cost.
LESSON 14: Managing Distribution and Pricing 229
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Selection Criteria
Railroads
Trucks
Pipelines
Waterways
Airplanes
Cost
Moderate
High
Low
Very low
Very high
Speed
Average
Fast
Slow
Very slow
Very fast
Products carried
Coal, grain, lumber,
heavy equipment, paper
and pulp products,
chemicals
Clothing, computers,
Oil, processed coal,
books, groceries, produce, natural gas
livestock
14-6
KEY TAKEAWAY
Regardless of which distribution channels a company
uses, it is important that products efficiently move
from producer to customer. Three primary functions of
physical distribution are inventory management, warehousing, and transportation. While management of
physical distribution was traditionally considered simply
an operations function, companies now take a customer-oriented view of distribution because it can serve as a
competitive advantage.
14-7
PRICING CONSIDERATIONS
14-5 List three key considerations when
determining prices.
Price is important because it essentially determines how
much a company will make from its products. Price
is also important to customers because it determines
how much they must pay to acquire the products they
want. Many factors affect product prices, including the
following:
●●
●●
on how we might set a price, where do we start? By
remembering three key considerations for determining
prices.
Let us start with a simple scenario. Imagine you
manufacture jeans and sell them customer-direct in your
own retail stores.
What is the lowest price you should reasonably set
for those jeans? What happens if you set a price below
that?
Now that we have determined our cost is the lowest
reasonable price, how about finding the highest reasonable
price? What happens when you set the price above that?
This reflects the basic concept of supply and
demand: as prices go up demand goes down. Still, in our
example a few customers would still be willing to pay a
higher price. So why would you not use that high price
in order to maximize your profits? Because the scenario
above is missing one important ingredient—competition.
See how the presence of competition affects your sales
volume at different prices.
With competition in the picture, you are not able
to charge quite as much without the threat of losing
Economic conditions—in a healthy economy companies have pricing flexibility, but in a struggling
economy customers become more price conscious,
forcing most companies to cut prices.
The industry—a company that dominates an industry
or has a unique product has the ability to charge higher
prices, but a company in a competitive industry often
sets prices comparable to similar products.
Stage of a product’s life cycle—a product at the beginning of its life cycle can often be priced higher, but as
the product category becomes more competitive and
saturated the price usually falls.
In addition to these factors, companies utilize a variety of objectives when setting prices, and can utilize several different pricing strategies. With so many influences
230 LESSON 14:
Managing Distribution and Pricing
hxdbzxy/Shutterstock.com
●●
Chemicals, bauxite, grain, Flowers, food (highly
motor vehicles, agriculperishable), technical
tural implements
instruments, emergency
parts and equipment,
overnight mail
© Cengage Learning
THE FIVE MAJOR MODES OF TRANSPORTATION
Product prices impact the volume of sales.
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Your Cost
should respond accordingly by updating your prices to
reflect these new realities.
Why It Could Increase
KEY TAKEAWAY
▸ Manufacturing costs increase due to higher material
costs, labour costs, or other related costs.
14-8
Why It Could Decrease
Price is an important component of the marketing mix
because it essentially determines how much a company
will make from selling its products. The three key considerations when determining prices are your cost, what
customers are willing to pay, and what competitors charge.
The price associated with any of these three considerations can increase or decrease based on a variety of factors.
▸ Manufacturing costs decrease due to lower material
costs, labour costs, or other related costs.
The Maximum Price Customers
are Willing to Pay
Why It Could Increase
▸ Customers love a new design, new feature, or new
materials used to make the product.
BREAK-EVEN POINT
Why It Could Decrease
14-9
▸ The economy goes into recession, and customers
have less disposable income.
14-6 Understand how to calculate the break-
What Competitors Charge
Why It Could Increase
▸ Prices increase industrywide because of increased
costs.
▸ Enhanced perception of the product in the marketplace.
Why It Could Decrease
▸ Competitors cut prices in order to increase their
own volume.
If there are changes to your cost, the maximum price
customers are willing to pay, or competitor prices, you
should respond accordingly by updating your prices to
reflect these new realities.
customers. You have to adjust your pricing to ensure that
your product remains an attractive option for customers.
As you can see, there are three key considerations
when determining pricing:
●●
Your cost
●●
The maximum price customers are willing to pay
●●
What competitors charge
It is important to note that the price associated
with any of these three considerations can increase or
decrease based on a variety of factors. For example,
if there are changes to your cost, the maximum price
customers are willing to pay, or competitor prices, you
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even point based on fixed and variable
costs.
To make a profit a company must sell enough units of
product to cover all costs. The minimum number of units
the company must sell to cover these costs is called the
break-even point. There are two types of costs to
consider: fixed and variable.
Fixed costs (also known as operating costs) are
items such as office salaries, rent, and other costs of operating the company. Fixed costs are incurred no matter
how many units are produced or sold; they remain the
same whether 1 or 1,000 units are produced. Suppose
you ran a shoe factory that spends $5,000 each month
on salaries, rent, and other costs of operating the company. These are basic costs of operating the business and
generally will not change based on your level of sales or
production. (Figure 14.5)
Variable cost is the cost of producing or purchasing one unit. It is also referred to as the unit cost.
Total variable cost varies with the level of production and
equals the variable cost per unit times the number of
units produced.
break-even point the numTotal cost, then, is
ber of units that must be sold for
the sum of fixed and varitotal revenue to equal total costs
able costs for a particular
fixed costs the operating costs
quantity of production. A
of a company, such as rent, salaries,
break-even analysis tells the
and marketing expenses
company how many units it
variable cost the cost of
needs to sell at a particular
producing or purchasing product,
price in order to cover their
which increases as the volume of
total fixed and variable costs.
production increases
Let us take a closer look.
LESSON 14: Managing Distribution and Pricing 231
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FIGURE 14.5
COMPARISON OF FIXED COSTS
Fixed costs if 1,000 units sold
$5,000
© Cengage Learning
Fixed costs if 1 unit sold
$5,000
FIGURE 14.6
COMPARISON OF VARIABLE COSTS
© Cengage Learning
= $30 variable cost (or unit cost)
10 pairs × $30 per unit = $300 total variable cost
CONTRIBUTION MARGIN
© Cengage Learning
FIGURE 14.7
$50 sales revenue – $30 variable costs = $20 contribution margin
If a pair of shoes costs $30 to produce, that is
the variable cost for the manufacturer. If the factory
makes 10 pairs of shoes, the total variable cost is $300.
(Figure 14.6)
After paying variable costs, the profit you make per
unit is called the contribution margin because it is
the amount of money that each sale contributes to paying
fixed costs. If the shoes sell for $50 and the variable cost
is $30, the contribution margin is $20 (Figure 14.7).
To calculate the break-even point, the company divides
the contribution margin into its total fixed costs to determine how many units must be sold to cover those costs.
$5,000 (fixed costs) 4 $20 (contribution margin) 5
250 units to break even
contribution margin the
profit margin on a unit of sale
calculated as sales revenue minus
variable costs (per unit)
232 LESSON 14:
Only after all fixed and
variable costs are paid can
the company begin making
a true net profit.
Managing Distribution and Pricing
The following provides another example of how
to calculate the break-even point and shows important
ways in which this calculation can be used.
Break-even analysis shows the number of units that
must be sold in order to cover all of the company’s fixed
and variable costs. The formula for break-even is total
fixed costs divided by contribution margin per unit. Contribution margin is your selling price per unit minus your
variable cost, or cost of production.
The result of this calculation is the break-even
volume. A company that sells this many units has covered all of its costs. Every unit it sells above this volume
drops to the bottom line as net profit. Let us take a closer
look at this formula.
A company’s fixed costs are costs that do not typically
change with the level of production. These are items
such as rent, office salaries, and marketing expenses. A
company covers fixed costs by selling a product for more
than it costs to manufacture or purchase it.
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14-10
KEY TAKEAWAY
Since one of the key considerations for determining
pricing is cost, knowing the fixed and variable costs is
essential. Break-even analysis shows you the number of
units that must be sold in order to cover the fixed costs of
the company and realize a net profit. Break-even analysis
also allows you to see how different pricing scenarios will
affect the overall profitability of the company.
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14-11 PRICING OBJECTIVES
14-7 List five common pricing objectives.
14-8 Differentiate among different pricing
strategies.
Before setting prices for products, management must
determine pricing objectives that are in line with the
company’s marketing goals. Of course, it is easy to
assume that every company’s goal is to maximize profit.
Over the long term, that is certainly the case. However,
pricing objectives are highly influenced by the type of
product, the industry, the company’s position within the
industry, and the branding goals of the company. There
are five common pricing objectives used by marketers.
14-11a
Pricing Strategies
A pricing strategy is a course of action designed to achieve
pricing objectives. Many pricing strategies exist, but they
generally fall into four categories. The extent to which
a business uses one of these strategies depends on its
Companies have a variety of pricing strategies
available to them:
New-Product Pricing
▸ Price skimming
▸ Penetration pricing
Psychological Pricing
▸ Odd-number pricing
▸ Multiple-unit pricing
▸ Reference pricing
▸ Bundle pricing
▸ Everyday low prices
▸ Customary pricing
Product-Line Pricing
▸ Captive pricing
▸ Premium pricing
▸ Price lining
Promotional Pricing
▸ Price leaders
▸ Special-event pricing
▸ Comparison discounting
© Cengage Learning
The cost to manufacture or purchase a product is
called the variable cost. For a manufacturer, variable cost
includes raw materials, cost of running the machinery,
and wages for the line workers. When a company sells the
product, the sales revenue pays for those variable costs, and
what is left over is the contribution margin. That margin is
used to pay the fixed costs of the company. Each unit sold
adds more contribution margin, and each bit of contribution margin chips away at those fixed costs until they are
all covered. How many units need to be sold to cover all
of those fixed costs? That brings us back to our formula,
fixed costs ÷ contribution margin. If a company has $5,000
in fixed costs and makes $50 contribution margin per unit
sold, it must sell 100 units to break even. After it has sold
those 100 units, all fixed costs are paid for. When they sell
that 101st unit, the $50 contribution margin becomes net
profit because all fixed costs are already covered.
To calculate the break-even point you need the
fixed costs. But to calculate the contribution margin per
unit you need the sales price and the variable cost per
unit. (In this case, use $75 sales price and $25 variable
cost 5 $50.)
What is great about break-even analysis is that
you can try different pricing scenarios to see how they
change the break-even point. For example, in our scenario above, when we raise prices by $50 (to $125), our
contribution margin increases to $100 per unit. Now
break-even volume is only 50 units. But if we cut our
price, our break-even volume goes way up.
Our break-even volume tells us how many units we
need to produce and sell. We are able to gather a lot of
information from this one simple formula.
You can see what an important business planning
tool break-even analysis can be. While pricing strategy
is often based on the unit cost, looking at unit cost and
contribution margin alone does not provide a complete
picture. Break-even analysis takes into account the need
for a company to use that contribution margin to cover
fixed costs. Only after all costs are covered can the company actually make a net profit.
LESSON 14: Managing Distribution and Pricing 233
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pricing and marketing objectives, the degree of product
differentiation, the competition, and the product’s lifecycle stage. The four categories of pricing strategies are
described next.
The two primary types of new-product pricing strategies are price skimming and penetration pricing. An
organization can use either one, or even both, over a
period of time. Price skimming is the strategy of charging
the highest possible price for a product during the introduction stage of its life cycle. The seller essentially “skims
the cream” off the market, which helps recover the high
costs of research and development (R&D) more quickly.
Over time the price is lowered.
At the opposite extreme, penetration pricing is the
strategy of selling new products at low prices in the hope
of achieving a large sales volume and market share.
Hopefully, before the competition can react.
Psychological pricing strategies encourage purchases
based on emotional responses rather than on economically
rational responses. These strategies are used primarily for
consumer products rather than business products.
●●
●●
●●
●●
●●
●●
Rather than considering products on an item-by-item
basis when determining pricing strategies, some marketers employ product-line pricing. Product-line pricing
means establishing and adjusting the prices of multiple
products within a product line. Product-line pricing can
provide marketers with flexibility in price setting. For
example, marketers can set prices so that one product is
quite profitable, while another increases market share by
virtue of having a lower price than competing products.
●●
●●
Odd-number pricing is the strategy of setting prices
using odd numbers that are slightly below wholedollar amounts. Nine and five are the most popular
ending figures for odd-number prices. The strategy is
not limited to low-priced items.
Multiple-unit pricing is setting a single price for two
or more units, such as two cans for 99 cents rather
than 50 cents per can. Especially for frequently purchased products, this strategy can increase sales.
Reference pricing means pricing a product at a moderate level and positioning it next to a more expensive
model or brand in the hope that the customer will use
the higher price as a reference price (i.e., a comparison
price). Because of the comparison, the customer is
expected to view the moderate price favourably.
Bundle pricing is the packaging together of two or more
products, usually of a complementary nature, to be sold
for a single price. To be attractive to customers, the
single price usually is considerably less than the sum of
the prices of the individual products. Bundle pricing is
used commonly for banking and travel services, computers, and automobiles with option packages.
With everyday low prices (EDLPs), a marketer sets
a low price for its products on a consistent basis
rather than setting higher prices and frequently
discounting them. EDLPs, though not deeply discounted, are set far enough below competitors’
prices to make customers feel confident that they
are receiving a fair price.
234 LESSON 14:
Managing Distribution and Pricing
Customary pricing sets the prices of certain goods
primarily on the basis of tradition. Examples of customary, or traditional, prices would be those set for
candy bars and chewing gum.
●●
When captive pricing is used, the basic product in a
product line is priced low, while the price on the items
required to operate or enhance it are set at a higher
level. Two common examples of captive pricing are
razor blades and printer ink.
Premium pricing occurs when the highest-quality
product or the most-versatile version of similar products in a product line is given the highest price. Other
products in the line are priced to appeal to price-sensitive shoppers or to those who seek product-specific
features. Examples of product categories in which
premium pricing is common are small kitchen appliances, beer, ice cream, and television cable service.
Price lining is the strategy of selling goods only at certain predetermined prices that reflect definite price
breaks. For example, a shop may sell men’s ties only
at $22 and $37. This strategy is used widely in clothing
and accessory stores.
Price, as an ingredient in the marketing mix, often
is coordinated with promotion. Promotional pricing
includes the following:
●●
●●
●●
Price leaders are priced below the usual markup,
near cost, or below cost. This type of pricing is used
most often in supermarkets and restaurants to attract
customers by giving them especially low prices on a
few items. Management hopes that sales of regularly
priced products will more than offset the reduced
revenues from the price leaders.
Special-event pricing involves advertised sales or price
cutting linked to a holiday, season, or event. If the pricing
objective is survival, then special sales events may be
designed to generate the necessary operating capital.
Comparison discounting sets the price of a product at
a specific level and simultaneously compares it with a
higher price. The higher price may be the product’s
previous price, the price of a competing brand, the
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Five Common Pricing Objectives
1. One pricing objective is to build a loyal user
base. This is common when a company is new
or is introducing a new product. In this case,
management may decide to accept leaner
margins than they normally would, in hopes that
a lower price will attract more customers. The
advantage of building a user base is that customers may buy add-on products or subscription services offered by the company. Microsoft
and Sony use this strategy by pricing the Xbox
and PlayStation consoles at or near their unit
cost. The goal is to establish a large user base,
then make profits by selling online services,
games, and accessories.
2. Some companies price to increase their market
share, which is the share of total industry sales. For
example, if a particular industry has $1 billion in
annual sales and your company represents $500
million of those sales, you have 50% market
share. This pricing objective is focused on the
competition. For example, Coca-Cola and Pepsi
continually try to gain market share through
aggressive pricing and other marketing efforts.
In large industries, even a tenth of a point
increase in market share can mean millions of
dollars of increased revenue.
3. Prices might also be chosen to communicate brand
value. How buyers perceive a product is often
determined by its price. High prices communicate
quality and status, which is why makers of luxury
goods such as Rolex watches almost never sell
at a discount. While discounting Rolex watches
product’s price at another retail outlet, or a manufacturer’s suggested retail price.
14-12
KEY TAKEAWAY
Five common pricing objectives are used by marketers:
to build a loyal user base, to increase market share,
to communicate brand value, to maintain status quo
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would likely result in a sales boost, it would also
cheapen the Rolex brand image—which does not
fit their long-term marketing goals.
4. Some companies may price to maintain the
status quo. This is especially true in industries
that depend on price stability, such as the
airline industry and retail gasoline. If a business
can maintain its profit or market share simply
by matching the competition, it will do so. A
competitor that shakes things up by deeply
discounting prices to gain market share can
sometimes start a price war, where everyone
lowers their price. In this case nobody benefits, except perhaps the customer. In industries
where there is little product differentiation,
competitors often choose to maintain an uneasy
truce by matching each other’s prices.
5. A final common pricing objective is survival or
liquidation. This usually means that the company will cut its price to attract customers,
even if it is below the break-even price for the
business or below the unit cost of the product.
Obviously, such a goal cannot be pursued on a
long-term basis, or the business will fail. But it
can be a legitimate way to increase company
cash flow in the short term, particularly when
the company has a large amount of inventory
to sell. This strategy can also be employed for
underperforming product lines, either as a lastditch effort to gain customers for the product
or as a liquidation strategy before discontinuing the product.
in the industry, and to survive. Pricing objectives are
highly influenced by the type of product, the industry,
the company’s position within the industry, and the
branding goals for that product. A pricing strategy is
a course of action designed to achieve pricing objectives. There are many pricing strategies, but they generally fall into four categories: new-product pricing,
psychological pricing, product-line pricing, and promotional pricing.
LESSON 14: Managing Distribution and Pricing 235
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LESSON SUMMARY
LO 14-1 Identify the primary channels for delivering products from producer to customer.
Distribution is a critical part of marketing strategy, but its importance
is often overlooked. Producers can utilize a variety of distribution channels, including direct (customer-direct), producer to retailer to customer, producer to wholesaler to retailer to customer (two-step), and
producer to agent to wholesaler to retailer to customer. Producers can,
and often do, use more than one channel at a time.
LO 14-2
Explain the four ways that intermediaries provide value for channel partners.
The advantage of utilizing marketing intermediaries is that they
provide efficiency and assortment of goods, break bulk, provide valuable marketing information, and offer an instant sales infrastructure.
Producers that carefully select marketing intermediaries can often
expand farther and faster than if they tried to accomplish all of the
functions of distribution by themselves. Wholesalers, which are intermediaries that sell products to other businesses, are an often misunderstood member of the marketing channel.
LO 14-3
Discuss the four features that differentiate
retailers.
Retailers are the final link between producers and customers. Whether
retailers buy directly from the producer or the wholesaler, they are a
critical component of distribution strategy for many companies. The
challenge—and opportunity—when securing physical retail distribution is to find retail partners who offer an appropriate fit for your
company’s products, customers, and brand. Common features that differentiate various physical retailers are number of product categories,
pricing, distribution intensity, and size. Increasingly, retailing does not
occur in a store setting. Non-store selling includes direct selling, direct
marketing, particularly online marketing, and automatic vending.
LO 14-4
Understand the goals of different distribution functions.
Regardless of which distribution channels a company utilizes, it is
important that products efficiently move from producer to customer.
Three primary functions of physical distribution are inventory management, warehousing, and transportation. While management of
physical distribution was previously considered a distinct operations
function, companies now take a customer-oriented view of supplychain management and distribution and even use it to develop a
competitive advantage.
LO 14-5 List three key considerations when
determining prices.
Price is important because it essentially determines how much a
company will make from selling its products. It is also important to
customers because price determines how much they must pay to
acquire the products they want. The three key considerations when
determining prices are costs, what customers are willing to pay, and
what competitors charge. The price associated with any of these three
considerations can increase or decrease based on a variety of factors.
LO 14-6 Understand how to calculate the breakeven point based on fixed and variable costs.
Since one of the key considerations for determining pricing is cost,
knowing your fixed and variable costs is essential. Break-even analysis
shows you the number of units that must be sold in order to cover the
236 LESSON 14:
Managing Distribution and Pricing
fixed costs of the company and realize a net profit. Break-even analysis
also allows you to see how different pricing scenarios will affect the
overall profitability of the company.
LO 14-7 List five common pricing objectives.
The five common pricing objectives used by marketers are to build a
loyal user base, to increase market share, to communicate brand value,
to maintain status quo in the industry, and to survive.
LO 14-8 Differentiate among different pricing
strategies.
Pricing objectives are highly influenced by the type of product, the
industry, the company’s position within the industry, and the branding
goals for that product. A pricing strategy is a course of action designed
to achieve pricing objectives. There are many pricing strategies, but
they generally fall into four categories: new-product pricing, psychological pricing, product-line pricing, and promotional pricing.
EXERCISES
Use the Internet, magazines, newspapers, books,
and personal experiences to complete the following
exercises.
1. Find two examples of companies that use more than one distribution channel. What purpose does each channel serve?
2. Many consumer products are manufactured in China. Research
what distribution options are available to transport these
products to Canada. Does the type of product influence the
distribution decision?
3. Find examples of price skimming, penetration pricing, and value
pricing at a local grocery store.
4. Visit an online retailer to try to identify examples of special-event
pricing, bundle pricing, odd-number pricing, and other pricing
strategies. Do online retailers have pricing considerations that are
different from brick-and-mortar retailers? Explain.
5. Do some comparison shopping. Travel companies offer many
last-minute specials where travellers can save money on trips.
Visit the following sites to compare package deals: Air Canada
Vacations, WestJet Vacations, and Expedia.
REVIEW QUESTIONS
1. What are the four commonly used channels for delivering products from producer to customer?
2. Define “marketing intermediaries.” What are the benefits of marketing intermediaries?
3. What are the four features that differentiate retailers?
4. Define direct marketing. What are the various forms of direct
marketing available to a business?
5. What are the primary functions of physical distribution?
6. What are the primary considerations when determining product
pricing? Explain each.
7. List the five common pricing objectives used by marketers.
NEL
Copyright 2020 Nelson Education Ltd. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content
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8. What are the various pricing strategies available to a business?
fixed costs, p. 231
9. What is the difference between fixed and variable costs?
inventory, p. 228
10. How is the break-even point calculated?
inventory management, p. 228
marketing intermediaries, p. 220
KEY TERMS
merchant wholesaler, p. 223
agent, p. 223
producer to agent to wholesaler to retailer to customer
channel, p. 221
automatic vending, p. 227
break-even point, p. 231
non-store retailing, p. 227
producer to retailer to customer channel, p. 221
broker, p. 223
producer to wholesaler to retailer to customer
channel, p. 221
commission merchant, p. 223
retailers, p. 220
contribution margin, p. 232
transportation, p. 228
direct channel, p. 221
variable cost, p. 231
direct marketing, p. 227
warehousing, p. 228
direct selling, p. 227
wholesalers, p. 220
distribution intensity, p. 224
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LESSON 14: Managing Distribution and Pricing 237
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PRICELESS
The idea behind a dollar store is simple: offer a variety of products, usually of
lower quality, for one dollar. That seems pretty straightforward. But a glance
at the prices in any dollar store in the world quickly reveals that the prices
are not all $1. A few items might be less, but many products are priced are
well north of the $1 threshold. So, while the dollar store conjures an idea
of the products and experience for the consumer, the image can be a little
misleading. Perhaps those first dollar store owners did not think much about
inflation, or tariffs.
Dollarama is one of Canada’s most recognized dollar stores, with headquarters in Montreal and locations across Canada. Despite its name, it
describes itself as a general merchandiser with price points up to $4. But
since “Fourdollarama” does not have quite the same catchy sound, the name
has stayed the same since its founding in 1993. And the company has continued to grow in revenues and store numbers over the past few years, with
four times the number of store locations as its closest dollar store rival, the
US-based Dollar Tree.
Thanks to positive financials, Dollarama has set upon an aggressive
growth strategy, all with the goal of getting consumers to buy more of
its under-$4 assortment of products. The company’s decision to expand
came thanks to some marketing research. Dollarama pored over the 2016
Canadian census data on demographics and household income. This
growth and success has occurred even though the store has continued to
raise prices over the last 10 years. The under-$4 promise was changed from
the under-$3.50 promise in 2016, yet consumers did not balk or change
their buying habits. The company still claims to focus on the $1–1.50 range
for the majority of its product offerings. And, despite potential opportunities in the United States and South America, Dollarama has maintained its
focus on Canada.
Being Canadian-based does come with its challenges. Surprisingly,
the demand for dollar-store items can be influenced by all of the following:
weather, currency rates, and Donald Trump. During longer winters, consumers
delay buying spring-related products like gardening tools and hats, products
that are often big sellers in Dollarama. When Canada’s currency is weaker, prices
for products tend to rise throughout the marketing channels, which is exactly
what happened in 2015. And the tariff war with the United States spurred on
by Mr. Trump makes food and other products from the United States more
expensive, raising prices for the dollar store retail chains.
But given all of these external environmental challenges, Dollarama continues to do more than just survive—it grows. And when you have a retailer
that can raise prices and still keep its customers, that garners attention. But it
can also draw the attention of competitors, especially in our globalized and
hyper-competitive international marketplace. And this is precisely what happened when China-based discount retailer Miniso announced it was going to
enter the Canadian retail market. It started with a store in Vancouver in 2017
238 LESSON 14:
Managing Distribution and Pricing
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and quickly grew across Canada. And while Miniso sells items priced as high
as $35–40, it still carries a number of goods in the $2–4 range.
Retail experts have noted that Miniso is trying to enter the low price
discount retail space similarly to another well known and successful retailer.
Doug Stephens from Retail Prophet postulated: “I think there’s an opportunity
for someone to come in and say: We know you want inexpensive stuff, but
that doesn’t mean that you can’t have nice design at the same time—kind of
like what IKEA did for furniture.”
When asked about Miniso’s aggressive expansion plans for Canada,
Dollarama CEO Neil Rossy stated that Dollarama recognizes Miniso as
competition in the same way as the company views other major retailers as
competition but, at this time, they do not feel a need to react to the news.
While Rossy shows confidence in Dollarama and its strategy, it’s not usually
advisable to treat competition too generically.
It would seem, then, that the industry might require a bit of a wake-up
call. You have been at your new consulting job for a few months and have just
been handed the Dollarama account. Your task is to create a short document
titled “Retailing and Pricing,” using your client Dollarama as a case study in
understanding the retail environment as it currently exists. You know you
have some really good notes and slides on this topic, so you download your
class materials from the cloud-based site where you keep all your schoolwork. You realize you need to show not only that you understand the concepts behind retailing and pricing, but also that you know your client well.
Your white paper is due soon, and your boss does not want to be nickel and
dimed—so get to the point right away.
Case Sources: http://www.dollarama.com/about_us/; http://business.financialpost.com/tag/dollarama-inc;
http://montrealgazette.com/business/local-business/retail/dollarama-sales-slowdown-a-rare-misstep-for-retail
-juggernaut; https://www.huffingtonpost.ca/2018/05/28/miniso-retail-canada_a_23445428/?utm_hp_ref=ca
-dollarama; https://www.huffingtonpost.ca/news/dollarama/
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LESSON 14: Managing Distribution and Pricing 239
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15 Developing
Integrated Marketing
Communications
LEARNING OBJECTIVES
Once you complete this lesson, you will be able to:
15-2 List the advantages of advertising as a promotional tool.
15-3 Discuss the advantages and disadvantages of different
advertising media.
15-5 Explain how different methods of sales promotion may
achieve different objectives.
15-6 Identify different types of public relations tools.
15-7 Differentiate among promotion mixes used to achieve
specific promotional objectives.
15-4 Identify the six steps of the personal-selling process.
I NTRODUCTION
Procter & Gamble, the company behind the Old Spice
brand, spends significant resources on advertising. However, the campaign featuring the “Old Spice Guy” shows
that advertising is just one aspect of a successful marketing campaign. Several components of what is called
the promotion mix must come together in a synchronized effort for a company to break through the clutter of
today’s marketing landscape.
In this lesson, we will learn about each component of
the promotion mix, then discuss how marketers integrate
them into campaigns tailored to meet specific objectives.
15-1
THE PROMOTION MIX
15-1 Summarize the four components of the
promotion mix.
Imagine that an electronics company has created a new
smartphone that would be perfect for you. The company
researched your needs and developed a product that met
every one of those needs. What is the best way for the
240 LESSON 15:
Developing Integrated Marketing Communications
bluedog studio/Shutterstock.com
15-1 Summarize the four components of the promotion mix.
company to inform you about this new product? Have a
salesperson call you? Put a billboard up on your route to
school? Put an ad in a mobile app you use?
Would these tactics be effective? Would you ignore
them? These are factors the company must consider
before planning a promotional campaign. But it also
must consider the following:
●●
The cost of these promotional tactics
●●
How much its competition is already using these tactics
●●
What other promotional tactics might be effective
as well
On top of all that, the company has to know how you
get to school, what apps you use, and more, or its promotional campaign could be ineffective and cost resources
because it would be wasted on the wrong target audience.
This is an example of the complicated world that
marketers face. They operate in a competitive and cluttered marketing environment. Getting the word out to
target customers requires a well-coordinated campaign
of informative and persuasive communications. This is
accomplished through the promotion mix, which
is the particular combination of promotional methods
a company uses to reach a target market. The makeup
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
of a promotion mix depends on many factors, including
the company’s promotional resources and objectives,
the nature of the target market, and the characteristics
of its product.
The four components of the promotion mix are:
●●
Advertising
●●
Personal selling
●●
Sales promotion
●●
Public relations
The four components are also called the promotional tools. The promotion mix may vary from product
to product and from industry to industry. For example,
our financial institutions regularly promote their products. Even though National Bank Financial and First
Nations Bank of Canada are both financial institutions,
their target markets are different. This could affect the
type of promotion mix each uses.
A company’s key promotional tools are typically
advertising and personal selling, and these are supported
by sales promotion. In order to develop a positive image
for the organization and its products, businesses rely on
public relations.
Factors in the external environment affect the promotion mix—the government (political environment)
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sets guidelines on what can and cannot be done in advertising, the competition (economic environment) has to be
monitored carefully to be aware of what message they are
projecting versus the company’s message, trends in the
social environment will influence advertising design, and,
of course, the technology environment is always changing
and expanding the limits of what can be done. For
example, the Internet is a potential vehicle for building
a brand presence, in fact more quickly than traditional
methods, and it is also a powerful tool for tailoring the
message to meet the needs of specific customers.
All the elements of the promotion mix are carefully
coordinated to produce a consistent, unified message
that is customer focused. Read on to learn about these
characteristics and some of the advantages and disadvantages of each promotional tool.
Advertising is a paid message communicated to an
audience through a mass medium such as television,
radio, print, or online. Advertising is flexible and can
reach a very large audience, such as during a Winnipeg
Jets hockey game, or a
promotion mix the unique
small, carefully chosen
combination of advertising,
audience, such as the ads
personal selling, sales promotion,
you see when scrolling
and public relations used to
through the CBC news
promote a product
feed.
LESSON 15: Developing Integrated Marketing Communications 241
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ACHPF/Shutterstock.com
15-1a
Advertising is flexible and can reach a very
large audience.
Personal selling is personal communication aimed at
informing and persuading customers to buy a company’s
products. Since personal selling involves the use of sales
reps, it is more expensive to reach buyers through personal selling than through advertising. However, personal
selling is the most flexible promotional tool because you
can tailor the message to each buyer’s specific needs and
receive immediate feedback. As a result, personal selling
often is more persuasive than advertising.
Sales promotion is the use of incentives to encourage
purchase of a product. This includes incentives such as
coupons, samples, and frequent-buyer rewards. Sales
promotions can be a cost-effective way to stimulate sales,
but the downside is that sometimes customers can come
to expect the discounts and rewards they get from sales
promotional campaigns.
Public relations, or PR, is a broad set of communication activities used to create and maintain favourable
relationships between a company and the public. We
usually associate public relations with news releases, company-sponsored events, and other activities meant to publicize a brand or a product. But PR activities also include
investor relations, public affairs, and even government
lobbying. By getting the media to report on a company’s
accomplishments, the company gains inexpensive and often
highly credible exposure. The shortcoming of PR is that the
company does not control the messages communicated in
media reports, which creates the risk of bad publicity.
These four tools are
strategically
blended
integrated marketing
communications
together to raise awareness,
coordinating all aspects of the
build product demand, or
promotion mix to send clear
achieve some other proand consistent messages to
motional objective for the
customers
company.
242 LESSON 15:
Developing Integrated Marketing Communications
Integrated Marketing
Communications
The clearest example of integration in promotion is the
need for integrated marketing communications.
The promotion mix must be coordinated in all aspects
to send clear and consistent messages to customers. If
this is not done, the company risks confusing customers,
who will simply buy a different product. The area with
the least control is in personal selling. In this case the
company is not designing an ad with a consistent message; the salespeople are the message. Therefore, the
message may not be the same every time—again, human
resource issues exist that must be dealt with very carefully to ensure consistency.
Although it might seem obvious, the day-to-day
realities of marketing management can cause the marketing message to become fragmented as the promotional campaign is built. In fact, until recently, specialists
handled different aspects of marketing communication
campaigns. Advertising agencies created advertising
campaigns, sales promotion companies handled sales
promotion activities, and public relations specialists
handled public relations issues. As a result, the target
audience might see a variety of different messages and
different visual presentations for the same company. For
a customer already bombarded with so many ad messages, a campaign that is not integrated will likely get
lost in the crowd. In contrast, a coordinated campaign
has a unified look, feel, and message. Such a fluid presentation increases the likelihood that customers will
notice, and perhaps respond to, the promotional campaign. For example, if a person sees a television ad for
Telus Mobility, then later that week sees a visually similar
magazine ad for Telus Mobility, then the same day sees a
similar-looking website banner ad for Telus Mobility, that
is an example of integrated marketing communications.
Today, companies can rely on organizations that
provide one-stop shopping for all marketing and promotion-related activities. Such organizations help reduce
coordination problems and improve integration among
different promotional functions. This is beneficial
because marketing communications can be very expensive, and it is important for companies to use promotional resources as efficiently as possible.
15-2
KEY TAKEAWAY
The promotion mix is the particular combination of promotional methods a business uses to reach a target market.
The makeup of a promotion mix depends on many
NEL
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
factors, including the company’s promotional resources
and objectives, the nature of the target market, and the
product’s characteristics. The four components of the promotion mix are advertising, personal selling, sales promotion, and public relations. While it is possible to use only
one of these promotional tools in a given campaign, it is
more likely that two, three, or all four will be used together
as a comprehensive approach for reaching customers.
15-3
ADVERTISING
15-2 List the advantages of advertising as a
promotional tool.
15-3 Discuss the advantages and disadvan-
tages of different advertising media.
Advertising is a very important component of the
promotion mix and represents the largest share of promotional spending. In Canada, spending on media advertising exceeds $10 billion each year, including $5 billion
on digital advertising. Worldwide ad spending is nearing
$500 billion per year,1 with almost $100 billion spent in
Western Europe and almost $150 spent in Asia.2 There
are many reasons why advertising is the promotional tool
of choice for so many marketers.
For these reasons, advertising’s share of the economy
has remained remarkably stable since the 1920s. Even
though our economy has grown so explosively, and even
though technology has decreased the cost of advertising
in many ways, advertising spending has averaged around
0.7% of gross domestic product (GDP). Recently, however, the average spending has been slowing down.4
15-3a
Evaluating Advertising Media
For a marketer, choosing the best media for advertising
can be similar to buying a car. Many options are on offer
that all perform the same basic function, but they come
in different sizes, have different features, can travel different places, and have different costs. The challenge is
to find the one that best fits your needs.
There are seven major categories of advertising
media. While there are other variations of advertising,
such as product placement
within movies and TV
advertising any paid form of
shows, most advertising
non-personal presentation by an
spending focuses on these
identified sponsor.
seven major categories.
The Reach of Advertising
No other promotional tool can reach so many
people at once. For example, the Grey Cup is one
of the biggest television events in Canada each
year, with an average audience of over 4 million
Canadians.3 Large advertisers such as Chevrolet
Canada, WestJet, and Molson Canadian may pay up
to $75,000 per 30-second spot to have access to this
huge audience.
Back when advertising relied on only a few
television stations, radio stations, and magazines, it
was hard to target specific audiences. That led to the
famous quote “Half the money I spend on advertising is wasted, the problem is I do not know which
half.” That is not true anymore. Marketers can now
choose highly targeted, highly measurable media
when spending money on advertising.
There are many different media for advertising,
which can be chosen based on the fit for your
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product and your target audience. Options include
television, radio, magazines, outdoor signs, online,
direct mail, and more. Regardless of your budget,
the size of your audience, or nature of your product,
you likely can find a medium that can effectively
advertise your message.
Just a decade ago, it was hard to advertise
unless you had a huge budget. Television ads could
cost at least $100,000 to produce (often much
more), plus an even higher cost to buy airtime. A
full-page ad in a major magazine could cost more
than $50,000. But now you can run a LinkedIn or
Google ad campaign for $25 or less. You can run ads
in a local newspaper for just a few hundred dollars.
The explosion of advertising choices, especially in
digital advertising, has led to increased accessibility
for smaller advertisers to get the word out about
their company.
LESSON 15: Developing Integrated Marketing Communications 243
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Newspapers
15-3b
dvantages and Disadvantages
A
of Major Advertising Media
The different advertising media have distinct differences
in terms of their reach, ability to target specific audiences, cost, and other important factors. Knowing these
differences is essential for any marketer hoping to make
efficient and effective use of valuable marketing dollars.
Marketers can use their knowledge of these advantages and disadvantages by asking questions such as:
●●
●●
●●
●●
●●
Who is our target audience, and how many of them do
we want to reach?
How fast do we need to reach them?
How geographically concentrated is our target
audience?
Does our good or service require media that offer
more visual or more complex communications?
244 LESSON 15:
Developing Integrated Marketing Communications
Outdoor
not have the large budget required to run a television or
magazine ad. Instead, they may opt for a local radio ad.
While radio might not be the ideal medium for a product,
it meets other advertising objectives by providing a geographically targeted message at a reasonable cost.
The composition of ad spending has changed considerably in the last 50 years. Once, the majority of
advertising spending was for television, magazine, and
newspaper ads. But spending on magazine and newspaper ads is falling, and online advertising is growing
fast. Based on total Canadian dollars spent on media
advertising, the share of digital marketing is expected to
surpass 40% in the next few years.5 Today, spending on
online advertising exceeds that of television, the next largest category, for a variety of reasons:
●●
●●
What is our advertising budget?
Sometimes marketers must make trade-offs. For
example, an ad for a restaurant often works best in a highquality visual format such as those offered by television
or colour magazine ads. The image of food seen on TV
is far more likely to capture a customer’s attention than a
description of food heard on the radio. As a result, restaurant chains such as Tim Hortons, Mr. Sub, and Pizza Pizza
spend billions of dollars on ads each year, much of it on
television ads. However, a local restaurant typically does
Lightspring/Shutterstock.com
Aigars Reinholds/
Shutterstock.com
Online (including mobile
and social media)
Magazines
Radio
Twin Design/Shutterstock.com
Direct mail
alexwhite/Shutterstock.com
Lineicons freebird/Shutterstock.com
3D Vector/Shutterstock.com
PPBR/Shutterstock.com
Television
●●
Online advertising is highly targeted and measurable
Online advertising can be done with a relatively small
budget, allowing companies of all sizes to invest in
digital campaigns
Buyers increasingly consume media via their desktop
or mobile devices instead of through traditional television and print outlets
However, television will likely remain the medium
of choice for advertisers that want to reach customers on
a massive scale. Media such as print, radio, and outdoor
remain viable options for local advertisers or companies
that wish to target specific geographies.
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
THE ADVANTAGES AND DISADVANTAGES OF MAJOR ADVERTISING MEDIA
Television
Direct Mail
Newspapers
Radio
Magazines
Online
Outdoor
15-4
●●
Largest reach
●●
Very expensive
●●
Audiovisual presentation has a high impact
●●
Message can be quickly forgotten
●●
Ads can be run frequently
●●
Increasingly ignored by users of digital video recorders (DVRs)
●●
Highly selective and personal
●●
Very expensive on a per-piece basis
●●
targeting
●●
Often thrown away as “junk mail”
●●
Easy to measure performance
●●
Hidden from competitors
●●
Can reach large, local audiences
●●
Short life, especially for daily publications
●●
Short lead times for placing ads
●●
High volume of ads limits exposure
●●
Ads can be run frequently
●●
Hard to target specific market segments
●●
Can target local audiences
●●
Lacks visual imagery
●●
Low relative cost
●●
Listener’s attention is limited
●●
Short lead times for placing ads
●●
Difficult for driving listeners to follow the ad’s “call to action”
●●
Selective targeting
●●
High cost
●●
Long life
●●
Long lead times (30–90 days)
●●
Good reproduction of visuals
●●
Infrequent publication
●●
Highly selective targeting
●●
Cost per click can be high
●●
Available for almost any ad budget
●●
Concerns about security and privacy
●●
Real-time, measurable feedback
●●
Uncertainty about how to evaluate return on investment
●●
Geographic selectivity
●●
Allows only very short messages
●●
Can be placed close to point of sale
●●
Seldom attracts reader’s attention
●●
Allows for frequent repetition
●●
Criticized as blight on landscape
KEY TAKEAWAY
More money is spent on advertising than on any other
component of the promotion mix. It is often the promotional tool of choice because it offers marketers scale,
targeting, choice, and accessibility. There are seven
major categories of advertising media. These media
have distinct differences in terms of their reach, ability
to target specific audiences, cost, and other important
factors. Knowing these differences is essential for any
marketer hoping to make efficient and effective use of
valuable marketing dollars.
15-5
PERSONAL SELLING
15-4 Identify the six steps of the personal-
selling process.
As discussed in the section on advertising, as a promotional tool advertising can be great because it offers the
choice of many media and the ability to reach millions of
people at the same time. In addition, the relative cost per
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Disadvantages
© Cengage Learning
Advantages
customer is relatively low. However, even in our digital
age, nothing beats individual attention—and that is what
personal selling provides.
Personal selling is the most adaptable of all promotional methods because the person who is presenting
the message can modify it to suit the individual buyer.
For example, if a car buyer is more concerned about
safety than design, a salesperson can shift the focus of
the conversation to the car’s safety features. However,
personal selling is also the most expensive method of
promotion because it involves salespeople working with
customers individually or in small groups. It is also the
area with the least control. You are not designing an ad
with a consistent message; your salespeople are your
message. Therefore, the message may not be the same
every time—this has definite human resource implications. The salesforce must be managed to communicate the intended message, and companies must make
a considerable investment
to build and train a salespersonal selling a faceforce. That is why personal
to-face sales presentation to a
selling is generally used to
prospective customer.
sell high-dollar goods and
LESSON 15: Developing Integrated Marketing Communications 245
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
services, such as real estate, expensive equipment, and
large service contracts.
Many selling situations demand the face-to-face
contact and adaptability of personal selling. This is especially true of industrial sales, in which a single purchase
may amount to millions of dollars.
Businesses employ all types of salespeople, from
inside sales reps who are mainly order takers, to business development reps who call on new customers. A
big focus within many organizations is management of
key accounts. A business-to-business example might be
a regional sales representative for Staples, managing the
accounts of its largest purchasers of office supplies. A
business-to-customer example might be a private wealth
adviser for a financial services organization, such as TD
Canada Trust. Private wealth advisers are assigned to personally work with high-net-worth clients, not just to maximize their return on investment, but also to ensure these
valuable clients remain with the business. Personal selling
is less likely to be used for low-value products that need
to be distributed on a large scale to a widely dispersed
target audience. For example, chewing gum is unlikely to
be sold to customers through sales reps. However, sales
reps might be used by a manufacturer of chewing gum to
sell bulk volumes to wholesalers and retailers.
15-5a
The Personal-Selling Process
The industry, the nature of the product, and the characteristics of the market influence the personal-selling
process. Personal selling may be effective for marketing
industrial products, but it is not as widely used for marketing consumer non-durables (consumer products
that get used up). For example, selling toothpaste differs greatly from selling component parts for an aircraft.
With widely scattered, well-informed buyers and with
brand-loyal customers, a company may rely less heavily
on personal selling. However, salespeople may still be
required to explain the product and finalize the details
of the purchase agreement. The personal-selling process
commonly follows six steps. While no two selling situations are exactly alike, a new salesperson can use the
personal-selling process as a template for building a solid
client base, from prospecting to following up. The following list shows how the process might look if you were
brand-new to a sales job.
prospecting a part of the
personal-selling process where
you research potential buyers and
choose the most likely customers or
prospects
246 LESSON 15:
1. Prospecting: The first
step in personal selling is
prospecting, where you
research potential buyers
and choose the most likely
customers or prospects.
Developing Integrated Marketing Communications
STUDY TOOLS
Visit the MindTap to watch videos on the promotion mix.
Go to nelson.com/student to access the digital resources.
2. Approach the prospect: The second step is to
approach the prospect. This could be done by first
sending an introductory email, and then following up
with a phone call. If the prospect is local, you could
even make a personal visit.
3. Make the presentation: The third step of the selling
process is to make the presentation. This often
includes a product demonstration, where you point
out the product’s features and benefits. The key to this
step is to identify your prospect’s key needs, and then
focus on the benefits of your product that satisfy those
needs. This requires listening on your part, especially
in the early part of the meeting.
4. Answer objections: The fourth step in the personalselling process is to answer objections. This is your
chance to overcome objections by highlighting the
key benefits of the product.
5. Close the sale: The fifth step is to close (or make) the
sale. As the old saying goes, “Tellin’ ain’t sellin’, askin’
is,” so you ask for the sale by offering to help them
with setup and asking how quickly they would like to
get started.
6. Follow-up: The sixth step is to follow up. You must
follow up to ensure that everything was set up on time
and that the new product meets their needs. Follow-up is essential because it leaves a good impression and helps increase the likelihood of future sales.
15-6
KEY TAKEAWAY
Personal selling is the most adaptable of all promotional
methods because the person who is presenting the message can modify it to suit the individual buyer. It is particularly relevant for selling high-dollar goods and services.
The personal-selling process varies by industry; however, there are typically six steps to the personal-selling
NEL
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process: prospecting, approaching the prospect, making
the presentation, answering objections, closing the sale,
and following up with the customer.
15-7
SALES PROMOTION
▸ Point-of-purchase displays: promotional material
placed in a retail store to draw attention to certain
products.
▸ Sweepstakes and contests: opportunities for
customers to win cash or prizes by entering.
15-5 Explain how different methods of sales
promotion may achieve different objectives.
Sales promotion consists of marketing events or sales
efforts—not including advertising, personal selling, and
public relations—that stimulate buying. Examples of
sales promotion methods include the following:
Companies have dramatically increased spending on
sales promotion in recent years. Sales promotion is often
used to enhance and supplement other promotional
efforts. Tim Hortons discount coupons and RRRoll Up
the Rim to Win contests offering money and food prizes
are examples of sales promotions.
Selection of Sales Promotion Methods
EXAMPLES OF SALES PROMOTION METHODS
15-7a
▸ Coupon: a discount on the purchase price of a
product.
Several factors affect a
marketer’s choice of sales
promotion methods, but
the biggest factor is usually
the promotional objective.
These objectives may
include the following:
▸ Samples: free product, usually in a trial size.
▸ Premiums: free gifts with the purchase of a product.
▸ Frequent-user incentives: rewards for customer loyalty.
sales promotion marketing
events or sales efforts—not
including advertising, personal
selling, and public relations—that
stimulate buying
Promotional Objective
Recommended Sales Promotion Method
To attract new customers
All methods
To encourage trial of a product
Samples
(Continued )
NEL
LESSON 15: Developing Integrated Marketing Communications 247
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Recommended Sales Promotion Method
To boost customer loyalty
Frequent-user incentives
To cross-sell other products from your company
All methods
To gain attention in a retail environment
Point-of-purchase displays
To identify prospects or build customer relationships
Sweepstakes and contests
All icons © Cengage Learning
Promotional Objective
15-8
KEY TAKEAWAY
Sales promotion consists of direct incentives for customers
to purchase or try a product. Examples of sales promotion methods include coupons, samples, premiums, frequent-use incentives, point-of-purchase displays, and
sweepstakes and contests. The best method of sales promotion depends largely on the promotional objective.
248 LESSON 15:
Developing Integrated Marketing Communications
15-9
PUBLIC RELATIONS
15-6 Identify different types of public
relations tools.
Public relations (PR) is a broad set of communication
activities used to build favourable relationships with the
public. The activities are initiated by the company, and
NEL
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
15-9a
Types of Public Relations Tools
There are three major public relations tools: press releases,
press conferences, and events.
The most widely used publicity tool is the press
release, generally a one-page document of about
300–500 words that the organization provides to the
media. Press releases can be related to a number of
topics, including:
●●
New products
●●
Interviews with company officials
●●
Reports of new discoveries
●●
Expansion into new markets
●●
Investment results
NEL
Twitter.com, “The reach and impact of Oscars 2014 Tweets,” https://blog.twitter.com/
official/en_us/a/2014/the-reach-and-impact-of-oscars-2014-tweets.html
include building a favourable image
with customers, investors, the media,
government officials, and society in
general. Negative publicity, which originates outside the company, costs
nothing, but it may cost the company
lost revenues.
The most common PR goal is
media coverage of the company on
television, in newspapers and magazines, and online. This type of coverage
is extremely valuable for a company
because the company does not pay for
the space and time in the same way it
does for advertising. For example, running a 30-second advertisement on a
weeknight evening costs thousands of
A visual analysis of Ellen DeGeneres’s 2014 Oscar
dollars just for airtime. When you take
selfie tweet.
into account the cost of production, that
one 30-second commercial could cost
$1 million or more. However, a well-executed PR camPress releases can lead to increased media coverage,
paign can cost as little as a few thousand dollars to create
such as when they are reprinted by media outlets or used
and can lead to many millions of dollars in free media
as the basis for news or entertainment stories. Companies
exposure. For example, Beyoncé released a new album
also hope that press releases can lead to inquiries from
and 17 videos by surprise, with no advance marketing—
media outlets that will turn into in-depth stories or interjust a simple press release and some social media posts.
views. These interviews alone sometimes become new
The lack of advance marketing became a story in itself
stories, increasing the amount of media coverage. In a teleand generated free media coverage and social media
vision interview with Amazon.com CEO Jeff Bezos, the
buzz. Then Beyoncé paid a surprise visit to a Walmart,
possibility of using robotic drones to make customer delivwhich generated more media coverage. The album sold
eries was discussed. The interview already provided con800,000 copies in its first weekend, generating additional
siderable free publicity for Amazon; however, the drone
media coverage.6 The brilliance of this PR strategy stands
comment was picked up in many news stories the following
in stark contrast to Lady Gaga’s launch of a new album
week, multiplying the free publicity. The same multiplier
the previous month that largely flopped even though its
effect was seen during the 2014 Oscars, when host Ellen
promotional budget was estimated at $25 million.7
DeGeneres tweeted a selfie with a number of celebrities.
Another publicity tool is the press conference,
where media members are invited to hear news
announcements.
Often
public relations (PR) any
com­
pany officials and
communication or activity initiated
celebrity endorsers are
by a company that is designed
present at a press conferto win goodwill or prestige for a
company or person
ence, which is a tactic for
attracting media exposure
press release a publicity tool that
is generally a one-page document
at the event. If media memof about 300–500 words that the
bers are not interested in a
organization provides to the media to
particular press conference,
promote its company or a product
few will show up and the
press conference a publicity
company will receive limited
tool where media members are
media coverage. Companies
invited by a company to hear news
often hold press conferences
or product announcements
at industry trade shows
LESSON 15: Developing Integrated Marketing Communications 249
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because members of the media are already there. Companies with well-known brands can often receive considerable press when announcing new products.
Probably the most famous press conferences of
the last decade have been Apple’s product launches.
Apple’s ability to keep new products secret until these
launch events leads to massive media speculation about
what the products will be, live tweeting and blogging
during the events, and thousands of news stories across
the Web, TV, and print providing details about the new
products. The flood of news stories in response to the
original launch of the iPhone generated millions in
free publicity for Apple. Apple displays its ability to
generate massive amounts of buzz and publicity when
launching new versions of the iPhone every few years.
Press conferences are also held to attempt to limit
damage from bad publicity, such as when Samsung,
for example, held a press conference to explain that
defective batteries and manufacturing flaws were behind
combustible Galaxy Note 7 smartphones.8
250 LESSON 15:
Developing Integrated Marketing Communications
15-9b
T he Advantages and Disadvantages
of PR as a Promotional Tool
The key advantage of public relations is that it is an
extremely leveraged use of money. Of the billions of
Canadian dollars spent on promotion each year, only
a small portion is spent on PR. Obviously, the value of
the free publicity generated from that PR spending is
exponentially higher. Another advantage to public relations is that companies with large social media followings
can essentially bypass traditional media and send news
directly to their fans and followers. A company such as
Telus, with its more than 900,000 Facebook likes, has
Jonny White/Alamy Stock Photo
David Paul Morris/Getty Images
Many companies such as Apple, uses press
conferences to announce new products,
corporate changes, etc.
The third major publicity tool is event sponsorship.
Event sponsorships are intended to promote a positive
image for the company, through both the involvement of
attendees and the media coverage generated by the event.
Not all event sponsorship would be considered PR, however. For example, many companies pay to have their
name associated with an event, such as the Grey Cup presented by Shaw, and Canadian Music Week sponsored by
Bell Media and iHeart Radio. Sponsorships like these are
closely aligned with the promotional tool of paid advertising
because the company is paying outright for media exposure.
These examples are considered strategic investing.
The type of event sponsorship that would commonly
fall under the PR umbrella involves events produced by
the company, for example road races such as the Scotiabank Marathon and the CIBC Run for the Cure. These
events are opportunities for companies to build relationships and improve their corporate reputation by giving
back to the communities they serve. Many marketers
see event marketing as the next big thing in promotion
because it offers a controlled way to interact with and
communicate the brand’s value directly to customers.
Canadian companies can use PR to
promote their businesses and to show
support to the community.
NEL
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15-11 PROMOTIONAL PLANNING
15-7 Differentiate among promotion mixes
Courtesy of Canadian Boat Shows
used to achieve specific promotional
objectives.
Events, such as the Vancouver International
Boat Show, allows business to promote
their products and reduce marketing
costs compared to if each business did it
independently.
the ability to instantly announce new products or promotions to those fans at essentially no cost.
The key downside to public relations as a promotional tool is that publicity is often out of the company’s
control. Media outlets are limited in number, but thousands of press releases are distributed each day from
companies all over the world. While we have highlighted some amazing success stories resulting from
simple press releases, the fact is that media outlets
ignore the majority of them, especially when they are
from companies without a recognized brand. In addition, companies are not able to control the message that
media outlets communicate. A press release celebrating
record-setting financial results might be presented positively in financial media outlets, while that same press
release could be used by environmental or labour activists as evidence of company exploitation. This requires a
company’s PR staff not only to look for opportunities to
create positive publicity, but also to do damage control
when negative publicity arises.
15-10
KEY TAKEAWAY
Public relations (PR) is a broad set of communication
activities used to build favourable relationships with the
public. The most common goal of PR is to gain media
publicity through press releases, press conferences, and
event sponsorships. The advantage of PR is that it can
generate valuable free publicity, but the disadvantage is
that companies cannot control the amount or the content of the media exposure they receive.
NEL
A promotional campaign is a plan for combining
the four components of the promotion mix—advertising,
personal selling, sales promotion, and public relations—
to achieve one or more marketing goals. When selecting
promotional methods, the goal is to maximize the impact
on the customer by providing clear and coordinated
messages across the entire campaign.
The selection of promotion mix tools typically
depends on four factors that can dramatically influence
your promotion mix. The first and most important factor
is your promotional objective, which is often one of the
following:
●●
Building awareness and demand for the product
●●
Increasing or retaining market share
●●
Enhancing or repairing your company brand
●●
Identifying and retaining existing customers
For example, a company trying to build market
share is more likely to focus on advertising. A company
trying to retain customers is more likely to focus on sales
promotion and personal selling.
The second factor is the nature of your target market
in terms of size, geographic distribution, and lifestyle
characteristics. If the market is small, personal selling
may be the most important element in the promotion
mix. If the market is large and widely dispersed, then
advertising will be more effective.
The third factor is the characteristics of the product.
Complex or high-value products are likely to require lots
of personal selling. Lower-priced consumer products are
more likely to be sold using advertising and sales promotion.
The fourth factor is the organization’s resources. A
local manufacturer with a limited budget may rely entirely
on personal selling or local advertising. However, a major
manufacturer with a large budget will likely rely on a comprehensive promotion mix—with an emphasis on national
advertising—to reach as many customers as possible.
While marketers often utilize all components of the
promotion mix within a
promotional campaign a
marketing campaign, the
plan for combining the four
four factors above can help
components of the promotion
mix—advertising, personal selling,
them decide how much
sales promotion, and public
focus—and funding—to
relations—to achieve one or more
devote to each component
marketing goals
of the marketing mix.
LESSON 15: Developing Integrated Marketing Communications 251
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
15-12
KEY TAKEAWAY
A promotional campaign is a plan for combining the four
components of the promotion mix—advertising, personal selling, sales promotion, and public relations—to
LESSON SUMMARY
LO 15-1 Summarize the four components of the
promotion mix.
The promotion mix is the particular combination of promotional
methods a business uses to reach a target market. The makeup of a
promotion mix depends on many factors, including the company’s
promotional resources and objectives, the nature of the target market,
and the product’s characteristics. The four components of the promotion mix are advertising, personal selling, sales promotion, and public
relations. While it is possible that only one of these promotional tools
may be used in a given campaign, it is more likely that two, three, or all
four of them will be used together as a comprehensive approach for
reaching customers.
LO 15-2 List the advantages of advertising as
a promotional tool.
Advertising is a very important component of the promotion mix.
Canadian companies currently spend billions annually on paid media
advertising, and much of this is allocated to Internet advertising.
Advertising is often the promotional tool of choice because it offers
marketers scale, targeting, choice, and accessibility.
LO 15-3 Discuss the advantages and disadvantages of different advertising media.
There are seven major categories of advertising media. These media
have distinct differences in terms of their reach, ability to target
specific audiences, cost, and other important factors. Knowing these
differences is essential for any marketer hoping to make efficient and
effective use of their valuable marketing dollars.
LO 15-4 Identify the six steps of the personalselling process.
Personal selling is the most adaptable of all promotional
methods because the person who is presenting the message can
modify it to suit the individual buyer. However, it is also the most
expensive method of promotion because it involves salespeople
working with customers individually or in small groups. That is
why it is generally used to sell high-dollar goods and services.
The personal-selling process varies by industry; however, there
are typically six steps to the personal-selling process:
prospecting, approaching the prospect, making the presentation,
answering objections, closing the sale, and following up with
the customer.
252 LESSON 15:
Developing Integrated Marketing Communications
achieve one or more marketing goals. Four factors that
will influence the makeup of a promotional campaign
are the company’s promotional objective, nature of the
target market, characteristics of the product, and the
organization’s resources.
LO 15-5 Explain how different methods of sales
promotion may achieve different objectives.
Sales promotion consists of direct incentives for customers to purchase
or try a product. Examples of sales promotion methods include coupons, samples, premiums, frequent-use incentives, point-of-purchase
displays, and sweepstakes and contests. Choosing the best method of
sales promotion depends largely on the promotional objective.
LO 15-6 Identify different types of public
relations tools.
Public relations (PR) is a broad set of communication activities used
to build favourable relationships with the public. The most common
goal of PR is to gain media publicity through press releases, press
conferences, and event sponsorships. The advantage of PR is that it
can generate valuable free publicity; the disadvantage is that companies cannot control the amount or the content of the media exposure
they receive.
LO 15-7 Differentiate among promotion mixes
used to achieve specific promotional objectives.
A promotional campaign is a plan for combining the four components
of the promotion mix— advertising, personal selling, sales promotion,
and public relations—to achieve one or more marketing goals. Four
factors that will influence the makeup of a promotional campaign are
the company’s promotional objectives, the nature of the target market,
the characteristics of the product, and the organization’s resources.
EXERCISES
Use the Internet, magazines, newspapers, books,
and personal experiences to complete the following
exercises.
1. Keep track of the promotional messages you receive in a day.
What products were being promoted? Did they influence your
purchasing behaviour?
2. Describe an advertisement that you remember from the past.
What made it memorable? How do you imagine this ad would
change if it aired today?
3. Recall a time when personal-selling tactics were used to convince you to buy a product. Describe the chain of events. Was the
seller successful at influencing your behaviour? Why or why not?
NEL
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4. Imagine you have just started your own consulting business and
need to attract new customers to build your client base. What
sales promotion methods would you use?
5. Recall a time when a company received negative media publicity. What was the situation and how did the company respond?
REVIEW QUESTIONS
1. What is the goal of promotion?
2. What is the promotion mix, and what tools are available in this
mix?
9. What are the disadvantages of using public relations as a promotional tool?
10. What factors will influence a company’s promotional
campaign?
KEY TERMS
advertising, p. 243
integrated marketing communications, p. 242
personal selling, p. 245
3. List the factors that affect the promotion mix.
press conference, p. 249
4. Explain integrated marketing communications (IMC).
press release, p. 249
5. What are the major categories of advertising media? What are
the advantages and disadvantages of each?
promotion mix, p. 241
6. Describe the personal-selling process.
prospecting, p. 246
7. Define sales promotion. Provide examples of various sales
promotion methods.
public relations (PR) p. 249
8. What is the difference between a press release and a press
conference?
NEL
promotional campaign, p. 251
sales promotion, p. 247
LESSON 15: Developing Integrated Marketing Communications 253
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HIGH EXPECTATIONS
The legalization of marijuana in Canada in 2018 provides an unprecedented
opportunity to observe how an industry is created from the ground up.
Several obstacles have stood in the path to have cannabis legalized, many of
them involving legal issues arising from a significant change to Canada’s laws.
On the business side, no doubt exists as to the greatest obstacle: advertising. The challenges are related not to coming up with ideas on how to
promote marijuana, but rather simply to being able to advertise at all. And the
rules regarding advertising are in a constant state of flux.
The manifestation of this issue is Bill C-45 (otherwise known as the
Cannabis Act), government legislation that has been changed, adjusted,
updated, and passed around like a political football. A significant issue in the
legislation is what type of branding should be allowed on promotional items.
In essence, are marijuana companies allowed to put their corporate logo and
images on T-shirts, mugs, or other items? The problem is that the legislation
would then limit the use of branding on other non-product items, such as
signage in retail locations.
A key issue with legislation on promotion of any product or service is the
ability for companies competing in the market to differentiate their products
from those of others. Canadians have seen increasing branding restrictions
on cigarettes over the last few decades, but since this was gradual and tied
to serious health risks associated with tobacco there was a greater understanding of the reasons behind these actions.
But when an industry is just starting out, uneven or confusing regulations
can cause concern among companies that are taking the first leap. One of the
largest producers of cannabis, Aphria, raised its concerns through CEO Vic
Neufeld: “How do you differentiate your brand versus somebody else’s brand
when you can’t convey messaging on key differences of quality, taste, or packaging? The biggest obstacle to all licensed producers, not just Aphria, is the
handcuffing placed on advertising.”1
Bill C-45 sets the rules for cannabis promotion, and it does not allow for
any advertising on television and radio. Concerns raised about promotional
products that show logos and branding stem from the idea that young
people could purchase products with these logos despite not being able
to buy cannabis products. This is the main reason why the Canadian Senate
rejected this back-door branding opportunity for marijuana companies.
Advertising restrictions have been laid out in the legislation as well, and
restrict marijuana sellers in what they can communicate in advertisements.
Companies are not allowed to mention pricing, distribution, testimonials, or
endorsements. Many of these elements form a significant part of how advertisements are created in any industry, and cannabis companies see these
Kaitie Fraser, “Aphria CEO ‘handcuffed’ by proposed cannabis advertising laws, supports some
Senate suggestions,” CBC News, June13, 2018, online: http://www.cbc.ca/news/canada/windsor/
vic-neufeld-aphria-ceo-bill-45-1.4704357. Reproduced by permission of CBC Licensing.
254 LESSON 15:
Developing Integrated Marketing Communications
NEL
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regulations as restrictive, with some even stating that the rules “take the fun
out of cannabis advertising.”
Although maybe not as fun, there are other ways to promote a company’s
offerings that go beyond advertising. And although advertising is still seen
as the gold standard for promotion, other options are available. And often it
is those companies that are willing to embrace what can be done instead of
dwelling on what cannot that find success.
One company hoping for such a result is Cannabis NB, a New Brunswick–
based business that will focus on cannabis retailing. It is looking beyond the
handcuffs placed on advertising and seeking other ways to communicate
with customers. Cannabis NB is taking a public education approach and is
focused on promoting responsible use of marijuana and informing the general public on the benefits and restrictions of cannabis usage.
Cannabis NB is limited in advertising just like any other company manufacturing or selling cannabis, but its approach toward education is novel
and potentially lucrative. Given the many stereotypes that exist, Cannabis
NB believes it is important to dispel myths and create new interactions for
Canadians regarding marijuana. The company has also created retail locations
that look like high-end electronics stores and seeks to include an educational
aspect in its promotions.
You have just started out as a business consultant, and a large player in
the Canadian marijuana market has contacted you to help navigate the murky
waters of cannabis promotion. The company is tired of focusing on the restrictions around advertising and is asking you for a report on other tools that
could be used to promote the product. You agree to put together a proposal
where you will highlight key areas outside of advertising that could be used
for promoting cannabis. You have promised to email your proposal in a few
days, so now is the time to sit down and write it out. Do not let this opportunity go up in smoke.
Case Sources: https://gowlingwlg.com/en/insights-resources/articles/2018/cannabis-advertising-in-canada;
http://business.financialpost.com/entrepreneur/will-marijuana-advertising-follow-the-restrictions-placed-on
-alcohol-or-on-tobacco; http://www.cbc.ca/news/canada/windsor/vic-neufeld-aphria-ceo-bill-45-1.4704357;
https://www.thestar.com/business/2018/06/04/marijuana-producers-say-cannabis-branding-ban-on
-promotional-items-will-bolster-black-market.html; http://www.cbc.ca/news/canada/new-brunswick/
marijuana-cannabis-nb-1.4702234; http://www.cbc.ca/news/canada/new-brunswick/first-cannabis-nb
-location-1.4704298
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LESSON 15: Developing Integrated Marketing Communications 255
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16 Exploring Business
Technology
LEARNING OBJECTIVES
16-1 Explain the various management information system (MIS)
functions.
16-4 List the three goals for using online tools to interact with
company stakeholders.
16-2 Discuss the common online business models used by
companies to generate revenue or decrease expenses.
16-5 Summarize the three important considerations for adapting
to the increase of mobile devices.
16-3 Identify online marketing tactics available to businesses.
I NTRODUCTION
Technology is incorporated into most, if not all, of a company’s operations. It can help the company to operate
more efficiently and, therefore, increase its bottom line.
Technology can provide businesses quicker and more
accurate access to information regarding their buyers’
needs. This enables the company to develop products to
meet customers’ needs and even to identify high-volume
customers and focus on enhancing those relationships,
or to contact customers about new or related products
to help form relationships. Consequently, technology
helps companies deliver on their promises and provide
customer service.
Another example of using technology for decision
making is planning operations. For example, The Boeing
Company produces aircraft for airlines and other users,
including WestJet and Air Canada. Its production forecast
is 20 years for production planning. It recently raised it
20-year forecast for passenger and cargo aircraft, increasing
the estimated demand to 42,700 industry deliveries.1
Amazon and Hudson’s Bay are two very different
companies. One is the largest online retailer in the
world, and the other is the largest offline retailer in the
256 LESSON 16:
Exploring Business Technology
jacoblund/iStock/Getty Images Plus
Once you complete this lesson, you will be able to:
world. However, the companies are similar in many ways
as well.
Comparing the largest online retailer with the largest offline retailer highlights some interesting facts. One
is that even an online retailer, such as Amazon, still operates in an offline world. That means millions of physical
items are packed and shipped by tens of thousands of
real people in almost 100 warehouses worldwide. No
matter how technologically advanced Amazon becomes,
its physical operations will always remain a critical part
of its business.
On the other hand, Hudson’s Bay became successful
on a brick-and-mortar retail strategy, but it has used business technology to both improve its operations and to
make a run at Amazon as a dominant force in e-commerce.
These examples help illustrate that to succeed in
a competitive economy, businesses that sell primarily
online must link their technological expertise with an
effective offline operation. At the same time, businesses
that sell primarily offline must embrace technology as a
way to accelerate productivity and reach new customers.
We will discuss many of the benefits of e-business in
this lesson on exploring business technology and online
marketing.
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U SING TECHNOLOGY TO MAKE
BETTER BUSINESS DECISIONS
16-1 Explain the various management
information system (MIS) functions.
Suppose you are an executive at Netflix, an Internet television network. Your business model has always been to
license content from entertainment studios and make it
available to your subscribers, who pay $13.99 per month
for the premium plan. But there is a radical proposal
before you that is a departure from Netflix’s business
model and breaks all the conventional rules of television.
How could you possibly know what to do? Either
way the decision is risky. The company made almost
$200 million last year, so you are considering spending
FIGURE 16.1
RISK SPECTRUM
More
risk
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about half of that to add one show to your existing roster
of thousands. At the same time, the cost of licensing content continues to increase and competition among television networks continues to be fierce. Doing nothing
could lead to a loss of subscribers. This demonstrates
how any decision made without information is a gamble.
On the other hand, if you had accurate and complete
information about how your choices would turn out,
there would be no risk whatsoever. That is not realistic,
though. The real goal is somewhere in between: to reduce
risk and improve your decision-making process by having
as much relevant information as you can acquire.
Luckily, you have been given some information to
help with this decision. In front of you are four envelopes. Open them and use this information to make your
final decision about this investment.
Relevant information
Better intelligence and knowledge
Better decisions
Less
risk
© Cengage Learning
16-1
LESSON 16: Exploring Business Technology 257
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Netflix is a streaming option. Recognized as one
of the biggest names in entertainment, Netflix has produced some the most recognizable TV shows and offers
a wide range of content.
●●
●●
●●
Netflix’s subscriber base continues to grow. For
example, in Canada it increased by over 1 million
subscribers in less than a year and continued growth
is expected in the future.2
The cost of licensing content eats up 50% of revenue
and will only increase, which could make creating original content a better value in the long term.
Netflix has secured an Academy Award-winning actor
and an acclaimed director to make the show.
Do you say yes to the $100 million show, or no? If
you said yes, congratulations. The show House of Cards
went on to receive multiple Emmy awards and garnered
massive amounts of free publicity for Netflix, and Netflix
now has more than 5.2 million subscribers in Canada.3
You made a great decision with the limited information
you had.
This example illustrates how the right information
can lead to a better decision. All decisions carry some
risk, but decisions made without the right information
can be much riskier. For this reason, managers are constantly seeking out insights that can help them better
serve customers, leapfrog the competition, and reduce
the risk associated with major investments. These
insights may come from sources such as:
management
information system
(MIS) a technology system
●●
Internal company records
●●
Market research projects
that provides managers and
employees with the information
they need to perform their jobs as
effectively as possible
●●
●●
Published
research
news
and
Analysis of competitors
16-1a
Management Information
Systems
So where does technology come in? Technology itself
does not create the information managers need, but it
makes collecting and processing data much easier. With
technology, companies can organize a large and diverse
array of data into actionable information that helps in the
decision-making process. The goal is to ensure that the
right people have the right information at the right time.
The table below provides examples of how technology
can improve decisions.
The examples above describe the advantages of
a management information system (MIS). An
MIS is typically an integrated computer database that
provides two key benefits over manual methods of processing information:
●●
●●
Huge amounts of data can be processed very quickly,
which expands and accelerates the ability to uncover
key insights that can improve decision making.
Timely and useful information can be distributed
to managers and employees automatically, making
processing and presentation of information highly
efficient.
An MIS system has three primary functions, as discussed in the boxed feature on the next page.
16-1b
T ypes of Management Information
Systems
While we use the term “MIS” generically, it can
actually refer to any number of systems that exist at a
company. The specific type of information managers
need usually depends on their work function—such as
financial, operations, marketing, or human resources.
Business
Before Technology
After Technology
Hardware store
Suppose you manage a hardware store that carries a few thousand
items. Without technology, you would have to constantly monitor
inventory levels by hand and manually manage the process of
ordering from your suppliers. That is expensive, time consuming,
and increases the likelihood you will run out of stock for key items.
With technology, you can efficiently run a store with tens of thousands of
items that are all tracked electronically. As you sell products each day, your
computer system will alert you to items that are running out of stock, and
perhaps even order those items automatically. This is an efficient way to
make sure customers have the products they need.
Bookstore
How about if you owned a bookstore? Customers would browse
your store and perhaps buy a few books, but without technology
this is a very transaction-based business.
With technology, you can build a relationship with customers by using their
browsing and purchase history to recommend other products they might
enjoy. This allows customers to find interesting books and allows you to
increase profits.
Restaurant
Anyone opening a restaurant knows that location is key. Without
technology, you might have to scour newspapers to locate properties, visit them one by one, and then manually sort through the
information you gathered to assess which property is best.
With technology, you could scan a database of property listings, compare
prices, evaluate how much foot and car traffic goes by each location, and
even map out the location of competitors in a fraction of the time it would
take to do these activities manually.
258 LESSON 16:
Exploring Business Technology
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FIGURE 16.2
MANAGEMENT INFORMATION SYSTEM
Finance
Operations
Human
resources
Marketing
© Cengage Learning
Integrated database capable of receiving, organizing, summarizing, and calculating data
and information from functional areas, and providing information to managers from
functional areas networked into the system.
Administration
Three Primary Functions of an MIS
1. Collect
Data collected and stored from internal and external
sources:
●●
●●
Internal data such as sales and marketing data,
financial data, inventory and production data,
human resources records, and other data related
to company operations.
External data such as market research reports,
information from suppliers, customer information, and other data collected from outside
the company.
2. Process
Transformation of data into a useful form. Some
data are used in the form in which they are stored,
whereas other data require processing to extract,
highlight, or summarize information. Examples of
data processing can include:
●●
●●
●●
●●
●●
Sorting
Combining
Filtering
Calculating
Validating
3. Present
Present information in usable form such as a report,
table, graph, or chart.
Clear presentation of information is important,
especially complex information. While text presentation of information is common, it can be helpful to
use visual displays whenever possible because people
often process visual information more quickly. Examples of basic types of visual presentation:
700,000
600,000
400,000
300,000
© Cengage Learning
Sales ($)
500,000
200,000
100,000
2015
2016
2017
2018
2019
(est.)
(Continued )
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LESSON 16: Exploring Business Technology 259
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Profits for the period 2015–2020
(in millions)
$4.5
Sales figures for selected products
of Martin manufacturing
$3.1
$2.6
Lamps
40%
$2.0
Air conditioners
35%
$1.2
2015 2016 2017 2018 2019 2020
(est.)
Various functional areas often have their own MIS.
For example:
Financial MIS
Financial managers and accountants study the company’s debts and receivables,
cash flow, future financial needs, and other accounting information. They
also study the present state of the economy, interest rates, and predictions of
business conditions in the future.
Operations MIS
Operations managers are concerned with present and future sales levels, current
inventory levels, and the availability and cost of the resources required to make
their products.
Marketing MIS
Marketing managers need to have detailed information about the company’s
products, customers, current and projected market share, and the activities of
competitors.
Human Resources MIS
Human resources managers must be aware of anything that pertains to the company’s employees. Key examples include current wage levels, benefits packages,
training needs, and the company’s growth plans.
Several decades ago, it might have taken a large team
of people to collect and process this type of information,
with much of it done by hand. And converting the information into a useful format
cloud computing a type of
was a painstaking process
computer usage in which services
because programs such
stored on the Internet are provided
as Microsoft Word, Excel,
to users on a temporary basis
and PowerPoint were not
260 LESSON 16:
Exploring Business Technology
Washers
and dryers
15%
Dishwashers
10%
© Cengage Learning
$1.7
available to help make charts, graphs, and presentations. Now, managers can ask the MIS a specific question, and within seconds a beautiful chart will pop up
on their screen with the information. Companies also
use systems that automatically pull together key pieces
of information and post them to the manager’s screen in
a dashboard format, so that he or she has real-time
access to important information without having to
search for it.
Companies have long housed management information systems on computer servers located within
their offices. Employees access the MIS using the
company’s internal computer network, which helps
keep data secure but makes it more difficult to access
information remotely or collaborate with colleagues
who are not on the network. Not only is technology
expensive to develop, but it is also expensive to
maintain and evaluate for effectiveness. Rapid new
technology development requires companies to continually evaluate their existing technology and determine if the new technology would provide competitive
advantages.
To address these drawbacks, we are currently seeing
a rapid shift to cloud computing. Cloud computing
is a type of computer usage in which services stored on
the Internet are provided to users on a temporary basis.
If you have used Microsoft’s OneDrive, Apple’s iCloud,
Dropbox, or even Gmail (through Google Drive), you
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
have worked in the cloud. For businesses, cloud computing can:
●●
●●
●●
Make collaboration easier because files can be
accessed from anywhere on a variety of devices
Provide access to a wider range of tools for storing
and processing data
Reduce IT costs for the organization
In addition to reducing costs, a growing number of
businesses are concerned about how their use of technology affects the environment. The term green IT is
now used to describe all of a business’s activities to support a healthy environment and sustain the planet. However, companies must also consider the risks associated
with cloud computing. Storing data offsite and allowing
access from anywhere increases the risk that unauthorized users access the data. A company must also be sure
that the business providing its cloud services follows
proper backup and security protocols to avoid loss of data
or breach of its computer system by hackers. In addition,
the cost of cloud computing means that each company
must estimate whether it really can reduce IT costs by
using the cloud. For some companies, maintaining data
onsite may be the more secure and cost-effective option.
16-2
KEY TAKEAWAY
All decisions carry some risk, but having reliable, accurate
information can lead to better decisions. To gain access to
valuable information, companies often use management
information system (MIS), which are typically integrated
databases that provide managers and employees with the
information they need to perform their jobs as effectively
as possible. The three functions of an MIS are to collect
data, process data, and present data as information useful
to solve problems or make decisions.
16-3
ONLINE BUSINESS
16-2 Discuss the common online business
models used by companies to generate
revenue or decrease expenses.
Technology has transformed the way we think about
business and the way we work. Many mundane, tedious
tasks have been automated, allowing us to focus on the
tasks that cannot be automated. The emergence of networked computers and databases enabled increased use
of management information systems. Those systems
allowed us to process massive amounts of information
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very quickly. Accountants, for example, spend less time
recording financial data and more time using the information to make financial decisions.
The real game changer was the Internet. For the
first time, we were not confined to closed networks
within a company. Anyone with online access could
now be connected to others around the world. The
widespread adoption of broadband and Wi-Fi and the
accelerating data speeds available on mobile networks
continue to drive innovation forward. If you were born
after 1990, you probably do not remember a world that
was not connected as it is now. In the Disney show Good
Luck Charlie, the young character named Charlie is told
that someone is writing a letter. Puzzled, she asks, “What
is a letter?” Her older brother replies that it is a slow,
expensive way of sending an email.
This increase in connectivity benefits both customers and businesses by making it easier to learn about
and purchase products online. The growth of online
business increases our choices and gives us new options
for acquiring the goods and
services we need. In many
green IT a term used to
describe all of a business’s activities
cases it also saves time
to support a healthy environment
and money. There are six
and sustain the planet
common business models
online-only retailing an
for leveraging the conneconline business model where the
tivity provided by today’s
company was conceived from the
technology: online-only
outset to sell online
retailing, click-andclick-and-mortar
mortar retailing, busiretailing an online business
ness-to-business (B2B)
procurement , advertising-based model,
fee-based content, and
fee-based platform.
Read on to learn about
these business models and
see examples of each.
The first is online-only
retailing. Companies such
as Amazon and Expedia
were built from the ground
up to sell goods and services online. The advantage for these companies
is that they can sell nationwide, even worldwide,
without having to invest
in thousands of retail
brick-and-mortar
locations (“click versus brick”).
model where traditional brick-andmortar retailers sell online as well
business-to-business
(B2B) procurement an
online business model where
companies move their supply chain
ordering processes online
advertising-based
model an online business
model where content or
functionality is offered to users
for free and the company sells
advertising to generate revenue
fee-based content an
online business model where sites
charge a fee for access to news,
research, entertainment, or other
types of content
fee-based platform an
online business model where
companies offer users functionality
or connectivity in exchange for a fee
LESSON 16: Exploring Business Technology 261
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262 LESSON 16:
Exploring Business Technology
requires a subscription. News and entertainment sites
such as Hulu are increasingly using the freemium model
to maximize revenues.
The sixth model for online business is a fee-based
platform. A fee-based platform provides users some kind
of functionality, such as sharing content or conducting
transactions. For example, Kijiji’s platform provides an
online marketplace where sellers can list their items for
a fee. Another example is Vimeo, a video-hosting site
where artists and businesses can post and share original
video content in exchange for a monthly or annual fee.
Fee-based platforms commonly use the freemium variation as well. For example, blogging service Wordpress
will host your blog for free, but also offers a number of
premium upgrades such as no ads, increased storage
space, and premium themes for your blog page. Feebased platforms provide value by offering functionality
and connectivity that users would have trouble replicating themselves.
16-3a
trategic Considerations for Online
S
Businesses
With new opportunities come new challenges—that is
why many online businesses have disappeared in the last
20 years. During the dot-com boom of the late 1990s,
some believed that Internet retailers such as Amazon
would destroy the entire brick-and-mortar retail industry.
Stock prices for online businesses were skyrocketing,
and venture capital investors were lining up to invest
in just about any large-scale online business in hopes of
finding the next Amazon.com. Then the dot-com bubble
burst in the early 2000s, and many online businesses
Bjoern Wylezich/Shutterstock.com
E-commerce has consistently become easier for even the
smallest retailer. All it takes to get started is a website, an
online shopping-cart system, and a payment-processing
system. E-commerce providers such as Shopify and Wix
offer these services for less than $50 per month. Onlineonly retailing is perfect for selling digital goods such as
apps, e-books, and downloadable software programs.
Another business model, referred to as click-andmortar retailing, is when traditional brick-and-mortar
retailers such as Hudson’s Bay and Best Buy also sell online.
Since e-commerce accounts for about 8% of all retail sales,
it is important for these physical retailers to have a strong
online presence as well. Advantages for large retailers who
also sell online are that they already have an established
brand name, and their advertising campaigns can be used
to promote both their online and offline stores.
A third model for online business is business-to-business (B2B) procurement, such as when Bombardier or
WestJet submit and track supplier orders electronically.
While B2B procurement does not necessarily create
new revenue, it can decrease costs and ensure greater
accuracy than older, paper-based methods of ordering.
This can be especially important for large companies
such as Bombardier, which has thousands of suppliers
and tens of thousands of open orders at any given time.
While B2B commerce is largely invisible to customers,
it is actually a far bigger share of our economy than the
consumer e-commerce market.
A fourth model for online business is advertising-based. Many sites and apps we use today such as Facebook, Instagram, and YouTube are advertising-based. In
fact, most popular social media, news, entertainment,
and blog sites are advertising-based. This classic business
model has been used for decades in broadcast television
and radio. The idea is to offer content or functionality
that attracts a large user base, and then sell advertisers
the opportunity to communicate with that user base. The
advantage for customers is that most advertising-based
online businesses are free to use. The biggest advertising-based site of them all is Google, which generates
over 90% of its revenue from selling ads.
A fifth model for online business is fee-based content. Companies such as Consumer Reports and Forrester Research sell their editorial and research content
for either a one-time or a monthly subscription fee.
Another example is Netflix, which provides access to
thousands of movies and TV shows for a monthly fee.
A common variation of this model is often called freemium, a combination of the words free and premium. A
certain amount of content is offered for free, using an
advertising-based model, but access to premium content
Although it is increasing its online
presence, Hudson’s Bay is still considered
a click-and-mortar retailer because it
continues to offer physical retail outlets.
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
started disappearing—along with all the money invested
in those businesses.
We have seen these same struggles recently, with
the roller-coaster ride of Zynga, makers of the hit social
game Farmville, and the near-collapse of daily-deal site
Groupon.4 While online businesses do have incredible
potential and continue to change our economic landscape, they are still businesses that need a well-developed
business plan. Many of the strategic considerations for
making them successful are the same ones that exist for
wholly offline businesses:
●●
How do we get enough customers?
●●
Are we making enough money per transaction?
●●
How many sales do we need to break even?
●●
●●
Do we have the right staff to meet our objectives, and
how do we keep them motivated?
Do we have the right mix of inventory, and how do we
ensure good quality?
Issues such as these can usually be monitored by
establishing and tracking a set of key performance
indicators (KPIs), which are measurements that a
company uses to track its progress toward achieving
various objectives. No matter which online business
model a company is pursuing, the company must address
a full range of strategic issues for success. These issues
will involve both online interaction with customers and
offline aspects of operating the business. A company
that manages these aspects well can become a powerful
competitor. For example, Amazon’s massive inventory,
streamlined operations, and low prices continues to put
competitive pressure on bookstore chain Indigo.
16-4
KEY TAKEAWAY
Increased Internet connectivity benefits both customers
and businesses by making it easier to learn about and purchase products online. The six common business models for
leveraging the connectivity provided by today’s technology
are online-only retailing, where the company was conceived from the outset to sell only online; click-and-mortar
retailing, where traditional brick-and-mortar retailers also
sell online; B2B procurement, where companies move
their supply-chain ordering processes online; advertising-based models, where content or functionality is offered
to users for free and the company sells advertising to generate revenue; fee-based content sites, which charge a fee
for access to news, research, entertainment, or other types
of content; and fee-based platforms, where companies offer
users functionality or connectivity in exchange for a fee.
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16-5
ONLINE MARKETING TACTICS
16-3 Identify online marketing tactics
available to businesses.
Online marketing is a fast-growing part of the promotion mix for most companies, whether their products
are sold 100% online or 100% offline. The reason is
simple: Marketers are on a quest to reach customers,
and in many cases those customers can be found online.
Approximately 80% of the Canadian adult population
uses the Internet.5 Facebook now has approximately
2 billion users worldwide, YouTube has 1.3 billion
users, and Twitter has more than 700 million. These
numbers increase daily, expanding the importance of
online marketing.
Marketers have certainly taken notice of the potential to promote their businesses online. Online ad
spending has now surpassed both print ad spending
and TV spending. TV captures approximately $3 billion
in domestic revenue, and digital advertising brought
in over $5 billion.6 This brings up an important point:
While there are many customers online, there are also
many marketers online. As a result, marketers now face
the same challenges of cutting through the clutter with
their online marketing as they do with their traditional
promotional activities. The first step in solving this
dilemma is to look at online marketing in the context
of the company’s overall marketing strategy. It is likely
that most companies will utilize multichannel marketing,
which is the combination of traditional offline marketing
tactics with online marketing tactics. The second step
is to achieve clarity about the goals of online marketing
efforts—to prevent wasting money in the belief that
simply “being online” will lead to success.
While the end goal of most marketing activities is to
increase sales, not every online marketing tactic is going
to be a direct sales pitch. For example, some online marketing tactics might focus
on increasing website
key performance
traffic, increasing engageindicators (KPIs)
ment with customers, or
measurements that a company
uses to track its progress toward
generating sales leads.
achieving various objectives
There are six major
categories
of
online
search engine
optimization (SEO) an
marketing tactics, which
online marketing tactic to
can be used alone or in
improve search engine ranking by
a coordinated campaign.
optimizing website structure, use
These tactics— search
of keywords, number of links from
engine optimization
online
ads
(SEO) ,
other sites, and a variety of other
techniques
LESSON 16: Exploring Business Technology 263
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may be suppressed from the eBook and/or eChapter(s). Nelson Education reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Online Marketing Tactic
Explanation
Search engine optimization (SEO) used to increase site traffic
H&M uses SEO to increase site traffic. This increased site traffic can then be used to generate leads and
ultimately increase sales.
Online ad used to increase site traffic
H&M uses online advertising to increase site traffic. This increased site traffic can then be used to
generate leads and ultimately increase sales.
Social media activity used to increase engagement
H&M uses social media marketing to engage with its Facebook community to build brand awareness and
customer relationships.
Content marketing used to increase engagement
H&M uses content marketing to bring value to their customers and build customer relationships.
Online ad used to increase site traffic and generate leads
H&M uses online advertising to drive traffic to its lead-generating landing page. Customer information
can later be used for email marketing.
Social media activity used to increase sales
H&M uses social media marketing to make a promotional pitch to its engaged customer base, usually
resulting in higher sales conversion rates than traditional advertising.
use these tactics together to increase traffic, increase
engagement, generate leads, and increase sales.
STUDY TOOLS
16-5b
Visit the MindTap to watch videos on how technology helps
companies operate more efficiently.
Go to nelson.com/student to access the digital resources.
pay-per-click (PPC) a
method of online advertising
where advertisers only pay when a
consumer clicks on an ad
content marketing an
online marketing tactic that
uses blogs, videos, infographics,
and other content to attract and
engage customers
social media
marketing an online
marketing tactic that involves
interacting with customers on
social networks such as Facebook,
Twitter, Pinterest, and Google+
lead generation an online
marketing tactic that often involves
creating a webpage whose sole
purpose is to incentivize customers
to provide their email address or
other contact information
Web analytics the collection
and analysis of data related to a
website or other online marketing
activities
264 LESSON 16:
(usually pay per click ,
or PPC ), content marketing , social media
marketing , lead generation , and email marketing—are often used to
complement traditional
offline marketing activities,
especially for businesses
that sell a physical product
or have a brick-and-mortar
store.
The boxed feature on
the next page discusses
these tactics and how they
can be used together.
16-5a
Integrating
Online
Marketing
Tactics
Here is an example of
how one company might
Exploring Business Technology
sing Data to Improve Online
U
Marketing
A key advantage of online marketing is that it is highly
measurable. Web analytics is the collection and
analysis of data related to a company’s website and online
marketing activities. For example, a company can use
Web analytics to measure:
●●
The number of visitors to its site
●●
The most visited pages on the site
●●
Time spent on each page
●●
The path users took through the site
●●
The number of customers who put an item in their
online shopping cart but abandoned their cart before
checkout
This type of data allows the website team to optimize the site by focusing on key areas for improvement.
For example, owners of a site where users arrive at the
homepage and then leave quickly may want to consider
a cleaner, more attractive design. Owners of a site where
many users abandon their shopping cart may want to
consider a simpler checkout process or a customer follow-up system. Without Web analytics, online marketers
would have to guess which parts of their site are effective
and which parts need upgrading.
Analytics is also crucial for online advertising campaigns. For instance, advertisers on Facebook can monitor
the number of users who have seen their ads, the number
who clicked on their ads, and the average cost-per-click
for each ad. This information can be used to optimize the
advertising campaign by creating mor